-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WxaNN/ZZxNxgndVKpBADnDo+sJwH0Pf9UanET1RzSViaOyjYXVtNztjNDzewkj0h Kj8AiiED79JsWmyNS+qRoQ== 0001047469-98-034659.txt : 19980916 0001047469-98-034659.hdr.sgml : 19980916 ACCESSION NUMBER: 0001047469-98-034659 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980801 FILED AS OF DATE: 19980915 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GANTOS INC CENTRAL INDEX KEY: 0000791182 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 382667266 STATE OF INCORPORATION: MI FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14577 FILM NUMBER: 98709924 BUSINESS ADDRESS: STREET 1: 1266 E MAIN STREET STREET 2: FIFTH FLOOR CITY: STAMFORD STATE: CT ZIP: 06902 BUSINESS PHONE: 2033580294 MAIL ADDRESS: STREET 1: 1266 E MAIN STREET STREET 2: FIFTH FLOOR CITY: STAMFORD STATE: CT ZIP: 06902 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange - --- Act of 1934. For the quarterly period ended August 1, 1998 or --------------- Transition report pursuant to Section 13 or 15(d) of the Securities - --- Exchange Act of 1934. For the transition period from to ---------------- --------------- Commission file number 0-14577 ---------- GANTOS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Michigan 38-1414122 - ----------------------------- --------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization) 1266 E. Main Street, Fifth Floor, Stamford, Connecticut 06902 - ---------------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 358-0294 --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No --- Number of common shares outstanding at September 10, 1998: 7,658,481 ---------- Page 1 of 14 GANTOS, INC. Page Number PART I. FINANCIAL INFORMATION Statements of Income (Loss) 3 Balance Sheets 4 Statements of Cash Flows 5 Notes to Financial Statements 6-8 Management's Discussion and Analysis of Results of Operations and Financial Condition 9-12 Quantitative and Qualitative Disclosures about Market Risk 12 PART II. OTHER INFORMATION Changes in Securities and Use of Proceeds 13 Exhibits and Reports on Form 8-K 13 Signatures 14 Page 2 of 14 GANTOS, INC. STATEMENTS OF INCOME (LOSS) (Amounts in thousands, except per share and store data)
13 Weeks Ended 26 Weeks Ended ----------------- ------------------- Aug. 1, Aug. 2, Aug. 1, Aug. 2, ----------------- ------------------- 1998 1997 1998 1997 -------- -------- --------- --------- Net sales $31,758 $35,816 $70,822 $81,380 Cost of sales (including buying, distribution and occupancy (28,396) (31,651) (59,289) (66,867) costs) -------- -------- --------- --------- Gross income 3,362 4,165 11,533 14,513 Selling, general and administrative expense (8,517) (9,196) (17,637) (18,785) Credit for facilities closings - 703 - 703 and other Finance charge and other revenue 1,061 1,218 2,132 2,429 -------- -------- --------- --------- Operating loss (4,094) (3,110) (3,972) (1,140) Interest expense (858) (437) (1,725) (952) -------- -------- --------- --------- Loss before income taxes (4,952) (3,547) (5,697) (2,092) Income taxes - - - - -------- -------- --------- --------- Net loss (4,952) (3,547) (5,697) (2,092) ======== ======== ========= ========= Net loss per share (basic and (0.65) (0.47) (0.75) (0.28) diluted) ======== ======== ========= ========= Outstanding shares 7,658,147 7,547,293 7,658,147 7,547,293 ========= ========= ========= ========= Weighted average shares outstanding (basic 7,628,528 7,540,655 7,610,344 7,546,380 and diluted) ======== ======== ========= ========= Stores open at end of period 115 115 115 115 ==== ===== ===== =====
See accompanying notes to financial statements. Page 3 of 14 GANTOS, INC. BALANCE SHEETS (Amounts in thousands, except share data)
ASSETS Aug. 1, Jan 31, Aug. 2, 1998 1998 1997 --------- -------- --------- Current assets: Cash and cash equivalents $ 775 $ 1,295 $ 1,059 Accounts receivable, less allowance for doubtful accounts of $492, $591 and $614 at August 1, 1998, January 31, 1998 and August 2, 1997, respectively 16,203 18,607 18,650 Merchandise inventories 26,640 22,540 22,476 Prepaid expenses and other 8,362 8,205 3,101 --------- -------- --------- Total current assets 51,980 50,647 45,286 --------- -------- --------- Property and equipment, at cost: Leasehold improvements 31,076 30,506 28,961 Furniture and fixtures 31,716 32,034 29,319 Other 772 122 1,791 --------- -------- --------- Total property and equipment 63,564 62,662 60,071 Less - Accumulated depreciation and amortization (50,247) (48,115) (46,200) --------- -------- --------- Net property and equipment 13,317 14,547 13,871 ========= ======== ========= Total assets $65,297 $65,194 $59,157 ========= ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 9,977 $ 7,644 $ 9,737 Accrued expenses and other 7,954 8,472 8,758 --------- -------- --------- Total current liabilities 17,931 16,116 18,495 --------- -------- --------- Long-term debt 31,339 27,398 11,364 --------- -------- --------- Shareholders' equity: Preferred stock, $.01 par value, 2,000,000 shares authorized; none issued Common stock, $.01 par value, 20,000,000 shares authorized; approximately 7,658,000 issued and outstanding at August 1, 1998, 7,583,000 issued and outstanding at January 31, 1998 and 7,547,000 issued and outstanding at August 2, 1997 77 76 76 Additional paid-in capital 41,020 40,977 40,892 Accumulated deficit (25,070) (19,373) (11,670) --------- -------- --------- Total shareholders' equity 16,027 21,680 29,298 --------- -------- --------- Commitments - - - --------- -------- --------- Total liabilities and shareholders' $65,297 $65,194 $59,157 equity ========= ======== =========
See accompanying notes to financial statements. Page 4 of 14 GANTOS, INC. STATEMENTS OF CASH FLOWS (Thousands)
26 Weeks Ended ------------------- Aug. 1, Aug. 2, 1998 1997 --------- --------- Cash flows from operating activities: Net loss $(5,697) $(2,092) --------- --------- Adjustments to reconcile net loss to net cash used by operating activities: Credit for facilities closings and (703) other Cash used for facilities closings (785) Depreciation and amortization 2,251 2,558 Restricted stock compensation 30 55 expense Changes in assets and liabilities: Accounts receivable 2,404 3,322 Merchandise inventories (4,100) (103) Prepaid expenses and other (157) 71 Accounts payable 2,333 (1,011) Accrued expenses and other (518) (1,627) --------- --------- Total adjustments 2,243 1,777 Net cash used by operating activities (3,454) (315) --------- --------- Cash flows from investing activities: Capital expenditures (696) (2,356) --------- --------- Net cash used by investing activities (696) (2,356) --------- --------- Cash flows from financing activities: Principal payments under capital lease obligations and other long-term debt (803) (2,570) Borrowings under long-term credit facility 82,394 105,199 Payments under long-term credit facility (77,650) (103,206) Issuance of Common Shares 14 40 Other (325) (79) --------- --------- Net cash provided (used) by financing 3,630 (616) activities --------- --------- Net decrease in cash and cash equivalents (520) (3,287) Cash and cash equivalents at beginning of 1,295 4,346 period ========= ========= Cash and cash equivalents at end of period $ 775 $ 1,059 ========= ========= Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest (net of amount capitalized) $ 860 $ 864 Income taxes - $ 79
See accompanying notes to financial statements. Page 5 of 14 GANTOS, INC. NOTES TO FINANCIAL STATEMENTS 1. The interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. Nevertheless, it is recommended that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K, as amended, for the fiscal year ended January 31, 1998. The accompanying interim financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results of the interim periods presented and necessary to present fairly the financial position as of August 1, 1998, January 31, 1998 and August 2, 1997, the results of operations for the thirteen and twenty-six weeks ended August 1, 1998 and August 2, 1997, and cash flows for the twenty-six weeks ended August 1, 1998 and August 2, 1997. All adjustments are of a normal and recurring nature. The results of operations for the thirteen and twenty-six week periods ended August 1, 1998 and August 2, 1997 are not necessarily indicative of the results to be expected for the full year due to the seasonal nature of the business. 2. Inventories are stated at the lower of cost or market. A physical inventory to determine actual cost of merchandise sold is taken at least two times per year. 3. Basic income (loss) per share is determined by dividing net income (loss) by the weighted average number of common shares outstanding during the quarter. Diluted net income (loss) per share is similarly determined except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Dilutive potential shares are principally comprised of employee stock options issued by the Company and had an insignificant impact on income (loss) per share during the periods presented. 4. The Company's borrowing agreement with Fleet Bank N.A. (the "Fleet Facility") was amended as of July 8, 1998 to cure potential defaults under the Fleet Facility. The Fleet Facility currently provides that, until October 12, 1998, the fixed charge coverage ratio, earnings before interest, taxes, depreciation and amortization and interest coverage ratio covenants are suspended. Thereafter, compliance with these financial covenants is based on a liquidity test as long as minimum levels of liquidity are maintained. The liquidity test generally requires that the Company have "availability" (as defined in the Fleet Facility) of at least (i) a daily average of $5,000,000 for each fiscal month, and (ii) $3,500,000 at the end of each business day. As of September 8, 1998, the Company had $28.2 million in borrowings and $2.9 million in letters of credit outstanding under the Fleet Facility, and approximately $1.5 million was available for borrowing under the Fleet Facility. In addition, the Indenture, dated as of April 1, 1995, pursuant to which the Company's 12.75% notes were issued (the "Indenture"), was amended as of June 30, 1998 to cure potential defaults under the Indenture, subject to consummation of the merger described in Note 6 by September 30, 1998. Previous covenants concerning capital expenditures, earnings before interest, taxes, depreciation and amortization, and interest coverage ratios were deleted from the Indenture. The remaining net worth covenant requires the Company to maintain a minimum net worth of $7.5 million at the end of each quarter through the third quarter of fiscal 2000 and $10.0 million at the end of each subsequent quarter. As of August 1, 1998, the Company's net worth was approximately $16.0 million. As of September 8, 1998, $7.0 million in principal amount of notes were outstanding under the Indenture. Holders of approximately 96% of the notes underlying the Indenture agreed to defer payment of their regularly scheduled July 1, 1998 payment of principal, totaling approximately $745,000, until the earlier of the consummation of the merger described in Note 6 or September 25, 1998. In Page 6 of 14 exchange for such deferral, the Company issued such holders five-year warrants to purchase 150,000 of the Company's Common Shares at an exercise price of $1.625 per share. The Company does not expect to be able to meet the liquidity test under the Fleet Facility on October 13, 1998, and, therefore, management believes that it will likely be in default under the Fleet Facility if the Fleet Facility is not further amended or replaced before then. In addition, because the Company does not expect to consummate the merger by September 30, 1998, the amendments to the Indenture described above are not expected to be effective unless the Indenture is further amended. Management does not believe that it will be in compliance with the financial covenants under the Indenture if such amendments are not affective. The Company is negotiating with Fleet Bank and the principal holder of the Notes issued under the Indenture to further defer or amend the financial covenants under the Fleet Facility, to defer the deadline for consummation of the merger under the Indenture or to modify the financial covenants under the Indenture and to further defer the July 1, 1998 Note payment currently due September 25, 1998. If the Company is not successful in negotiating further amendments to the Fleet Facility and the Indenture on or before September 25, 1998 on terms and conditions acceptable to the Company, if the Company's "availability" under the Fleet Facility, trade credit or sales are lower than expected, or if the Company's borrowing requirements or liquidity needs are higher than expected, the Company could have insufficient liquidity to continue its current operations, its business, operations, liquidity, financial condition and results of operations could be materially adversely affected, and the Company could be required to substantially reduce or discontinue its operations. In addition, even if the Company is successful in amending the Fleet Facility and the Indenture, there can be no assurance that the Company will be able to meet the revised covenants or the continuing net worth covenant under the Indenture for the next 12 months unless sales and trade credit substantially improve. 5. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, during the twenty-six weeks ended August 1, 1998, the Company incurred a loss of $5,697,000 and has experienced a tightening of trade credit. See also Notes 4 and 6. These factors among others indicate that the Company may be unable to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's ability to continue as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms of the Fleet Facility and the Indenture, support from trade creditors, changes in comparable store sales, future profitable operations, and the successful completion of the merger described in Note 6 below. 6. On May 12, 1998, the Company announced it had entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") with Hit or Miss, Inc. ("Hit or Miss") and HOM Holding, Inc., the sole stockholder of Hit or Miss ("HOM Holding"). Pursuant to the Merger Agreement, by operation of law, the Company would acquire all of the assets and assume all of the liabilities of HOM Holding, including all the capital stock of Hit or Miss, for an aggregate of approximately 7.4 million of the Company's Common Shares and warrants to purchase 1.25 million of the Company's Common Shares for $1.50 per share. The warrants would not be immediately exercisable. The Company expects to account for the transaction as a purchase and for the transaction to be finalized on or before October 31, 1998. The consummation of the transaction contemplated by the Merger Agreement is subject to several material conditions including, among others, the consummation of a financing to refinance the working capital facilities of the Company and Hit or Miss into a combined $60 million facility, the approval of the merger by the Company's shareholders and Holding, the waiver of certain covenants under the Fleet Facility and the Indenture and by certain debtholders of Hit or Miss, and the absence of adverse changes to the business of the Company and Hit or Miss. In addition, either HOM Holding or the Company may terminate the Merger Agreement if the merger is not consummated on or before August 31, 1998, unless the failure of the closing to occur by such date shall be due to the failure of the party seeking to terminate the Merger Agreement to perform or observe in any material respect the covenants and agreements of such party. The parties are negotiating an amendment to extend this deadline to October 31, 1998. The Company is continuing to Page 7 of 14 negotiate financing for the surviving corporation, but it does not have a definitive commitment or a credit committee approved proposal. There can be no assurance that the Company will be successful in closing the above-described merger with Holding and Hit or Miss. Page 8 of 14 GANTOS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 1, 1998, COMPARED TO THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 2, 1997. The following table indicates the percentage relationships to net sales of various revenue and expense items for the thirteen and twenty-six week periods ended August 1, 1998 and August 2, 1997.
As a percent of As a percent of net sales for net sales for the thirteen the twenty-six weeks ended weeks ended -------------------- ------------------- Aug. 1, Aug. 2, Aug. 1, Aug. 2, 1998 1997 1998 1997 --------- -------- --------- --------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales (including buying, distribution and occupancy costs) (89.4) (88.4) (83.7) (82.2) --------- -------- --------- --------- Gross income 10.6 11.6 16.3 17.8 Selling, general and administrative expense (26.8) (25.7) (24.9) (23.1) Credit for facilities - 2.0 - 0.9 closings and other Finance charge and other 3.3 3.4 3.0 3.0 revenue --------- -------- --------- --------- Operating loss (12.9) (8.7) (5.6) (1.4) Interest expense (2.7) (1.2) (2.4) (1.2) --------- -------- --------- --------- Loss before income taxes (15.6) (9.9) (8.0) (2.6) Income taxes - - - - --------- -------- --------- --------- Net loss (15.6)% (9.9)% (8.0)% (2.6)% ========= ========= ========= ========
Net sales for the thirteen weeks ended August 1, 1998 were approximately $31.8 million, a decrease of approximately $4.0 million, compared to net sales of approximately $35.8 million in the same period of the prior fiscal year. Net sales for stores in operation throughout both periods decreased 11.4%, or $4.0 million, for the second quarter of 1998 compared to the same period in 1997. The 11.4% decrease in comparable store sales is comprised of a 7.6% decrease in unit sales (partially due to difficulties in obtaining merchandise from vendors resulting from the Company's current financial condition and the related tightening of trade credit) and a 4.1% decrease in average sales dollars per unit partially offset by a .3% increase due to a change in merchandise mix. Net sales for the twenty-six weeks ended August 1, 1998 were approximately $70.8 million, a decrease of approximately $10.6 million, compared to net sales of approximately $81.4 million in the same period of the prior fiscal year. Net sales for stores in operation throughout both periods decreased 13.4%, or $10.7 million, for the first two quarters of 1998 compared to the same period in 1997. The 13.4% decrease in comparable store sales is comprised of a 10.5% decrease in unit sales(partially due to difficulties in obtaining merchandise from vendors Page 9 of 14 resulting from the Company's current financial condition and the related tightening of trade credit) and a 3.2% decrease in average sales dollars per unit, partially offset by a .3% increase due to a change in merchandise mix. The Company opened a new store in April 1997 and another in October 1997. One store was closed in January 1998. The Company experienced negative comparable store sales during the second quarter and management expects this trend to continue into the third quarter. Cost of sales decreased $3.3 million in the thirteen weeks ended August 1, 1998 compared to the prior fiscal year. Cost of sales, as a percent of net sales, increased to 89.4% in the thirteen weeks ended August 1, 1998, compared to 88.4% in the same period in the prior fiscal year. Cost of sales decreased $7.6 million in the twenty-six weeks ended August 1, 1998 compared to the prior fiscal year. Cost of sales, as a percent of net sales, increased to 83.7% in the twenty-six weeks ended August 1, 1998, compared to 82.2% in the same period in the prior fiscal year. The increase in cost of sales, as a percent of net sales, for the thirteen and twenty-six weeks ended August 1, 1998 is primarily the result of decreased sales volume with consistent buying, distribution and occupancy costs and lower vendor allowances, partially offset by lower net markdowns for the period compared to a year ago. Selling, general and administrative (SG&A) expense for the thirteen weeks ended August 1, 1998 decreased approximately $679,000, compared to the same period in the prior fiscal year. The decrease in SG&A is partly due to prior period one-time moving costs associated with the Company's merchandising operations to Stamford, Connecticut. In addition, the decrease in SG&A is due to lower payroll and the related taxes primarily at the store locations due to the decreased sales volume, and a decrease in depreciation due to the age of the assets. These decreases were partially offset by increases in rent and maintenance and dues as a result of increases passed on from the landlords and an increase in net advertising expense due to increased private label merchandise and decreased vendor participation. As a percent of net sales, SG&A expense increased from 25.7% to 26.8% for the thirteen weeks ended August 1, 1998 primarily as a result of lower sales, offset slightly by the reductions described above. Selling, general and administrative (SG&A) expense for the twenty-six weeks ended August 1, 1998 decreased approximately $1,148,000, compared to the same period in the prior fiscal year. The decrease in SG&A is primarily due to lower payroll and the related taxes primarily at the store locations due to the decreased sales volume, and a decrease in depreciation due to the age of the assets. These decreases were partially offset by increases in rent and maintenance and dues as a result of increases passed on from the landlords and an increase in net advertising expense due to increased private label merchandise and decreased vendor participation. As a percent of net sales, SG&A expense increased from 23.1% to 24.9% for the twenty-six weeks ended August 1, 1998 primarily as a result of lower sales. During the thirteen weeks ended August 2, 1997, the Company recorded a Credit for Facilities Closings and Other of $0.7 million. During the second quarter of 1997, the Company completed the relocation of its corporate offices and distribution center facilities for less than the amounts accrued. Finance charge and other revenue decreased approximately $157,000 to 3.3% of net sales and approximately $297,000 to 3.0% of net sales for the thirteen and twenty-six weeks ended August 1, 1998, respectively, compared to the same periods in the prior fiscal year. The decreases in both the thirteen and twenty-six weeks ended August 1, 1998 were partially due to new legal limits on late fees, and a decrease in finance charge income during the first half of 1998 due to a lower average outstanding balance of Gantos credit card receivables compared to the same period in the prior fiscal year. The decrease in the receivable balances is primarily the result of lower sales and lower use of the Gantos charge card. Finance charge income is expected to remain lower than last year due to sales volume. Interest expense for the thirteen and twenty-six weeks ended August 1, 1998 increased approximately $421,000 and $773,000, respectively, compared to the same periods in the prior fiscal year. The increase for both periods is due to higher debt levels under the Fleet Facility, partially offset by reduced interest expense on the Indenture Notes as a result of scheduled principal payments. The increase in amounts outstanding under the Fleet Facility is due to operating losses and continued difficulties with trade credit. The effective tax rate varies from the statutory rate of 35% due to the establishment of additional valuation allowances during the quarter. These factors resulted in a net loss of approximately $5.0 million, or $0.65 per share, for the thirteen weeks ended August 1, 1998, compared to a net loss of approximately $3.5 million, or $0.47 per share, in the same period of the Page 10 of 14 prior year. For the twenty-six weeks ended August 1, 1998, the Company reported a net loss of approximately $5.7 million, or $0.75 per share, compared to net loss of approximately $2.1 million, or $0.28 per share, in the same period of the prior year. LIQUIDITY AND CAPITAL RESOURCES Net cash used by operating activities totaled $3.5 million in the first half of 1998 compared to $0.3 million in the same period a year ago. The increase was primarily due to a greater net loss this year (net of non-cash items) compared to last year, a larger increase in merchandise inventories this year over last year and a smaller decrease in accounts receivable this year. These amounts are partially offset by an increase in accounts payable this year, compared to a decrease last year, a smaller decrease in accrued expenses and other this year, and cash used last year for facilities closings. The increase in merchandise inventory and accounts payable this year is primarily due to the low 1998 beginning inventory levels. The decrease in accrued expense and other is the result of the timing of payments and the effects of lower sales volumes. The smaller decrease in accounts receivable this year is due to a greater portion of sales made using the Gantos charge card. The Company expects the accounts receivable balance to remain lower than last year levels for the remainder of 1998 and trade credit to remain tight through at least the third quarter of 1998. Capital expenditures for the first six months of 1998 were approximately $696,000, compared to approximately $2,356,000 for the same period in 1997. Capital expenditures in fiscal 1998 were primarily for remodeling one store. Net cash provided by financing activities in the first half of 1998 was approximately $3.6 million compared to net cash used of approximately $0.6 million in the same period a year ago. The increase in cash provided is the result of reduced payments on the long-term debt (one payment due July 1, 1998 was deferred to September) and increased borrowing under the Fleet Facility. Cash provided in 1998 represents $803,000 in payments made on the long-term notes, offset by net borrowings of $4.7 million ($82.4 million in total borrowings, $77.7 million in total payments) under the Fleet Facility. In the same period of 1997, the Company made $2.6 million in payments on the long-term notes (including a $1.8 million "alternative cash flow payment") and borrowed $2.0 million ($105.2 million in total borrowings, $103.2 in total payments) under the Fleet Facility. The Company has a revolving credit agreement (the "Fleet Facility") expiring March 31, 2000, with Fleet Bank N.A. (formerly NatWest Bank N.A.) with a maximum commitment of $40 million, subject to a borrowing base formula and lender reserves. The Company has entered into nine amendments to the Fleet Facility. Without these amendments, the Company would not have been in compliance with the financial covenants, including the liquidity test, under the Fleet Facility (See Note 4 to the Financial Statements). As of September 8, 1998, the Company had $28.2 million in borrowings and $2.9 million in letters of credit outstanding under the Fleet Facility. As of September 8, 1997, approximately $1.5 million was available for borrowing under the Fleet Facility. During the first two quarters of 1998, the weighted average interest rate under the Fleet Facility was 8.80%. The Company's Indenture, under which the Company's 12.75% Notes were issued, was amended as of June 30, 1998 to cure potential defaults under the Indenture, subject to consummation of the merger described in Note 6 to the Financial Statements by September 30, 1998 (See Note 4 to the Financial Statements). As of September 8, 1998, $7.0 million in principal amount of notes were outstanding under the Indenture. Holders of approximately 96% of the notes underlying the Indenture agreed to defer payment of their regularly scheduled July 1, 1998 payment of principal, totaling approximately $745,000, until the earlier of the consummation of the merger described in Note 6 of the Financial Statements or September 25, 1998. In exchange for such deferral, the Company issued such holders five-year warrants to purchase 150,000 of the Company's Common Shares at an exercise price of $1.625 per share. Another principal payment, totaling approximately $775,000, is due October 1, 1998. The Company does not expect to be able to meet the liquidity test under the Fleet Facility on October 13, 1998, and, therefore, management believes that it would likely be in default under the Fleet Facility if the Fleet Facility is not further amended or replaced before then. In addition, because the Company does not expect to consummate the merger by September 30, 1998, the amendments to the Indenture described above are not expected to be effective unless the Indenture is further amended. Management does not believe that it will be in compliance with the Page 11 of 14 financial covenants under the Indenture if such amendments are not effective. The Company is negotiating with Fleet Bank and the principal holder of the Notes issued under the Indenture and to further defer or amend the financial covenants under the Fleet Facility, to defer the deadline for consummation of the merger under the Indenture and to modify the financial covenants under the Indenture and to further defer the July 1, 1998 Note payment currently due September 25, 1998. If the Company is not successful in negotiating further amendments to the Fleet Facility and the Indenture on or before September 25, 1998 on terms and conditions acceptable to the Company, if the Company's "availability" under the Fleet Facility, trade credit or sales are lower than expected, or if the Company's borrowing requirements or liquidity needs are higher than expected, the Company could have insufficient liquidity to continue its current operations, its business, operations, liquidity, financial condition and results of operations could be materially adversely affected, and the Company could be required to substantially reduce or discontinue its operations. In addition, even if the Company is successful in amending the Fleet Facility and the Indenture, there can be no assurance that the Company will be able to meet the revised covenants or the continuing net worth covenant under the Indenture for the next 12 months unless sales and trade credit substantially improve. As discussed in Note 6 to the Financial Statements, the Company has entered into a definitive Agreement and Plan of Merger with Hit or Miss, Inc. and HOM Holding, Inc., subject to various terms and conditions (some of which are discussed in Note 6 to the Financial Statements). Either HOM Holding or the Company may terminate the Merger Agreement if the merger is not consummated on or before August 31, 1998, unless the failure of the closing to occur by such date shall be due to the failure of the party seeking to terminate the Merger Agreement to perform or observe in any material respect the covenants and agreements of such party. The parties are negotiating an amendment to extend this deadline to October 31, 1998. In connection with this proposed merger, the Company and Hit or Miss have received a proposal, which has not received credit committee approval, to refinance the working capital facilities of the Company and Hit or Miss into a combined $60 million facility. The Company is continuing to negotiate financing for the surviving corporation, but it does not have a definitive commitment or a credit committee approved proposal. Each of the above statements regarding future revenues, expenses or business plans (including statements regarding the sufficiency of the Company's cash resources to meet future liquidity needs and future compliance with financial covenants) may be a "forward looking statement" within the meaning of the Securities Exchange Act of 1934. Such statements are subject to important factors and uncertainties that could cause actual results to differ materially from those in the forward-looking statement, including the Company's ability to negotiate acceptable amendments to the Fleet Facility and the Indenture, the Company's ability to negotiate acceptable financing terms for the surviving corporation in the merger, the level of support of the Company's trade creditors and factors, general trends in retail clothing apparel purchasing, especially during the Christmas season, the Company's comparable store sales changes, and the factors set forth in this Management's Discussion and Analysis of Financial Condition and Results of Operations. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. To distinguish 21st century dates from 20th century dates, these date code fields must be able to accept four digit entries. The Company has evaluated its management information systems (including information technology ("IT") and non-IT computerized systems) and has prepared a plan for Year 2000 compliance. The Company estimates that the cost to modify its management information systems to become Year 2000 compliant will be approximately $400,000 and therefore will not be material to its financial condition or results of operations. Given that such modification is expected to be completed by June 1999, the Company has not prepared a contingency plan and does not currently believe that a contingency plan is necessary. The Company is also evaluating the systems of its vendors to ensure that these companies are Year 2000 compliant. The cost of this evaluation is expected to be nominal. In the event that its current vendors are unable to certify that they will be Year 2000 compliant by early 1999 or if such vendors are unable to certify that their failure to be Year 2000 compliant will not adversely affect the Company, the Company will be reviewing its alternatives with respect to other vendors. There can be no assurance that the Company will be able to find vendors which are acceptable to the Company. The Company does not anticipate any material disruption in its operations as a result of any failure by the Company or its vendors to become Year 2000 compliant. Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. Page 12 of 14 PART II. OTHER INFORMATION Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Four holders of approximately 96% of the notes underlying the Indenture agreed to defer payment of their regularly scheduled July 1, 1998 payment of principal, totaling approximately $745,000, until the earlier of the consummation of the merger described in Note 6 to the Financial Statements in Part I, Item 1 of this Report (the "Merger") or September 25, 1998. In exchange for such deferral, on July 1, 1998, the Company issued such holders warrants exercisable until June 30, 2003 to purchase 150,000 of the Company's Common Shares, par value $0.01 per share, at an exercise price of $1.625 per share. The Company has agreed to use its good faith efforts to register the Common Shares underlying such warrants for resale within sixty days after consummation of the Merger. Such warrants were not registered, but were issued in reliance on the exemptions from registration contained in Sections 4(2) and 4(6) under the Securities Act of 1933, as amended. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 4.1 Supplemental Indenture No. 2, dated as of June 30, 1998, to Indenture dated as of April 1, 1995, between Gantos, Inc. and State Street Bank and Trust Company (successor to Fleet Bank N.A., which was the successor to Shawmut Bank Connecticut, National Association), and forms of Agreement, dated as of June 30, 1998 between Gantos, Inc. and various holders of notes issued under the Indenture. 4.2 Form of Common Stock Purchase Warrant, dated as of July 1, 1998, issued to consenting note holders. 10.1 Amendment No. 9 to Credit Agreement, dated as of July 8, 1998, between Gantos, Inc. and Fleet Bank, N.A.(formerly known as NatWest Bank N.A.). 10.2 Letter Agreement dated as of July 8, between Gantos, Inc. and Enhanced Retail Funding, LLC. 10.3 1998 Gantos, Inc. Executive Bonus Plan, adopted May 19, 1998. 27.1 Financial Data Schedule (b) Reports on Form 8-K. On May 15, 1998, Gantos, Inc. filed a Current Report on Form 8-K, reporting in Item 5 that on May 12, 1998 Gantos, Inc. entered into a definitive Agreement and Plan of Merger with Hit or Miss, Inc. ("Hit or Miss") and HOM Holding, Inc., the sole stockholder of Hit or Miss ("HOM Holding") regarding the merger of HOM Holding with and into the Company. No financial statements were filed. Page 13 of 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: September 15, 1998 GANTOS, INC. ------------------------ (Registrant) By:/s/ ARLENE H. STERN ------------------------- ARLENE H. STERN Its: PRESIDENT AND CHIEF EXECUTIVE OFFICER (DULY AUTHORIZED OFFICER AND PRINCIPAL FINANCIAL OFFICER) Page 14 of 14 EXHIBIT INDEX DOCUMENT NUMBER AND DESCRIPTION 4.1 Supplemental Indenture No. 2, dated as of June 30, 1998, to Indenture dated as of April 1, 1995, between Gantos, Inc. and State Street Bank and Trust Company (successor to Fleet Bank N.A., which was the successor to Shawmut Bank Connecticut, National Association), and forms of Agreement, dated as of June 30,1998 between Gantos, Inc. and various holders of notes issued under the Indenture. 4.2 Form of Common Stock Purchase Warrant, dated as of July 1, 1998, issued to consenting note holders. 10.1 Amendment No. 9 to Credit Agreement, dated as of July 8, 1998, between Gantos, Inc. and Fleet Bank, N.A Financial Data Schedule. 10.2 Letter Agreement dated as of July 8, 1998 between Gantos, Inc. and Enhanced Retail Funding, LLC. 10.3 1998 Gantos, Inc. Executive Bonus Plan, adopted May 19, 1998. 27.1 Financial Data Schedule EX-4.1 2 EXHIBIT 4.1 SUPPLEMENTAL INDENTURE & LETTER OF CON - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GANTOS, INC. AND STATE STREET BANK AND TRUST COMPANY ----------------------------------------- SUPPLEMENTAL INDENTURE NO. 2 TO INDENTURE DATED AS OF APRIL 1, 1995 ----------------------------------------- SERIES A PROMISSORY NOTES SERIES B PROMISSORY NOTES DATED AS OF JUNE 30, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUPPLEMENTAL INDENTURE NO. 2 Supplemental Indenture No. 2 (the "Supplemental Indenture"), dated as of June 30, 1998, between Gantos, Inc., a Michigan corporation (the "Company"), and State Street Bank and Trust Company, a Massachusetts trust company and successor to Fleet Bank N.A. (successor to Shawmut Bank Connecticut, National Association, a national banking association) (the "Trustee"). RECITALS A. The Company and the Trustee are the parties to the Indenture, dated as of April 1, 1995 between Company and Trustee, as successor trustee, as amended by Supplemental Indenture No. 1, dated as of December 15, 1997 ("Supplemental Indenture No. 1" and, together with the initial Indenture, the "Indenture"). B. The Company has entered into an Agreement and Plan of Merger, dated as of May 12, 1998 (the "Merger Agreement"), with HOM Holding, Inc., a Delaware corporation ("Holding"), and Hit or Miss Inc., a Delaware corporation wholly owned by Holding, pursuant to which Holding will merge (the "Merger") with and into the Company with the Company being the surviving corporation, and an aggregate of 7,415,450 of the Company's common shares ("Gantos Common Shares") and warrants ("Warrants") to purchase an aggregate of 1,250,000 Gantos Common Shares will be issued to Holding's stockholders and certain affiliated entities, which will represent approximately 49.5% of the outstanding Gantos Common Shares immediately after the Merger (and approximately 53.3% of the outstanding Gantos Common Shares, assuming full exercise of the Warrants). NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH, for and in consideration of the premises, it is mutually agreed and consented, for the equal and proportionate benefit of the respective Holders from time to time of the Notes as follows: 1. CAPITALIZED TERMS. Capitalized terms used in this Supplemental Indenture No. 2 and not defined in this Supplemental Indenture No. 2 have the meanings given them in the Indenture. 2. ELIMINATION OF COVENANTS. Effective on the Effective Date (as defined in Section 21 hereof), Sections 6.12(a), (c), (d) and (f) and Section 6.16 of the Indenture are eliminated from, and shall not apply to, the Indenture or the Notes. 3. ELIMINATION OF DEFINITIONS. Effective on the Effective Date, the definitions of the following terms are eliminated from Section 1.01 of the Indenture and shall not apply to the Indenture or the Notes: "Adjusted Interest Expense"; "Alternative Payment"; "Availability"; "Capital Expenditures"; "Capitalized Lease Obligation"; "Cases"; "Disclosure Statement"; "EBITDA"; "Fiscal Period"; "Interest Coverage Ratio"; "Interest Expense"; and "Trigger Date". 4. AMENDMENT TO DEFINITION OF FREE CASH FLOW. Effective on the Effective Date, the definition of "Free Cash Flow" in Section 1.01 of the Indenture is amended and restated to read as follows: "The term "Free Cash Flow" means, for any year (i) Net Income, PLUS (ii) the sum of amortization expense and depreciation expense, MINUS (iii) actual principal payments (including sinking fund payments) and voluntary principal payments, but not Excess Cash Flow payments, made with respect to indebtedness for borrowed money (which does not include the Revolving Credit Agreement or Replacement Credit Agreement), PLUS OR MINUS (iv) extraordinary cash items (provided that such items are not taken into account in determining Net Income)." 5. AMENDMENT TO DEFINITION OF SENIOR DEBT OBLIGATIONS. Effective on the Effective Date, the definition of "Senior Debt Obligations" in Section 1.01 of the Indenture is amended as follows: (a) The phrase "up to $40,000,000" in clause (ii) of the definition is amended to read "up to $60,000,000;" (b) The phrase "not exceeding $500,000" in clauses (iii)(b), (iii)(d) and (iii)(f)(8) of the definition is amended to read "not exceeding $1,000,000;" and (c) The phrase "(A) which do not exceed $350,000 in the aggregate or (B) securing the repayment of up to $500,000 aggregate outstanding principal amount of landlord constructions loans" in clause (iii)(f)(9) of the definition is amended to read "(A) which do not exceed $750,000 in the aggregate or (B) securing the repayment of up to $1,000,000 aggregate outstanding principal amount of landlord constructions loans." 6. ELIMINATION OF ELECTION TO APPLY REVISIONS TO REVOLVING CREDIT AGREEMENT COVENANTS. Effective on the Effective Date, Section 5 of Supplemental Indenture No. 1 is eliminated from, and shall not apply to, the Indenture or the Notes. 2 7. AMENDMENT TO REDEMPTION PROVISIONS. Effective on the Effective Date, Section 3.01(c) of the Indenture is amended and restated to read as follows: "(c) The Notes shall be subject to special mandatory redemption at the Redemption Price on the next succeeding Interest Payment Date after which notice can be given following payment of an Excess Cash Flow payment (made pursuant to Section 6.12(e) hereof) in an amount for each Series of Notes equal to its Pro-Rata share of the Excess Cash Flow payment. The amount of any redemptions made pursuant to this subsection 3.01(c) shall decrease the aggregate amount of sinking fund redemptions in the reverse order of the dates upon which such sinking fund payments are to be made." 8. ELIMINATION OF SPECIAL MANDATORY REDEMPTION RIGHTS FOR SALES OF EQUITY SECURITIES. Effective on the Effective Date, Section 3.01(f) of the Indenture is deleted from the Indenture and shall no longer apply to the Indenture or the Notes. 9. WAIVER OF RIGHT TO TENDER NOTES. Any rights that the Holders may have to tender the Notes for purchase by the Company pursuant to Section 3.06 of the Indenture are hereby waived to the extent that any such rights would be triggered by the Merger or the following transactions contemplated thereby: (i) the issuance of the Gantos Common Shares and Warrants in the Merger, (ii) the exercise of the Warrants, (iii) the purchase and sale of the Gantos Common Shares underlying the Warrants and (iv) the resale of Gantos Common Shares and Warrants to employees of Holding or Hit or Miss Inc. as described in the Company's registration statement. 10. AMENDMENT TO MAINTENANCE OF PROPERTIES; COMPLIANCE WITH LAWS PROVISIONS. Effective on the Effective Date, Section 6.05, line 6 of the Indenture is amended by the insertion of the parenthetical, "(I.E., the sale of women's clothing)", following the phrase "maintain and operate the same general businesses which it is presently conducting" and before the semi-colon. 11. WAIVER OF NET WORTH COVENANT. The Company shall not be in default of or be deemed to have breached the covenant regarding net worth of the Company and its Subsidiaries set forth in Section 6.12(b) of the Indenture as a result of the consummation of the Merger and the transactions contemplated thereby. Further, effective on the Effective Date, Section 6.12(b) of the Indenture is amended to read as follows: "(b) MINIMUM NET WORTH. Not permit the Net Worth of the Company and its Subsidiaries, on a Consolidated basis, at the end of any fiscal quarter of the Company specified below to be less than the respective amounts set forth below: 3
Period Minimum ------ ----------- Second Fiscal Quarter - 1998 Through Third Fiscal Quarter - 2000" $ 7,500,000 Fourth Fiscal Quarter - 2000 and Thereafter $10,000,000;
provided, however, that if the Company is required under applicable purchase accounting rules to revise its financial statements in a material manner from and after the Effective Date, the Company and the Trustee shall endeavor in good faith to amend this Section 6.12(b) to revise the Net Worth numbers set forth above." 12. AMENDMENT TO COVENANTS REGARDING THE POLICY SECTION. Effective on the Effective Date, the first two lines of Section 6.13 of the Indenture beginning "The Company will," and ending "of the Company," are amended to read as follows: "The Company will, for so long as L. Douglas Gantos ("Mr. Gantos") remains an officer, director or consultant of the Company," 13. WAIVER OF RESTRICTION REGARDING FUTURE DEBT OBLIGATIONS. The Company shall not be in default of or be deemed to have breached the restrictions on future debt obligations of the Company set forth in Section 6.14(a) of the Indenture as a result of the consummation of the Merger and the transactions expressly contemplated thereby. Further, effective on the Effective Date, Sections 6.14(b) and (c) are deleted from the Indenture and shall no longer apply to the Indenture or the Notes. Moreover, effective on the Effective Date, Section 6.14(a) of the Indenture is amended to read as follows: "(a) Notwithstanding anything herein to the contrary, the Company and its Subsidiaries may issue Senior Debt Obligations only if the Company has fulfilled the obligations of Section 3.06 regarding purchases of the Notes. Notwithstanding the preceding sentence or anything herein to the contrary, and without compliance with Section 3.06, the Company and its Subsidiaries may (i) issue debt that is secured by any assets of the Company, provided that the Company's and its Subsidiaries' aggregate secured debt, including pursuant to the Revolving Credit Agreement, any Replacement Credit Agreement and any other secured debt, shall not exceed $60,000,000 in principal amount or (ii) issue Senior Debt Obligations, provided that the aggregate amount of the Company's and its Subsidiaries' secured debt and Senior Debt Obligations may not exceed $60,000,000 in principal amount." 14. WAIVER OF RESTRICTION REGARDING MULTIEMPLOYER PLANS. The Company shall not be in default of or be deemed to have breached the restrictions on adopting, maintaining or contributing to a Pension Plan or Multiemployer Plan of the Company set forth in Section 6.15(f) of the Indenture as a result of the consummation of the Merger and the transactions contemplated thereby, including 4 without limitation the assumption of and future performance under Hit or Miss' current multiemployer plan. 15. AMENDMENT TO ADDITIONAL COVENANTS. (a) Effective on the Effective Date, Section 6.15(c), line 7 of the Indenture is amended by the insertion of the phrase "or any substantially similar provision of a Replacement Credit Agreement" following the phrase "Section 7.06 of the Revolving Credit Agreement" and before the semi-colon. Further, effective on the Effective Date, Sections 6.15(d) and 6.15(e)(i) of the Indenture are deleted in their entireties. (b) Effective as of the Effective Date, Section 6.15(e)(ii), line 1 of the Indenture, is amended by the insertion of the phrase "or acquire" following the phrase "The Company may form." (c) Effective on the Effective Date, Section 6.15(g) of the Indenture is amended and restated to read as follows: "The Company shall not alter the nature of its business (I.E., the sale of women's clothing) as operated on the date of this Indenture in any material respect." (d) Effective on the Effective Date, Section 6.15(h) of the Indenture is amended by the insertion of the phrase "Subject to Article XI," at the beginning of the section and the insertion of the phrase "or any substantially similar provision of a Replacement Credit Agreement" at the end of the section prior to the period. 16. AMENDMENTS TO EVENTS OF DEFAULT SECTION. (a) Effective on the Effective Date, Section 8.01(a)(ii), line 1 of the Indenture is amended by the deletion of the words "or 3.06". (b) Effective on the Effective Date, Section 8.01(a)(vii), line 4 of the Indenture is amended by the deletion of the word "or" after the semicolon. (c) Effective on the Effective Date, Section 8.01(a)(viii), line 6 of the Indenture is amended by the deletion of the period and the addition of a semicolon after the word "days". (d) Effective on the Effective Date, new Sections 8.01(a)(ix) and 8.01(a)(x) shall be added to read as follows: 5 "(ix) an Event of Default as such term is defined under the Senior Subordinated Note due October 1, 2004 (the "TJX Note") issued by Hit or Miss Inc. to The TJX Companies, Inc. shall occur under such TJX Note; or (x) any holder of any portion of the TJX Note shall elect to have all or any portion of such holder's portion of the TJX Note redeemed pursuant to the terms of Section 3.7 of the TJX Note." 17. AMENDMENT TO UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL AND INTEREST SECTION. Effective on the Effective Date, Section 8.09, lines 6-8 of the Indenture is amended by the deletion of the words "or in the case of a tender in accordance with Section 3.06 of this Indenture, on such Purchase Date" from the parenthetical. 18. REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants (which representations and warranties shall survive the execution and delivery of this Supplemental Indenture) as of the date hereof that: (a) All representations and warranties contained in the Indenture are true and correct in all material respects as of the date of this Supplemental Indenture with the same force and effect as if made on such date (except to the extent that any such representation or warranty relates expressly to an earlier date). (b) The Company has the corporate power and authority to execute, deliver and carry out the terms and provisions of this Supplemental Indenture and has taken all necessary corporate action to authorize the execution, delivery and performance of this Supplemental Indenture. (c) This Supplemental Indenture has been duly executed and delivered and constitutes the legal, valid and binding obligation of the Company, and is enforceable in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, reorganization, insolvency, moratorium and other similar laws affecting the enforcement of creditors' rights generally and by general equity principles. (d) No registration or filing with, consent or approval of, or other action by, any Federal, State or other governmental agency, authority or regulatory body is or will be required on behalf of the Company in connection with the execution, delivery, performance, validity or enforcement of this Supplemental Indenture, other than any such registration or filing which has been made or any such consent, approval or other action which has been obtained and remains in full force and effect and other than the filing of Form 10-Q or a Form 10-K with the Securities and Exchange Commission. 6 (e) The execution, delivery and performance of this Supplemental Indenture by the Company will not violate any provision of the certificate or articles of incorporation or bylaws of the Company (before or immediately after the Effective Date) or any of its subsidiaries or any law, statute, rule or regulation, or any order or decree of any court or governmental instrumentality applicable to the Company or any of its subsidiaries, or, after the Effective Date, violate, result in the breach of or constitute a default under any indenture, agreement or other instrument to which the Company or any of its subsidiaries or any of their respective properties or assets are or may be bound. (f) After giving effect to this Supplemental Indenture after the Effective Date, the Company is in compliance with all of the various covenants and agreements applicable to it set forth in the Indenture. (g) After giving effect to this Supplemental Indenture after the Effective Date, no event has occurred and is continuing which constitutes or would constitute, with the giving of notice or the lapse of time or both, an Event of Default under the Indenture. (h) The Company has no defense to or setoff, counterclaim or claim against payment of the Notes or enforcement of the Indenture or the Notes based upon a fact or circumstance existing or occurring on or prior to the date of this Supplemental Indenture. 19. CONDITIONS PRECEDENT. Notwithstanding any term or provision of this Supplemental Indenture to the contrary, no amendment set forth in this Supplemental Indenture shall become effective until the Trustee shall have determined that each of the following conditions precedent shall have been satisfied, such determination to be conclusively evidenced by the Trustee's execution and delivery of this Supplemental Indenture: (a) The Company shall have delivered to the Trustee a copy of the resolution of the Company, certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, that this Supplemental Indenture has been authorized by the Company. The Company shall have also delivered to the Trustee a certification of an officer of the Company that all of the conditions precedent to the effectiveness of this Indenture Supplement shall have been met as of the date of such certificate and that the representations and warranties set forth in Section 18 of this Supplemental Indenture are true as of the Effective Date. (b) The Trustee shall have received an Opinion of Counsel stating that the execution of this Supplemental Indenture is authorized or permitted by the Indenture. (c) Counterparts of the separate letter agreements, dated the date of this Supplemental Indenture, between the Company and holders representing 85% or more of the Outstanding Notes, pursuant to which each such holder has consented to the amendments 7 contained in this Supplemental Indenture, shall have been duly executed and delivered on behalf of the Company and each such holder, and such agreements shall be in full force and effect. (d) The Trustee or its counsel shall have been provided true and accurate copies of the Merger Agreement and such other documents relating to the Merger, the Company or Holding as either of them may reasonably request from the Company. (e) Counterparts of this Supplemental Indenture shall have been duly executed and delivered on behalf of the Company and the Trustee. (f) Counterparts of (i) the Subordination Agreement, dated as of the Effective Date, made by The TJX Companies, Inc. in favor of the Trustee for the benefit of each holder of the Notes and (ii) the Guaranty Agreement, dated as of the Effective Date, made by Hit or Miss Inc. in favor of the Trustee for the benefit of each holder of the Notes shall have been duly executed and delivered on behalf of the Trustee. (g) The Company shall have obtained the consent of Fleet Bank, N.A. under the Revolving Credit Agreement to this Supplemental Indenture. 20. CONDITION SUBSEQUENT. In the event that the Merger shall not be consummated as contemplated by the Merger Agreement, as such Merger Agreement may be amended from time to time after the date of this Supplemental Indenture, by September 30, 1998, no amendment set forth in this Supplemental Indenture shall be effective and the terms of the Indenture shall be enforced without giving effect to the terms of this Supplemental Indenture. 21. EFFECTIVE DATE. Subject to Section 20, the Effective Date shall be the date this Supplemental Indenture is executed and delivered by the parties to this Supplemental Indenture. 22. ADDITIONAL EVENT OF DEFAULT. It shall constitute an Event of Default under the Indenture if any of the representations and warranties of the Company under this Supplemental Indenture shall prove to have been incorrect in any material respect when made. 23. NO OTHER CHANGE. Except as modified by this Supplemental Indenture, the Indenture shall continue in full force according to its terms and is hereby ratified. 8 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, all as of the day and year first above written. GANTOS, INC. By: /s/ Arlene H. Stern ---------------------------------- Its: President and CEO --------------------------------- Attest: /s/ Joseph Giudice - ----------------------------------- Name: Joseph Giudice ------------------------------ Title: Senior V.P. Operations ----------------------------- STATE STREET BANK AND TRUST COMPANY By: Susan T. Keller ---------------------------------- Its: Vice President --------------------------------- 9 STATE OF ) ) ss.: COUNTY OF ) Before me, a Notary Public, in and for said State and County, duly commissioned and qualified, personally appeared __________________________, with whom I am personally acquainted and who, upon oath, acknowledged him/herself to be the ____________________ of ___________________________, and that as such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by him/herself as such officer. IN WITNESS WHEREOF, I have hereunto set my hand on this ________ day of _________________, 199 . ----------------------------- Notary Public My Commission Expires: STATE OF CONNECTICUT) ) ss.: COUNTY OF HARTFORD ) Before me, a Notary Public, in and for said State and County, duly commissioned and qualified, personally appeared Susan T. Keller, with whom I am personally acquainted and who, upon oath, acknowledged him/herself to be the Vice President of State Street Bank and Trust Co., and that such officer, being authorized to do so, executed the foregoing instrument for the purposes therein contained by signing the name of the corporation by him/herself as such officer. IN WITNESS WHEREOF, I have hereunto set my hand on this __________ day of ___________________, 199 . /s/ Dawn P. Heintz ---------------------------- Notary Public My Commission Expires: Dawn P. Heintz Notary Public [SEAL] My commission expires May 31, 2002 10 ELLIOTT ASSOCIATES, L.P. 712 FIFTH AVENUE NEW YORK, NEW YORK 10019 As of June 30, 1998 Gantos, Inc. 1266 East Main Street, 5th Floor Stamford, Connecticut 06902 State Street Bank and Trust Company 225 Asylum Street, 23rd Floor Hartford, Connecticut 06103 Ladies and Gentlemen: This letter hereby confirms the consent of the undersigned, in accordance with Section 10.02 of the Indenture, dated as of April 1, 1995 between Company and Trustee, as successor trustee, as amended by Supplemental Indenture No. 1, dated as of December 15, 1997 ("Supplemental Indenture No. 1" and, together with the Indenture, the "Indenture"), to the terms of Supplemental Indenture No. 2, dated as of the date hereof ("Supplemental Indenture No. 2"). In addition, this letter hereby confirms the consent of the undersigned that payment of the Pro-Rata share of the principal amount of the Notes (as defined in the Indenture) due to be paid on the July 1, 1998 sinking fund redemption date ($774,725.87), as set forth in Section 3.01(b) of the Indenture, may be postponed until such time as the Merger (as defined in Supplemental Indenture No. 2) has been consummated; PROVIDED, HOWEVER, that in no event shall the payment of such amount be postponed beyond September 25, 1998. Interest shall accrue on the principal amount of the Notes postponed hereby at the rate of 12.75% per annum until payment is made. Within five (5) days after the date of this letter, the Company shall issue to the undersigned warrants (substantially in the form annexed hereto) exercisable until June 30, 2003 to purchase the undersigned's pro rata portion (based on the principal amount of the Notes which sign letters consenting to the postponement of the July 1, 1998 payment of principal under the Notes) of 150,000 Gantos Common Shares at an exercise price of $1.625 per share as consideration for postponing the July 1, 1998 payment of principal under the Notes. The payment of such consideration shall not change the amount of principal and interest due with respect to the outstanding Notes. The Company shall use its reasonable good faith efforts to register the Gantos Common Shares underlying the warrants on the Company's currently filed registration statement on Form S-4. If the Company is unable to register the Gantos Common Shares thereon, the Company shall register the Gantos Common Shares underlying the warrants within sixty (60) days after the consummation of the Merger. The Company shall use its best efforts to keep the registration statement registering 1 such Gantos Common Shares (the "Registration Statement") continuously effective until the earlier of (x) the date when all shares covered by the Registration Statement have been sold or (y) the date the warrants cease to be exercisable. The Company shall use its best efforts to list the Gantos Common Shares underlying the warrants on any national securities exchange or Nasdaq market, if any, on which the Gantos Common Shares are then listed or quoted. The Company shall use its best efforts to register or qualify, no later than the effective date of the Registration Statement under the Securities Act of 1933, all shares covered by the Registration Statement under the blue sky laws of such jurisdictions as any holder of the warrants shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable such holder to consummate the disposition of the shares owned by such holder in such jurisdictions, provided that the Company will not be required to register or qualify any shares in any jurisdiction where such registration or qualification would (i) require it to qualify generally to do business in such jurisdiction, (ii) subject it to taxation in such jurisdiction, (iii) require it to consent to service of process in any such jurisdiction, provided it has not already so consented, or (iv) require it to amend the terms of the warrants or of any other class of the Company's securities. The Company hereby agrees that it shall not voluntarily prepay all or part of the principal amount due under the TJX Note prior to the payment in full of the Notes. In addition, as additional consideration for postponing the July 1, 1998 payment of principal under the Notes, the Company shall pay the legal fees and expenses of Kleinberg, Kaplan, Wolff & Cohen, P.C. on behalf of the undersigned incurred in connection with (i) the negotiation of Supplemental Indenture No. 2 and this letter, (ii) any waivers or agreements with the Company related thereto and (iii) any related due diligence, including without limitation the review of the Company's Registration Statement on Form S-4, the Subordination Agreement, the Guaranty Agreement and the form of warrant. The undersigned shall be provided true and accurate copies of the Merger Agreement and such other documents relating to the Merger, the Company or Holding as the undersigned may reasonably request from the Company. 2 If this letter is acceptable, please so indicate by countersigning this letter in the places indicated. ELLIOTT ASSOCIATES, L.P. By: Braxton Associates, L.P., as general partner By: Braxton Associates, Inc., as general partner By: ------------------------------------- An Authorized Signator Accepted: GANTOS, INC. By: -------------------------------- Its: -------------------------- Accepted: STATE STREET BANK AND TRUST COMPANY By: -------------------------------- Its: -------------------------- 3 [LETTERHEAD] June 30, 1998 Gantos, Inc. 1266 East Main Street, 5th Floor Stamford, Connecticut 06902 State Street Bank and Trust Company 225 Asylum Street, 23rd Floor Hartford, Connecticut 06103 Ladies and Gentlemen: This letter hereby confirms the consent of the undersigned, in accordance with Section 10.02 of the Indenture, dated as of April 1, 1995 between Company and Trustee, as successor trustee, as amended by Supplemental Indenture No. 1, dated as of December 15, 1997 ("Supplemental Indenture No. 1" and, together with the Indenture, the "Indenture"), to the terms of Supplemental Indenture No. 2, dated as of the date hereof ("Supplemental Indenture No. 2"). In addition, this letter hereby confirms the consent of the undersigned that payment of the Pro-Rata share of the principal amount of the Notes due to be paid on the July 1, 1998 sinking fund redemption date ($774,725.87), as set forth in Section 3.01(b) of the Indenture, may be postponed until such time as the Merger (as defined in Supplemental Indenture No. 2) has been consummated; PROVIDED, HOWEVER, that in no event shall the payment of such amount be postponed beyond September 25, 1998. Interest shall accrue on the principal amount of the Notes postponed hereby at the rate of 12.75% per annum until payment is made. Within five (5) days after the date of this letter, the Company shall issue to the undersigned warrants exercisable until June 30, 2003 to purchase the undersigned's pro rata portion (based on the principal amount of the Notes which sign letters consenting to the postponement of the July 1, 1998 payment of principal under the Notes) of 150,000 Gantos Common Shares at an exercise price of $1.625 per share as consideration for postponing the July 1, 1998 payment of principal under the Notes. The payment of such consideration shall not change the amount of principal and interest due with respect to the outstanding Notes. The Company shall use its reasonable good faith efforts to register the Gantos Common Shares underlying the warrants on the Company's currently filed registration statement on Form S-4. If the Company is unable to register the Gantos Common Shares thereon, the Company shall use its reasonable good faith efforts to register the Gantos Common Shares underlying the warrants within sixty (60) days after the consummation of the Merger. 1 If this letter is acceptable, please so indicate by countersigning this letter in the places indicated. [NAME OF HOLDER] By: ____________________________ Its: __________________________ Accepted: GANTOS, INC. By: ______________________________ Its: ___________________________ Accepted: STATE STREET BANK AND TRUST COMPANY By: ______________________________ Its: ___________________________ 2 EX-4.2 3 COMMON STOCK PURCHASE WARRANT DATED 7/31/98 WARRANT WARRANT NO. WARRANTS ----- ----- THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY LAWS. GANTOS, INC. This warrant certificate (the "WARRANT CERTIFICATE") certifies that, for value received, [NAME OF HOLDER] or registered assigns under Section 8 hereof (the "HOLDER") is the owner of [NUMBER OF WARRANTS] specified above (the "WARRANTS") each of which entitles the Holder thereof to purchase one (1) fully paid and nonassessable share of common stock, $ .01 par value (the "COMMON STOCK"), of Gantos, Inc., a corporation organized under the laws of the State of Michigan (the "COMPANY"), or such other number of shares as may be determined pursuant to an adjustment in accordance with Section 4 hereof, at the price per share set forth in Section 4 hereof, subject to adjustment from time to time pursuant to Section 4 hereof (the "WARRANT PRICE") and subject to the provisions and upon the terms and conditions set forth herein. 1. TERM OF WARRANT. Each Warrant is exercisable in full for a period of five (5) years beginning on the date hereof and ending on June 30, 2003. 2. METHOD OF EXERCISE AND PAYMENT; ISSUANCE OF NEW WARRANT CERTIFICATE; CONTINGENT EXERCISE. (a) In connection with any exercise pursuant to Section 1 hereof, this Warrant Certificate shall be surrendered (with the notice of exercise form attached hereto as EXHIBIT 1 (the "NOTICE OF EXERCISE") duly executed) at the principal office of the Company together with the payment to the Company of cash or a certified check or a wire transfer in an amount equal to the then applicable Warrant Price multiplied by the number of shares of Common Stock then being purchased. (b) NET ISSUE ELECTION. The holder hereof may elect to receive, without the payment by such holder of any consideration (other than the surrender referred to in this Section 2(b)), shares equal to the value of this Warrant or any portion hereof (as determined below) by the surrender of this Warrant or such portion to the Company, with the Notice of Exercise duly executed by such holder, at the office of any duly appointed transfer agent for the Common Stock or at the office of the Company. Thereupon, the Company shall issue to such holder such number of fully paid and nonassessable shares of Common Stock as is computed using the following formula: X = Y (A-B) -------- A where X = the number of shares of Common Stock to be issued to such holder pursuant to this Section 2(b). Y = the number of shares of Common Stock covered by this Warrant in respect of which the net issue election is made pursuant to this Section 2(b). A = the Fair Market Value (as defined below) of one share of Common Stock. B = the Warrant Price then in effect under this Warrant at the time the net issue election is made pursuant to this Section 2(b). As used herein, "FAIR MARKET VALUE" per share of Common Stock as of any date shall mean the numerical average of the fair market value per share of Common Stock over a period of 21 business days consisting of the business day on which the Notice of Exercise is received by the Company and the 20 consecutive business days prior to such date. The fair market value per share of Common Stock for any day shall mean the average of the closing prices of the Company's Common Stock sold on all securities exchanges on which the Common Stock may at the time be listed or as quoted on the Nasdaq National Market, or, if there have been no sales on any such exchange or any such quotation on any day, the average of the highest bid and lowest asked prices on all such exchanges or such system at the end of such day, or, if any day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the Nasdaq system as of 4:00 p.m., Boston time, or, if on any day that Common Stock is not quoted in the Nasdaq system, the average of the highest bid and lowest asked price on such day in the domestic over-the-counter market as reported by the 2 National Quotation Bureau, Incorporated, or any similar successor organization. If at any time the Common Stock is not listed on any securities exchange or quoted in the Nasdaq system or the over-the-counter market, the current fair market value of Common Stock shall be the highest price per share which the Company could obtain from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board of Directors of the Company. (c) The Company agrees that the shares of Common Stock so purchased shall be deemed to be issued to the Holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant Certificate shall have been surrendered and payment made for such shares as aforesaid. In the event of any exercise of the rights represented by this Warrant Certificate, certificates for the shares of Common Stock so purchased shall be delivered to the Holder hereof within ten (10) days thereafter and, unless all of the Warrants represented by this Warrant Certificate have been fully exercised or have expired pursuant to Section 1 hereof, a new Warrant Certificate representing the shares of Common Stock, if any, with respect to which the Warrants represented by this Warrant Certificate shall not then have been exercised, shall also be issued to the Holder hereof within such ten (10) day period. 3. COMMON STOCK FULLY PAID; RESERVATION OF SHARES. All Common Stock which may be issued upon the exercise of the Warrants will, upon issuance, be fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof. During the period within which the rights represented by this Warrant Certificate may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issuance upon exercise of the purchase rights evidenced by this Warrant Certificate, a sufficient number of shares of its Common Stock to provide for the exercise of the Warrants. 4. WARRANT PRICE; ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The Warrant Price shall be $1.625 per share of Common Stock, and the Warrant Price and the number of shares of Common Stock purchasable upon exercise of the Warrants shall be subject to adjustment from time to time, as follows: 3 (a) RECLASSIFICATION, CONSOLIDATION OR MERGER. In case of any reclassification or change of outstanding securities of the class issuable upon exercise of the Warrants, or in case of any consolidation or merger of the Company with or into another corporation or entity, other than a consolidation or merger with another corporation or entity in which the Company is the continuing corporation and which does not result in any reclassification, conversion or change of outstanding securities issuable upon exercise of the Warrants, the Company, or such successor corporation, as the case may be, shall execute a new warrant certificate (the "NEW WARRANT CERTIFICATE"), providing that the Holder of this Warrant Certificate shall have the right to exercise such new warrants and procure upon such exercise, in lieu of each share of Common Stock theretofore issuable upon exercise of the Warrants, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification, conversion, change, consolidation, or merger by a holder of one share of Common Stock. Such New Warrant Certificate shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The provisions of this Section 4(a) shall similarly apply to successive reclassifications, changes, consolidations, mergers and transfers. (b) SUBDIVISIONS, COMBINATIONS AND STOCK DIVIDENDS. If the Company shall subdivide or combine its Common Stock, or shall pay a dividend with respect to Common Stock payable in, or make any other distribution with respect to its Common Stock consisting of, shares of Common Stock, then the Warrant Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price (rounded to the nearest $.01) determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution. Such adjustment shall be made successively whenever such a dividend or distribution occurs. Upon each adjustment in the Warrant Price pursuant to this Section 4(b) hereof, the number of shares of Common Stock purchasable hereunder shall be adjusted to the product obtained by multiplying the number of shares purchasable immediately prior to such adjustment in the Warrant Price by a fraction (i) the numerator of which shall be the Warrant Price immediately prior to such adjustment and (ii) the denominator of which shall be the Warrant Price immediately thereafter. (c) MINIMUM ADJUSTMENT. No adjustment of the Warrant Price or the number of shares of Common Stock purchasable hereunder shall be made if the amount of any such Warrant Price adjustment would be an amount less than $.01, but any such amount shall be carried forward and an adjustment in respect thereof shall be made at the time of, and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate an increase or decrease of $.01 or more. 4 5. NOTICE OF ADJUSTMENTS. Whenever any adjustment shall be made pursuant to Section 4 hereof, the Company shall prepare a certificate signed by its chief financial officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, the Warrant Price after giving effect to such adjustment and the number of shares of Common Stock then purchasable upon exercise of the Warrants, and shall cause copies of such certificate to be mailed to the Holder hereof at the address specified in Section 9(d) hereof, or at such other address as may be provided to the Company in writing by the Holder hereof. 6. COMPLIANCE WITH SECURITIES ACT. The Holder of this Warrant Certificate, by acceptance hereof, agrees that the Warrants and the shares of Common Stock to be issued upon exercise thereof are being acquired for investment and that it will not offer, sell or otherwise dispose of the Warrants or any shares of Common Stock to be issued upon exercise thereof except under circumstances which will not result in a violation of the Act or applicable state securities or blue sky laws. Upon exercise of the Warrants, the Holder hereof shall, if requested by the Company, confirm in writing that the shares of Common Stock so purchased are being acquired for investment and not with a view toward distribution or resale. This Warrant Certificate and all shares of Common Stock issued upon exercise of the Warrants (unless registered under the Act) shall be stamped or imprinted with a legend substantially in the following form: THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY LAWS. 5 7. TRANSFER. Subject to compliance with the terms of Section 6 above, the Warrants and all rights under this Warrant Certificate are transferable, in whole or in part, at the principal office of the Company by the Holder hereof, in person or by its duly authorized attorney, upon surrender of this Warrant Certificate properly endorsed (with the instrument of transfer form attached hereto as EXHIBIT 2 duly executed), together with payment of all transfer taxes, if any, payable in connection herewith. Each Holder of this Warrant Certificate, by taking or holding the same, consents and agrees that this Warrant Certificate, when endorsed in blank, shall be deemed negotiable; provided, however, that the last Holder of this Warrant Certificate as registered on the books of the Company may be treated by the Company and all other persons dealing with this Warrant Certificate as the absolute owner of the Warrants for any purposes and as the person entitled to exercise the rights represented by this Warrant Certificate or to transfer the Warrants on the books of the Company, any notice to the contrary notwithstanding, unless and until such Holder seeks to transfer registered ownership of the Warrants on the books of the Company and such transfer is effected. 8. MISCELLANEOUS. (a) REPLACEMENT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant Certificate and, in the case of loss, theft or destruction, on delivery of an indemnity agreement or bond reasonably satisfactory in form and amount to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant Certificate, the Company, at its expense, will execute and deliver, in lieu of this Warrant Certificate, a new warrant certificate of like tenor. (b) NOTICE OF CAPITAL CHANGES. In case: (i) the Company shall declare any dividend or distribution payable to the holders of shares of Common Stock; (ii) there shall be any capital reorganization or reclassification of the capital of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation or business organization; or (iii) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company. then, in any one or more of said cases, the Company shall give the Holder hereof prior written notice of such event, in the manner set forth in Section 8(c) below, at least 30 days prior to the date on which a record shall be taken for such dividend or distribution or for determining shareholders entitled to vote upon such reorganization, reclassification, consolidation, merger, 6 sale, dissolution, liquidation, winding up or the date when any such transaction shall take place, as the case may be. (c) NOTICE. Any notice to be given to either party under this Warrant Certificate shall be in writing and shall be deemed to have been given to the Company or the Holder hereof, as the case may be, when delivered in hand or when sent by first class mail, postage prepaid, addressed, if to the Company, at its principal office and, if to the Holder hereof, at its address as set forth in the Company's books and records or at such other address as the Holder hereof may have provided to the Company in writing. (d) NO IMPAIRMENT. The Company will not, by amendment of its Articles of Incorporation, Bylaws or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant Certificate. (e) WARRANT HOLDER NOT STOCKHOLDER. This Warrant Certificate shall not confer upon the Holder hereof any right to vote or to consent to or receive notice as a stockholder of the Company, as such, in respect of any matters whatsoever, or any other rights as a stockholder, prior to the exercise hereof. (f) GOVERNING LAW; JURISDICTION. This Warrant Certificate shall be deemed to be a contract made under, and shall be construed in accordance with, the laws of the State of Delaware without giving effect to conflict of laws principles except to the extent that the corporate laws of the State of Michigan are mandatorily applicable thereof. The Company and the Holder of the Warrant Certificate by acceptance hereof, each hereby agrees that the state and federal court of New York shall have jurisdiction to hear and determine any claims or disputes between the Holder and the Company pertaining directly or indirectly to this Warrant Certificate and all documents, instruments and agreements executed pursuant hereto, or to any matter arising therefrom (unless otherwise expressly provided for therein). To the extent permitted by law, the Company and the Holder of the Warrant Certificate by acceptance hereof, each hereby expressly submits and consents in advance to such jurisdiction in any action or proceeding commenced by the Company or any Holder in any of such courts, and agrees that service of such summons and complaint or other process or papers may be made by registered or certified mail addressed to such party at the address to which notices are to be sent to such party pursuant to this Agreement. To the extent permitted by law, should the Company or the Holder of this Warrant Certificate, as the case may be, after being so served, fail to appear or answer to any summons, complaint, or process or papers so served within 30 days after the mailing thereof, such party shall be deemed in default and an order and/or judgment may be entered against such party as demanded or prayed for in such summons, complaint, process or papers. The exclusive choice of forum set forth in this Section 8(f) shall not be deemed to preclude the enforcement of any judgment 7 obtained in such forum or the taking of any action to enforce the same in any other appropriate jurisdiction. [THE REMAINDER OF THIS PAGE HAS INTENTIONALLY BEEN LEFT BLANK] 8 The Company has caused this Warrant Certificate to be executed as of this [__] day of [_____], 1998. GANTOS, INC. By: ----------------------------------- Name: --------------------------------- Title: ------------------------------- Attest: By: ------------------------------ Name: --------------------------- Title: -------------------------- 9 EXHIBIT 1 NOTICE OF EXERCISE TO: GANTOS, INC. 1. The undersigned hereby irrevocably elects to purchase ____________________ (_________) shares of the Common Stock, $.01 par value per share, of Gantos, Inc. covered by Warrant No.___ according to the terms thereof and herewith makes payment of the Warrant Price of such shares in full. 2. Specify method of exercise by check mark: __ a. Such payment is hereby made in the amount of $_______ by (i) cash, (ii) wire transfer or (iii) certified or bank check payable to Gantos, Inc. __ b. The holder elects to receive the number of shares of Common Stock for the value (as determined pursuant to Section 2(b) of the Warrant Certificate) of the Warrant or the portion thereof specified in 1. above. 3. Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: ____________________________ (Name) ____________________________ (Address) ------------------ Signature Dated: _______________ EXHIBIT 2 FORM OF ASSIGNMENT For value received, the undersigned hereby sells, assigns and transfers unto the rights represented by the within Warrant Certificate to purchase [___________] shares of Common Stock of Gantos, Inc. to which the within Warrant Certificate relates and appoints _______________________ to transfer such rights on the books of Gantos, Inc. with full power of substitution in the premises. Dated: Signature --------------------- --------------------------- 2 EX-10.1 4 AMENDMENT NO. 9 TO CREDIT AGREEMENT AMENDMENT NO. 9 TO CREDIT AGREEMENT AMENDMENT NO. 9 TO CREDIT AGREEMENT, dated as of July 8, 1998 (this "AMENDMENT"), among GANTOS, INC., a Michigan corporation (the "BORROWER"), the lenders named therein (each individually, "LENDER" and collectively, the "LENDERS"), and FLEET BANK, N.A. (formerly known as Natwest Bank N.A.) as agent for the Lenders (in such capacity, the "AGENT"). WHEREAS, the Borrower, the Lenders, and the Agent are party to the Revolving Credit Agreement, dated as of March 10, 1995 (as amended by amendment no. 1, dated April 25, 1996, amendment no. 2, dated March 18, 1997, amendment no. 3, dated October 8, 1997, amendment no. 4, dated as of February 1, 1998, amendment no. 5, dated as of February 27, 1998, amendment no. 6, dated as of March 30, 1998, amendment no. 7, dated as of April 29, 1998, amendment no. 8, dated as of April 30, 1998 and as otherwise and/or further amended, supplemented or modified from time to time in accordance with its terms, the "CREDIT AGREEMENT"); and WHEREAS, subject to the terms and conditions hereof, the parties hereto desire to amend certain provisions of the Credit Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, and subject to the fulfillment of the conditions set forth below, the parties hereto agree as follows: 1. DEFINED TERMS. Unless otherwise specifically defined herein, all capitalized terms used herein shall have the respective meanings ascribed to such terms in the Credit Agreement. 2. AMENDMENTS TO CREDIT AGREEMENT. Subject to the conditions as to effectiveness set forth in Paragraph 4 of this Amendment, the Credit Agreement is hereby amended effective as of July 8, 1998, as follows: (a) The definition of "Availability appearing in Article I of the Credit Agreement is amended and restated in its entirety as follows: (i) From the date hereof through October 12, 1998: "AVAILABILITY" shall mean, at any time, an amount equal to (a) the lesser of (i) the Total Commitment and (ii) the Borrowing Base MINUS (b) the sum of (i) all Loans outstanding at such time, (ii) the Standby Letter of Credit Usage at such time, (iii) fifty-five percent (55%) of the Trade Letter of Credit Usage at such time and (iv) a reserve equal to the sum of (x) $1,000,000, plus (y) all other reserves which the Agent in good faith deems in its reasonable discretion to be necessary and appropriate to maintain with respect to the account of the Borrower, including, without limitation, shrinkage reserves, reserves for environmental liabilities, reserves for judgments, decrees, fines and penalties rendered by a court or other tribunal against any Credit Party (excluding therefrom amounts which an insurance carrier has affirmatively acknowledged are fully covered by insurance or with respect to which an insurance carrier is precluded from denying coverage or liability) and any amounts which the Agent or any Lender may be obligated to pay in the future for the account of the Borrower. (ii) From October 13, 1998 and thereafter: "AVAILABILITY" shall mean, at any time, an amount equal to (a) the lesser of (i) the Total Commitment and (ii) the Borrowing Base plus an amount equal to the lesser of (x) ten percent (10%) of the value (based on the lower of cost (on a FIFO basis) and current market value) of then existing Eligible Inventory and (y) $2,000,000, MINUS (b) the sum of (i) all Loans outstanding at such time, (ii) the Standby Letter of Credit Usage at such time, (iii) fifty-five percent (55%) of the Trade Letter of Credit Usage at such time, (iv) $3,500,000 and (v) an amount equal to all reserves which the Agent in good faith deems in its reasonable discretion to be necessary and appropriate to maintain with respect to the account of the Borrower, including, without limitation, shrinkage reserves, reserves for environmental liabilities, reserves for judgments, decrees, fines and penalties rendered by a court or other tribunal against any Credit Party (excluding therefrom amounts which an insurance carrier has affirmatively acknowledged are fully covered by insurance or with respect to which an insurance carrier is precluded from denying coverage or liability) and any amounts which the Agent or any Lender may be obligated to pay in the future for the account of the Borrower. (b) The definition of "Borrowing Base" appearing in Article I of the Credit Agreement is amended and restated in its entirety as follows: (i) From the date hereof through October 12, 1998: "BORROWING BASE" shall mean an amount equal to the sum of (a) ninety percent (90%) of the Net Amount of Eligible Receivables plus (b) sixty five percent (65%) of Eligible Inventory valued at the lower of cost (on a FIFO basis) and current market value minus the aggregate amount of all outstanding gift certificates sold by the Borrower; provided that the amount of Eligible Inventory (valued as aforesaid) included in the Borrowing Base shall at no time exceed $28,500,000. 2 (ii) From October 13, 1998 and thereafter: "BORROWING BASE" shall mean an amount equal to: (a) ninety percent (90%) of the Net Amount of Eligible Receivables, PLUS (b) the excess of: (i) the lesser of (A) (1) at any time during the period commencing on October 1, 1997 and ending on January 31, 1999, and each four month period occurring thereafter commencing on October 1 and ending on January 31, fifty-five percent (55%) of the Eligible Inventory valued at the lower of cost (on a FIFO basis) and current market value and (2) at any time during the period commencing on February 1, 1999 and ending on September 30, 1999, and each eight month period occurring thereafter commencing on February 1 and ending on September 30, forty-five percent (45%) of the Eligible Inventory valued at the lower of cost (on a FIFO basis) and current market value and (B) thirty-five percent (35%) of the Retail Value of Eligible Inventory, OVER (ii) the aggregate amount of all outstanding gift certificates sold by the Borrower. (c) The definition of "Change of Control" appearing in Article I of the Credit Agreement is amended as follows: (a) The word "or" is deleted after subsection (i) and before subsection (ii) and a comma is inserted in lieu thereof, (b) at the end of subsection (ii) the period is deleted and the words "or (iii)" are inserted in lieu thereof and (c) after "or (iii)" the following text is added: "Arlene H. Stern or a replacement reasonably satisfactory to the Agent is no longer the President and the Chief Executive Officer of the Borrower performing the functions thereof." (d) A new sentence shall be added to the end of Section 2.06(b) of the Credit Agreement: (d) The Reduction Fee shall become immediately due and payable to the Agent on behalf of each Lender in the event that Fleet Bank, N.A. assigns its interests, rights and obligations under the Loan Documents, including with respect to the Loans and the other Obligations to Enhanced Retail Funding, LLC. (e) Section 6.05(j) is amended as follows: 3 (a) The word "and" is deleted after subsection (i) and before subsection (ii) and a comma is inserted in lieu thereof, (b) at the end of subsection (ii) the period is deleted and the words "and (iii)" are inserted in lieu thereof and (c) after "and (iii)" the following text is added: "Commencing October 1, 1998, and on each day thereafter, a daily borrowing base certificate substantially in the form of Schedule 6.05(j) hereto (or in such other form as is mutually agreed to by the Borrower and the Agent) executed by the Financial Officer of the Borrower (or the duly authorized financial officer of the Borrower) demonstrating compliance as at the close of business of the preceding day with the Borrowing Base and the Availability and utilizing the preceding day=s amounts for inventory and Receivables; provided that if on October 15, 1998 no Default exists, then the Borrower shall not be required to comply with this subsection (iii) thereafter." (f) Section 11.03(c) is amended by adding the following sentence at the end thereof: Notwithstanding the foregoing, the Borrower=s consent shall not be required in the event that Fleet Bank, N.A. assigns all or a portion of its interests, rights and obligations under this Agreement and the other Loan Documents to Enhanced Retail Funding, LLC or any affiliate. (g) From the date hereof through October 12, 1998, the applicability and effectiveness of Sections 7.09, 7.10 and 7.11 (as amended in "Amendment No. 3 to Credit Agreement" dated as of October 8, 1997) shall be suspended and on October 13, 1998 and at all times thereafter such Sections shall be applicable and fully effective. 3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants as follows (which representations and warranties shall survive the execution and delivery of this Amendment) as of the date hereof that: (a) All representations and warranties contained in the Credit Agreement and each of the other Loan Documents are true and correct in all material respects as of the date hereof with the same force and effect as if made on such date (except to the extent that any such representation or warranty relates expressly to an earlier date). (b) The Borrower has the corporate power and authority to execute, deliver and carry out the terms and provisions of this Amendment and has taken all necessary corporate action to authorize the execution, delivery and performance of this Amendment. (c) This Amendment has been duly executed and delivered and constitutes the legal, valid and binding obligation of the Borrower, and is enforceable in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, reorganization, 4 insolvency, moratorium and other similar laws affecting the enforcement of creditors= rights generally and by general equity principles. (d) No registration or filing with, consent or approval of, or other action by, any Federal, State or other governmental agency, authority or regulatory body is or will be required on behalf of the Borrower in connection with the execution, delivery, performance, validity or enforcement of this Amendment other than any such registration or filing which has been made or any such consent, approval or other action which has been obtained and remains in full force and effect and other than the filing of a Form 10-Q or a Form 10-K or the filing of this Amendment as an exhibit to any other report or registration statement filed or to be filed with the Securities and Exchange Commission. (e) The execution, delivery and performance of this Amendment by the Borrower will not violate any provision of the certificate or articles of incorporation or bylaws of the Borrower or any of its subsidiaries or any law, statute, rule or regulation, or any order or decree of any court or governmental instrumentality applicable to the Borrower or any of its subsidiaries, or violate, result in the breach of or constitute a default under any indenture, agreement or other instrument to which the Borrower or any of its subsidiaries or any of their respective properties or assets are or may be bound. (f) After giving effect to this Amendment, the Borrower is in compliance with all of the various covenants and agreements applicable to it set forth in the Credit Agreement and each of the other Loan Documents. (g) After giving effect to this Amendment, no event has occurred and is continuing which constitutes or would constitute, with the giving of notice or the lapse of time or both, an Event of Default under the Credit Agreement or any of the other Loan Documents, or an Event of Default (as defined in the Indenture) under the Indenture. (h) The Borrower has no defense to or setoff, counterclaim or claim against payment of the Obligations or enforcement of the Loan Documents based upon a fact or circumstance existing or occurring on or prior to the date hereof. As of July 7, 1998, the outstanding principal amount of Loans is $23,709,332.88 and the aggregate amount of outstanding Letters of Credit is $1,814.014.82 (consisting of $1,714,014.82 of Trade Letter of Credit Usage and $100,000 of Standby Letter of Credit Usage). 4. CONDITIONS PRECEDENT. Notwithstanding any term or provision of this Amendment to the contrary, the amendments set forth in Paragraph 2 hereof shall become effective as of July 8, 1998 if, and only if, the Agent shall have determined that each of the following conditions precedent shall have been satisfied: (a) All required corporate actions in connection with the execution and delivery of this Amendment shall have been taken, and each shall be satisfactory in form and substance to the Agent, and the Agent shall have received all information and copies of all 5 documents, including, without limitation, records of requisite corporate action that the Agent may reasonably request, to be certified by the appropriate corporate person or government authorities. (b) All representations and warranties made by the Borrower contained in Paragraph 3 hereof shall be true and correct with the same effect as though such representations and warranties had been made on the date of effectiveness of the amendments contained in this Amendment after giving effect to such amendments (unless any such representation or warranty speaks expressly to an earlier date). (c) Counterparts of this Amendment shall have been duly executed and delivered on behalf of the Borrower, the Lenders and the Agent. (d) The Agent shall have received a Junior Participation Agreement entered into by Enhanced Retail Funding, LLC and Fleet Bank, NA and the Agent shall have received the letter of credit provided for therein. 5. CONTINUED EFFECTIVENESS. The term "Agreement", "hereof", "herein" and similar terms as used in the Credit Agreement, and references in the other Loan Documents to the Credit Agreement, shall mean and refer to, from and after the effective date of the amendments contained herein as determined in accordance with Paragraph 4 hereof, the Credit Agreement as amended by this Amendment. Each of the parties hereto agrees that, as amended by this Amendment, all of the covenants and agreements and other provisions contained in the Credit Agreement and the other Loan Documents are hereby ratified and confirmed in all respects and shall remain in full force and effect from and after the date of this Amendment. 6. COUNTERPARTS. This Amendment may be executed in two or more counterparts, each of which shall be an original, and all of which, taken together, shall constitute a single instrument. Delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment. 7. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF). 8. MISCELLANEOUS. The Borrower agrees to request a loan to pay any outstanding fees set forth in the fee letter attached hereto as Exhibit A owed to Enhanced Retail Funding, LLC. The Agent will advance to the Borrower such funds upon such request to the extent there is, at such time, sufficient Availability to do so after giving effect to such advance. The Borrower consents to Fleet Bank, N.A. entering into the Junior Participation Agreement dated as of the date hereof with Enhanced Retail Funding, LLC and agrees that Fleet Bank, N.A. may grant to Enhanced Retail Funding, LLC the rights granted thereunder. 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. GANTOS, INC., as Borrower By:________________________________ Name: Title: FLEET BANK, N.A. (formerly known as Natwest Bank N.A.), as Agent and as a Lender By:________________________________ Name: Title: 7 EX-10.2 5 EX 10.2 LTR OF AGREEMENT Enhanced Retail Funding, LLC 40 Broad Street Boston, Massachusetts 02109 Dated as of: July 8, 1998 Gantos, Inc. 1266 East Main Street 5th Floor Stamford, CT 06902 Attn: Arlene H. Stern, President and CEO Dear Arlene: Reference is made to the Revolving Credit Agreement between Gantos, Inc. ("Gantos"), as Borrower and Fleet Bank, N.A. ("Fleet"), as Agent and Lender, dated as of March 10, 1995, as amended, supplemented, and/or modified from time to time in accordance with the provisions thereof, (as so amended and in effect, the "Loan Agreement"). Terms defined in the Loan Agreement and not otherwise defined herein have the same meanings herein as specified therein. The undersigned is pleased to advise Gantos of its agreement to provide Fleet with an irrevocable standby letter of credit in the face amount of $3,350,000 and with an expiration date of October 20, 1998 (the "Letter of Credit"). This Letter of Credit is a condition precedent to Fleet's further amendment of the Loan Agreement to, INTER ALIA, increase Availability of Loans under the Borrowing Base for the period through October 12, 1998, as more fully set forth in Amendment No. 9 to the Credit Agreement of even date herewith ("Amendment No. 9"). The terms and conditions for the issuance of the Letter of Credit are contained in the Junior Participation Agreement of even date herewith (the "Participation Agreement") entered into between Fleet and the undersigned. In consideration for the undersigned's provision of the Letter of Credit and its commitments, obligations and agreements which will allow Gantos increased liquidity from its asset base, which will, in turn, enhance Gantos' ability to consummate a merger with Hit or Miss, Inc., and for other valuable consideration, the receipt and sufficiency of which are acknowledged, by its signature below, Gantos hereby agrees with the undersigned as follows: -1- 1. Gantos agrees that on the date of and as a condition to the issuance of the Letter of Credit it will pay to the undersigned in immediately available funds a fee equal to $167,500. In addition, Gantos agrees that on the 30th calendar day after the issuance of the Letter of Credit it will pay to the undersigned in immediately available funds a fee equal to $33,500. In addition, Gantos agrees that on each of the 60th calendar day and the 90th calendar day after the issuance of the Letter of Credit it will pay to the undersigned in immediately available funds a fee equal to $33,500, PROVIDED, HOWEVER, that this fee due on each of the 60th day and the 90th day after the issuance of the Letter of Credit will not be payable if, on or before the date such fee payment is due, all of the Obligations under the Loan Agreement have been paid in full as a result of the merger between Gantos and Hit or Miss, Inc. 2. Gantos agrees that on the date of and as a condition to the issuance of the Letter of Credit, it will pay to the undersigned all of the issuer's costs of issuance for the Letter of Credit (presently calculated at 1% per year, prorated), in addition to any and all other sums due hereunder. 3. Gantos agrees to pay to the undersigned during the term of the Letter of Credit a monthly monitoring fee of $1,500. The first $1,500 monthly monitoring fee shall be due and payable on the date of the issuance of the Letter of Credit. Subsequent $1,500 monthly monitoring fees will be due and payable on the first business day of each subsequent calendar month during the term of the Letter of Credit or, if Fleet draws on the Letter of Credit in any amount, until all Obligations under the Loan Agreement, including, without limitation, amounts payable to the undersigned under the Junior Participation Agreement, are paid in full. 4. Gantos agrees to pay all of the undersigned's expenses (including out-of-pocket expenses) for due diligence and for all other expenses related to this transaction, including, without limitation, legal fees and expenses, accountants fees and expenses, costs of appraisals and inspections, filing fees, credit check fees, recording fees, and similar fees and expenses up to $50,000. The undersigned acknowledges that it has already received a $20,000 deposit towards the expenses outlined in this Paragraph 4. On the date of and as a condition to the issuance of the Letter of Credit, Gantos agrees to pay to the undersigned in immediately available funds the remaining $30,000 payable on account of the expenses outlined in this Paragraph 4. Any remaining unused funds will be returned to Gantos after a final accounting of all the expenses incurred in connection with this transaction. 5. Gantos acknowledges that Fleet has agreed in the Participation Agreement, and under the latest amendment to the Loan Agreement, to make available from the line of credit under the Loan Agreement the amounts necessary to pay the above fees and expenses, provided, in all instances, that there is adequate Availability under the terms and conditions of the Loan Agreement (as amended by Amendment No. 9) to advance such funds. Gantos agrees to request such funds under its line of credit under the Loan Agreement (as amended by Amendment No. 9) to pay all of the fees and expenses owed -2- to the undersigned. The failure of Gantos to have adequate Availability under its line of credit will not excuse Gantos from its obligation to pay the fees and expenses owed to the undersigned, and nothing herein shall be construed as a waiver, in whole or in part, by the undersigned of its right to any of the fees and expenses due from Gantos to the undersigned under this letter agreement. If you are in agreement with the above, please indicate such agreement by your signature below. Upon your execution below, this letter will become a binding agreement between the parties hereto. Sincerely, ENHANCED RETAIL FUNDING, LLC By:_____________________________ Name: Title: AGREED AND ACCEPTED this _____________ day of _____________, 1998. GANTOS, INC. By:________________________________ Arlene H. Stern President and Chief Executive Officer -3- EX-10.3 6 EXHIBIT 10.3 GANTOS, INC. EXECUTIVE BONUS PLAN 1998 Gantos, Inc. Executive Bonus Plan (1) 1. DEFINITIONS. As used in this Executive Bonus Plan, the following terms have the following meanings: "BOARD" is the Board of Directors of Corporation. "COMMITTEE" is the Compensation Committee of the Board or any other committee appointed by the Board to administer the Plan or, at the Board's discretion, the Board itself. "CORPORATION" is Gantos, Inc., a Michigan corporation, or any successor thereto. "EFFECTIVE DATE" is February 1, 1998. "FISCAL 1998" is Corporation's fiscal year ending January 30, 1999. "FISCAL 1998 TARGET" is the Fiscal 1998 Profit target which has been determined by the Board or the Committee and announced to the Participants. "PARTICIPANT" means any participant in the Plan pursuant to paragraph 3 below. "PLAN" is this Executive Bonus Plan. "PROFIT" is Corporation's income (i) before deductions for (1) federal, state and local income taxes, (2) extraordinary items, and (3) all bonuses payable under this Plan, and (ii) plus or minus any items not included in the projections from which the Fiscal 1998 Profit was determined and that otherwise decreased or increased Profit, at the discretion of the Compensation Committee. Profit will be determined by Corporation's regular independent public accountants (1) in accordance with generally accepted accounting principles and (2) using amounts obtained as part of the annual audit of Corporation's Fiscal 1998 financial statements. 2. ADMINISTRATION. The Plan will be administered by the Committee. Subject to the provisions of the Plan, the Committee is authorized to interpret the Plan, to make, amend and rescind rules and regulations relating to the Plan, to make bonus awards under the Plan and to make all other determinations necessary or advisable for its administration. All Plan (1) Adopted by the Gantos, Inc. Board of Directors on May 19, 1998. determinations made by the Committee, and the Committee's interpretation and construction of any provision of the Plan, will be final and conclusive. 3. PARTICIPANTS; TERMINATION OF A PARTICIPANT'S EMPLOYMENT. (a) The initial persons covered by the Plan are Arlene H. Stern, Joseph Giudice, Dennis Horstman, Neal Gottfried, David Nelson, Vicki Boudreaux and Hope Grey. The Committee or the Corporation's Chief Executive Officer will determine and designate from time to time, in its, his or her discretion, any additional officers hired by the Corporation during Fiscal 1998 to be covered by the Plan. The Committee will determine and designate from time to time, in its discretion, any other key employees of Corporation to be covered by the Plan. (b) If a Participant's employment with Corporation terminates before the end of Fiscal 1998 because of such Participant's death or disability, such Participant will be eligible to receive a bonus under the Plan. If a Participant's employment with Corporation terminates before the end of Fiscal 1998 for any other reason, such Participant will receive no bonus under the Plan. 4. FISCAL 1998 ANNUAL BONUS. (a) If Corporation's Fiscal 1998 Profit exceeds the Fiscal 1998 Target, the Fiscal 1998 cash bonus pool will equal 50% of such excess, up to a maximum cash bonus pool equal to 35% of the actual salaries of all Participants in the Plan with respect to services performed in Fiscal 1998 for Corporation (the "Bonus Pool"). (b) Fifty percent of the Bonus Pool will be automatically earned and payable upon achievement of Fiscal 1998 Profits in excess of the Fiscal 1998 Target. This 50% portion will be paid to each Participant in proportion to the 1998 base salary actually paid to such Participant. The Committee shall determine, in its discretion, what portion, if any, of the remaining Bonus Pool will be payable to each Participant, based on its evaluation of senior management's recommendations, the individual's achievement of his or her Performance Plan/Objectives and such other factors as the Committee deems relevant. The Committee, in its discretion, may determine that all, any portion or none of the remaining Bonus Pool will be payable to any particular Participant, and the Committee is not required to award the entire amount of the remaining Bonus Pool to the Participants. Bonuses will be paid promptly after the Committee certifies the amount of Fiscal 1998 Profit and the calculation of the portion of the Bonus Pool automatically payable to each Participant receiving bonuses under the Plan and makes its decisions regarding the merit portion of the bonus, if any. The Board reserves the right to pay bonuses to Participants beyond those, if any, called for by the Plan. 5. BASE SALARIES. The Plan does not cover Participants' salaries. 6. STOCK OPTIONS. The Plan does not cover stock option grants, which will be subject to the Board's discretion. 2 7. NONTRANSFERABILITY OF RIGHTS UNDER THE PLAN. A Participant's rights under the Plan may not be transferred, assigned or pledged. 8. EMPLOYMENT AGREEMENT/CONTINUATION OF EMPLOYMENT. Nothing contained in the Plan nor any action taken by the Committee in connection with the Plan will confer upon any Participant any right to continuation of employment by Corporation or any subsidiary of Corporation, nor interfere in any way with the right of Corporation or any subsidiary to terminate such Participant's employment at any time. Notwithstanding the preceding sentence, nothing in the Plan affects the rights of any Participant under any written employment agreement between such Participant and Corporation. 9. WITHHOLDING PAYMENTS. Participants will be responsible for all taxes on bonuses awarded to them under the Plan, and Corporation will be entitled to make all appropriate withholding from amounts due to Participants under the Plan. 10. EFFECTIVENESS OF PLAN. This Plan becomes effective on the Effective Date and will remain in effect through the end of Fiscal 1998. 3 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF GANTOS, INC. AS OF, AND FOR THE SIX MONTH PERIOD ENDED AUGUST 1, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS, AND ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 1,000 6-MOS JAN-30-1999 AUG-01-1998 775 0 16,695 492 26,640 51,980 63,564 50,247 65,297 17,931 31,339 0 0 77 15,950 65,297 70,822 70,822 59,289 59,289 0 0 1,725 (5,697) 0 (5,697) 0 0 0 (5,697) (.75) (.75)
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