<PAGE>
As filed with the Securities and Exchange Commission on September 28, 1999
Registration No. 333-81307
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 2 to
Form S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
G+G Retail, Inc.
(Exact name of registrant as specified in its charter)
Delaware 5621 22-3596083
(State or
other
jurisdiction
of
incorporation
or (Primary Standard Industrial (I.R.S. Employer
organization) Classification Code Number) Identification No.)
520 Eighth Avenue Mr. Scott Galin
New York, New York 10018 President and Chief Operating Officer
(212) 279-4961 G+G Retail, Inc.
520 Eighth Avenue
(Address, including zip code, and New York, New York 10018
telephone (212) 279-4961
number, including area code, of
registrant's (Name, address, including zip code,
principal executive offices) and
telephone number, including area code,
of agent for service)
Copies of communications to:
Mark S. Selinger, Esq.
Kaye, Scholer, Fierman, Hays & Handler, LLP
425 Park Avenue
New York, New York 10022
(212) 836-7016
---------------
Approximate date of commencement of proposed sale to the public: as soon as
practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it is not soliciting an offer to buy +
+these securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated September 28, 1999
Preliminary Prospectus
$107,000,000
G+G Retail, Inc.
Offer to Exchange All Outstanding 11% Senior Notes Due 200 6 for 11% Senior
Notes Due 2006
Registered Under the Securities Act of 1933
The Exchange Offer
. We will exchange all outstanding notes that are validly tendered and not
validly withdrawn for an equal principal amount of exchange notes that are
freely tradeable.
. You may withdraw tenders of outstanding notes at any time prior to the
expiration of the exchange offer.
. The exchange offer expires at 5:00 p.m., New York City time, on ,
1999, unless extended. We do not currently intend to extend the expiration
date.
. The exchange of outstanding notes for exchange notes in the exchange offer
will not be a taxable event for U.S. federal income tax purposes.
. We will not receive any proceeds from the exchange offer.
The Exchange Notes
. We are offering the exchange notes to satisfy obligations under a
registration rights agreement entered into in connection with our private
placement of the outstanding notes.
. The terms of the exchange notes to be issued in the exchange offer are
substantially identical to the outstanding notes, except that the exchange
notes are registered under the Securities Act of 1933 and will be freely
tradeable.
You should consider carefully the risk factors beginning on page 7 of this
prospectus before participating in the exchange offer.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The date of this prospectus is , 1999.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information discussed in greater detail
elsewhere in this prospectus. This summary does not contain all of the
information that may be important to you. You should read the entire prospectus
carefully.
We are a leading national mall-based retailer of popular price female junior
apparel. For over 30 years, we have built a reputation for providing fashion
apparel and accessories distinctly targeted at teenaged women. As of May 1,
1999, we had 441 stores, generally in major enclosed regional shopping malls,
throughout the United States, Puerto Rico and the U.S. Virgin Islands primarily
under the G+G and Rave names. Our business strategy is to expand our operations
and increase our sales, net income and EBITDA through the opening of new Rave
stores primarily in mall locations that we believe are favorable for our
business. We recently launched, and are in the process of expanding, an
Internet web site that provides information about our merchandise offerings,
promotions and store sites. Our principal executive office is located at 520
Eighth Avenue, New York, New York 10018, and our main telephone number is (212)
279-4961. Our URL is www.gorave.com.
Summary of Terms of the Exchange Notes
The terms of the exchange notes and the outstanding notes are identical in all
material respects, except that transfer restrictions that apply to the
outstanding notes do not apply to the exchange notes. The exchange notes will
evidence the same debt as the outstanding notes and will be governed by the
same indenture.
Total Amount of Notes.......
Up to $107.0 million in aggregate principal
amount.
Maturity Date............... May 15, 2006.
Interest Payment Date....... Interest on the notes will accrue at 11% per
annum, payable semi-annually in arrears on May 15
and November 15 of each year, beginning November
15, 1999.
Both the outstanding notes and the exchange notes
Ranking..................... are general unsecured obligations. They rank
equally in right of payment with all of our
existing and future senior debt. The notes will
rank above all of our existing and future debt
instruments that expressly provide that they are
subordinated to the notes. However, the notes
will effectively rank below all of our secured
debt and all secured debt of our subsidiaries, to
the extent of the value of the collateral
securing that debt, and below all debt of any of
our subsidiaries that are not guarantors of the
notes.
1
<PAGE>
Summary of the Exchange Offer
In connection with a private placement in May 1999 of our outstanding 11%
senior notes due 2006, we entered into a registration rights agreement under
which we agreed to deliver this prospectus and to complete an exchange offer
for the outstanding notes. In the private placement, we issued the outstanding
notes, while G&G Retail Holdings, Inc., referred to by us as Holdings, which
owns all of our outstanding capital stock, issued warrants to purchase its
class D common stock. After this exchange offer commences, the outstanding
notes and the warrants for Holdings class D common stock will trade separately
rather than as units.
Securities Offered.......... We are offering up to $107.0 million aggregate
principal amount of 11% senior notes due 2006
registered under the Securities Act of 1933. The
terms of these exchange notes are identical in
all material respects to those of the outstanding
notes, except that transfer restrictions that
apply to the outstanding notes do not apply to
the exchange notes.
Exchange Offer.............. We are offering to exchange $1,000 in principal
amount of new 11% senior notes due 2006
registered under the Securities Act of 1933 for
each $1,000 in principal amount of outstanding
11% senior notes due 2006.
To be exchanged, an outstanding note must be
properly tendered and accepted. All outstanding
notes that are validly tendered and not validly
withdrawn will be exchanged. As of the date of
this prospectus, there is $107.0 million
aggregate principal amount of outstanding notes.
Resales.....................
Based on interpretations by the staff of the
Securities and Exchange Commission, as set forth
in a series of no-action letters issued to third
parties, we believe that you may offer for
resale, resell or otherwise transfer the exchange
notes without compliance with the registration
and prospectus delivery requirements of the
Securities Act of 1933, as long as:
. you are acquiring the exchange notes in the
ordinary course of your business;
. you are not participating, do not intend to
participate and have no understanding with any
person to participate in a distribution of the
exchange notes; and
. you are not an "affiliate" of ours.
By executing documents that are required for
tendering your outstanding notes, you will
represent that these conditions apply to you. If
you cannot so represent, you must comply with the
registration and prospectus delivery requirements
of the Securities Act of 1933 in connection with
any resale transaction.
All brokers or dealers who acquire exchange notes
for their own account in exchange for outstanding
notes that they acquired as a result of market-
making or other trading
2
<PAGE>
activities must acknowledge that they will
deliver this prospectus in connection with any
offer to resell, resale or other transfer of the
exchange notes. In reselling outstanding notes or
exchange notes, brokers and dealers who acquire
notes from us may not rely on the SEC staff
interpretations described. Instead, they must
comply with the registration and prospectus
delivery requirements of the Securities Act of
1933 and be named as selling noteholders.
Expiration Date.............
5:00 p.m., New York City time, on , 1999,
unless we extend the expiration date. We
currently do not intend to extend the expiration
date. Under no circumstances will we extend the
expiration date of the exchange offer beyond
, 1999.
Accrued Interest............ The exchange notes will bear interest from May
17, 1999. If you exchange your outstanding notes,
then you will receive interest on the exchange
notes and not on the outstanding notes.
Conditions..................
The exchange offer is subject to a number of
conditions. We may assert or waive these
conditions in our sole discretion. If we
materially change the terms of the exchange
offer, we will resolicit tenders of the
outstanding notes. See "The Exchange Offer--
Conditions to the Exchange Offer."
Procedures..................
To tender your outstanding notes, you must:
. complete, sign and date the letter of
transmittal or a facsimile of it according to
its instructions; and
. send the letter of transmittal, together with
your outstanding notes and any other required
documentation, to U.S. Bank Trust National
Association, the exchange agent.
The exchange agent must receive the required
documentation at the address set forth in the
letter of transmittal by 5:00 p.m., New York City
time, on the expiration date. See "The Exchange
Offer--Procedures for Tendering."
If you wish to exchange outstanding notes that
Beneficial Holders.......... are registered in the name of your broker,
dealer, commercial bank, trust company or other
nominee, you should promptly contact the person
in whose name your outstanding notes are
registered and instruct that person to tender on
your behalf. See "The Exchange Offer--Procedures
for Tendering."
Guaranteed Delivery
Procedures................. If you wish to exchange but cannot deliver your
outstanding notes, the letter of transmittal or
any other required documents to the exchange
agent before the expiration date,
3
<PAGE>
you may use the guaranteed delivery procedures
described in "The Exchange Offer--Guaranteed
Delivery Procedures."
Withdrawal Rights...........
Tenders may be withdrawn at any time before 5:00
p.m., New York City time, on the expiration date.
Effect on Holders of
Outstanding Notes..........
Upon acceptance for exchange of all outstanding
notes that are validly tendered and not validly
withdrawn, we will have fulfilled our obligations
under the registration rights agreement.
Accordingly, the interest rate on the outstanding
notes that are not exchanged will not increase.
If you do not tender in this exchange offer, you
will continue to hold outstanding notes and be
entitled to all of your existing rights under the
notes, except for rights under the registration
rights agreement that terminate upon the closing
of this exchange offer. In general, the
outstanding notes may not be offered or sold,
unless they are registered under the Securities
Act of 1933, an exemption from registration is
available or the transaction is not subject to
registration. We currently do not intend to
register any resales of outstanding notes under
the Securities Act of 1933.
U.S. Federal Income Tax
Considerations............. We believe that your exchange of outstanding
notes for exchange notes will not result in any
gain or loss to you for U.S. federal income tax
purposes. See "Material Federal Income Tax
Considerations."
We will not receive any proceeds from the
issuance of the exchange notes. We will pay all
Use of Proceeds............. expenses incident to the exchange offer. We have
used $90.6 million of the $94.0 million net
proceeds from the May 1999 private placement of
the outstanding notes to repay our senior bridge
notes. We expect to use the balance of those net
proceeds for general corporate purposes. See "Use
of Proceeds."
Summary Historical and Unaudited Pro Forma Financial and Operating Data
We account for our operations on a fiscal year rather than calendar year basis.
As a result, we present information on a fiscal year basis in this prospectus.
Each reference to a "fiscal year" means the 52- or 53-week fiscal year that
ends on the Saturday nearest January 31 in the particular calendar year. For
example, references to "fiscal 1999" mean the fiscal year ended January 30,
1999.
4
<PAGE>
The following table sets forth:
. summary historical combined financial data related to our business for
fiscal 1995 through fiscal 1998, the seven months ended August 28, 1998 and
the six months ended August 1, 1998, which reflect operations before we
acquired our business in an acquisition that closed in August 1998;
. pre-acquisition summary historical combined balance sheet data as of January
28, 1995, February 3, 1996, February 1, 1997, January 31, 1998 and August 1,
1998;
. summary historical consolidated financial data for G+G Retail for the five
months ended January 30, 1999 and the six months ended July 31, 1999;
. summary historical consolidated balance sheet data for G+G Retail as of
January 30, 1999 and July 31, 1999; and
. summary unaudited pro forma consolidated financial data for G+G Retail for
fiscal 1999 and the six months ended July 31, 1999.
We derived historical financial data for fiscal 1995 and for the six months
ended August 1, 1998 and balance sheet data as of January 28, 1995, February 3,
1996 and August 1, 1998 from unaudited combined financial statements of the
companies from which we acquired our business in the acquisition. We derived
historical financial data for these companies for fiscal 1996 through fiscal
1998 and for the seven months ended August 28, 1998 and balance sheet data as
of February 1, 1997 and January 31, 1998, from audited combined financial
statements of these companies. Combined financial statements include the
accounts of G & G Shops and stores operated by G & G Shops that were owned by
subsidiaries of Petrie Retail. The stores acquired from G & G Shops and the
other subsidiaries of Petrie Retail were under 100% voting and economic control
of Petrie Retail. In the acquisition, we purchased the assets of all of the
stores that G & G Shops operated and the trademarks used in our business.
We derived historical financial data for the five months ended January 30, 1999
and balance sheet data as of January 30, 1999 from the audited consolidated
financial statements of G+G Retail. We derived historical financial data for
the six months ended July 31, 1999 and balance sheet data as of July 31, 1999
from the unaudited financial statements of G+G Retail.
The pro forma statements of operations data for fiscal 1999 and for the six
months ended July 31, 1999 are intended to reflect how our business would have
looked if we had closed the acquisition and the private placement of the
outstanding notes and the warrants of Holdings on February 1, 1998. The pro
forma statements of operations data for fiscal 1999 and the six months ended
July 31, 1999 do not reflect the write-off of the unamortized portion of the
financing costs, net of taxes, related to the acquisition. We have written off
that portion of the financing costs as an extraordinary item in our financial
statements for the second quarter of fiscal 2000.
Pro forma financial data may not be indicative of either the future results of
our operations or the results that would have occurred if the acquisition and
the private placement had closed on the dates indicated or had been in effect
for the periods presented.
You should read the summary financial data presented below in conjunction with
"Unaudited Pro Forma Consolidated Financial Statements," "Selected Financial
and Operating Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical combined and
consolidated financial statements and related notes included elsewhere in this
prospectus. In particular, you should read carefully the introduction and the
notes to "Selected Financial and Operating Data" beginning on page 31, which
provide important information about the following data.
5
<PAGE>
Summary Historical and Unaudited Pro Forma Financial and Operating Data
<TABLE>
<CAPTION>
Acquired Assets G+G Retail
------------------------------------------------------- -------------------------
February 1, August 29,
Fiscal Year 1998 to 1998 to Pro Forma
------------------------------------------ August 28, January 30, Fiscal Year
1995 1996 1997 1998 1998 1999 1999
--------- --------- --------- --------- ----------- ----------- ------------
(Dollars in thousands, except
sales per gross
square foot)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales....... $ 237,680 $ 243,583 $ 266,362 $ 286,938 $ 162,823 $ 131,567 $294,390
Cost of sales
(including
occupancy
costs)......... 155,940 159,262 166,636 177,765 106,056 79,267 185,323
Selling, general, administrative
and buying
expenses....... 75,526 78,128 76,684 79,702 49,330 36,170 81,188
Depreciation and
amortization
expense........ 8,905 5,148 4,526 4,489 2,845 5,141 11,074
--------- --------- --------- --------- --------- --------- --------
Operating income
(loss)......... (2,691) 1,045 18,516 24,982 4,592 10,989 16,805
Interest
expense, net... -- -- -- -- -- 7,395 13,861
--------- --------- --------- --------- --------- --------- --------
Income (loss) before provision
for (benefit
from) income
taxes and
extraordinary
loss........... (2,691) 1,045 18,516 24,982 4,592 3,594 2,944
Provision for
(benefit from)
income taxes... (1,109) 431 7,629 10,293 1,892 1,581 1,292
--------- --------- --------- --------- --------- --------- --------
Income (loss)
before
extraordinary
loss........... (1,582) 614 10,887 14,689 2,700 2,013 $ 1,652
========
Extraordinary
loss, net of
$354 of income
taxes.......... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net income
(loss)......... $ (1,582) $ 614 $ 10,887 $ 14,689 $ 2,700 $ 2,013
========= ========= ========= ========= ========= =========
Other Operating
Data:
Sales per gross square foot.. $ 222 $ 238 $ 277 $ 295 $ 160 $ 130 $ 290
Inventory
turnover....... 5.1x 5.4x 6.4x 6.6x 6.0x 6.5x 6.2x
Same store net
sales increase
(decrease)..... 3.1% 5.5% 13.0% 4.5% (3.0%) (1.1%) (2.2%)
Capital
expenditures:
New stores..... $ 940 $ 835 $ 829 $ 2,972 $ 1,299 $ 1,027 $ 2,326
Remodels....... 887 1,780 892 3,320 1,809 1,341 3,150
Non-store
assets and systems.. 576 205 231 713 292 411 703
--------- --------- --------- --------- --------- --------- --------
Total capital
expenditures.. $ 2,403 $ 2,820 $ 1,952 $ 7,005 $ 3,400 $ 2,779 $ 6,179
========= ========= ========= ========= ========= ========= ========
Number of
stores:
Beginning
balance....... 465 441 416 395 408 415 408
New stores
opened........ 5 6 11 25 9 13 22
Existing
stores
closed........ 29 31 32 12 2 6 8
--------- --------- --------- --------- --------- --------- --------
Ending
balance....... 441 416 395 408 415 422 422
========= ========= ========= ========= ========= ========= ========
Other Financial
Data:
EBITDA as
adjusted....... $ 9,721 $ 9,802 $ 24,791 $ 31,305 $ 8,449 $ 16,130 $ 27,879
EBITDA margin
as adjusted.... 4.1% 4.0% 9.3% 10.9% 5.2% 12.3% 9.5%
Cash provided by
(used in)
operating
activities..... $ 10,638 $ 18,652 $ 20,043 $ 25,588 $ 15,793 $ 11,943 $ 24,675
Cash provided by
(used in)
investing
activities..... (2,607) (1,985) (1,952) (7,005) (3,400) (137,658) (6,179)
Cash provided by
(used in)
financing
activities..... (9,923) (16,498) (18,545) (19,069) (14,140) 137,069 (14,140)
Royalty
expense........ 3,507 3,609 1,749 1,834 1,012 -- --
Ratio of
earnings to
fixed charges.. -- 1.2x 3.7x 4.5x 2.1x 1.3x 1.1x
Deficiency of
earnings to
cover fixed
charges........ $ (2,691) $ -- $ -- $ -- $ -- $ -- $ --
Ratio of earnings as adjusted to fixed charges............................................1.3x
Ratio of EBITDA as adjusted to interest expense...........................................2.2x
Ratio of net debt to EBITDA as adjusted...................................................3.0x
<CAPTION>
Acquired
Assets G+G Retail
----------- ---------------------
Pro Forma
First Six First Six First Six
Months of Months of Months of
Fiscal Fiscal Fiscal
1999 2000 2000
----------- ---------- ----------
(Dollars in thousands, except
sales per gross
square foot)
<S> <C> <C> <C>
Statement of Operations Data:
Net sales....... $ 138,032 $ 150,266 $ 150,266
Cost of sales
(including
occupancy
costs)......... 90,458 96,750 96,750
Selling, general, administrative
and buying
expenses....... 39,639 42,198 42,198
Depreciation and
amortization
expense........ 2,451 6,172 6,172
----------- ---------- ----------
Operating income
(loss)......... 5,484 5,146 5,146
Interest
expense, net... -- 6,433 6,462
----------- ---------- ----------
Income (loss) before provision
for (benefit
from) income
taxes and
extraordinary
loss........... 5,484 (1,287) (1,316)
Provision for
(benefit from)
income taxes... 2,259 (566) (579)
----------- ---------- ----------
Income (loss)
before
extraordinary
loss........... 3,225 (721) $ (737)
==========
Extraordinary
loss, net of
$354 of income
taxes.......... -- (450)
----------- ----------
Net income
(loss)......... $ 3,225 $ (1,171)
=========== ==========
Other Operating
Data:
Sales per gross square foot.. $ 138 $ 143 $ 143
Inventory
turnover....... 6.3x 6.1x 6.1x
Same store net
sales increase
(decrease)..... (3.5%) 2.5% 2.5%
Capital
expenditures:
New stores..... $ 1,185 $ 3,925 $ 3,925
Remodels....... 1,426 4,670 4,670
Non-store
assets and systems.. 479 729 729
----------- ---------- ----------
Total capital
expenditures.. $ 3,090 $ 9,324 $ 9,324
=========== ========== ==========
Number of
stores:
Beginning
balance....... 408 422 422
New stores
opened........ 9 22 22
Existing
stores
closed........ 2 1 1
----------- ---------- ----------
Ending
balance....... 415 443 443
=========== ========== ==========
Other Financial
Data:
EBITDA as
adjusted....... $ 8,786 $ 11,318 $ 11,318
EBITDA margin
as adjusted.... 6.4% 7.5% 7.5%
Cash provided by
(used in)
operating
activities..... $ 9,012 $ 3,195 $ 3,179
Cash provided by
(used in)
investing
activities..... (3,090) (9,324) (9,324)
Cash provided by
(used in)
financing
activities..... (5,922) 4,275 (5,385)
Royalty
expense........ 851 -- --
Ratio of
earnings to
fixed charges.. 2.5x -- --
Deficiency of
earnings to
cover fixed
charges........ $ -- $ (1,287) $ (1,316)
Ratio of earnings as adjusted to f..........................1.1xixed charges............................................1.3x
Ratio of EBITDA as adjusted to int..........................1.8xerest expense...........................................2.2x
Ratio of net debt to EBITDA as adj..........................8.0xusted...................................................3.0x
</TABLE>
<TABLE>
<CAPTION>
Acquired
Acquired Assets G+G Retail Assets G+G Retail
----------------------------------------------- ----------- --------- ----------
January 28, February 3, February 1, January 31, January 30, August 1, July 31,
1995 1996 1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Balance Sheet Data:
Total assets............ $31,746 $29,218 $25,818 $28,157 $167,664 $41,011 $186,270
Total long-term debt.... 7,623 12,364 20,591 20,866 90,000 20,866 99,354
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and other information
in this prospectus before deciding whether or not to tender your outstanding
notes in the exchange offer. Some of the information in this prospectus
contains forward-looking statements.
Some of our statements about future events may not prove to be correct.
Forward-looking statements that we make in this prospectus use forward-looking
terminology, such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. These statements discuss future
expectations, contain projections of results of operations or financial
condition or state other "forward-looking" information. While these statements
reflect our current judgment about the direction of our business, our actual
results likely will vary, sometimes in a material way, from the estimates,
projections, assumptions and other future performance suggested in this
prospectus. Our actual revenues, profitability and operating results may differ
materially from those expressed in the "forward-looking" statements contained
in this prospectus as a result of one or more factors, including:
. our ability to successfully implement operating strategies (including the
opening of new stores);
. changes in economic conditions;
. competition; and
. other risks described below.
We do not intend to release publicly any revisions to our forward-looking
statements as a result of events or circumstances that occur after the date of
this prospectus.
You will be subject to continued restrictions on transfer if you do not
exchange your outstanding notes. In addition, having fewer old notes may
negatively impact their market value, reduce their liquidity and increase their
volatility.
If you do not exchange outstanding notes for exchange notes, you will continue
to be subject to the transfer restrictions on the outstanding notes. In
general, the outstanding notes may not be offered or sold unless they are
registered or exempt from registration under the Securities Act of 1933 and
applicable state securities laws. Except as required by the registration rights
agreement, we do not intend to register resales of outstanding notes under the
Securities Act of 1933. In most cases, our obligations under the registration
rights agreement will be satisfied by the closing of this exchange offer.
Because the notes that are tendered in the exchange offer will be retired,
there will be fewer old notes remaining after this exchange offer is closed.
Having fewer old notes may negatively impact their market value, reduce their
liquidity and increase their volatility. See "The Exchange Offer" for
information about how to tender your notes.
We have significant debt that may prevent us from fulfilling our obligations
under the notes.
We have significant debt. As of July 31, 1999, our outstanding debt was $99.4
million. In addition, as of July 31, 1999, we had $925,000 in letters of credit
outstanding and additional availability of approximately $18.3 million under
our revolving credit facility. Subject to restrictions in our revolving credit
facility, future credit facilities and the indenture relating to the notes, we
may incur additional debt from time to time to finance acquisitions or capital
expenditures. In addition, we recently entered into a capital lease agreement,
under which we may incur debt of up to $5.0 million to finance our point-of-
sale equipment upgrade.
7
<PAGE>
Our significant level of debt, and the resulting amount of leverage, may:
. make it more difficult for us to satisfy our obligations with respect to the
notes;
. make it more difficult for us to make required payments under our revolving
credit facility;
. increase our vulnerability to general adverse economic and industry
conditions;
. limit our ability to obtain additional financing to fund future working
capital, capital expenditure and other general corporate requirements;
. require us to dedicate a substantial portion of cash flow from operations to
principal and interest payments with respect to our debt, thereby reducing
the availability of cash flow to fund working capital, capital expenditures
or other general corporate purposes;
. limit our flexibility in planning for, or reacting to, changes in our
business and industry; and
. place us at a competitive disadvantage compared to our competitors that have
less debt.
For the six months ended July 31, 1999, our earnings were insufficient to cover
our fixed charges by $1.3 million, in part due to the seasonal nature of our
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Seasonality and Quarterly Results."
We require a significant amount of cash to service our debt and make necessary
capital expenditures, and we may not be able to generate sufficient cash to do
so.
Our business may not generate sufficient cash flow from operations, and future
borrowings may not be available in an amount sufficient, to enable us to
service our debt, including the notes, or to fund our other liquidity needs.
Our ability to make payments on and to refinance our debt and to fund capital
expenditures will depend on our ability to generate cash in the future. This
ability is subject to many factors, including general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. We may need to refinance all or a portion of our debt on or before
maturity. In addition, a default under any of our existing debt generally
triggers a default under all of our debt. As a result, we might be required to
refinance all of our debt because of our inability to service a portion of the
debt. We cannot assure you that we will be able to refinance any of our debt,
including our revolving credit facility and the notes, on commercially
reasonable terms or at all.
The notes effectively rank below our secured debt, which could affect our
ability to repay them.
The outstanding notes are, and the exchange notes will be, unsecured and
therefore will be effectively subordinated to any secured debt we may incur to
the extent of the value of the collateral securing that debt. We have pledged
substantially all of our assets to secure our revolving credit facility. In
addition, the notes will be effectively subordinated to a capitalized lease to
finance our point-of-sale equipment upgrade to the extent of the value of the
equipment leased. In the event of a bankruptcy or similar proceeding involving
us, our assets that serve as collateral will be available to repay secured debt
before any payments are made on the notes. In addition, if we default on our
secured debt, the lenders may foreclose on and take control of our assets that
are pledged as collateral. As a result, we may have insufficient remaining
assets to service and repay the notes. As of July 31, 1999, we had no secured
debt. However, as of July 31, 1999, we had $925,000 in secured letters of
credit outstanding under our revolving credit facility.
Failure to comply with the restrictions imposed by our revolving credit
facility and the indenture relating to the notes could cause an acceleration of
the debt.
We must comply with restrictive covenants contained in our revolving credit
facility and the indenture relating to the notes. Our ability to continue to
comply with these covenants may be affected by events beyond our control.
Failure to comply with these covenants could cause us to be in default under
our
8
<PAGE>
revolving credit facility, which in turn could cause the lenders to accelerate
our debt or to cease to provide additional revolving loans or letters of
credit. Our revolving credit facility requires us to maintain a minimum
tangible net worth. Our revolving credit facility and the indenture relating to
the notes also require us to comply with customary affirmative and negative
covenants including, among other things, limitations on our ability to:
. incur additional indebtedness;
. make acquisitions and capital expenditures;
. pay dividends;
. create liens on assets;
. sell assets; or
. engage in fundamental business changes.
If we default under our revolving credit facility and are unable to pay the
accelerated debt, the lenders could foreclose on substantially all of our
assets, which we pledged as collateral. As a result of foreclosure, we may have
insufficient remaining assets to repay the notes. The acceleration of our
revolving credit facility would constitute a default under the indenture
relating to the notes. Similarly, our failure to comply with the restrictions
in the indenture could result in a default under the indenture, which could
lead to a cross-default under our revolving credit facility and other debt.
Same store sales results have fluctuated in the past and declined from fiscal
1998 to fiscal 1999. We cannot be certain that our revenues will increase in
the future.
Our sales results for comparable stores that had been open for 12 full months
have fluctuated in the past and likely will continue to fluctuate. Factors
affecting these sales results include, among others:
.economic conditions;
.fashion trends;
.the retail sales environment;
.changes in our merchandise mix;
.merchandising, buying and distribution of products;
.our ability to execute our business strategy efficiently;
.calendar shifts of holiday periods;
.actions taken by our competitors; and
.weather.
The following table shows the fluctuations in our annual same store sales
results over the past five fiscal years.
<TABLE>
<CAPTION>
Same Store
Fiscal Year Sales Growth (Decrease)
----------- -----------------------
<S> <C>
1995............................................. 3.1%
1996............................................. 5.5%
1997............................................. 13.0%
1998............................................. 4.5%
1999............................................. (2.2%)
</TABLE>
As indicated in the table above, we recorded decreases in fiscal 1999 for
comparable stores that had been open for twelve full months. Sales from
comparable stores for any particular fiscal quarter or fiscal year may decrease
in the future.
9
<PAGE>
We face significant competition in the junior apparel retail business.
The junior apparel retail business is highly competitive. We compete for sales
primarily with specialty apparel retailers, such as Wet Seal/Contempo Casual, a
mall-based junior apparel retailer. We also compete with several discount
department stores and local and regional department store chains with which our
merchandise offerings and price points overlap. Some of our competitors are
larger and may have greater financial, marketing and other resources than we
do. In addition, we compete with our competitors and other persons for
favorable site locations and lease terms in shopping malls. Competition from
our current competitors, as well as from catalog and Internet retailers, may
increase significantly in the future. See "Business--Competition."
Our profitability depends upon our ability to identify fashion tastes, which
may change frequently.
Our profitability largely depends upon our ability to identify the fashion
tastes of our customers and to provide merchandise that appeals to their
preferences in a timely manner. The fashion tastes of our customers may change
frequently. Our failure to identify or react appropriately to changes in styles
or trends could lead to, among other things, excess inventories and higher
markdowns than we expect. In addition, our fashion misjudgments could
materially decrease our profitability and harm our image with our customers.
See "Business--Merchandising and Marketing."
Our success depends upon our ability to retain our senior management.
Our success depends significantly upon the performance of our senior
management. Jay Galin has been with us for over 40 years and is our chairman of
the board and chief executive officer. Scott Galin, Jay Galin's son, who has
been with us for over 20 years, is our president and chief operating officer.
In addition to Jay and Scott Galin, our senior management includes our chief
financial officer, three vice presidents and five divisional merchandise
managers who have an average of nine years experience with us and G & G Shops.
Jay and Scott Galin are parties to employment agreements expiring in August
2000 and August 2003, respectively. We also have employment agreements with
Michael Kaplan, our vice president and chief financial officer, and Jeffrey
Galin, our vice president/divisional merchandise manager. However, under their
respective agreements, Michael Kaplan and Jeffrey Galin are at-will employees.
We do not have employment agreements with any of our other senior management.
Accordingly, all of the members of our senior management, except for Jay and
Scott Galin, may terminate their employment with us at any time. The loss of
our senior management could materially decrease our profitability. Our success
also depends upon our ability to attract and retain qualified employees in
connection with our growth strategy. We do not maintain "key man" life
insurance on our senior management.
We may be unable to implement our growth strategy of opening new stores, and
our success depends on growth.
Our continued growth significantly depends upon our ability to open new stores
on a profitable basis and to manage growth and expanded operations. During
fiscal 1997, 1998 and 1999, we opened 11, 25 and 22 new stores, respectively.
We opened 18 Rave stores between January 31, 1999 and July 31, 1999, and we
intend to open approximately 22 Rave stores by the end of fiscal 2000.
Accomplishing our expansion goals will depend upon a number of factors,
including the availability of funds and our ability to identify favorable
geographical locations and suitably sized locations for new stores at
acceptable costs.
We have entered the market for sales to 8- to 12-year-old girls by opening
approximately four mall stores under the name Rave Girl between January 31,
1999 and July 31, 1999. We intend to open two additional Rave Girl stores by
the end of fiscal 2000. If this market test succeeds, we intend to further
expand into this market. Our ability to operate successfully in this market
will depend upon a number of factors, including our ability to identify and
react appropriately to fashion trends in this market. The market for sales to
8- to 12-year-old girls may present different merchandising challenges than the
teen market.
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<PAGE>
We expect to finance the expenditures related to our planned expansion,
including our Rave Girl stores, with cash flow from operations and borrowings
under our existing and future revolving credit facility. We may not always have
access to sufficient funds to finance these expenditures or be able to achieve
our store expansion goals, successfully integrate planned new stores into our
operations, successfully expand into the market for sales to 8- to 12-year-old
girls or operate new stores profitably. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Business--Store Openings and Closings."
The demand for our merchandise may decrease because of general economic
conditions, and our performance is likely to depend on the continued popularity
of malls as a shopping destination.
General economic conditions, including business conditions, levels of
employment and consumer confidence in future economic conditions, affect the
level of consumer spending. In addition, because our stores are located
primarily in malls, we depend upon the continued popularity of malls as a
shopping destination and the ability of mall anchor tenants and other
attractions to generate customer traffic to our stores. Mall traffic or
economic conditions in the markets in which our stores are located may decline
and may result in lower revenues and profits. See "Business--Location and
Format of Our Stores."
Future leases may have terms less favorable than existing leases or may be
unavailable.
All of our store sites are leased. Although we believe that our real estate
staff has strong relationships with our present landlords, we may be unable to
renew expiring or expired leases for the term we desire, on favorable terms or
at all. As of July 31, 1999, leases for 38 stores (8.5%) had expired, and we
occupy the stores involved on a month-to-month basis. In addition, leases for
an additional 89 stores (19.9%) are scheduled to expire by January 31, 2000. Of
these 127 stores, as of July 31, 1999, we were negotiating renewals for 121
stores, 50 of which were in the final documentation phase. Furthermore, leases
for 75 stores (16%) are scheduled to expire by January 31, 2001, and leases for
64 stores (15%) are scheduled to expire by January 31, 2002. As of July 31,
1999, approximately 16% of our stores were leased from a single landlord. See
"Business--Properties."
We depend on a single distribution facility, the operations of which may be
interrupted.
We handle distribution functions for all of our stores from a single facility
in North Bergen, New Jersey. Any significant interruption in the operation of
this distribution facility would decrease our profitability and adversely
impact our ability to pay interest on the notes. See "Business--Distribution
and Transportation."
We may be unable to obtain inventory because we depend upon outside suppliers
with whom we do not have long-term contracts. Inadequate inventory would
decrease our profitability.
The inability or failure of key suppliers to supply us with adequate quantities
of desired merchandise, the loss of one or more key suppliers or a material
change in our current purchase terms may decrease our profitability. We do not
have long-term contracts with our suppliers. We transact business principally
on an order-by-order basis. In addition, many of our smaller suppliers have
limited resources, production capacities and operating histories, which may
adversely affect their ability to adequately service our requirements. Although
we believe that we have strong relationships with our key suppliers, we may be
unable to acquire merchandise from our suppliers in sufficient quantities or on
favorable terms in the future. Our business depends upon our ability to
purchase current season apparel at competitive prices. We currently purchase
inventory primarily from domestic manufacturers. We do not own any
manufacturing facilities. During the six months ended July 31, 1999, our top
three suppliers accounted for 13%, 10% and 8% of our inventory purchases.
During fiscal 1999, our top three suppliers accounted for 13%, 11% and 10% of
our inventory purchases. During the first six months of fiscal 2000 and fiscal
1999, we did not purchase more than 5% of our inventory from any one of our
other suppliers.
11
<PAGE>
Our results of operations fluctuate based on the seasons. As a result, poor
performance in the fourth fiscal quarter may jeopardize our ability to service
or repay the notes. In addition, comparisons to prior-period results of
operations may not be indicative of results for future periods.
Our results of operations fluctuate based on the seasons. Historically, the
fourth fiscal quarter has generated the largest percentage of our annual net
sales. For example, in fiscal 1999, the fourth fiscal quarter accounted for 30%
of our net sales. In contrast, the first fiscal quarter historically has
generated the smallest percentage of our net sales. A substantial decline in
our sales during the fourth fiscal quarter, or sales below seasonal norms
during other fiscal quarters, may cause us to be unable to service or repay the
notes.
Our quarterly results of operations also may fluctuate significantly as a
result of a variety of other factors, including the number and timing of store
openings and closings, the level of markdowns taken and the amount of revenue
contributed by new stores. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality and Quarterly
Results."
Members of our senior management and affiliates of one investment fund control
Holdings and therefore may influence our affairs.
Currently, members of our senior management and affiliates of Pegasus
Investors, L.P., a private equity investment fund, control Holdings through
their ownership of 51.1% of the voting capital stock of Holdings. Since
Holdings owns all of our outstanding capital stock, these persons also control
us. Circumstances may occur in which the interests of the stockholders of
Holdings could be in conflict with your interests. In addition, the
stockholders of Holdings may pursue acquisitions, divestitures or other
transactions that, in their judgment, could enhance their equity investment
even though those transactions may subject you, as a holder of notes, to risks.
See "Management--Directors, Executive Officers and Key Employees" and
"Principal Stockholders."
A significant number of our stores are concentrated geographically in Florida,
New York, California and Puerto Rico. As a result, we are vulnerable to severe
weather, natural disasters or adverse economic conditions in those areas.
Although our stores were located in 39 states in the United States, Puerto Rico
and the U.S. Virgin Islands as of May 1, 1999, a significant number of our
stores are located in Florida, New York, California and Puerto Rico. As of July
31, 1999, we had 49 stores in Florida, 40 stores in New York, 34 stores in
California and 41 stores in Puerto Rico. In addition, we plan to expand within
these markets. As a result, we are susceptible to fluctuations in our business
caused by severe weather, natural disasters or adverse economic conditions in
these geographic regions. See "Business--Location and Format of Our Stores."
We rely on third-party computer systems that may not be year 2000 compliant.
The year 2000 issue concerns the potential exposures related to the automated
generation of erroneous business and financial information resulting from the
fact that some computer systems and programs use two digits, rather than four,
to define the applicable year of business transactions. On January 1, 2000,
these systems and programs may recognize the date as January 1, 1900 and may
process data incorrectly or stop processing data altogether. In addition to our
own systems, we rely directly and indirectly on external systems of our
suppliers, landlords, banks, utilities providers and other third parties. We
are currently in the process of asking our significant suppliers about their
year 2000 compliance. To date, we are not aware of any third-party year 2000
issues that will adversely affect us. However, we have no means of ensuring
that the third parties with whom we deal will be year 2000 compliant. Year 2000
problems experienced by third parties with whom we interact may negatively
impact our ability to process purchasing and sales information and to perform
other automated functions which, in turn, may negatively impact our revenues
and our ability to service or repay the notes . See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Year 2000
Compliance."
12
<PAGE>
Some of our distribution center employees are represented by a union. As a
result, we may be more vulnerable to work stoppages.
As of July 31, 1999, Local 2326 of the UAW/AFL/CIO represented 132 employees at
our distribution center in North Bergen, New Jersey. The collective bargaining
agreement covering these employees expires on January 31, 2002. Although we
believe that we have good relations with our union employees and never have
experienced a work stoppage, we may be subject to work stoppages in the future.
Any work stoppages could decrease our revenues and profitability.
We may not be able to raise enough money to finance the change of control offer
required by the indenture relating to the notes. If there is a change of
control, we could be in default under the indenture.
If a "change of control" occurs, we will be required under the indenture to
offer to repurchase all outstanding notes and exchange notes. In general, a
change of control includes sales of our capital stock or assets, mergers or
liquidations. We may not have sufficient funds at the time of the change of
control to make the required repurchases, or restrictions in our revolving
credit facility may prohibit the repurchases. If we cannot raise enough money
to finance the change of control offer, we would be in default under the
indenture. See "Description of the Notes--Repurchase at Your Option."
You will be required to recognize income for federal tax purposes before
receiving cash payments on the notes.
The outstanding notes were issued with original issue discount for federal
income tax purposes. The exchange notes will also have original issue discount.
As a result, you will be required to include the original issue discount in
your gross income for federal income tax purposes as it accrues in advance of
the receipt of cash payments on the notes, regardless of whether you are a cash
or accrual basis taxpayer. See "Material Federal Income Tax Considerations--
Other Tax Considerations--United States Holders--Taxation of Original Issue
Discount."
Our obligations under the notes could be voided under federal or state
fraudulent transfer laws.
Our obligations under the notes could be voided under federal or state
fraudulent transfer laws if a bankruptcy case or other lawsuit is commenced by
or on behalf of our creditors. Specifically, a court could void all or part of
the notes, subordinate the notes to our existing and future debt or take other
action detrimental to you if the court determines that we either:
. issued the notes with the intent to hinder, delay or defraud our existing or
future creditors; or
. received less than reasonably equivalent value or fair consideration for
issuing the notes and we:
. were insolvent at the time of issuance;
. were rendered insolvent by reason of the issuance and the application of
the proceeds of the notes;
. were engaged or were about to engage in a business or transaction for
which our remaining assets constituted unreasonably small capital; or
. intended to incur, or believed that we would incur, debts that we will
not have the ability to repay.
The measure of our insolvency for purposes of this determination will vary
depending upon the law applied in the case. Generally, however, we would be
considered insolvent at a particular time if:
. the sum of our debts, including our contingent liabilities, exceeded the
fair saleable value of our assets;
. the fair saleable value of our assets was less than the amount that would be
required to pay the probable liability on our existing debts, including our
contingent liabilities, as they become absolute and matured; or
. we could not pay our debts as they become due.
13
<PAGE>
We issued the outstanding notes, and will issue exchange notes, in good faith
and for proper purposes and without the intent to hinder, delay or defraud our
creditors. We believe that, after the private placement and the application of
the proceeds of the outstanding notes, we were solvent, had sufficient capital
for carrying on our business and were able to pay our debts as they matured.
However, a court may apply a different standard or disagree with our view.
You may find it difficult to resell the exchange notes due to the lack of a
public trading market.
The exchange notes are new securities for which there is no existing market.
Accordingly, we cannot predict whether a liquid market will develop for the
exchange notes. The notes are eligible for trading in the Private Offerings,
Resales and Trading Through Automated Linkages Market (PORTAL). U.S. Bancorp
Investments, Inc. and CIBC World Markets Corp., the initial purchasers of all
of the outstanding notes, have advised us that they currently intend to make a
market in the exchange notes. However, they are not obligated to do so, and any
market-making may be discontinued at any time without notice. We do not intend
to apply for a listing of the exchange notes on any securities exchange or on
any automated dealer quotation system. The liquidity of, and trading market
for, the exchange notes also may be adversely affected by general declines in
the market for similar securities or by changes in our financial performance. A
market decline may decrease the liquidity and increase the volatility of the
exchange notes independent of our financial performance and prospects.
We have not independently verified the teen market data contained in this
prospectus. It may be inaccurate or based on faulty assumptions.
This prospectus includes information about the teen market. This information
indicates that the teen market (1) is large and rapidly growing, (2) has
significant discretionary income which is increasing and (3) spends a
significant percentage of discretionary income on apparel. We obtained this
information from a well-known information source, but we have not independently
verified the information. The teen market may not be as large as reported or
growing at the reported rate. In addition, teenagers may not have as much
discretionary income as reported, and their discretionary income may not be
increasing as reported. Furthermore, teenagers may not currently spend or
continue to spend the reported amount of their income on apparel. An adverse
change in the size, growth rate, purchasing power or purchasing habits of the
teen market would decrease our profitability.
14
<PAGE>
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
Your participation in the exchange offer is voluntary. You should carefully
consider whether or not to participate. You are urged to consult your financial
and tax advisors before making your decision.
We entered into a registration rights agreement with the initial purchasers of
the outstanding notes. In this agreement, we agreed to file a registration
statement relating to an offer to exchange the outstanding notes for exchange
notes. This prospectus is part of that registration statement. We also agreed
to use our reasonable best efforts to cause the exchange offer to close within
30 business days after the Securities and Exchange Commission declares the
registration statement effective. The exchange notes have terms identical in
all material respects to the outstanding notes, except that the exchange notes
will not be subject to the transfer restrictions and a requirement to pay
additional interest for failure to observe specified obligations in the
registration rights agreement that apply to the outstanding notes. The
outstanding notes were issued on May 17, 1999. Outstanding notes that are not
tendered in the exchange offer will remain outstanding and continue to accrue
interest. Their holders will be entitled to the rights and benefits under the
indenture relating to the notes.
Under the registration rights agreement, we also agreed to use our reasonable
best efforts to cause the SEC to declare effective a shelf registration
statement regarding the resale of the outstanding notes and to keep that
registration statement effective for at least two years after their issuance,
or until they all have been sold, if:
. applicable law does not permit us to effect this exchange offer;
. any holder of outstanding notes notifies us within 20 business days after
the deadline for completing this exchange offer that law or SEC policy
prohibits the holder from participating in this exchange offer;
. any holder of outstanding notes notifies us within 20 business days after
the deadline for completing this exchange offer that the holder may not
resell the exchange notes to the public without delivering a prospectus, and
this prospectus is not appropriate or available for use in resales by the
holder; or
. any holder of outstanding notes notifies us within 20 business days after
the deadline for completing this exchange offer that the holder is a broker-
dealer and holds outstanding notes acquired directly from us or any of our
"affiliates," as defined in Rule 144 under the Securities Act of 1933.
If we fail to comply with our obligations under the registration rights
agreement, we must pay liquidated damages to holders of the outstanding notes.
See "Description of the Notes--Registration Rights Agreement."
If you want to exchange outstanding notes for exchange notes, you must
represent that:
. you are acquiring the exchange notes in the ordinary course of your
business;
. you are not participating, do not intend to participate and have no
understanding with any person to participate in a distribution of the
exchange notes; and
. you are not an "affiliate" of ours within the meaning of Rule 144.
If you cannot so represent, you must comply with the registration and
prospectus delivery requirements of the Securities Act of 1933 in connection
with any resale transaction.
Resale of Exchange Notes
Based on SEC no-action letters issued to unrelated third parties, we believe
that you may offer for resale, resell or otherwise transfer the exchange notes
without compliance with the registration and prospectus delivery provisions of
the Securities Act of 1933 if you can make the representations described in the
preceding paragraph.
15
<PAGE>
If you tender outstanding notes with the intent to participate in a
distribution of the exchange notes, or if you are our "affiliate" within the
meaning of Rule 144:
. you may not rely on the position of the SEC staff enunciated in letters to
Morgan Stanley and Co., Inc. or Exxon Capital Holdings Corporation or
similar interpretive letters;
. you must comply with the registration and prospectus delivery requirements
of the Securities Act of 1933 in connection with a secondary resale
transaction, including being named as a selling noteholder; and
. an effective registration statement containing the selling security holder
information required by Regulation S-K Item 507 or 508, as applicable, must
cover that resale.
This prospectus may be used for an offer to resell, resale or other transfer of
exchange notes only as specifically set forth in this prospectus.
If you are a broker-dealer, you may participate in the exchange offer only if
you acquired the outstanding notes as a result of market-making or other
trading activities. In order to resell outstanding notes or exchange notes,
brokers and dealers who acquired their notes from us may not rely on the SEC
staff interpretations described. Instead, they must comply with the
registration and prospectus delivery requirements of the Securities Act of 1933
and be named as selling noteholders. See "Plan of Distribution."
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus and
in the letter of transmittal, a copy of which is attached as an exhibit to the
registration statement of which this prospectus is a part, we will accept for
exchange any outstanding notes that you properly tender and do not withdraw
prior to the expiration date. This exchange offer is not conditioned upon any
minimum aggregate principal amount of outstanding notes being tendered for
exchange. We will issue to you $1,000 principal amount of exchange notes in
exchange for each $1,000 principal amount of outstanding notes that you
surrender. You may tender outstanding notes only in integral multiples of
$1,000.
The exchange notes have terms identical in all material respects to the
outstanding notes, except that the exchange notes:
. will be registered under the Securities Act of 1933;
. will not bear transfer restriction legends; and
. will not provide for any liquidated damages upon our failure to file, and
cause to be declared effective, a registration statement as required in the
registration rights agreement.
The exchange notes will evidence the same debt as the outstanding notes. The
exchange notes will be issued under and entitled to the benefits of the same
indenture that relates to the outstanding notes. Consequently, both outstanding
notes and exchange notes will be treated as a single class of debt securities
under the indenture. For a description of the indenture, see "Description of
the Notes."
We have fixed the close of business on , 1999 as the record date for
determining whether this prospectus and the letter of transmittal will be
mailed initially to a particular holder of outstanding notes. This prospectus
and the letter of transmittal are being sent to all registered holders of
outstanding notes on the record date. There will be no fixed record date for
determining whether you are entitled to participate in this exchange offer. To
participate, you must be a holder of outstanding notes.
16
<PAGE>
We will have accepted properly tendered outstanding notes for exchange when we
give oral or written notice of our acceptance to the exchange agent. The
exchange agent will act as your agent for the purposes of receiving the
exchange notes from us and delivering the exchange notes to you. Subject to the
terms of the registration rights agreement, we expressly reserve the right to
amend or terminate this exchange offer, and to refuse to accept for exchange
any outstanding notes not previously accepted for exchange, if any of the
conditions described in "--Conditions to the Exchange Offer" occur.
If you tender outstanding notes in this exchange offer, you will not be
required to pay brokerage commissions or fees or transfer taxes, subject to the
instructions in the letter of transmittal. We will pay all charges and
expenses, other than the taxes described below, in connection with this
exchange offer. See "--Fees and Expenses."
Expiration Date; Extensions; Amendments
This exchange offer will expire at 5:00 p.m., New York City time on ,
1999, unless we extend it in our sole discretion, but in no event will this
exchange offer expire later than , 1999, which is the date 30 business days
after the registration statement becomes effective.
We will give the exchange agent oral or written notification of the extension
of this exchange offer. We will notify registered holders of outstanding notes
at the record date of the extension no later than 9:00 a.m., New York City
time, on the business day after the previously scheduled expiration date.
We reserve the right, in our sole discretion:
. to delay accepting the tender of any outstanding notes;
. to extend or to terminate this exchange offer and to refuse to accept
outstanding notes not previously accepted, if any of the conditions
described in "--Conditions to the Exchange Offer" occur, by giving oral or
written notice of the delay, extension or termination to the exchange agent;
or
. subject to the terms of the registration rights agreement, to amend the
terms of this exchange offer in any manner.
We will follow any delay in acceptance, extension, termination or amendment as
promptly as practicable by oral or written notice to the registered holders of
outstanding notes. If we amend this exchange offer in a manner that we
determine to constitute a material change, we will promptly disclose that
amendment in a way that will inform the holders of outstanding notes of the
amendment. If we consider the change in the terms of the exchange offer to be
fundamental, we will file with the SEC a post-effective amendment to the
registration statement of which this prospectus is a part. We will distribute
any post-effective amendment to the holders of the outstanding notes.
We have no obligation to publish, advertise or otherwise communicate any public
announcement of a delay, other than by making a timely release to a financial
news service.
Conditions to the Exchange Offer
We are not required to accept for exchange any outstanding notes or to issue
any exchange notes. In addition, we may terminate this exchange offer before
accepting any outstanding notes for exchange if, in our reasonable judgment:
. this exchange offer, or the making of any exchange by a holder of
outstanding notes, would violate applicable law or any applicable
interpretation of the SEC; or
17
<PAGE>
. any action or proceeding has been instituted or threatened in any court or
by or before any governmental agency regarding this exchange offer that
would reasonably be expected to impair our ability to proceed with this
exchange offer.
Furthermore, we are not obligated to accept for exchange any outstanding notes
that you tender if you have not made to us:
. the representations described in "--Purpose and Effect of the Exchange
Offer"; and
. other representations that may be reasonably necessary under applicable SEC
rules, regulations or interpretations to make available to us an appropriate
form for registration of the exchange notes under the Securities Act of
1933.
We reserve the right, at any time, to extend the time period of this exchange
offer, but in no event will this exchange offer be open for less than 20
business days or more than 30 business days. Therefore, we may delay acceptance
of any outstanding notes by giving oral or written notice of the extension.
During any extension, all outstanding notes previously tendered will remain
subject to this exchange offer, and we may accept them for exchange. We will
return any outstanding notes that, for any reason, we do not accept for
exchange without expense to you as promptly as practicable after the expiration
or termination of this exchange offer.
We reserve the right to amend or terminate this exchange offer, and to reject
for exchange any outstanding notes not previously accepted for exchange, if
either of the conditions described above occurs. We will give oral or written
notice of any extension, amendment, non-acceptance or termination to holders of
outstanding notes as promptly as practicable.
These conditions are solely for our benefit, and we may assert them or waive
them in whole or in part at any time in our sole discretion, subject to the
terms of the registration rights agreement. If at any time we fail to exercise
any of our foregoing rights, our failure will not be a waiver of our right.
Each right is an ongoing right that we may assert at any time.
In addition, we will not accept for exchange any outstanding notes that you
tender, and will not issue to you any exchange notes, if at that time the
registration statement of which this prospectus is a part contains a material
misstatement or if any stop order has been issued with respect to the
registration statement or the qualification of the indenture under the Trust
Indenture Act of 1939.
Procedures for Tendering
You may participate in this exchange offer only if you are a holder of
outstanding notes. To tender in this exchange offer, you must:
. complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal;
. have the signature on the letter of transmittal guaranteed, if required by
the letter of transmittal; and
. mail or deliver the letter of transmittal, or a facsimile of the letter of
transmittal, to the exchange agent before the expiration date.
In the alternative, you may comply with the automated tender offer program
procedures of The Depository Trust Company, known as DTC, that are described
below.
In addition:
. the exchange agent must receive your outstanding notes along with the letter
of transmittal;
. the exchange agent must receive, before the expiration date, a timely
confirmation of book-entry transfer of your outstanding notes into the
exchange agent's account at DTC, according to the procedure for book-entry
transfer described below or a properly transmitted agent's message; or
18
<PAGE>
. you must comply with the guaranteed delivery procedures described below.
For effective tender, the exchange agent must receive any physical delivery of
the letter of transmittal and other required documents at the address set forth
in "--Exchange Agent" before the expiration date. If you do not withdraw your
tender before the expiration date, then we will have an agreement with you
under the terms and conditions described in this prospectus and the letter of
transmittal.
You choose and bear the risk of the delivery method for the outstanding notes,
the letter of transmittal and all other required documents. We recommend that
you use an overnight or hand delivery service. In all cases, you should allow
ample time for delivery to the exchange agent before the expiration date. You
should not send the letter of transmittal or outstanding notes to us. You may
request your broker, dealer, commercial bank, trust company or other nominees
to effect these actions for you. Delivery occurs only when actually received or
confirmed by the exchange agent.
If you wish to exchange outstanding notes that are registered in the name of
your broker, dealer, commercial bank, trust company or other nominee, you
should promptly contact the person in whose name your outstanding notes are
registered and instruct that person to tender on your behalf. If you want to
tender on your own behalf, before completing and executing the letter of
transmittal and delivering the outstanding notes, you must either:
. arrange to register ownership of the outstanding notes in your name; or
. obtain a completed bond power from the registered holder of the outstanding
notes.
Transferring registered ownership may take a long time and might not be
completed before the expiration date.
Your signature on the letter of transmittal or the notice of withdrawal
described below must be guaranteed by:
. a member firm of a registered national securities exchange or the National
Association of Securities Dealers, Inc.;
. a commercial bank or trust company that has an office or correspondent in
the United States; or
. another "eligible institution" within the meaning of Rule 17Ad-15 under the
Securities Exchange Act of 1934;
unless you tender the outstanding notes:
. and you, as a registered holder, have not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the
letter of transmittal; or
. for the account of an eligible institution.
If the letter of transmittal is signed by a person other than the registered
holder of the outstanding notes, then a completed bond power must accompany the
outstanding notes or you must endorse the outstanding notes. You must sign the
bond power as your name appears on the outstanding notes. An eligible
institution must guarantee your signature.
If the letter of transmittal or any outstanding notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
those persons should indicate their titles when signing. They should also
submit evidence satisfactory to us of their authority to deliver the letter of
transmittal, unless we waive this requirement.
The exchange agent and DTC have confirmed that any financial institution that
participates in DTC's system may use DTC's automated tender offer program to
tender. Participants in the program may,
19
<PAGE>
instead of manually completing and signing the letter of transmittal and
delivering it to the exchange agent, transmit their acceptance electronically
by having DTC transfer the outstanding notes to the exchange agent according to
DTC's transfer procedures. DTC will then send an agent's message to the
exchange agent. An agent's message is a message transmitted by DTC and received
by the exchange agent and forms part of the book-entry confirmation to the
effect that:
. DTC has received an express acknowledgment from a participant in DTC's
automated tender offer program that is tendering outstanding notes that are
the subject of book-entry confirmation;
. the participant has received and agrees to be bound by the terms of the
letter of transmittal or, in the case of an agent's message relating to
guaranteed delivery, the participant has received and agrees to be bound by
the applicable notice of guaranteed delivery; and
. the agreement is enforceable against the participant.
We will determine in our sole discretion all questions regarding the validity,
form, eligibility (including time of receipt), acceptance and withdrawal of the
outstanding notes that you tender. Our determination will be final and binding.
We reserve the absolute right to reject any outstanding notes not properly
tendered or any outstanding notes if acceptance would be unlawful in our
counsel's opinion. We also reserve the right to waive any defects,
irregularities or conditions of tender. Our interpretation of the terms and
conditions of this exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties. Unless we waive any
defects or irregularities regarding your tender, you must cure them within a
time period determined by us. Although we intend to notify you of defects or
irregularities regarding your tender, neither we, the exchange agent nor any
other person will incur any liability for failure to give notice. Your tender
is not effective until all defects or irregularities have been cured or waived.
Any outstanding notes received by the exchange agent that are not properly
tendered will be returned to the exchange agent without cost to you, unless the
letter of transmittal instructs otherwise, as soon as practicable after the
expiration date.
In all cases, we will issue exchange notes for outstanding notes that we accept
for exchange only after the exchange agent timely receives:
. outstanding notes or a timely book-entry confirmation of the outstanding
notes into the exchange agent's account at DTC; and
. a properly completed and signed letter of transmittal and all other required
documents or a properly transmitted agent's message.
Book-Entry Transfer
Promptly after the date of this prospectus, the exchange agent will establish
an account at DTC for purposes of this exchange offer. Financial institutions
participating in DTC's system may make book-entry delivery of outstanding notes
by having DTC transfer the outstanding notes into the exchange agent's account
at DTC. If you are unable to deliver confirmation of the book-entry tender of
your outstanding notes into the exchange agent's account at DTC, or all other
documents required by the letter of transmittal to the exchange agent on or
prior to the expiration date, you must tender according to the guaranteed
delivery procedures described below.
Guaranteed Delivery Procedures
If you want to tender but your outstanding notes are not immediately available
or you cannot deliver them, the letter of transmittal or any other required
documents to the exchange agent, or comply with the applicable procedures under
DTC's automated tender offer program prior to the expiration date, then you may
tender if:
. you tender through an eligible institution;
20
<PAGE>
. before the expiration date, the exchange agent receives from the eligible
institution either a properly completed and signed notice of guaranteed
delivery, by facsimile transmission, mail or hand delivery, or a properly
transmitted agent's message and notice of guaranteed delivery that:
. contains your name and address and the registered number and principal
amount of the outstanding notes that you are tendering;
. states that the tender is being made; and
. guarantees that, within three New York Stock Exchange trading days after
the expiration date, the eligible institution will deposit with the
exchange agent the letter of transmittal, or a facsimile, with the
outstanding notes or a book-entry confirmation and any other documents
required by the letter of transmittal; and
. the exchange agent receives a properly completed and signed letter of
transmittal, or facsimile of a letter of transmittal, with all tendered
outstanding notes in proper form for transfer or a book-entry confirmation,
and all other documents required by the letter of transmittal, within three
New York Stock Exchange trading days after the expiration date.
The exchange agent will send you upon request a notice of guaranteed delivery.
You should request a notice of guaranteed delivery if you want to tender your
outstanding notes according to the guaranteed delivery procedures.
Withdrawal of Tenders
Except as provided elsewhere in this prospectus, you may withdraw your tenders
at any time before the expiration date. For an effective withdrawal:
. the exchange agent must receive a written withdrawal notice, by facsimile or
letter, at one of the addresses specified in "--Exchange Agent"; or
. you must follow DTC's automated tender offer program procedures.
Any withdrawal notice must:
. contain your name;
. identify the outstanding notes that you are withdrawing, including the
principal amount; and
. if certificates for outstanding notes have been transmitted, specify the
name of the registered holder of the outstanding notes if you are not the
registered holder.
If certificates for outstanding notes have been delivered or otherwise
identified to the exchange agent, then, before the release of the certificates,
you must also submit:
. the serial numbers of the certificates to be withdrawn; and
. a signed notice of withdrawal with your signature guaranteed by an eligible
institution, unless you are an eligible institution.
If you tender outstanding notes according to the procedure for book-entry
transfer described above, the withdrawal notice must specify the name and
number of the account at DTC to be credited with the withdrawn outstanding
notes and must otherwise follow DTC procedures. We will determine all questions
as to the validity, form and eligibility, including time of receipt, of
withdrawal notices. Our determination will be final and binding on all parties.
All outstanding notes that are withdrawn will not be validly tendered for
exchange. Outstanding notes that are tendered but are not exchanged for any
reason will be returned without cost to you. If your outstanding notes are
tendered by book-entry transfer into the exchange agent's account at DTC, they
will be returned to you by a credit to the DTC
21
<PAGE>
account for outstanding notes. Return of outstanding notes will be made as soon
as practicable after withdrawal, rejection of tender or termination of the
exchange offer. You may tender properly withdrawn outstanding notes by
following the procedures described in "--Procedures for Tendering" at any time
on or before the expiration date.
Exchange Agent
U.S. Bank Trust National Association is the exchange agent. You should direct
questions and requests for assistance, requests for additional copies of this
prospectus or the letter of transmittal and requests for the notice of
guaranteed delivery to the exchange agent addressed as follows:
By overnight courier or by hand:
By registered or certified mail:
U.S. Bank Trust National Association
U.S. Bank Trust National Association Fourth Floor--Bond Drop Window
P.O. Box 64485 180 East 5th Street
St. Paul, Minnesota 55164-9549 St. Paul, Minnesota 55101
Attn: Specialized Finance Attn: Specialized Finance
By facsimile transmission (for eligible institutions only):
U.S. Bank Trust National Association
(612) 973-6877
Attn: Specialized Finance
Delivery of the letter of transmittal to an address other than as set forth
above or transmission via facsimile other than as set forth above will not
constitute valid delivery. You may confirm your delivery by calling (800) 934-
6802.
Fees and Expenses
We will bear the expenses of soliciting tenders. We are primarily soliciting by
mail. However, our officers and those of our affiliates may further solicit by
telegraph, by telephone or in person.
We have not retained any dealer-manager for this exchange offer and will not
make any payments to broker-dealers or others who solicit tenders. We will,
however, pay the exchange agent reasonable and customary fees for its services
and reimburse it for its related reasonable out-of-pocket expenses.
We will pay the cash expenses for this exchange offer. Total expenses are
estimated to be approximately $300,000. They include:
. SEC registration fees;
. fees and expenses of the exchange agent and trustee;
. accounting and legal fees and printing costs; and
. related fees and expenses.
Transfer Taxes
In general, we will pay all transfer taxes. You, however, will be required to
pay transfer taxes imposed on you or any other person if:
. certificates representing outstanding notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or to be issued in
the name of, any person other than you;
. tendered outstanding notes are registered in the name of any person other
than the person signing the letter of transmittal; or
. a transfer tax is imposed for any reason other than the exchange of
outstanding notes under this exchange offer.
22
<PAGE>
If you do not submit satisfactory evidence of payment of transfer taxes with
the letter of transmittal, we will bill you for the amount of the transfer
taxes.
Consequences of Failure to Exchange
If you do not exchange your outstanding notes for exchange notes, you will
remain subject to the transfer restrictions of the outstanding notes:
. as stated in the legend printed on the outstanding notes because they were
issued under the exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act of 1933 and applicable state
securities laws; and
. as described in the offering memorandum distributed with the private
placement.
In general, you may not offer or sell the outstanding notes unless they are
registered under the Securities Act of 1933 or the offer or sale is exempt from
registration under the Securities Act of 1933 and applicable state securities
laws. We do not intend to register resales of the outstanding notes under the
Securities Act of 1933.
In the future, we may try to acquire untendered outstanding notes in open
market or privately negotiated transactions, through subsequent exchange offers
or by other methods. However, we have no present plans to acquire any
outstanding notes that are not tendered in this exchange offer or to file a
registration statement to permit resales of any untendered outstanding notes.
Accounting Treatment
We will record the exchange notes in our accounting records at the same
carrying value as the outstanding notes are reflected on the date of exchange.
The carrying value is the aggregate principal amount net of original issue
discount. We will not recognize any gain or loss for accounting purposes. We
will amortize the expenses of this exchange offer over the term of the exchange
notes.
23
<PAGE>
THE ACQUISITION
In August 1998, Jay and Scott Galin and an investor group led by affiliates of
Pegasus Investors, L.P. acquired the assets of the junior apparel retail
business that was then conducted by G & G Shops, Inc. with the approval of the
U.S. Bankruptcy Court for the Southern District of New York in accordance with
the United States Bankruptcy Code. We acquired the business for $132.0 million
in cash and the assumption of specified liabilities. In addition, Holdings
issued 15,000 shares of class C common stock to G & G Shops. A portion of the
cash purchase price was financed with debt, consisting of senior bridge notes,
in the aggregate principal amount of $90.0 million. The senior bridge notes
were repaid with the net proceeds of the private placement of the outstanding
notes. See "Use of Proceeds."
Pegasus Investors managed the acquisition process by structuring the
transaction, arranging the financing and negotiating the acquisition
documentation. In the acquisition, Pegasus Investors received approximately
51.1% of the voting common stock and all of the series B preferred stock of
Holdings in exchange for an investment of approximately $31.4 million.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange notes.
In consideration for our issuing the exchange notes, you will tender to us an
equal principal amount of outstanding notes. The outstanding notes tendered and
accepted will be retired and canceled and may not be reissued. Therefore,
issuance of the exchange notes will not result in any change in our
capitalization.
The net proceeds to us from the private placement of the outstanding notes were
approximately $94.0 million, after deducting the original issue discount of
$7.3 million and $5.7 million of placement fees, transaction fees and expenses.
Of those net proceeds, we used $90.6 million to repay in full all of the senior
bridge notes, including accrued interest of $600,000. The senior bridge notes
accrued interest at the one-month London Inter-Bank Offered Rate (LIBOR) plus
6% (10.9% as of May 17, 1999, the date on which they were repaid). We expect to
use the balance of the net proceeds from the private placement for general
corporate purposes.
24
<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of July 31, 1999,
which reflects the private placement of the outstanding notes. You should read
this table in conjunction with "Unaudited Pro Forma Consolidated Financial
Statements," "Selected Financial and Operating Data" and the historical
combined and consolidated financial statements and related notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
July 31, 1999
-------------
<S> <C> <C>
(Dollars in thousands)
Cash............................................................ $ 11,275
=========
Long-term debt:
Revolving credit facility(1).................................. $ --
11% senior notes due 2006(2).................................. 99,354
---------
Total long-term debt........................................ 99,354
Stockholder's equity(3)......................................... 51,141
---------
Total capitalization........................................ $ 150,495
=========
</TABLE>
- --------
(1) The revolving credit facility, which matures in October 2001, provides for
revolving loans of up to $20.0 million, including a sublimit of $10.0
million for letters of credit. As of July 31, 1999, we had no borrowings
outstanding under the revolving credit facility, but $925,000 in letters of
credit were outstanding and $18.3 million was available for future
borrowing.
(2) Net of original issue discount of $7.3 million and the $470,000 value
assigned to the warrants to purchase class D common stock of Holdings.
(3) Stockholder's equity includes a $470,000 capital contribution by Holdings
in connection with the issuance of the warrants to purchase Holdings class
D common stock.
25
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The unaudited pro forma consolidated statements of operations are based on
historical combined financial statements related to the business acquired in
the acquisition and the historical consolidated financial statements of G+G
Retail, as adjusted to illustrate the estimated effects of the acquisition and
the private placement. The acquisition purchase price was $133.1 million,
consisting of $132.0 million in cash and the issuance of a class of common
stock of Holdings that was valued at $1.1 million. In addition, $23.3 million
of liabilities were assumed in the acquisition.
On May 17, 1999, we closed the private placement of $107.0 million face amount
of our 11% senior notes due May 15, 2006 and warrants to purchase Holdings
class D common stock at an exercise price of $0.01 per share. There was
original issue discount of $7.3 million related to the issuance of the
outstanding notes. We used most of the net proceeds of the private placement to
repay the senior bridge notes and to pay fees related to the private placement.
We will use the balance of the net proceeds for general corporate purposes. The
outstanding notes, net of original issue discount and the $470,000 value
assigned to the warrants to purchase Holdings stock, were recorded at
approximately $99.2 million. See "The Acquisition" and "Use of Proceeds."
The unaudited pro forma consolidated statements of operating data for fiscal
1999 and the six months ended July 31, 1999 gives effect to the acquisition,
the private placement and the $470,000 capital contribution by Holdings, as if
each had occurred on February 1, 1998. The unaudited pro forma consolidated
statements of operations for fiscal 1999 and the six months ended July 31, 1999
do not reflect the write-off of the unamortized portion of the financing costs,
net of tax, related to the acquisition. This write-off was treated as an
extraordinary item in our financial statements for the second quarter of fiscal
2000.
The unaudited pro forma consolidated statements of operations may not
accurately represent what our results of operations would have been if the
acquisition, the private placement and the $470,000 capital contribution had
occurred on the dates indicated. In addition, they may not be indicative of our
financial results for any future periods. The unaudited pro forma consolidated
statements of operations are based upon assumptions that we believe are
reasonable. You should read this information in conjunction with the historical
combined and consolidated financial statements and the related notes included
elsewhere in this prospectus.
26
<PAGE>
G+G Retail, Inc.
Unaudited Pro Forma Consolidated Statement of Income
for Fiscal 1999
<TABLE>
<CAPTION>
Acquired
Assets G+G Retail
----------- ----------- Pro Forma Pro Forma Pro Forma
February 1, August 29, Adjustments Fiscal 1999 Adjustments
1998 to 1998 to Reflecting Reflecting Reflecting
August 28, January 30, the the Private Pro Forma
1998 1999 Acquisition Acquisition Placement Fiscal 1999
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Net sales............... $162,823 $131,567 $294,390 $294,390
Cost of sales (including
occupancy costs)....... 106,056 79,267 185,323 185,323
Selling, general,
administrative
and buying expenses.... 49,330(1) 36,170 (3,300)(2) 81,188 81,188
(1,012)(3)
Depreciation and
amortization expense... 2,845 5,141 820 (4) 11,074 11,074
2,268 (5)
-------- -------- ------- -------- ------- --------
Operating income........ 4,592 10,989 (1,224) 16,805 16,805
Interest expense, net... -- 7,395 8,400 (6) 17,195 (1,748)(7) 13,861
1,400 (8) 814 (9)
(2,400)(10)
-------- -------- ------- -------- ------- --------
Income (loss) before
provision for
income taxes........... 4,592 3,594 (8,576) (390) 3,334 2,944
Provision (benefit) for
income taxes........... 1,892 1,581 (3,647)(11) (174) 1,466 (11) 1,292
-------- -------- ------- -------- ------- --------
Net income (loss)....... $ 2,700 $ 2,013 $(4,929) $ (216) $ 1,868 $ 1,652
======== ======== ======= ======== ======= ========
Ratio of earnings to
fixed charges(12)...... 2.1x 1.3x -- 1.1x
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Income for Fiscal
1999.
27
<PAGE>
Notes to Unaudited Pro Forma Consolidated Statement of Income
for Fiscal 1999
(1)Includes royalty expense and store closing expenses. See Note 3.
(2) Eliminates a success fee paid to Jay Galin, our chairman of the board and
chief executive officer, and Scott Galin, our president and chief
operating officer, in connection with their assistance in the
acquisition.
(3) Eliminates royalty expenses charged by Petrie Retail for the use of
trademarks that we purchased in the acquisition.
(4) Represents additional depreciation associated with the $5.6 million step-
up in the value of property and equipment with a four-year useful life.
(5) Represents additional amortization of $116.0 million of intangible assets
associated with the acquisition. The amortization period for these
intangible assets is 30 years.
(6) Represents additional interest expense and quarterly fees for the period
from February 1, 1998 to August 28, 1998 of $6.3 million and $2.1
million. We base additional interest expense on the $90.0 million
aggregate principal amount of the senior bridge notes, which accrued
interest at LIBOR plus 6% per annum (12.0%). Quarterly fees equalled 1%
per quarter on the aggregate unpaid principal amount of the senior bridge
notes. The remaining five months of interest expense and fees are
included in the January 30, 1999 statement of income.
(7) Records a reduction to interest expense to reflect the lower interest
rate on the outstanding notes than on the senior bridge notes and the
elimination of the quarterly fees on the senior bridge notes, as if the
outstanding notes had been issued and the senior bridge notes repaid on
February 1, 1998. The reduction is comprised of:
<TABLE>
<S> <C>
Interest on $90.0 million of senior bridge notes............. $(10,693,000)
1% quarterly fee on senior bridge notes...................... (3,600,000)
Interest expense on outstanding notes at 11%................. 11,770,000
Amortization of original issue discount...................... 708,000
Amortization of value assigned to warrants................... 67,000
------------
$ (1,748,000)
============
</TABLE>
Interest was payable on the senior bridge notes at LIBOR plus 6% per annum
(11.6% at January 30, 1999). We amortized the original issue discount of
$7.3 million, the difference between the face amount of the outstanding
notes and the proceeds received, over seven years based on a present-value
amortization table. We amortized the discount for the $470,000 value
assigned to the warrants on a straight-line basis over seven years. A 1/8%
change in the interest rate would have resulted in a difference of
approximately $133,750 in interest costs for fiscal 1999.
(8) Records additional amortization of $2.4 million in deferred financing
costs related to the senior bridge notes as if they were outstanding on
February 1, 1998. We amortized the deferred financing costs on a straight
line basis over 12 months, which was the life of the senior bridge notes.
This adjustment represents seven months of pro forma amortization of
deferred financing costs. The remaining five months of pro forma
amortization is included in the statement of income for fiscal 1999.
(9) Represents amortization of $5.7 million in deferred financing costs over
seven years, which is the life of the outstanding notes, as if the
outstanding notes were outstanding on February 1, 1998.
(10) Eliminates amortization of $2.4 million in deferred financing costs
related to the senior bridge notes. We wrote off the unamortized portion
of $450,000 in deferred financing costs, net of tax, and treated it as an
extraordinary item in our statement of operations for the second quarter
of fiscal 2000, when the senior bridge notes were repaid.
(11) Represents income tax provision at an effective tax rate of 44%.
(12) Computed by dividing the sum of earnings before income taxes and fixed
charges by fixed charges. Fixed charges consist of interest on debt,
amortization of debt issuance costs, amortization of original issue
discount with respect to the outstanding notes, the value assigned to the
warrants issued by Holdings and the estimated interest component of rental
expense. For pro forma fiscal 1999, which reflects the acquisition,
earnings were insufficient to cover fixed charges by $390,000.
28
<PAGE>
G+G Retail, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
for the Six Months Ended July 31, 1999
<TABLE>
<CAPTION>
Pro Forma
January 31, 1999 First Six
to Pro Forma Months of
July 31, 1999 Adjustments Fiscal 2000
---------------- ----------- -----------
<S> <C> <C> <C>
(Dollars in thousands)
Net sales........................... $150,266 $150,266
Cost of sales (including
occupancy costs)................... 96,750 96,750
Selling, general, administrative
and buying expenses................ 42,198 42,198
Depreciation and amortization
expense............................ 6,172 6,172
-------- ----- --------
Operating income.................... 5,146 5,146
Interest expense, net............... 6,433 $ 398 (1) 6,462
(607)(2)
238 (3)
-------- ----- --------
Loss before benefit from income
taxes and extraordinary loss....... (1,287) (29) (1,316)
Benefit for income taxes............ (566) (13)(4) (579)
-------- ----- --------
Loss before extraordinary item...... $ (721) $ (16) $ (737)
======== ===== ========
Ratio of earnings to fixed
charges(5)......................... -- --
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statement of Operations for the
Six Months Ended July 31, 1999.
29
<PAGE>
Notes to Unaudited Pro Forma Consolidated Statement of Operations
for the Six Months Ended July 31, 1999
(1) Represents an increase in interest expense to reflect the higher interest
rate on the outstanding notes than on the senior bridge notes and the
elimination of the quarterly fees on the senior bridge notes, as if the
outstanding notes had been issued and the senior bridge notes repaid on
February 1, 1998. The increase is comprised of:
<TABLE>
<S> <C>
Interest on $90.0 million senior bridge notes................. $(2,955,000)
1% quarterly fee on senior bridge notes (amount for one
month)....................................................... (300,000)
Interest expense on outstanding notes at 11%.................. 3,433,000
Amortization of original issue discount....................... 200,000
Amortization of value assigned to warrants.................... 20,000
-----------
$ 398,000
===========
</TABLE>
Interest was payable on the senior bridge notes at LIBOR plus 6% per annum
(10.9% at May 17, 1999). We amortized the original issue discount of $7.3
million, the difference between the face amount of the outstanding notes and
the proceeds received, over seven years based on a present-value
amortization table. We amortized the discount for the $470,000 value
assigned to the warrants on a straight-line basis over seven years. A 1/8%
change in the interest rate would have resulted in a difference of
approximately $66,876 in interest costs for the six months ended July 31,
1999.
(2) Eliminates amortization of $2.4 million in deferred financing costs
related to the senior bridge notes. We amortized the deferred financing
costs on a straight-line basis over 12 months, which was the life of the
senior bridge notes. We wrote off and recorded the unamortized portion of
$450,000 in deferred financing costs, net of tax, as an extraordinary item
in our statement of operations for the second quarter of fiscal 2000, when
we repaid the senior bridge notes.
(3) Represents amortization of $5.7 million in deferred financing costs over
seven years, which is the life of the outstanding notes, as if the
outstanding notes were outstanding on February 1, 1998.
(4) Represents income tax benefit at an effective tax rate of 44%.
(5) Computed by dividing the sum of earnings before income taxes and fixed
charges by fixed charges. Fixed charges consist of interest on debt,
amortization of debt issuance costs, amortization of original issue
discount with respect to the outstanding notes, the value assigned to the
warrants issued by Holdings and the estimated interest component of rental
expense. For the six months ended July 31, 1999, earnings were
insufficient to cover fixed charges by $1.3 million (actual and pro
forma).
30
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
We account for our operations on a fiscal year rather than calendar year basis.
As a result, we present information on a fiscal year basis in this prospectus.
Each reference to a "fiscal year" means the 52- or 53-week fiscal year that
ends on the Saturday nearest January 31 in the particular calendar year. For
example, references to "fiscal 1999" mean the fiscal year ended January 30,
1999. Fiscal 1996 consisted of 53 weeks.
We derived the following selected financial and operating data for:
. the combined balance sheets as of January 28, 1995 and February 3, 1996 and
the related combined statements of operations and cash flows for fiscal 1995
from the unaudited financial statements of the companies from which we
acquired our business in the acquisition;
. the combined balance sheets as of February 1, 1997 and January 31, 1998 and
the related combined statements of operations and cash flows for fiscal
1996, 1997 and 1998 and the seven months ended August 28, 1998 from the
audited financial statements of these companies;
. the combined balance sheet as of August 1, 1998 and the related combined
statements of operations and cash flows for the six months ended August 1,
1998 from the unaudited financial statements of these companies;
. the consolidated balance sheet as of January 30, 1999 and the related
consolidated statements of income and cash flows for the five months ended
January 30, 1999 from our audited financial statements; and
. the consolidated balance sheet as of July 31, 1999 and the related
consolidated statements of operations and cash flows for the six months
ended July 31, 1999 from our unaudited financial statements.
Combined financial statements include the accounts of G & G Shops and stores
operated by G & G Shops that were owned by subsidiaries of Petrie Retail. In
the acquisition, we purchased the assets of all of the stores that G & G Shops
operated and the trademarks that we use in our business.
The pro forma statement of operations data for fiscal 1999 and the six months
ended July 31, 1999 are intended to reflect how our business would have looked
if we had closed the acquisition and the private placement of the outstanding
notes and the warrants of Holdings on February 1, 1998. The pro forma statement
of operations data for fiscal 1999 and the six months ended July 31, 1999 do
not reflect our write-off of the unamortized portion of the financing costs,
net of tax, related to the acquisition in May 1999. We recorded this write-off
as an extraordinary item in our financial statements for the second quarter of
fiscal 2000.
Historical and pro forma financial and operating data for fiscal 1999 and the
six months ended July 31, 1999 may not be indicative of the results to be
expected for future periods. G+G Retail did not conduct operations from the
date of our incorporation on June 26, 1998 to August 28, 1998, when we closed
the acquisition. We closed the private offering of the placement of the
outstanding notes on May 17, 1999. See "The Acquisition" and "Use of Proceeds."
Our selected financial and operating data should be read in conjunction with
"Unaudited Pro Forma Consolidated Financial Statements," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical combined and consolidated financial statements and related notes
included elsewhere in this prospectus.
31
<PAGE>
G+G Retail, Inc.
Selected Financial and Operating Data
<TABLE>
<CAPTION>
Acquired Assets G+G Retail
----------------------------------------------------- -------------------------
February 1, August 29,
Fiscal Year 1998 to 1998 to Pro Forma
---------------------------------------- August 28, January 30, Fiscal Year
1995 1996 1997 1998 1998 1999 1999
--------- --------- -------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations
Data:
Net sales....... $ 237,680 $ 243,583 $266,362 $286,938 $162,823 $131,567 $294,390
Cost of sales
(including
occupancy costs).. 155,940 159,262 166,636 177,765 106,056 79,267 185,323
Selling,
general,
administrative
and buying
expenses(1).... 75,526 78,128 76,684 79,702 49,330 39,170 81,188
Depreciation and
amortization
expense(2)..... 8,905 5,148 4,526 4,489 2,845 5,141 11,074
--------- --------- -------- -------- -------- -------- --------
Operating income
(loss)......... (2,691) 1,045 18,516 24,982 4,592 10,989 16,805
Interest
expense, net... -- -- -- -- -- 7,395 13,861
--------- --------- -------- -------- -------- -------- --------
Income (loss)
before
provision for
(benefit from)
income taxes
and
extraordinary
loss........... (2,691) 1,045 18,516 24,982 4,592 3,594 2,944
Provision for
(benefit from)
income taxes... (1,109) 431 7,629 10,293 1,892 1,581 1,292
--------- --------- -------- -------- -------- -------- --------
Income (loss)
before
extraordinary
loss........... (1,582) 614 10,887 14,689 2,700 2,013 $ 1,652
========
Extraordinary
loss, net of
$354 of income
taxes.......... -- -- -- -- -- --
--------- --------- -------- -------- -------- --------
Net income
(loss)......... $ (1,582) $ 614 $ 10,887 $ 14,689 $ 2,700 $ 2,013
========= ========= ======== ======== ======== ========
Other Operating
Data:
Sales per gross
square foot.... $ 222 $ 238 $ 277 $ 295 $ 160 $ 130 $ 290
Inventory
turnover(3).... 5.1x 5.4x 6.4x 6.6x 6.0x 6.5x 6.2x
Same store sales
increase
(decrease)(4).. 3.1% 5.5% 13.0% 4.5% (3.0%) (1.1%) (2.2%)
Capital
expenditures:
New stores...... $ 940 $ 835 $ 829 $ 2,972 $ 1,299 $ 1,027 $ 2,326
Remodels........ 887 1,780 892 3,320 1,809 1,341 3,150
Non-store assets
and systems.... 576 205 231 713 292 411 703
--------- --------- -------- -------- -------- -------- --------
Total capital
expenditures... $ 2,403 $ 2,820 $ 1,952 $ 7,005 $ 3,400 $ 2,779 $ 6,179
========= ========= ======== ======== ======== ======== ========
Number of
stores:
Beginning
balance........ 465 441 416 395 408 415 408
New stores
opened......... 5 6 11 25 9 13 22
Existing stores
closed......... 29 31 32 12 2 6 8
--------- --------- -------- -------- -------- -------- --------
Ending balance.. 441 416 395 408 415 422 422
========= ========= ======== ======== ======== ======== ========
Other Financial
Data:
EBITDA as
adjusted(6).... $ 9,721 $ 9,802 $ 24,791 $ 31,305 $ 8,449 $ 16,130 $ 27,879
EBITDA margin as
adjusted(7).... 4.1% 4.0% 9.3% 10.9% 5.2% 12.3% 9.5%
Cash provided by
(used in)
operating
activities..... $ 10,638 $ 18,652 $ 20,043 $ 25,588 $ 15,793 $ 11,943 $ 24,675
Cash provided by
(used in)
investing
activities..... (2,607) (1,985) (1,952) (7,005) (3,400) (137,658) (6,179)
Cash provided by
(used in)
financing
activities..... (9,923) (16,498) (18,545) (19,069) (14,140) 137,069 (14,140)
Royalty
expense(8)..... 3,507 3,609 1,749 1,834 1,012 -- --
Ratio of
earnings to
fixed charges(9).. -- 1.2x 3.7x 4.5x 2.1x 1.3x 1.1x
Deficiency of
earnings to
cover fixed
charges ....... $ (2,691) $ -- $ -- $ -- $ -- $ -- $ --
Ratio of earnings as adjusted to fixed charges(10)................................... 1.3x..
Ratio of EBITDA as adjusted to interest expense(11).................................. 2.2x..
Ratio of net debt to EBITDA as adjusted(12).......................................... 3.0x
<CAPTION>
Acquired
Assets G+G Retail
---------- --------------------
First First
Six Six Pro Forma
Months Months First Six
of of Months of
Fiscal Fiscal Fiscal
1999 2000 2000
---------- --------- ----------
<S> <C> <C> <C>
Statement of
Operations
Data:
Net sales....... $138,032 $150,266 $150,266
Cost of sales
(including
occupancy costs).. 90,458 96,750 96,750
Selling,
general,
administrative
and buying
expenses(1).... 39,639 42,198 42,198
Depreciation and
amortization
expense(2)..... 2,451 6,172 6,172
---------- --------- ----------
Operating income
(loss)......... 5,484 5,146 5,146
Interest
expense, net... -- 6,433 6,462
---------- --------- ----------
Income (loss)
before
provision for
(benefit from)
income taxes
and
extraordinary
loss........... 5,484 (1,287) (1,316)
Provision for
(benefit from)
income taxes... 2,259 (566) (579)
---------- --------- ----------
Income (loss)
before
extraordinary
loss........... 3,225 (721) $ (737)
==========
Extraordinary
loss, net of
$354 of income
taxes.......... -- (450)
---------- ---------
Net income
(loss)......... $ 3,225 $ (1,171)
========== =========
Other Operating
Data:
Sales per gross
square foot.... $ 138 $ 143 $ 143
Inventory
turnover(3).... 6.3x 6.1x 6.1x
Same store sales
increase
(decrease)(4).. (3.5%) 2.5% 2.5%
Capital
expenditures:
New stores...... $ 1,185 $ 3,925 $ 3,925
Remodels........ 1,426 4,670 4,670
Non-store assets
and systems.... 479 729 729
---------- --------- ----------
Total capital
expenditures... $ 3,090 $ 9,324 $ 9,324
========== ========= ==========
Number of
stores:
Beginning
balance........ 408 422 422
New stores
opened......... 9 22 22
Existing stores
closed......... 2 1 1
---------- --------- ----------
Ending balance.. 415 443 443
========== ========= ==========
Other Financial
Data:
EBITDA as
adjusted(6).... $ 8,786 $ 11,318 $ 11,318
EBITDA margin as
adjusted(7).... 6.4% 7.5% 7.5%
Cash provided by
(used in)
operating
activities..... $ 9,012 $ 3,195 $ 3,179
Cash provided by
(used in)
investing
activities..... (3,090) (9,324) (9,324)
Cash provided by
(used in)
financing
activities..... (5,922) 4,275 (5,385)
Royalty
expense(8)..... 851 -- --
Ratio of
earnings to
fixed charges(9).. 2.5x -- --
Deficiency of
earnings to
cover fixed
charges ....... $ -- $ (1,287) $ (1,316)
Ratio of earnings
as adjusted to
fixed
charges(10).... 1.1x
Ratio of EBITDA
as adjusted to
interest
expense(11).... 1.8x
Ratio of net debt
to EBTIDA as
adjusted(12)... 8.0x
</TABLE>
<TABLE>
<CAPTION>
Acquired
Acquired Assets G+G Retail Assets G+G Retail
----------------------------------------------- ----------- --------- ----------
January 28, February 3, February 1, January 31, January 30, August 1, July 31,
1995 1996 1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Balance Sheet Data:
Total assets............ $31,746 $29,218 $25,818 $28,157 $167,664 $41,011 $186,270
Total long-term debt.... 7,623 12,364 20,591 20,866 90,000 20,866 99,354
</TABLE>
32
<PAGE>
Notes to Selected Financial and Operating Data
(1) Selling, general, administrative and buying expenses include royalty
expense and store closing expenses. See note 8 below.
(2) In November 1994, Petrie Stores Corporation was acquired by Petrie Retail
in a bargain purchase. Accordingly, the fixed assets were written down.
This write-down of assets caused the substantial decrease in depreciation
and amortization for fiscal 1996, 1997 and 1998.
(3) Calculated by dividing the sum of monthly net retail sales by average
monthly retail inventory.
(4) A store becomes comparable after it is open 12 full months.
(5) Does not include five stores for which we have executed leases, but which
were not open, as of July 31, 1999.
(6) We define EBITDA as operating income plus depreciation and amortization.
In addition, we have further adjusted EBITDA to add back royalty expense.
See note 8. EBITDA as adjusted does not represent cash flow from
operations. You should not consider EBITDA as adjusted to be an
alternative to operating or net income computed in accordance with
generally accepted accounting principles, an indicator of our operating
performance, an alternative to cash from operating activities as
determined in accordance with GAAP or a measure of liquidity. We believe
that EBITDA is a standard measure commonly reported and widely used by
analysts, investors and other interested parties in the retail industry.
As a result, we present this information to give you a more complete
comparative analysis of our operating performance relative to other
companies in the industry. Not all companies calculate EBITDA using the
same methods. Therefore, the EBITDA as adjusted figures that we present
may not be comparable to EBITDA reported by other companies.
(7) Computed by dividing EBITDA as adjusted by net sales.
(8) Royalty expense represents an amount charged by Petrie Retail for the use
of trademarks that we purchased in the acquisition.
(9) Computed by dividing the sum of earnings before income taxes and fixed
charges by fixed charges. Fixed charges consist of:
.interest on debt;
.amortization of debt issuance costs;
.amortization of original issue discount with respect to the
outstanding notes;
.the value assigned to the warrants issued by Holdings; and
.the estimated interest component of rental expense.
(10) Computed by dividing the sum of earnings before income taxes,
amortization of goodwill and fixed charges by fixed charges. The ratio of
earnings as adjusted to fixed charges is not a substitute for the ratio
of earnings to fixed charges. We believe this ratio is meaningful
information for analysts, investors and other interested parties.
(11) Computed by dividing EBITDA as adjusted by interest expense, including
the amortization of original issue discount with respect to the
outstanding notes and the value assigned to the warrants issued by
Holdings, excluding amortization of deferred financing costs.
(12) Computed by dividing total debt less excess cash, where excess cash is
defined as the cash balance less $3.0 million, the amount that we
estimate is the minimum average balance required for our operations, by
EBITDA as adjusted.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following in conjunction with the selected financial and
operating data and unaudited pro forma consolidated financial statements and
the historical combined and consolidated financial statements and the related
notes included elsewhere in this prospectus.
Overview
Since early 1995, we have implemented an ongoing strategy to open new stores in
locations that we believe are favorable for our business and to close
underperforming stores. Between October 31, 1995 and January 30, 1999, we
opened 59 new stores and closed 70 stores. We opened six Rave stores between
January 31, 1999 and May 1, 1999, and we intend to open approximately 24 Rave
stores by the end of fiscal 2000. We also expect to open six Rave Girl stores
during fiscal 2000.
We achieved positive store sales growth for comparable stores that had been
open for 12 full months on an annual basis in fiscal 1995, 1996, 1997 and 1998.
This "same store" sales growth was 3.1% during fiscal 1995, 5.5% during fiscal
1996, 13.0% during fiscal 1997 and 4.5% during fiscal 1998. However, we
experienced a 2.2% decline in same store sales in fiscal 1999. We believe that
same store sales in fiscal 1999 were adversely affected by the significant time
and attention that we spent in connection with:
. the acquisition, which took ten months to complete;
. the complications of Petrie Retail's bankruptcy proceedings; and
. the liquidity problems faced as a result of Petrie Retail's using
substantially all excess cash to fund its own cash needs.
We closed the acquisition on August 28, 1998. We obtained financing for the
acquisition by a net capital contribution by Holdings to us of $49.8 million
and $90.0 million of borrowings under the senior bridge notes. We accounted for
the acquisition under the purchase method of accounting. Accordingly, our pro
forma financial statements for fiscal 1999 reflect the effects of purchase
accounting adjustments, including increased depreciation expense and
amortization of goodwill.
Prior to the acquisition, Petrie Retail provided payroll administration and
legal services, tax, real estate and employee benefits support and insurance
coverage. We reflect an estimate for the costs of these services in the
financial statements included elsewhere in this prospectus. We no longer pay
royalties that were paid to Petrie Retail before the acquisition for the use of
trademarks. These royalties comprised $1.8 million in fiscal 1998, because we
purchased these trademarks in the acquisition. During Petrie Retail's
bankruptcy proceedings, rent concessions were sometimes obtained because of
special rights of debtors in bankruptcy proceedings to accept or reject leases.
Approximately $500,000 of these rent concessions remained available at July 31,
1999 but may not continue to be available to us in the future because the
special right to accept or reject leases will not be available to us. Rent
concessions received from landlords are recognized on a straight-line basis
over the remaining term of the respective leases.
We intend to finance our future operations, including our expansion plans,
through cash flow from operations, borrowings under our revolving credit
facility and capitalized leases.
Statement of Operations
The table below sets forth selected statements of operating data, expressed as
a percentage of net sales, of:
. the companies from which we acquired our business for fiscal 1997 and 1998,
the period from February 1, 1998 to August 28, 1998 and the six months ended
August 1, 1998; and
34
<PAGE>
. G+G Retail for the period from August 29, 1998 to January 30, 1999, pro
forma fiscal 1999 and the six months ended July 31, 1999 (actual and pro
forma).
<TABLE>
<CAPTION>
Acquired
Acquired Assets G+G Retail Assets G+G Retail
------------------------- --------------------- -------- -------------------
First
Six Pro Forma
February 1, August 29, Months First Six First Six
Fiscal Year 1998 to 1998 to Pro Forma of Months of Months of
------------ August 28, January 30, Fiscal Fiscal Fiscal Fiscal
1997 1998 1998 1999 Year 1999 1999 2000 2000
----- ----- ----------- ----------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (including
occupancy costs)....... 62.6 62.0 65.1 60.2 63.0 65.6 64.4 64.4
Selling, general,
administrative
and buying expenses.... 28.8 27.8 30.3 27.5 27.6 28.7 28.1 28.1
Depreciation and
amortization expense... 1.7 1.6 1.7 3.9 3.8 1.8 4.1 4.1
Operating income........ 6.9 8.6 2.9 8.4 5.6 3.9 3.4 3.4
Interest expense, net... -- -- -- 5.6 4.7 -- 4.3 4.3
Income (loss) before
extraordinary item and
provision for (benefit
from) income taxes
(benefit).............. 6.9 8.6 2.9 2.8 0.5 3.9 (0.9) (0.5)
Extraordinary loss, net
....................... -- -- -- -- -- -- (0.3) --
Net income (loss)....... 4.1 5.1 1.7 1.5 0.6 2.3 (0.8) (0.5)
EBITDA as adjusted...... 9.3 10.9 5.2 12.3 9.5 6.4 7.5 7.5
</TABLE>
Comparison of Six Months Ended July 31, 1999 and Six Months Ended August 1,
1998
The statement of operations for the six months ended July 31, 1999 is not
comparable to the statement of operations for the six months ended August 1,
1998 because of a change in the basis of accounting that resulted from the
acquisition. In the first six months of fiscal 2000, we incurred additional
depreciation and amortization expense associated with the acquisition and
interest expense associated with the financing of the acquisition. The
historical statement of operating data for the six months ended July 31, 1999
is substantially the same as the pro forma statement of operating data for that
period, except for net interest expenses and the related tax effect. Net
interest expense is different because the historical data reflect interest
expense associated with the senior bridge notes through May 17, 1999, while the
pro forma data reflect interest expense associated with the outstanding notes
for the full six-month period.
Net sales increased to $150.3 million in the first six months of fiscal 2000
from $138.0 million in the first six months of fiscal 1999. The $12.3 million,
or 8.9%, increase in net sales was due to the opening of new stores that
contributed $8.9 million to the increase in net sales in fiscal 2000 and a $3.4
million, or 2.5%, increase in same store sales as compared to the first six
months of fiscal 1999. Average sales per gross square foot increased 3.6% to
$143 in the first six months of fiscal 2000 from $138 in the first six months
of fiscal 1999. We operated 443 stores as of July 31, 1999, as compared to 415
stores as of August 1, 1998, as a result of closing seven stores and opening 35
stores.
Cost of sales, including occupancy costs, increased 7% to $96.8 million in the
first six months of fiscal 2000 from $90.5 million in the first six months of
fiscal 1999. As a percentage of net sales, cost of sales, including occupancy
costs, decreased 1.2% from 65.6% in the first six months of fiscal 1999 to
64.4% in the first six months of fiscal 2000. This 1.2% decrease resulted from
a decrease in cost of sales, with no change in occupancy costs as a percent of
sales. The decrease in the cost of sales as a percentage of net sales was due
to an increase in the initial mark-on.
Selling, general, administrative and buying expenses increased 6.6% from $39.6
million in the first six months of fiscal 1999 to $42.2 million in the first
six months of fiscal 2000. As a percentage of net sales, these expenses
decreased to 28.1% in the first six months of fiscal 2000 as compared to 28.7%
35
<PAGE>
in the first six months of fiscal 1999. The $2.6 million increase resulted from
(1) additional selling costs related to new store openings, (2) an increase in
same store selling expenses and (3) an increase in administrative costs. This
increase was partially offset by a gain of approximately $300,000 resulting
from insurance proceeds received in the second quarter of fiscal 2000 from a
prior year hurricane loss and the elimination of royalty expense in the first
six months of fiscal 2000 as compared to approximately $800,000 of royalty
expense in the first six months of fiscal 1999. Fiscal 1999 royalty expense was
a charge from Petrie Retail for the use of trademarks that were owned by Petrie
Retail. We purchased these trademarks in connection with the acquisition.
Depreciation and amortization expense for the first six months of fiscal 2000
increased $3.7 million to $6.2 million from $2.5 million in the first six
months of fiscal 1999. The increase is mainly attributable to the additional
depreciation and amortization related to the incremental value assigned to the
property and equipment and goodwill resulting from the acquisition.
Interest expense in the first six months of fiscal 2000 was $6.7 million or
4.5% of net sales for the first six months of fiscal 2000 (actual and pro
forma). The historical six-month period reflects interest on the senior bridge
notes and amortization of the related issuance costs through May 17, 1999 and
interest and amortization on the outstanding notes from May 18, 1999 to July
31, 1999. Pro forma interest expense assumes that the outstanding notes were
outstanding for the full six months and assumes the amortization of the $7.3
million original issue discount, the $470,000 value assigned to the warrants
issued by Holdings and deferred financing costs for the full six-month period.
In the first six months of fiscal 1999, we did not have any borrowings.
The income tax benefit for the first six months of fiscal 2000 (actual and pro
forma) was approximately $566,000 and $579,000, respectively, excluding
$354,000 of income tax expense from the extraordinary loss, as compared to an
income tax expense of approximately $2.3 million in the first six months of
fiscal 1999. The tax benefit in the first six months of fiscal 2000, as
compared to tax expense in the first six months of fiscal 1999, was due to a
pre-tax loss in the first six months of fiscal 2000 that resulted from interest
expense on the debt and the amortization of intangible assets. The income tax
rate for the first six months of fiscal 2000 was 44%, as compared to 41.2% for
the first six months of fiscal 1999. The higher rate in the first six months of
fiscal 2000 was mainly attributable to the fact that our legal structure is
different from the legal structure of the companies from which we acquired our
business.
The extraordinary loss of $450,000, net of $354,000 of income taxes, resulted
from our write-off of the unamortized finance fees related to the senior bridge
notes. We repaid the senior bridge notes in the second quarter of fiscal 2000.
Net income decreased from $3.2 million in the first six months of fiscal 1999
to a loss of $1.2 million in the first six months of fiscal 2000 due to the
factors discussed above.
Comparison of Fiscal 1999 and Fiscal 1998
The statement of income data for the seven months ended August 28, 1998 and the
five months ended January 30, 1999 on a combined basis are the same as the pro
forma statement of income data for fiscal 1999, except for:
. the increased depreciation and amortization resulting from the acquisition,
as if it occurred on February 1, 1998;
. the additional interest expense resulting from the outstanding notes, as if
we had closed the private placement on February 1, 1998; and
. the related tax effect of each of these pro forma adjustments.
Net sales increased approximately $7.5 million, or 2.6%, to $294.4 million in
fiscal 1999, as compared to $286.9 million in fiscal 1998. The increase in net
sales was due to the opening of stores, which contributed $13.6 million to net
sales in fiscal 1999, partially offset by a $6.1 million, or 2.2%,
36
<PAGE>
decrease in same store sales. Average sales per gross square foot decreased
1.7% from $295 in fiscal 1998 to $290 in fiscal 1999. Same store sales and
average sales per gross square foot in fiscal 1999 were adversely affected by
the ten-month acquisition process, the bankruptcy proceedings and the liquidity
problems faced by Petrie Retail. We had 422 stores at the end of fiscal 1999,
as compared to 408 stores at the end of fiscal 1998, as a result of closing
eight stores and opening 22 stores.
Costs of sales, including occupancy costs, increased 4.2% from $177.8 million
in fiscal 1998 to $185.3 million in fiscal 1999. As a percentage of net sales,
cost of sales including occupancy costs increased from 62.0% in fiscal 1998 to
63.0% in fiscal 1999. This 1% increase resulted from a 0.3% increase in cost of
sales and a 0.7% increase in occupancy costs as a percentage of sales. The
increase in cost of sales was due to an overall increase in mark-downs, offset
by a slight increase in the initial mark-on. The occupancy cost increase
resulted primarily from a decrease of $534,000 in rent concessions that were
available to the companies from which we acquired our business and an overall
increase in store occupancy costs, primarily related to the store openings.
Selling, general, administrative and buying expenses increased 1.9%, from $79.7
million in fiscal 1998 to $81.2 million in fiscal 1999. As a percentage of net
sales, these expenses decreased to 27.6% in fiscal 1999 as compared to 27.8% in
fiscal 1998. The $1.5 million increase resulted from additional selling costs
related to store openings, a small increase in same store selling expenses and
an increase in administrative costs, partially offset by the elimination of
royalty expense in fiscal 1999, as compared to $1.8 million of royalty expense
in fiscal 1998. Fiscal 1998 royalty expense was a charge from Petrie Retail for
the use of trademarks that we purchased in the acquisition.
Depreciation and amortization expense for the seven months ended August 28,
1998 and the five months ended January 30, 1999 was $2.8 million and $5.2
million. Depreciation for fiscal 1998 was $4.5 million. We attribute the
increase to the additional depreciation and amortization in the five months
ended January 30, 1999 related to the incremental value assigned to property
and equipment and goodwill in the acquisition. Depreciation and amortization
expense for pro forma fiscal 1999 was $11.1 million. We attribute the increase
to the additional depreciation and amortization related to the incremental
value assigned to property and equipment and goodwill in the acquisition, as if
it occurred on February 1, 1998.
Net interest expense was $7.4 million, and as a percentage of net sales was
5.6%, for the five months ended January 30, 1999. Interest expense primarily
reflects the interest on, and amortization of debt issuance costs with respect
to, the senior bridge notes. Net interest expense was $13.9 million, and as a
percentage of net sales was 4.7%, for pro forma fiscal 1999. Pro forma interest
expense assumes that the notes were outstanding for all of fiscal 1999 and
assumes the amortization of associated deferred financing costs of $814,000. We
had no borrowings in fiscal 1998 or during the seven months ended August 28,
1998.
Income tax expense was $1.9 million and $1.6 million for the seven months ended
August 28, 1998 and five months ended January 31, 1999. Income tax expense was
$10.3 million for fiscal 1998. The decrease in tax expense is primarily due to
lower pre-tax income resulting from interest expense associated with the notes
and the amortization of intangible assets. The effective income tax rate for
the five months ended January 30, 1999 was 43.9%. The effective tax rate for
fiscal 1998 and the seven months ended August 28, 1998 was 41.2%. The higher
effective tax rate in pro forma fiscal 1999 was principally attributable to the
fact that we have a different legal structure for our Puerto Rican operations
than did the companies from which we acquired our business.
Net income was $2.7 million and $2.0 million for the seven months ended August
28, 1998 and the five months ended January 30, 1999. Net income for fiscal 1998
was $14.7 million. The difference was caused by the factors discussed above.
37
<PAGE>
Comparison of Fiscal 1998 and Fiscal 1997
Net sales increased approximately $20.5 million, or 7.7%, to $286.9 million in
fiscal 1998, as compared to $266.4 million in fiscal 1997. The increase in net
sales was due to the opening of stores, which contributed $9.0 million to net
sales in fiscal 1998 and an $11.5 million, or 4.5%, increase in same store
sales compared to fiscal 1997. Average sales per gross square foot increased
6.5% from $277 in fiscal 1997 to $295 in fiscal 1998. We had 408 stores at the
end of fiscal 1998 as compared to 395 stores at the end of fiscal 1997, as a
result of closing 12 stores and opening 25 stores.
Cost of sales, including occupancy costs, increased approximately 6.7% from
approximately $166.6 million in fiscal 1997 to $177.8 million in fiscal 1998.
As a percent of net sales, cost of sales including occupancy costs decreased
from 62.6% in fiscal 1997 to 62.0% in fiscal 1998. This 0.6% decrease resulted
from a 0.2% decrease in cost of sales and a 0.4% decrease in occupancy costs.
The decrease in cost of sales as a percent of net sales was due to a decrease
in mark-downs and an increase in vendor allowances, which were slightly offset
by a decrease in the initial mark-on. The occupancy cost decrease as a percent
of net sales resulted primarily from an increase in comparable store sales,
offset by a decrease of approximately $300,000 in rent concessions which were
available to the companies from which we acquired our business.
Selling, general, administrative and buying expenses increased 3.9%, from $76.7
million in fiscal 1997 to $79.7 million in fiscal 1998. As a percentage of net
sales, these expenses decreased to 27.8% in fiscal 1998 as compared to 28.8% in
fiscal 1997. The $3.0 million increase resulted from additional selling costs
related to store openings and cost increases that were offset by lower store
closing costs. We closed 12 stores in fiscal 1998, as compared to closing 32
stores in fiscal 1997.
Depreciation and amortization expense for fiscal 1998 was 1.6% of net sales, as
compared to 1.7% in fiscal 1997, and was approximately $4.5 million in both
years.
Income tax expense for fiscal 1998 was $10.3 million, as compared to income tax
expense of $7.6 million for fiscal 1997. The effective income tax rate was
41.2% for both fiscal years.
Net income increased $3.8 million to $14.7 million in fiscal 1998 from $10.9
million in fiscal 1997 due to the factors discussed above.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operating activities and
borrowings under our revolving credit facility. Our primary cash requirements
are for:
. seasonal working capital;
. the construction of new stores;
. the remodeling or upgrading of existing stores as necessary; and
. upgrading and maintaining our computer systems.
On May 17, 1999 we and Holdings completed a private placement of an aggregate
of $107.0 million face amount of outstanding notes issued by us and warrants
issued by Holdings to purchase 8,209 shares of its class D common stock at an
exercise price of $0.01 per share. The net proceeds from this private placement
were approximately $94.0 million, after deducting the original issue discount
of $7.3 million and estimated fees of $5.7 million. We used the net proceeds to
repay the senior bridge notes. We will use the balance of the net proceeds for
general corporate purposes.
Net cash provided by operating activities in the first six months of fiscal
2000 was $3.2 million, as compared to $9.0 million in the first six months of
fiscal 1999. The decrease in net cash provided by operating activities is
principally due to the fact that accounts payable and accrued expenses
increased by $5.9 million during the first six months of fiscal 1999, as
compared to the first six months of fiscal
38
<PAGE>
2000, because Petrie Retail used substantially all excess cash to fund its cash
needs. Fiscal 1999 net cash provided by operating activities totaled $27.7
million, an increase of $2.1 million as compared to fiscal 1998. This increase
was primarily due to the payment of $7.8 million in liabilities in connection
with the acquisition.
Capital expenditures for the first six months of fiscal 2000, the first six
months of fiscal 1999 and fiscal 1999, 1998 and 1997 were $9.3 million, $3.1
million, $6.2 million, $7.0 million and $2.0 million, respectively. We estimate
that capital expenditures for the remaining six months of fiscal 2000 will be
$6.0 million, of which $2.0 million will be used for new point-of-sale
equipment and software and $4.0 million will be used to open an additional 24
stores and to upgrade existing stores. As of
July 31, 1999, 22 stores had been opened.
We have entered into a $5.0 million lease financing agreement with The Chase
Manhattan Bank for the purchase of the point-of-sale equipment and software.
The lease provides for monthly payments that depend on the volume of equipment
leased. The lease terms include a variable interest rate based on the purchase
date and expires five years from the date of the initial equipment financed. As
of July 31, 1999, we had incurred $112,000 of lease financing under this
arrangement.
We review the operating performance of our stores on an ongoing basis to
determine which stores, if any, to expand or close. We closed eight stores in
fiscal 1999 and one store in the first six months of fiscal 2000. We expect to
close an additional 11 stores during fiscal 2000. We closed two stores in the
first six months of fiscal 1999.
Fiscal 1999 net cash provided by financing activities, excluding net
distributions to Petrie Retail, was $137.0 million, reflecting the acquisition
and associated fees and expenses.
As of July 31, 1999, we had $11.3 million in cash. We historically have
maintained negligible accounts receivable balances, since our customers
primarily pay for their purchases with cash, checks and third- party credit
cards that are promptly converted to cash.
As of July 31, 1999, our indebtedness under the notes totalled $99.4 million,
which reflects the aggregate face amount of the notes of $107.0 million, net of
$7.3 million in original issue discount and the $470,000 value assigned to the
warrants issued by Holdings. The interest on the notes is 11% per annum,
payable semi-annually.
Our revolving credit facility provides for a line of credit in an amount of up
to $20.0 million, including a sublimit of $10.0 million for letters of credit.
This revolving credit facility matures in October 2001. We may use the
revolving credit facility for general operating, working capital and other
proper corporate purposes. Amounts available under the revolving credit
facility are subject to the value of our eligible inventory and to the
satisfaction of a number of conditions. The borrowing base provides for
seasonal fluctuations in inventory. Peak borrowing periods occur in July,
August, October and November. Interest on outstanding borrowings under the
revolving credit facility is payable at 1.75% over the adjusted Eurodollar rate
or at the prime rate (8% as of July 31, 1999). The revolving credit facility
subjects us to a minimum tangible net worth covenant of $39.0 million and
contains other customary restrictive covenants. Our obligations under the
revolving credit facility are secured by a lien on substantially all of our
assets. As of July 31, 1999, we had no borrowings outstanding under the
revolving credit facility but had $925,000 of letters of credit outstanding and
$18.3 million available for borrowing.
We have minimum annual rental commitments of approximately $18.5 million in
fiscal 2000 under existing store leases and the leases for our corporate
headquarters and distribution center.
We are not aware of any material environmental liabilities relating to either
past or current properties owned, operated or leased by us.
39
<PAGE>
We believe that our cash flow from operating activities, cash on hand and
borrowings available under the revolving credit facility will be sufficient to
meet our operating and capital expenditure requirements through the end of
fiscal 2000. In addition, we believe that cash flow from operations will be
sufficient to cover the interest expense arising from the revolving credit
facility and our long-term debt. However, the sufficiency of our cash flow is
affected by numerous factors affecting our operations, including factors beyond
our control. See "Risk Factors--We require a significant amount of cash to
service our debt and make necessary capital expenditures, and we may not be
able to generate sufficient cash to do so."
If a "change of control" occurs, we will be required under the indenture to
offer to repurchase all of the notes. However, we may not have sufficient funds
at the time of the change of control to make the required repurchases, or
restrictions in our revolving credit facility may prohibit the repurchases. See
"Risk Factors--We may not be able to raise enough money to finance the change
of control offer required by the indenture relating to the notes. If there is a
change of control, we could be in default under the indenture."
Seasonality and Quarterly Results
Due to the seasonal nature of our business, our working capital requirements
increase as inventory levels peak in anticipation of the back-to-school and
Christmas shopping seasons. Our working capital as of July 31, 1999 was $2.9
million, compared to a negative $19.7 million as of August 1, 1998. Our working
capital at January 30, 1999 was $2.0 million, as compared to a negative working
capital of $13.1 million and $6.9 million as of January 31, 1998 and February
1, 1997. The negative working capital amounts as of August 1, 1998, January 31,
1998 and February 1, 1997 were due to the transfer of all excess cash to Petrie
Retail.
Our fourth fiscal quarter historically accounts for the largest percentage of
our annual net sales. Our first fiscal quarter historically accounts for the
smallest percentage of annual net sales. In fiscal 1999, our fourth quarter
accounted for approximately 30% of our annual net sales. Our quarterly results
of operations may also fluctuate significantly as a result of a variety of
factors, including:
. the timing of store openings;
. the amount of revenue contributed by new stores;
. changes in the mix of products sold;
. the timing and level of markdowns;
. the timing of store closings and expansions;
. competitive factors; and
. general economic conditions.
The following table sets forth:
. statements of operations and operating data for our business for each fiscal
quarter in fiscal 1998, the first and second quarters of fiscal 1999 and the
period from August 2, 1998 to August 28, 1998;
. our actual statement of operations and operating data for G+G Retail for
August 29 to October 31, 1998, the fourth quarter in fiscal 1999 and the
first two quarters in fiscal 2000; and
. quarterly pro forma statement of operations and operating data for fiscal
1999 and the first and second quarters in fiscal 2000.
This quarterly data was derived from the unaudited financial statements of G+G
Retail and the companies from which we acquired our business. In our opinion,
the data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation thereof.
40
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1999 Fiscal 2000
---------------------------------- -------------------------------------------------- ----------------
First Second Third Fourth First Second August 2 to August 29 to Fourth First Second
(Dollars in Quarter Quarter Quarter Quarter Quarter Quarter August 28 October 31 Quarter Quarter Quarter
thousands) ------- ------- ------- ------- ------- ------- ----------- ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........... $66,043 $69,961 $66,840 $84,094 $66,398 $71,634 $24,791 $ 44,457 $87,110 $72,733 $77,533
Net income (loss)... 2,713 2,967 1,720 7,289 1,906 1,319 (525) (1,485) 3,498 (397) (774)
EBITDA as adjusted.. 6,168 6,629 4,459 14,049 4,874 4,008 (433) 1,440 14,690 5,631 5,687
Cashflow provided by
(used from):
Operating
activities........ 1,486 1,911 6,311 15,880 378 8,634 6,781 1,635 10,308 (4,194) 7,389
Investing
activities........ (1,082) (1,230) (3,342) (1,351) (1,558) (1,532) (310) (136,294) (1,364) (3,246) (6,078)
Financing
activities........ (1,438) (3,005) (872) (13,754) (1,180) (4,742) (8,218) 137,069 -- (357) 4,632
<CAPTION>
Pro Forma
Pro Forma Fiscal 1999 Fiscal 2000
-------------------------------------------------- ----------------
First Second August 2 to August 29 to Fourth First Second
Quarter Quarter August 28 October 31 Quarter Quarter Quarter
(Dollars in thousands) ------- ------- ----------- ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........................................... $66,398 $71,634 $24,791 $ 44,457 $87,110 $72,733 $77,533
Net income (loss)................................... (754) (1,266) 350 (1,424) 4,746 (425) (312)
EBITDA as adjusted.................................. 4,874 4,008 2,864 1,443 14,690 5,631 5,687
Cashflow provided by (used from):
Operating activities............................... (2,282) 6,049 7,656 1,696 11,556 (4,186) 7,365
Investing activities............................... (1,558) (1,532) (310) (1,415) (1,364) (3,246) (6,078)
Financing activities............................... (1,180) (4,742) (8,218) -- -- (357) (5,028)
</TABLE>
Year 2000 Compliance
We have completed a review of our own information technology and non-
information technology systems to determine whether our systems are year 2000
compliant.
Our merchandise system, which includes purchase order management, open order
reporting, allocation and distribution, material handling, price management and
inventory reporting, is written in an application that provides four digits
rather than two digits to define the year and, accordingly, is inherently year
2000 compliant. Our financial systems, which include sales audit, inventory
control and accounts payable, are written in the same application language as
our merchandise system. Our general ledger system that we recently purchased
has been certified by the software vendor to be year 2000 compliant. An outside
service provides payroll and payroll related tax services and, based on the
documentation that we obtained from this vendor, these systems are compliant
with the year 2000.
We have assigned two employees, and we have expended approximately $35,000 and
expect to spend an additional $15,000 in the third quarter of fiscal 2000, to
identify and correct year 2000 compliance issues. We began testing these
systems on a separate computer with simulated data after December 31, 1999 to
verify compliance. We expect to complete this testing by October 31, 1999. We
expect that any issues identified will be corrected before December 31, 1999,
although we cannot assure you that this will be the case.
We plan to install new point-of-sale equipment in all of our stores during
fiscal 2000 and 2001. If we are not successful with this implementation, we
believe that our current point-of-sale terminals will continue to support our
store operations adequately, and will permit us to obtain authorization of
third-party credit cards in the year 2000. Our current point-of-sale devices
are unsophisticated terminals, and the current date must be entered manually
each day.
41
<PAGE>
In Spring 1999, we distributed a questionnaire relating to year 2000 compliance
to all merchandise vendors that had annual volume with us of over $1.0 million.
This mailing covered approximately 80% ($120.0 million) of our annual
merchandise volume for fiscal 1999. Vendors with annual volume with us of $97.0
million replied that they are year 2000 compliant. Vendors with annual volume
of $12.4 million with us responded that they will be compliant by the end of
the third quarter of fiscal 2000. No responses were received from vendors with
$10.6 million of annual volume with us. Our top three vendors, which represent
approximately 31% of our annual merchandise volume, have responded that they
are year 2000 compliant. Based on the response of our year 2000 questionnaire,
we have not identified any single vendor whose failure to be year 2000
compliant on a timely basis would materially adversely impact our business.
Vendors who are not compliant and who cannot fulfill our merchandise
requirements will be replaced.
We currently believe that our systems will be year 2000 compliant and capable
of functioning beyond December 31, 1999. In the worst case scenario that is
most reasonably likely to occur, we could experience total system failure of
our management information systems. This would cause significant disruptions in
our operations, including temporary inability to process financial information
or credit card transactions, receive shipments and timely deliver our
merchandise to our stores. We could experience increased expenses associated
with stabilization of operations after critical systems failure and execution
of contingency plans. In another worst case scenario that is reasonably likely
to occur, a significant number of our vendors would be unable to continue to
supply adequate amounts of merchandise. Although the adverse effects of any or
all of these events are not quantifiable at this time, any of these events
would likely result in a loss of income and otherwise have a material adverse
effect on our business and operating results.
We have not yet developed contingency plans to handle these most reasonably
likely worst case year 2000 scenarios. We expect, however, that the worst case
scenario involving the failure of our management information systems over a
sustained period would necessitate reverting to a number of manual systems for
recording sales, ordering merchandise and replenishing our store level
inventory. Further, we expect that the worst case scenario for the loss of a
significant number of vendors would require us to seek alternative sources of
supply, although there can be no assurance that such alternative sources would
be available on reasonable terms or at all. We intend to take appropriate
actions to mitigate the effects of third-party failures to remediate year 2000
issues and for unexpected failures in our systems. If it becomes necessary for
us to take corrective actions, these corrective actions could result in
significant interruptions in service or delays in business operations and could
have a material adverse effect on our results of operations, financial position
or cash flow.
Inflation
We do not believe that inflation has had a material effect on our results of
operations during the past three fiscal years. However, our business may be
affected by inflation in the future.
New Accounting Pronouncements
In 1998, we adopted the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information (known as SFAS 131). SFAS 131 superseded
SFAS 14, Financial Reporting for Segments of a Business Enterprise. The
adoption of SFAS 131 did not affect our results of operations or financial
position. We conduct business in one operating segment. We have determined our
operating segment based on individual stores that the chief operating decision
maker reviews for purposes of assessing performance and making operational
decisions. These individual operations have been aggregated into one segment
because we believe it helps to understand our performance. Our combined
operations have similar economic characteristics, and each operation has
similar products, services, customers and distribution channels.
42
<PAGE>
BUSINESS
General
We are a leading national mall-based retailer of popular price female junior
apparel. For over 30 years, we have built a reputation for providing fashion
apparel and accessories distinctly targeted at teenaged women. We closely
monitor the fashion trends of our core customers, young women principally
between the ages of 13 to 19 years old, who, together with male teenagers,
represent the fastest growing segment of the United States population. We sell
substantially all of our merchandise under private label names, including Rave,
Rave Up and In Charge, which provide our customers with fashionable, quality
apparel and accessories at lower prices than brand name merchandise. Our
emphasis on purchasing merchandise domestically and our efficient distribution
system provide us with short inventory lead times, which enable us to respond
quickly to the latest fashion trends and therefore to turn over our inventory a
large number of times and reduce mark-downs. Our pricing strategy, which
emphasizes delivering consistent value to our customers rather than driving
sales with periodic promotions, also contributes to reduced mark-downs.
As of July 31, 1999, we had 448 stores, generally in major enclosed regional
shopping malls, throughout the United States, Puerto Rico and the U.S. Virgin
Islands primarily under the G+G and Rave names. We use the same store format
for both our G+G and Rave stores and apply this format in all of our markets.
Our stores average approximately 2,400 gross square feet with approximately 25
feet of mall frontage and are designed to create a lively and exciting shopping
experience for our teenaged customers. Our sales per gross square foot
increased from $222 in fiscal 1995 to $290 in fiscal 1999, representing a
compound annual growth rate of 6.9%. EBITDA as adjusted increased from
$9.7 million in fiscal 1995 to $27.9 million in pro forma fiscal 1999,
representing a compound annual growth rate of 30.1%, net income (loss)
increased from a loss of approximately $1.5 million in fiscal 1995 to pro forma
net income of approximately $1.7 million in fiscal 1999. Revenues increased
from $237.7 million in fiscal 1995 to $294.4 million in pro forma fiscal 1999.
In addition, from fiscal 1995 to fiscal 1999 our same store sales, based on
359 stores open throughout this period, grew 23.6%.
Our retail business was founded in the 1930s by Jay Galin's father and uncle.
Our first stores offered only lingerie and hosiery for sale. In 1969, the
business opened its first mall-based store and introduced female junior
sportswear. Due to the success of our mall-based stores that offered
sportswear, the business began to focus exclusively on opening mall-based
stores and selling sportswear in these stores. In 1969, the business completed
an initial public offering of its common stock. In 1980, the business was
acquired by Petrie Stores Corporation. In October 1995, Petrie Retail, as
successor-in-interest to Petrie Stores, filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code. In August 1998, we
acquired our business.
Business Strategy
Our business strategy is to expand our operations and increase our sales and
EBITDA through the opening of Rave stores, including through the acquisition of
groups of or individual leases, primarily in mall locations that we believe are
favorable for our business. We opened 22 stores in fiscal 1999 and 18 stores
between January 31 and July 31, 1999. We expect to open approximately 22 stores
before the end of fiscal 2000. We believe that our strong relationships with
our existing landlords, coupled with the fact that we are no longer hampered by
the bankruptcy proceedings of the companies from which we acquired our
business, provide us with a good opportunity to negotiate favorable leases in
new locations. We believe that at least 200 locations exist in which the
opening of new stores would be attractive. We believe that our current
distribution infrastructure can support a total of 700 stores without a
material increase in cost.
In addition, we have entered the market for sales to 8- to 12-year-old girls by
opening approximately four mall stores under the name Rave Girl between January
31 and July 31, 1999. We intend to open two additional Rave Girl stores by the
end of fiscal 2000. We believe that the market for the sale of
43
<PAGE>
popularly priced fashion apparel to this age group is currently under served.
We entered this market at a relatively low incremental cost by leveraging our
existing administrative, distribution and marketing infrastructure. Our
prototype Rave Girl store is approximately 1,500 square feet, with a design
aimed at appealing to 8- to 12-year-old girls.
We recently launched, and are in the process of expanding, an Internet web site
that provides information about our merchandise offerings, promotions and store
sites. The address of this web site is www.gorave.com. We intend to monitor the
popularity of this web site and its potential for additional applications.
Merchandising and Marketing
Merchandising Strategy
Our merchandising strategy is to deliver the latest fashions to our teenaged
customers more quickly and at lower prices than our competitors. Our
merchandise is designed primarily to appeal to young women between the ages of
13 and 19 years old who desire fashion, quality and value. Due to our
merchandise and our geographic diversity, over the past few years our stores
also have increasingly attracted the 20- to 30-year-old female customer.
Substantially all of our merchandise is private label that is manufactured to
our specifications. This strategy gives us tighter control over apparel
production and delivery than we would have if we purchased and sold brand-name
merchandise. We offer the latest fashion in both apparel and accessories in
stores that are designed to be bright, energetic and welcoming to create a fun
and enjoyable shopping experience. Our apparel offerings include tops, bottoms,
dresses, lingerie, coordinates and outerwear. We utilize an everyday value
pricing strategy, as opposed to offering discounts on marked-up merchandise.
During fiscal 1999, the average selling price of the items that we sold was
$10.50.
During fiscal 1997, 1998 and 1999 and the first quarter of fiscal 2000, tops,
bottoms and dresses each accounted for more than 10% of our net sales, except
for dresses in fiscal 1999 and the first quarter of fiscal 2000 that accounted
for 9.1% and 5.8%, respectively. No other category of merchandise accounted for
more than 10% of our net sales in fiscal 1997, 1998 or 1999 or the first
quarter of fiscal 2000.
<TABLE>
<CAPTION>
Percentage of Net Sales
------------------------------------------------
First Fiscal
Merchandise Category Fiscal 1997 Fiscal 1998 Fiscal 1999 Quarter 2000
- -------------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Tops........................... 42.3% 46.9% 47.4% 45.7%
Bottoms........................ 18.8 21.0 21.5 29.6
Dresses........................ 14.7 11.0 9.1 5.8
</TABLE>
In order to react quickly to teenagers' changing tastes and to keep our stores
stocked with current fashions, we purchase approximately 90% of our merchandise
domestically. Maintaining current merchandise allows us to turn over our
inventory frequently and to achieve high sales per square foot while improving
profitability. The speed of our merchandising and buying capability enables us
to change our product mix in season. As a result, we seek to respond
immediately to, rather than to try to anticipate, teenaged fashion trends. From
fiscal 1995 through fiscal 1999, the number of times that we turned over our
inventory increased from 5.1 to 6.2 and our sales per gross square foot
increased from $222 to $290.
Our merchandising strategy is a product of the collective efforts of our six
divisional merchandise managers, each of whom report to Jay Galin, the chairman
of our board and our chief executive officer. Our managers identify and target
fashion trends and customer demand by, among other things, shopping domestic
and European markets, reviewing magazines and catalogs and viewing television
shows and movies directed to our customers, monitoring sell-through trends and
attending selected fashion shows. We also maintain an office in California to
ensure proper coverage of the trend-setting
44
<PAGE>
West Coast market. We review inventory levels constantly. Our planning and
distribution staff plans our inventory on a store-by store basis and is
responsible for understanding the fashion desires of our customers, who are
primarily young and demand the latest fashion trends.
Visual Presentation and Advertising
We believe that effective and strong visual merchandising is critical. We
believe that we must capture a customer's interest in the few seconds that she
is exposed to the store front. At G+G and Rave, presentation is a product of
store design, use of fixtures and in-store marketing that complements our
merchandise. Our merchants and the marketing department jointly plan the
arrangement of merchandise, which is integral to merchandise presentation. Once
approved, we communicate a consistent arrangement to all of the stores in the
chain through a formal layout. We finalize arrangements based on seasonal and
climatic differences among regional markets. We prepare major arrangements for
each major selling season and sale period. We forward modifications to the
arrangement to all of the stores on a bi-weekly basis.
We primarily advertise in our stores, stressing fashion, quality and value in
support of our everyday value pricing strategy. Our marketing department
creates a seasonal set of store signs that accentuates the merchandise
presentation. Each season, we select and highlight key items with a
comprehensive program of in-store posters and signs. The set of signs reflects
new merchandise colors and fashion trends to keep the stores looking current
and visually stimulating. The merchandise package also targets the customer
with hard-hitting, value pricing slogans in the form of large store-spanning
banners and rack-top signs. Store bags, boxes, name badges and other store
peripherals emphasize fashion and value.
Merchandise Planning
Our financial department prepares seasonal merchandise plans that are approved
by senior management. Our merchandise department then allocates monthly
corporate merchandise plan based on historical and current trends. The
preparation and monitoring of merchandise plans independent of purchasing
functions is essential for controlling inventory levels. We monitor our
inventory through an automated inventory system. We use four merchandise
seasons each year, a strategy that enables us to identify inventory age. We
maintain a current base of inventory, which is extremely important in ensuring
a proper mix of seasonal inventory to match customer buying patterns and a
profitable reduction of inventory at the end of a season.
Our ability to procure the majority of our merchandise within two to four weeks
from delivery of a purchase order allows us to purchase seasonal merchandise
within the season and quickly identify, address and correct any negative sales
trends or quickly react to and capitalize on positive sales trends. This fluid
purchasing practice prevents significant over-inventoried positions which could
adversely affect our profitability and cash flow.
The table below reflects average store inventory and the average number of
times that we turned over our inventory during the last five fiscal years.
<TABLE>
<CAPTION>
Average Store Average Annual
Fiscal Year Retail Inventory Inventory Turn
- ----------- ---------------- --------------
<S> <C> <C>
1995............................................ $102,900 5.1x
1996............................................ 103,400 5.4
1997............................................ 102,800 6.4
1998............................................ 107,300 6.6
1999............................................ 113,100 6.2
</TABLE>
45
<PAGE>
Purchasing and Suppliers
We purchase all of our inventory from third-party suppliers or manufacturers.
We do not own any manufacturing facilities. Approximately 90% of our private
label merchandise is manufactured domestically, with the remainder manufactured
overseas. We supply the design and the specifications to the manufacturers. Our
manufacturers continually consult with us regarding developing fashion trends
so that they can respond quickly to our merchandise orders. Prior to delivery,
we regularly inspect samples of our manufactured goods for quality based on
materials, color, sizing specifications and shrinkage. Our merchants also
routinely inspect the factories of our suppliers to ensure that our goods are
of high quality.
We believe that we have established relationships with an adequate number of
suppliers to meet our ongoing inventory needs and that we have strong
relationships with these suppliers. During fiscal 1999, we purchased our
inventory from more than 300 suppliers. We have been purchasing inventory from
our top three suppliers for more than five years. We do not have long-term
contracts with our suppliers, and we transact business principally on an order-
by-order basis. During the first six months of fiscal 2000, our top three
suppliers accounted for 12.7%, 10.4% and 8.2% of our inventory purchases.
During fiscal 1999, our top three suppliers accounted for 12.8%, 11.2% and 9.8%
of our inventory purchases. During the first quarter of fiscal 2000 and during
fiscal 1999, no other single supplier accounted for more than 5.0% of our
inventory purchases.
Distribution and Transportation
We maintain a 165,000 square foot leased distribution center in North Bergen,
New Jersey. All of our vendors ship the merchandise that we purchase to our
distribution center, which then ships the merchandise to our stores. We believe
that our current distribution infrastructure can support a total of 700 stores.
Merchandise allocation begins the day before a vendor's delivery, when the
vendor makes a receiving appointment. This pre-allocation process allows the
merchandise to be shipped to stores generally within 24 hours from receipt. To
expedite delivery, our vendors located on the West Coast ship merchandise by
air to the distribution center.
We employ an internally developed allocation system that interfaces with our
store cash registers, order and receiving system and distribution system. The
allocation system maintains unit inventory and sales data by store at the style
level, enabling us to identify specific store needs for replenishment.
We use national and regional package carriers to ship merchandise to our
stores, and we also use air freight to ship merchandise to stores in certain
regions. Transit time to stores generally is two to three days, and merchandise
is available for sale by stores on the day it is received. Therefore, the time
period from receipt of goods at the distribution center to display in our
stores is generally less than five days.
We estimate that during fiscal 1999 more than 50% of merchandise coming into
our distribution center was pre-ticketed, and a substantial portion of this
merchandise was vendor pre-packed. Pre-ticketing and pre-packing save time,
reduce labor costs and enhance inventory management.
Our distribution and allocation operations are managed by our vice president--
warehouse and distribution. On the distribution side, this vice president
supervises the distribution center manager, who in turn oversees supervisors
for receiving, packing and shipping. On the allocation side, this vice
president supervises planners and distributors who prepare store merchandise
allocations.
46
<PAGE>
Locations and Format of Our Stores
Store Locations
As of May 1, 1999, we had 441 stores in 39 states in the United States, Puerto
Rico and the U.S. Virgin Islands:
<TABLE>
<CAPTION>
Number
State/Territory of Stores
- --------------- ---------
<S> <C>
Alabama................. 9
Arkansas................ 2
Arizona................. 4
California.............. 34
Colorado................ 6
Connecticut............. 7
Delaware................ 1
Florida................. 49
Georgia................. 12
Hawaii.................. 1
Idaho................... 1
Illinois................ 17
Indiana................. 5
Kentucky................ 2
Louisiana............... 13
Maine................... 1
Maryland................ 17
Massachusetts........... 17
Michigan................ 20
Mississippi............. 3
Missouri................ 6
</TABLE>
<TABLE>
<CAPTION>
Number
State/Territory of Stores
- --------------- ---------
<S> <C>
Nebraska................ 1
Nevada.................. 1
New Hampshire........... 4
New Jersey.............. 13
New Mexico.............. 2
New York................ 40
North Carolina.......... 9
Ohio.................... 16
Oregon.................. 2
Pennsylvania............ 22
Puerto Rico............. 41
Rhode Island............ 2
South Carolina.......... 2
Tennessee............... 8
Texas................... 27
Virginia................ 8
Virgin Islands.......... 2
Washington.............. 9
Wisconsin............... 3
West Virginia........... 2
</TABLE>
Store Format
We use an identical store format for both our G+G and Rave stores and
consistently apply our store format in all the markets that we serve. In
general, the G+G name is used in the New York, New Jersey and Connecticut
markets, and the Rave name is used in the other markets that we serve.
Our stores are predominantly located in major enclosed regional shopping malls,
including Roosevelt Field in Garden City, New York and Florida Mall in Orlando,
Florida. Within malls, we seek locations in proximity to stores and areas
having high teen traffic flow, such as music stores, shoe stores and food
courts. Our stores are typically 2,400 gross square feet in size, with
approximately 25 feet of mall frontage.
Our stores are designed to create a lively and exciting shopping experience for
the teenaged customer. Our stores are fitted with various fixtures to display
the merchandise in an appealing manner. Approximately 15% of the total space is
committed to fitting rooms and storage space. Our merchandising staff centrally
controls the store layout and merchandise placement. We update store and
merchandise layouts approximately every six weeks, or sooner when necessary, to
stay current with the seasons and fashion trends.
The clean design of our stores allows us to enjoy a relatively low level of
maintenance expenditures while retaining an attractive, well-maintained store
base. For example, in fiscal 1999, our maintenance expenditures totaled $3.2
million. Sales have been evenly balanced among our store base, with our highest
volume store accounting for less than 1.0% of gross sales during fiscal 1999.
47
<PAGE>
Store Operations
Our district/area managers manage all aspects of store operations other than
purchasing. Each of these district/area managers is responsible for six to ten
stores and reports to a regional manager who oversees seven to eight
district/area managers. The regional managers, in turn, report to our vice
president--store operations.
Generally, each of our stores employs five to ten employees, consisting of a
store manager who is in charge of all aspects of operations, including
recruiting, training, customer service and merchandising, two assistant
managers and sales employees. Store managers report to a district/area manager,
and assistant managers and sales employees report to a store manager.
We seek to hire sales employees who have prior retail sales experience and an
entrepreneurial spirit. Sales personnel are knowledgeable about the
merchandise. Our sales personnel and assistant store managers are trained by
experienced store managers, and our store managers are trained by experienced
district/area managers, in order to offer customers courteous and knowledgeable
service.
Our customers may pay for merchandise with cash, checks or third-party credit
cards. During fiscal 1999, 80% of purchases were made with cash or checks and
20% were made with credit cards.
Our merchandise return policy permits returns to be made within 30 days from
the date of purchase. We give refunds if the customer has a receipt. Otherwise,
we issue a store credit.
Store Openings and Closings
Since 1995, we have implemented an ongoing program of opening new stores in
locations that we believe are favorable for our business and closing
underperforming stores. Between October 31, 1995 and January 30, 1999, we
opened 59 stores. During this same period, we closed 70 underperforming stores.
This strategy benefitted from the special right of debtors in bankruptcy
proceedings to accept or reject leases. The quality of our store base and store
productivity has increased, as measured by sales per gross square foot, which
increased from $222 in fiscal 1995 to $290 in fiscal 1999.
We opened six Rave stores between January 31, 1999 and May 1, 1999 and plan to
open approximately 24 Rave stores by the end of fiscal 2000. We intend to test
the market for sales to 8- to 12-year-old girls by opening approximately six
mall stores under the name Rave Girl during fiscal 2000. We believe that our
strong relationships with our existing landlords, coupled with the fact that
our business is no longer hampered by the bankruptcy proceedings of the
companies from which we acquired our business, provide us with a good
opportunity to negotiate favorable leases in new locations. We anticipate
closing approximately 12 stores by the end of fiscal 2000.
In deciding whether to open or close a store, we consider several factors,
including:
. the extent of competition from other mall tenants;
. the location of the store in the mall;
. the rental rate for the property where the store is or will be located;
. the performance of other apparel retail stores in the mall, which
information is often made available to us by mall owners;
. whether the particular mall environment is suitable for the store;
. the anticipated return on investment; and
. the quality of anchor stores in the mall in which the store is or will be
located.
48
<PAGE>
Opening a new store requires an investment in leasehold improvements and
fixtures plus the cost of inventory, which required an average of approximately
$110,000 and 62,500, respectively, in fiscal 1999.
Size and Purchasing Power of the Teen Market
Teenagers represent both a growing part of the U.S. population and an
increasing source of purchasing power. The domestic teenaged population reached
approximately 31 million in 1998 and is projected to grow to approximately 34
million by 2005, representing a projected average annual growth rate nearly
twice that of the overall United States population. This rapid growth is
primarily because the children of the baby boomers are growing up.
In addition to the growing number of teenagers, teen purchasing power is also
growing. Income for teens reached a record $119.9 billion in 1998, up from
$75.0 billion in 1995, and is expected to grow at a compound annual growth rate
of approximately 4.4% to reach $148.5 billion in 2003. Teen income stems from
three main sources:
. part- and full-time employment, comprising approximately 22% of teenagers'
total income;
. allowances, comprising approximately 30% of teenagers' total income; and
. gifts and occasional odd jobs, comprising the remaining approximately 48% of
teenagers' total income.
The bulk of teenagers' income is discretionary since most teenagers live with
their parents. Teenage girls spend the largest percentage of their total
income, approximately 42%, on clothing and jewelry. In addition, according to
industry sources, some teens save a portion of the money that they receive.
Malls serve as social centers for teenagers. Teens go to malls 40% more
frequently than older shoppers, with approximately 63% of teens shopping at a
mall at least once a week. In general, teens choose malls as their favorite
shopping destination, with teenage girls tending to shop at mall specialty
clothing and beauty stores. Each mall trip averages 90 minutes with 56% of
teens making purchases averaging $35.
Competition
The junior apparel retail business is highly competitive, with fashion,
quality, price, location, store environment and customer service being the
principal competitive factors. While we believe that we are able to compete
favorably with respect to each of these factors, we believe we compete
primarily on the basis of fashion, price and quality.
We compete with a number of mall-based popular priced junior fashion retailers
but have few direct competitors at our price points and levels of fashion and
quality. Our competitors include Wet Seal/Contempo Casual, a mall-based junior
apparel retailer based in Irvine, California that offers current fashions at
higher price points than we offer. In addition, we compete with several
discount department stores and local and regional department store chains that
overlap with our merchandise offerings and price points. Some of our
competitors are larger and may have greater financial, marketing and other
resources than we have. In addition, we compete for favorable site locations
and lease terms in shopping malls. In the future, we may experience increased
competition from catalog and Internet retailers.
49
<PAGE>
Properties
As of July 31, 1999, we had 448 stores in 39 states in the United States,
Puerto Rico and the U.S. Virgin Islands. All of our store sites are leased. As
of July 31, 1999, the average remaining lease term of our stores, excluding
stores with month-to-month leases, was approximately 41 months, assuming that
renewal options are not exercised, or approximately 53 months, assuming that
renewal options are exercised. This table reflects the fiscal years in which
the leases on our stores, as of July 31, 1999, expire, assuming renewal options
are not exercised:
<TABLE>
<CAPTION>
Number of
Fiscal Year Leases Expiring
----------- ---------------
<S> <C>
2000...................................................... 89
2001...................................................... 75
2002...................................................... 65
2003...................................................... 50
2004 and thereafter....................................... 131
---
410
===
</TABLE>
As of July 31, 1999, we also had 38 stores with expired leases. We occupy those
premises on a month-to-month basis.
We believe that our real estate staff has strong relationships with our present
landlords. We believe that the strength of these relationships is based, among
other things, upon:
. the credibility established from the many years that we have been doing
business with the key leasing personnel at our major landlords;
. our long history in the female junior apparel business;
. the national scope of our business;
. the attractive tenant use offered by our stores; and
. our expansion strategy.
As of July 31, 1999, we leased approximately 16% and 8% of our stores from our
two largest landlords. However, despite these factors and our relationships
with landlords, the companies from which we acquired our business often were
unable to negotiate long-term leases during the bankruptcy proceeding. We
believe that we will be able to negotiate longer and more favorable store
leases in the future. However, we may not be able to renew existing leases on
favorable terms or at all. Between the date on which we closed the acquisition
and July 31, 1999, we renewed leases for 94 stores and entered into leases for
36 new stores. In addition, as of July 31, 1999, we were negotiating renewals
for 121 of the 127 stores which have leases expiring during fiscal 2000 or
expired leases. With respect to these 121 stores, our negotiations had then
progressed to the final documentation phase for 50 stores.
We lease our distribution center located in North Bergen, New Jersey. The lease
expires in August 2004. We have one five-year renewal option under which the
rent will be equal to 90% of the fair market value of the premises.
Our headquarters is located in New York City and consists of 35,000 square feet
of leased office space. From our headquarters, we administer our purchasing,
merchandising, finance, store operations, management information systems,
marketing, real estate, human resources and store construction functions. The
lease for our headquarters will expire in January 2000 unless extended under
our three-year renewal option.
50
<PAGE>
Management Information Systems--Ability to Monitor Sales Daily
We have a computer system that is fully integrated using an IBM RISC 6000
computer. Our management information and control systems provide management,
buyers, planners and distributors information by the next business day to
identify sales trends, replenish depleted store inventories, re-price
merchandise and monitor merchandise mix. The automated and integrated
allocation and material handling systems enable us to move the majority of our
merchandise through our distribution center within 24 hours of receipt.
All of our stores have point-of-sale terminals that record sales at the style
level, mark-downs, distribution center receipts, interstore transfers and store
payroll. This information is transmitted daily to our host systems. During
fiscal 2000 and 2001, we intend to replace our existing point-of-sale equipment
and software with new equipment and software that we believe will give us the
capability of bar code scanning, price look-up and inventory tracking and
enhanced store productivity and reporting. We estimate the cost of the upgrade
to be approximately $6.8 million and expect to finance a substantial portion of
the upgrade with capital leases.
Trademarks and Service Marks
We own numerous trademarks, service marks and trade names. G+G and In Charge
are registered on the federal principal trademark register for use in
connection with retail services and items of apparel. Rave and Rave Up are
registered under the laws of the states in which we transact business for use
in connection with retail services and items of apparel. These registrations
are renewable indefinitely so long as we are using the marks. We intend to
maintain our marks and their related registrations. We are not aware of any
claims of infringement or other challenges to our right to use our marks in the
United States.
Employees
As of May 1, 1999, we had a total of 3,901 employees, consisting of 778 full-
time salaried employees, 1,316 full-time hourly employees and 1,807 part-time
hourly employees. The number of part-time hourly employees fluctuates due to
the seasonal nature of our business.
As of May 1, 1999, the Local 2326 of the UAW/AFL/CIO represented 132 hourly
employees in our distribution center. The collective bargaining agreement
covering these employees expires on January 31, 2002. None of our other
employees are members of a union. We have never had a strike or work stoppage.
We consider our relations with both our union and non-union employees to be
favorable. We believe that our employees are paid competitively with current
standards in the industry. We have experienced little turnover among our
regional managers and district/area managers.
Litigation
From time to time, we are involved in litigation relating to claims arising out
of our operations in the normal course of business. As of the date of this
prospectus, we were not engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material adverse effect on us.
51
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
Our directors, executive officers and key employees, each of whom assumed his
or her position with us on August 31, 1998, are as follows as of June 15, 1999:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Jay Galin........................ 63 Chairman of the Board of Directors and
Chief Executive Officer
Scott Galin...................... 40 President, Chief Operating Officer and
Director
Craig Cogut...................... 45 Director
Donald D. Shack.................. 70 Director
Lenard B. Tessler................ 47 Director
Michael Kaplan................... 45 Vice President, Chief Financial Officer,
Treasurer and Secretary
James R. Dodd.................... 57 Vice President--Store Operations
Robert W. Tinbergen.............. 51 Vice President--Warehouse and Distribution
Jeffrey Galin.................... 37 Vice President/Divisional Merchandise
Manager
Donna D'Angelo................... 43 Divisional Merchandise Manager
Carol J. Harren.................. 54 Divisional Merchandise Manager
Robert B. Lembersky.............. 43 Divisional Merchandise Manager
Denise Vazquez................... 46 Divisional Merchandise Manager
Joshua S. Podell................. 29 Director of Real Estate
</TABLE>
Jay Galin worked for G & G Shops for over 40 years and served as president of G
& G Shops from 1972 to August 1998. Mr. Galin was responsible for developing
our business from a lingerie and hosiery shop into a women's specialty
retailer. Mr. Galin also served as senior vice president of Petrie Retail from
1981 to 1990. Mr. Galin served as executive vice president of Petrie Stores
Corporation/Petrie Retail from 1990 to 1995. Mr. Galin held various management
and executive positions with G & G Shops from 1956 to 1972. Mr. Galin served as
a board member of Petrie Stores, Petrie Retail's predecessor, from 1980 to 1995
and is a member of the board of directors of Ark Restaurants Corp. Mr. Galin is
the father of Scott Galin and Jeffrey Galin.
Scott Galin served as executive vice president and chief operating officer of G
& G Shops from 1992 to August 1998. From 1985 to 1992, Mr. Galin served as a
senior vice president of G & G Shops and held executive positions in real
estate, finance and store operations. Mr. Galin served as senior vice president
of Petrie Stores/Petrie Retail from 1985 to 1995. From 1980 to 1984, Mr. Galin
held various buying and merchandising positions at G & G Shops. From 1977 to
1980, Mr. Galin held various part-time and training positions with G & G Shops.
Scott Galin is the son of Jay Galin and the brother of Jeffrey Galin.
Craig Cogut is a senior founding principal of Pegasus Investors, which manages
$220.0 million in equity capital. From 1990 to 1995, Mr. Cogut was a senior
principal of Apollo Advisors, L.P. and Lion Advisors, L.P., partnerships which
managed several billion dollars of equity capital for investment partnerships
and private accounts. From 1984 to 1990, Mr. Cogut served as a consultant and
advisor to Drexel Burnham Lambert Incorporated and associated entities. From
1979 to 1984, Mr. Cogut practiced law with Irell & Manella in Los Angeles,
California. Mr. Cogut serves as a member of the board of directors of Vail
Resorts, Inc. Mr. Cogut received a J.D. from Harvard Law School and a B.A. from
Brown University.
Donald D. Shack is a founding director of the law firm of Shack & Siegel, P.C.,
general counsel to G+G Retail and Holdings. Before the formation of Shack &
Siegel in April 1993, Mr. Shack was a member of the law firm of Whitman and
Ransom from January 1990 to April 1993. Mr. Shack
52
<PAGE>
received a B.A. from Williams College in 1948 and an LLB from Harvard Law
School in 1951. After he completed service with the U.S. Army in Korea in 1953,
he joined the law firm of Golenbock and Barell and became a partner in 1959.
Mr. Shack is a member of the board of directors of Ark Restaurants Corp., the
Andover Apparel Group, Inc., Just Toys, Inc. and International Citrus, Inc.
Lenard B. Tessler is a founding principal of TGV Partners, a private investment
partnership that was formed in April 1990. Mr. Tessler served as chairman of
the board of Empire Kosher Poultry from 1994 to 1997, after serving as its
president and chief executive officer from 1992 to 1994. Before founding TGV
Partners, Mr. Tessler was a founding partner of Levine, Tessler, Leichtman &
Co., a leveraged buyout firm formed in 1987. From 1982 to 1987, Mr. Tessler was
a founder, director and executive vice president of Walker Energy Partners, a
publicly traded master limited partnership in the oil and gas industry, and
subsequently he served as an independent financial consultant to financially
troubled companies in that industry. Previously, Mr. Tessler practiced
accounting in New York as a certified public accountant, specializing in tax.
Mr. Tessler received an M.B.A. from Fairleigh Dickinson University and a B.B.A.
from the University of Miami. Mr. Tessler currently serves as a member of the
board of directors of Opinion Research Corporation and Garfield & Marks
Designs, Ltd.
Michael Kaplan served as vice president and chief financial officer of G & G
Shops from 1988 to August 1998. From 1986 to 1988, Mr. Kaplan was employed as
controller for Brooks Fashions Stores, Inc. From 1983 to 1985, he was a
consultant for Deloitte & Touche, LLP. From 1980 to 1983, he served as
corporate controller for Ormond Shops Inc. Mr. Kaplan is a certified public
accountant and from 1976 to 1980 held various auditing positions with Ernst &
Young LLP.
James R. Dodd served as vice president of store operations of G & G Shops from
April 1998 to August 1998. From 1995 to 1998, he was vice president--retail
division for JH Collectibles in Milwaukee, Wisconsin. On October 4, 1996, JH
Collectibles filed a voluntary petition pursuant to Chapter 11 of the United
States Bankruptcy Code with the United States Bankruptcy Court for the Eastern
District of Wisconsin--Milwaukee. As of March 31, 1999, the plan of
liquidation, which was confirmed and has become effective, was substantially
consummated. From 1990 to 1995, he was vice president of operations for several
companies including Tommy Hilfiger, London Fog and Cape Island Knitters. From
1982 to 1990, he held several positions with The Limited, Inc., including vice
president of operations for Lane Bryant from 1988 to 1990. From 1974 to 1982,
he was employed by Damschroders, Inc., a midwestern retailer in which he held
several positions, including vice president of operations. In the early 1970s,
he was associated with The Limited, Inc., and before that he was employed by
International Business Machines Corporation.
Robert W. Tinbergen served as vice president of planning and distribution of G
& G Shops from 1988 to August 1998. From 1982 to 1987, he served as director of
distribution for Orbachs. From 1980 to 1982, Mr. Tinbergen was employed as a
senior consulting manager for Ernst & Young LLP in its retailing group. From
1973 to 1980, Mr. Tinbergen served as the manager of planning and distribution
for K-Mart Apparel Corp.
Jeffrey Galin served as divisional merchandise manager of G & G Shops from 1991
to August 1998. From 1989 to 1991, Mr. Galin was employed as a sales associate
for Bergdorf Goodman. From 1985 to 1988, Mr. Galin served as a commercial real
estate salesperson. Mr. Galin started his career as an associate buyer for G &
G Shops from 1983 to 1984. Jeffrey Galin is the son of Jay Galin and the
brother of Scott Galin.
Donna D'Angelo served as divisional merchandise manager of G & G Shops from
1986 to August 1998. From 1981 to 1986, Ms. D'Angelo was employed as a buyer
for G & G Shops. From 1975 to 1981, she was a buyer for Felix Lilenthal &
Company.
53
<PAGE>
Carol J. Harren served as divisional merchandise manager of G & G Shops from
1992 to August 1998. From 1989 to 1991, Ms. Harren was employed as a buyer for
Weathervane Stores. From 1986 to 1989, she served as head of merchandising for
Sebo Knitwear. Ms. Harren served as vice president of merchandise for Brooks
Fashion Stores from 1984 to 1986. From 1980 to 1984, she was the merchandise
manager for Lane Bryant Stores. From 1972 to 1980, Ms. Harren was a buyer for
Gimbels New York. Ms. Harren was also a buyer for R.H. Macy & Co. from 1966 to
1972.
Robert B. Lembersky served as divisional merchandise manager of G & G Shops
from 1993 to August 1998. From 1990 to 1992, Mr. Lembersky held various
positions at Networks, a division of Worth Stores, including vice president,
merchandise manager and divisional merchandise manager. From 1984 to 1990, Mr.
Lembersky was employed as sales manager and executive vice president of
Barefoot Miss.
Denise Vazquez served as buyer for and divisional merchandise manager of G & G
Shops for the Puerto Rico division from 1988 to August 1998. From 1981 to 1988,
Mrs. Vazquez was employed as a buyer for Goldrings. From 1979 to 1981, Mrs.
Vazquez was a buyer for Melburn Shops. From 1969 to 1979, Mrs. Vazquez held
various positions for Gimbels New York, including buyer and department manager.
Joshua S. Podell served as director of real estate of G & G Shops from August
1997 to August 1998 and as real estate manager of G & G Shops from January 1997
to August 1997. From January 1996 to January 1997, Mr. Podell served as
director of real estate for Speedo Authentic Fitness Stores. From January 1994
to January 1996, Mr. Podell held various positions at The Greenberg Group,
Inc., including retail tenant consultant, site analyst and retail real estate
broker. From January 1992 to December 1993, Mr. Podell was employed as an
advertising salesperson at K-III Corporation.
All of our executive officers were also executive officers of G & G Shops prior
to the acquisition. In addition, Jay and Scott Galin were executive officers of
Petrie Retail. In October 1995, Petrie Retail and its affiliates, including G &
G Shops, filed a voluntary petition for relief under Chapter 11 of the United
States Bankruptcy Code. In August 1998, we purchased assets from these
companies.
Our board of directors consists of five members. All of our directors hold
office until the next annual meeting of stockholders and until their successors
are duly elected and qualified. Under the certificate of incorporation of
Holdings, so long as Holdings controls us, Holdings is required to cause our
board of directors to be identical to the board of directors of Holdings. The
board of directors of Holdings and, as a result, our board of directors each
consists of five members. Holders of class A common stock of Holdings are
currently entitled to elect three directors, and holders of class B common
stock of Holdings are currently entitled to elect two directors. Jay Galin,
Scott Galin and Donald D. Shack were elected to the board of directors of
Holdings by the holders of class A common stock of Holdings. Craig Cogut and
Lenard Tessler were elected to the board of directors of Holdings by the
holders of class B common stock. As of March 31, 1999, Jay and Scott Galin
collectively owned, assuming the exercise of their stock options that became
exercisable as of March 31, 1999, approximately 81% of the outstanding class A
common stock of Holdings. Affiliates of Pegasus Investors owned 100% of the
class B common stock of Holdings. See "Principal Stockholders."
Holders of class A common stock of Holdings will be entitled to elect two of
our directors, and holders of class B common stock of Holdings will be entitled
to elect three of our directors, upon the occurrence of any of the following
triggering events:
. the consolidated earnings of Holdings before interest, taxes, depreciation
and amortization for the most recent 12 full months being less than $15.0
million;
. the occurrence of defaults under any debt facilities of G+G Retail or
Holdings;
54
<PAGE>
. termination of the employment of either of Jay Galin or Scott Galin by us
for cause or by either of them without good reason, as these terms are
defined in each executive's employment agreement; or
. the failure of Holdings to perform certain obligations to the holders of its
series B preferred stock.
From and after the time that there are no longer any shares of the class B,
class C or class D common stock of Holdings outstanding, the board of directors
of Holdings will be elected at each annual meeting of stockholders by a
plurality of the votes cast by holders of the class A common stock of Holdings.
Under an agreement dated August 28, 1998 among Pegasus Investors, G+G Retail,
Pegasus Partners, L.P. and Pegasus Related Partners, L.P., the Pegasus entities
agreed that they will elect Lenard Tessler as a director of G+G Retail and
Holdings, for as long as:
. TGV/G+G Investors LLC, an affiliate of TGV Partners of which Lenard Tessler
is a principal, is a limited partner of Pegasus G&G Retail; and
. the Pegasus entities have the power to elect at least two directors to the
board of directors of Holdings.
In the event that Lenard Tessler votes, or after inquiry indicates his
intention to vote, on any issue brought before the board of directors of
Holdings differently than the other director elected by the Pegasus entities,
then the obligation of the Pegasus entities to elect Lenard Tessler to the
board of directors of Holdings will terminate, Mr. Tessler will immediately
resign from our board of directors and from the board of directors of Holdings
and the Pegasus entities will be entitled to elect a new director to replace
Mr. Tessler. In this event, the Pegasus entities will appoint Mr. Tessler or
another individual acceptable to the Pegasus entities as an observer at
meetings of the board of directors of Holdings until the time that their
obligation to elect Mr. Tessler as a director would otherwise have terminated.
Our executive officers were elected to serve in their capacities until the next
annual meeting of our board of directors and until their respective successors
are elected and qualified or until their earlier resignation or removal. In
addition, we employ Jay Galin and Scott Galin under employment agreements. See
"--Employment Contracts and Severance Agreements."
See "Related Transactions" for descriptions of agreements relating to the stock
ownership and management of our business.
Compensation of Our Directors
As of the date of this prospectus, our directors do not receive any
compensation for their services as directors.
55
<PAGE>
Compensation of Our Executives
The table below contains information on the annual and long-term compensation
for services in all capacities to G & G Shops from February 1, 1998 to August
28, 1998 and to us from August 31, 1998 to January 30, 1999 of individuals who
served as our chief executive officer and our four next most highly compensated
executive officers during the fiscal year ended January 30, 1999. In connection
with the acquisition, each of these executive officers terminated his
employment with G & G Shops and became our officer.
Summary Compensation Table For 1999 Fiscal Year
<TABLE>
<CAPTION>
Annual Compensation--
G & G Shops and Petrie Retail Annual Compensation--G+G Retail
------------------------------------------------ ----------------------------------------
Name and Principal Other Annual All Other Other Annual All Other
Position Salary Bonus Compensation Compensation Salary Bonus Compensation Compensation
- ------------------ --------- ----------- ------------ ------------ -------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jay Galin............... $ 679,166 -- $148,942(1) $9,018(2) $437,500 -- $4,045(4) $1,656,442(2)
Chairman of the Board
of Directors and
Chief Executive Officer
Scott Galin............. $ 274,519 -- $147,294(1) $9,018(2) $228,365 -- $2,869(4) $1,656,442(2)
President and Chief
Operating Officer
Michael Kaplan.......... $ 143,654 $ 26,500(3) -- $6,651 $115,671 -- -- $ 4,750
Vice President, Chief
Financial Officer,
Treasurer and Secretary
Jeffrey Galin........... $ 109,615 $ 20,500(3) -- $5,085 $ 84,711 -- -- $ 3,633
Vice
President/Divisional
Merchandise Manager
Robert W. Tinbergen..... $ 84,115 $ 15,000(3) -- $6,281 $ 65,067 -- -- $ 4,487
Vice President--
Warehouse
and Distribution
</TABLE>
- --------
(1) Represents personal legal fees and disbursements reimbursed in connection
with the acquisition. Also includes reimbursement for automobile-related
expenses and commuting expenses.
(2) Includes a success fee equal to $1,378,000 in cash and a note payable by us
in the amount of $272,000 for their assistance in the sale of the junior
apparel retail business of G & G Shops before the acquisition. See "Related
Transactions--Purchase of Stock in Holdings; Success Fees; Loans from
Holdings."
(3) Reflects a retention bonus earned during fiscal 1999 and prior fiscal years
during which the companies from which we acquired our business operated
under the protection of Chapter 11 of the United States Bankruptcy Code.
These bonuses were paid on or about March 15, 1999.
(4) Represents reimbursement for automobile-related expenses and commuting
expenses.
The figures in the columns "All Other Compensation" reflects actual premiums
paid under our executive medical reimbursement plan and estimates of premiums
that G & G Shops paid under this plan. The estimates assume that the premiums
paid by G & G Shops were identical to the premiums that we paid because both we
and G & G Shops offered the same plan. The plan, which is available to full-
time employees at or above the assistant director level, reimburses covered
employees for medical, dental, vision and deductible expenses not covered by
our primary healthcare plan, which is available to all of our full-time
employees. The premiums paid under the plan for the following officers were:
Jay Galin ($8,118), Scott Galin ($8,118), Michael Kaplan ($4,059), Jeffrey
Galin ($1,376) and Robert W. Tinbergen ($4,059). The figures in the column "All
Other Compensation" also include contributions to the G+G Retirement Plan and
Trust that were made available for the benefit of the above officers as
follows: Jay Galin ($7,342), Scott Galin ($7,342), Michael Kaplan ($7,342),
Jeffrey Galin ($7,342) and Robert W. Tinbergen ($6,709).
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<PAGE>
Employment Contracts and Severance Agreements
We employ Jay Galin as the chairman of our board and our chief executive
officer under an employment agreement that expires on August 28, 2000. Under
his employment agreement, Jay Galin is entitled to receive a base salary of
$1,050,000 per year, which increases to $1,075,000 per year on August 28, 1999.
Jay Galin is also entitled to receive a bonus under our bonus plan for senior
management employees. At any time during the term of his employment agreement,
Jay Galin may, upon three months' prior written notice to us, terminate his
employment agreement and enter into a three-year consulting agreement with us.
The consulting agreement would require Jay Galin to provide consulting services
to us for up to half normal working time, in exchange for annual consulting
fees equal to one-half of his annual salary at the time of termination of his
employment agreement. See "--Our Bonus Plan."
We employ Scott Galin as our president and chief operating officer under an
employment agreement that expires on August 28, 2003. Under his employment
agreement, Scott Galin is entitled to receive a base salary of $525,000 per
year, that increases by $25,000 annually. Scott Galin is also entitled to
receive a bonus under our bonus plan for senior management employees. In
addition, in the event that Jay Galin's employment is terminated for any
reason, including the exercise of his consulting option described above, Scott
Galin will serve as our chief executive officer for the remaining term of his
employment agreement, and his base salary initially will be increased to
$750,000 per year, subject to further annual increases of $25,000. See "--Our
Bonus Plan."
If we terminate the employment of Jay Galin or Scott Galin without cause or
either executive terminates his employment for good reason, as those terms are
defined in the employment agreements, each of these executives will be entitled
to receive the salary, bonus and benefits to which they would have been
entitled for the remainder of the employment term. In the event the employment
of Jay Galin or Scott Galin terminates upon disability, as defined in the
employment agreements, each of these executives will be entitled to receive his
full salary and benefits for one year and 50% of his salary and full benefits
for an additional six months. Upon the death of Jay Galin or Scott Galin, we
are required to pay to the designated beneficiary of each of these executives
his salary and bonus for one year following his death, provided that we can
obtain key-man life insurance covering each executive at a reasonable cost. In
the event that Jay Galin exercises his consulting option described above, his
consulting agreement will contain termination provisions substantially similar
to those contained in his employment agreement.
Each employment agreement also contains covenants precluding the executive
from, among other things, competing with us or soliciting our customers or
employees until the earlier of:
. the expiration of the initial term of the employment agreement; or
. the date which is 18 months after the termination of his employment with us.
In the event that Jay Galin exercises his consulting option, his consulting
agreement will contain substantially similar covenants not to compete or
solicit.
We have also entered into separate agreements with Michael Kaplan, our vice
president and chief financial officer, and Jeffrey Galin, our vice
president/divisional merchandise manager, that provide for severance payments
in the event that we terminate their employment without cause, as that term is
defined in the severance agreements. These severance payments consist of the
executive's base salary for one year and, if the executive elects to continue
coverage under our medical insurance, the payment of a portion of the premiums
for such insurance equal to the portion which would have been paid had he
remained in our employ for up to one year.
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<PAGE>
Our Bonus Plan
Our board of directors adopted a bonus plan for senior management employees
that became effective on February 2, 1999. Participants in the bonus plan
include Jay Galin, Scott Galin, and other selected members of our senior
management. Under the bonus plan, participants are eligible to receive annual
cash bonuses in addition to their base salaries.
The payment of bonus awards for each fiscal year is based upon our financial
performance for the fiscal year measured by EBITDA for that fiscal year. The
bonus plan provides for several performance levels, each based on:
. a percentage of our projected EBITDA for the relevant fiscal year
established by our board of directors; and
. the dollar amount of bonuses payable to participants in the bonus plan for
the relevant fiscal year at the performance level.
The dollar amount of bonus awards is based on a percentage of each
participant's base salary and ranges from 0% to 40% of a participant's salary
or, for Jay Galin and Scott Galin, 0% to 65% of his salary, based on the
performance level that we achieve.
The bonus plan is administered by our board of directors. The bonus plan may be
amended or terminated at any time upon the recommendation of the chairman of
our board and chief executive officer and our president and chief operating
officer.
Stock Option Plan of Holdings
Effective as of March 15, 1999, Holdings adopted a stock option plan providing
for the granting of options to purchase shares of its class A common stock to
its employees and employees of its subsidiaries. This option plan is
administered by the board of directors of Holdings, which is authorized to
grant incentive stock options and non-qualified stock options to purchase up to
7,000 shares of the class A common stock of Holdings.
The board of directors of Holdings will determine the number of shares subject
to each option, the times when the options will be granted, the times when each
option may be exercised and any other matters which it deems appropriate. The
exercise price of the options is $300.00 per share. However, for incentive
stock options, the exercise price per share may not be less than:
. 100% of the fair market value of one share of class A common stock of
Holdings at the time the option is granted; or
. 110% of the fair market value of one share of class A common stock of
Holdings at the time the option is granted, if the option is granted to an
employee who owns more than 10% of the voting stock of Holdings.
Each option will terminate on the date specified by the board of directors of
Holdings, but in no event later than ten years from the date on which the
option was granted. However, if an incentive stock option is granted to an
employee who owns more than 10% of the voting stock of Holdings, the option
must terminate no later than five years from the date of grant.
The board of directors of Holdings will determine whether each option granted
will be an incentive stock option or a non-qualified stock option. However, if,
at the time of grant, the fair market value of the class A common stock of
Holdings underlying the incentive stock options to be granted exceeds $100,000
on the date that the options first become exercisable, the options shall be
treated as non-qualified stock options to the extent of the excess.
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<PAGE>
The incentive stock options are non-transferrable other than by a will or the
laws of descent and distribution. The non-qualified stock options may not be
transferred other than by a will or the laws of descent and distribution,
unless the board of directors of Holdings permits transfer and the transfer is
described in the option instrument.
This option plan automatically terminates on March 14, 2009, unless the board
of directors of Holdings terminates it earlier. Termination of the option plan
will not terminate any option that was granted before termination.
Effective as of March 15, 1999, Holdings granted under its option plan non-
qualified options to purchase 5,000 shares of its class A common stock, of
which 1,250 are currently exercisable. Holdings granted options to purchase
2,500 shares of class A common stock to each of Jay Galin and Scott Galin. An
aggregate of 5,000 options may be granted to Jay Galin and Scott Galin under
this option plan.
Our Retirement Plans
We currently maintain three tax-qualified retirement plans. The G+G Retail
retirement plan and trust and the G+G Retail 401(k) savings plan cover all
employees, except those covered under a collective bargaining agreement or,
with respect to our 401(k) savings plan, those employed in Puerto Rico. The G+G
Retail--UAW Local collectively bargained 401(k) plan covers employees employed
under a collective bargaining agreement with Local 2326 of the UAW.
Since each of these plans is a "defined contribution plan" under applicable
pension laws, our only obligation to them is to make any contribution required
by their terms. We have no contingent liability to the plans based on poor
investment returns or other factors. We have the discretion, but not the
obligation, to make a contribution in any year to the G+G Retail retirement
plan. We have no obligation to make a contribution to the 401(k) savings plan.
We are obligated to make a contribution to the Local 2326 401(k) plan equal to
2% of each participant's compensation, up to a maximum of $30,000 in
compensation. We also must match 50% of a participant's contribution to the
plan, up to a maximum matching contribution of the lesser of 1% of the
participant's compensation or $300.
We have established a 401(k) plan for employees in Puerto Rico, but we are not
obligated to contribute to that plan.
Indemnification Agreements with Our Directors
We have entered into separate, identical indemnification agreements with each
of our directors. Under each indemnification agreement, we have agreed to hold
harmless and indemnify the director, to the fullest extent provided by Sections
145(a) and (b) of the Delaware General Corporation Law, against all expenses,
judgments, fines and amounts paid in settlement reasonably incurred by the
director in connection with any threatened, pending or completed civil or
criminal action, suit or proceeding, including derivative actions, to which the
director is, was or becomes a party, or is threatened to be made a party, as a
result of being our director or a former director of G+G Retail.
Our obligation to indemnify a director is subject to the conditions that the
director acted in good faith and in a manner the director reasonably believed
to be in our best interest and not against us and, with respect to a criminal
proceeding, had no reason to believe the conduct was unlawful. In addition, our
obligation to indemnify a director is subject to limited exclusions described
in the applicable indemnification agreement. Under each indemnification
agreement, a director also is entitled to receive from us an advance for
expenses incurred in defending any action, suit or proceeding. All advances are
subject to repayment if a court ultimately determines that the director was not
entitled to be indemnified.
59
<PAGE>
PRINCIPAL STOCKHOLDERS
Holdings owns all of our outstanding capital stock. The following table
contains information on the beneficial ownership of Holdings capital stock as
of September 1, 1999 by:
. each person known to us to beneficially own more than 5% of the outstanding
voting securities of Holdings;
. each of our directors;
. each of our five most highly compensated executive officers; and
. all of our directors and executive officers as a group.
Except as otherwise indicated, each beneficial owner has the sole power to vote
and dispose of all shares beneficially owned by it. Beneficial ownership is
determined in accordance with SEC rules and regulations. In computing the
number of Holdings shares beneficially owned by a person and the percentage of
ownership by that person, shares of capital stock subject to options or
warrants held by that person that are currently exercisable or exercisable
within 60 days of September 1, 1999 are deemed outstanding and owned by that
person. Those shares, however, are not deemed outstanding for the purpose of
computing the percentage ownership of any other person.
Holdings has four authorized classes of common stock: class A, class B, class C
and class D. We and Holdings are prohibited from taking some actions without
the affirmative vote or written consent of holders of a majority of the issued
and outstanding shares of class B common stock. Restricted actions include,
among others:
.issuance or redemption of securities;
. incurrence of indebtedness in excess of specified amounts;
. effecting a liquidation or sale of the business of G+G Retail or Holdings;
or
. initiating a public offering, subject to limited exceptions.
Except as required by the Delaware General Corporation Law, holders of class C
and class D common stock do not have any voting rights. After the completion of
a public offering, if at least 20% of the common stock of Holdings is listed or
admitted for trading on a national securities exchange or quoted on the Nasdaq
National Market, each share of class B, class C and class D common stock then
issued and outstanding will automatically convert into one share of class A
common stock. Holders of series A preferred stock are entitled to receive
dividends at an annual rate of 15%, increasing to 17% if the triggering events
specified in the certificate of incorporation of Holdings occur. Holdings is
prohibited from taking specified actions without the affirmative vote or
written consent of a majority of the holders of series A preferred stock.
Otherwise, except as required by the Delaware General Corporation Law, holders
of series A preferred stock do not have any voting rights. Series A preferred
stock is exchangeable at the option of Holdings for notes containing
substantially similar terms. Holders of series B preferred stock are entitled
to receive dividends at an annual rate of 12%, increasing to 17% if the
triggering events specified in the certificate of incorporation of Holdings
occur. Except as required by the Delaware General Corporation Law, holders of
series B preferred stock do not have any voting rights. The shares of series B
preferred stock are exchangeable at the option of Holdings for notes containing
substantially similar terms.
60
<PAGE>
<TABLE>
<CAPTION>
Percentage Percent of Percentage Percentage
Ownership Vote of all Number of Ownership Number of Ownership
of all Classes of Shares of of Shares of of
Number Classes of Voting Series A Series A Series B Series B
of Shares of Common Common Preferred Preferred Preferred Preferred
Name of Beneficial Owner Common Stock Stock Stock Stock Stock Stock Stock
- ------------------------ ------------ ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Pegasus Related
Partners, L.P.......... 26,723(1) 39.4% 25.2% -- -- 16,690.067 49.4%
Paul Gunther, as
Liquidating Trustee
under Liquidating Trust
Agreement dated as of
December 18, 1998...... 15,000(2) 30.0% -- -- -- -- --
Cerberus G&G Company,
L.L.C.................. 14,000(3) 21.9% -- 20,308.507 100.0% -- --
Pegasus G&G Retail,
L.P.................... 11,924(4) 20.6% 11.4% -- -- 7,549.410 22.3%
Pegasus Partners, L.P... 10,276(5) 18.1% 9.7% -- -- 6,416.829 19.0%
Jay Galin............... 7,465(6) 14.7% 21.0% -- -- -- --
Scott Galin............. 7,465(6) 14.7% 21.0% -- -- -- --
Pegasus G&G Retail II,
L.P.................... 4,977(7) 9.3% 4.8% -- -- 3,152.066 9.3%
Donald D. Shack......... 20(8) * * -- -- -- --
Craig Cogut (9)......... -- -- -- -- -- -- --
Lenard Tessler.......... -- -- -- -- -- -- --
Michael Kaplan.......... 675(10) 1.4% 1.9% -- -- -- --
Jeffrey Galin........... 1,420(11) 2.8% 4.1% -- -- -- --
Robert Tinbergen........ 225(8)(12) * * -- -- -- --
James R. Dodd........... 150(8) * * -- -- -- --
All directors and
executive officers as a
group (9 individuals).. 17,420 34.0% 48.1% -- -- -- --
</TABLE>
- --------
*Less than 1%.
(1) Includes 8,837 shares of class B common stock, representing 49.4% of the
issued and outstanding class B common stock and warrants to purchase
17,886 shares of class D common stock. The address of this stockholder is
c/o Pegasus Investors, L.P., 99 River Road, Cos Cob, Connecticut 06807.
(2) Class C common stock issued to G & G Shops in connection with the
acquisition and transferred to the liquidating trustee in the bankruptcy
proceedings for Petrie Retail and its subsidiaries. The address of this
stockholder is c/o Petrie Retail, Inc., 150 Meadowlands Parkway, Secaucus,
New Jersey 07094.
(3) Warrants to purchase class D common stock. The address of this stockholder
is c/o Cerberus Partners, 450 Park Avenue, 28th Floor, New York, New York
10022.
(4) Includes 3,997 shares of class B common stock, representing 22.3% of the
issued and outstanding class B common stock, and warrants to purchase
7,927 shares of class D common stock. The address of this stockholder is
c/o Pegasus Investors, L.P., 99 River Road, Cos Cob, Connecticut 06807.
(5) Includes 3,398 shares of class B common stock, representing 19.0% of the
issued and outstanding class B common stock, and warrants to purchase
6,878 shares of class D common stock. The address of this stockholder is
c/o Pegasus Investors, L.P., 99 River Road, Cos Cob, Connecticut 06807.
(6) Class A common stock. Includes options to purchase 625 shares of class A
common stock that are currently exercisable. Assuming that these options
were exercised, these shares represent 42.1% of the issued and outstanding
class A common stock. The address of this stockholder is c/o G+G Retail,
Inc., 520 Eighth Avenue, New York, New York 10018.
(7) Includes 1,668 shares of class B common stock, representing 9.3% of the
issued and outstanding class B common stock, and warrants to purchase
3,309 shares of class D common stock. The address of this stockholder is
c/o Pegasus Investors, L.P., 99 River Road, Cos Cob, Connecticut 06807.
(8) Class A common stock.
(9) Craig Cogut may be deemed to own beneficially 17,900 shares of class B
common stock, 36,000 shares of class D common stock and 33,808.372 shares
of series B preferred stock through his indirect ownership interest in
Pegasus Partners, L.P., Pegasus Related Partners, L.P., Pegasus G&G
Retail, L.P. and Pegasus G&G Retail II, L.P. Craig Cogut beneficially owns
100% of the issued and outstanding capital stock of Pegasus Investors GP,
Inc., a Delaware corporation that is the general partner of Pegasus
Investors. Pegasus Investors is the general partner of each of Pegasus
Partners and Pegasus Related Partners. Pegasus Partners and Pegasus
Related Partners collectively own 100% of the issued and outstanding
capital stock of Pegasus G&G Retail GP, Inc., a Delaware corporation that
is the general partner of each of Pegasus G&G Retail and Pegasus G&G
Retail II.
(10) Represents 3.9% of the issued and outstanding class A common stock.
(11) Represents 8.3% of the issued and outstanding class A common stock.
(12) Represents 1.3% of the issued and outstanding class A common stock.
61
<PAGE>
RELATED TRANSACTIONS
Purchase of Stock in Holdings; Success Fees; Loans from Holdings
In connection with the acquisition, affiliates of Pegasus Investors--Pegasus
Related Partners, L.P., Pegasus G&G Retail, L.P., and Pegasus Partners L.P.--
purchased for an aggregate purchase price equal to $31,346,400:
. 17,900 shares (100%) of the outstanding class B common stock of Holdings;
. 30,000 shares (100%) of the outstanding series B preferred stock of
Holdings; and
. warrants to purchase 35,500 shares of the class D common stock of Holdings
for $0.01 per share.
In December 1998, Pegasus Partners and Pegasus Related Partners transferred
some of their shares of Holdings class B common stock, series B preferred stock
and warrants to another affiliate of Pegasus Investors, Pegasus G&G Retail II.
From the acquisition to September 1, 1999, all of the affiliates of Pegasus
Investors have received in the aggregate an additional 3,808.372 shares of
series B preferred stock of Holdings as dividends on series B preferred stock
that they hold. The class B common stock of Holdings owned by the affiliates of
Pegasus Investors represents approximately 51.1% of the voting common equity of
Holdings outstanding on September 1, 1999, or 49.4%, assuming the exercise of
stock options that were exercisable as of September 1, 1999. As a result of
their ownership of Holdings, the affiliates of Pegasus Investors have the
ability to determine the outcome of most corporate actions that are required to
be submitted to Holdings stockholders, other than, currently, the election of a
majority of the board of directors of Holdings. In addition, as holders of
class B common stock of Holdings, the affiliates of Pegasus Investors have
special veto rights which allow them to control the timing and occurrence of a
number of major corporate transactions by us and Holdings. Craig Cogut, a
director of our company and of Holdings, has an indirect ownership interest in
each of the affiliates of Pegasus Investors. See "Principal Stockholders."
Lenard Tessler, a director of G+G Retail and Holdings, is a principal of TGV
Partners. TGV Partners and its affiliates hold limited partnership interests in
Pegasus G&G Retail and Pegasus G&G Retail II. Pegasus G&G Retail and Pegasus
G&G Retail II own 22.3% and 9.3%, respectively, of the shares and warrants to
purchase shares of Holdings held by the affiliates of Pegasus Investors
described above. Under the limited partnership agreement of Pegasus G&G Retail,
in the event that Holdings has not consummated an initial public offering of
its common stock on or prior to August 28, 2003, TGV Partners may require
Pegasus G&G Retail to exercise its demand registration rights that are
described below. See "Principal Stockholders" and "--Stockholder Agreements;
Management Fees."
In connection with the acquisition, Holdings and we assumed the obligation of G
& G Shops to pay success fees to Jay Galin and Scott Galin. The success fees
were payable under an agreement among Petrie Retail, G & G Shops, Jay Galin and
Scott Galin. In that agreement, Jay Galin and Scott Galin agreed:
. to provide their full cooperation and assist in the sale of the business of
G & G Shops;
. to provide prospective purchasers with information that would enable them to
evaluate the assets of G & G Shops;
. to conduct meetings and presentations; and
. under limited circumstances, to make themselves available on a full-time
basis for up to six months after a closing of the sale to a successful
purchaser.
To satisfy the obligations in respect of the success fee, we and Holdings paid
to each of Jay Galin and Scott Galin $1,378,000 in cash and issued to each of
them a note payable by us in the amount of
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<PAGE>
$272,000. We paid these non-interest bearing notes in full on their maturity
date, January 4, 1999. In addition, in the agreement providing the success fee,
Petrie Retail and G & G Shops agreed to reimburse Jay Galin and Scott Galin for
professional fees and disbursements incurred by them. We, G & G Shops and
Petrie Retail paid an aggregate of $286,555 of these professional fees and
disbursements.
In connection with the acquisition, each of Jay Galin and Scott Galin purchased
7,130 shares of class A common stock of Holdings for $841,500 and transferred
290 shares of class A common stock to Jeffrey Galin, who is our vice
president/divisional merchandise manager as well as Jay Galin's son and Scott
Galin's brother. Of the 290 shares transferred by each of Jay and Scott Galin,
169 shares were given to Jeffrey Galin as a gift and 121 shares were sold to
Jeffrey Galin in exchange for a promissory note. The class A common stock owned
by Jay Galin and Scott Galin represent approximately 81% of the outstanding
class A common stock, and approximately 41.2% of the voting common equity of
Holdings, as of September 1, 1999, assuming the exercise of stock options that
were exercisable as of September 1, 1999. In addition, holders of class A
common stock currently are entitled to elect three-fifths of the board of
directors of Holdings. See "Principal Stockholders."
In connection with the acquisition, Holdings gave Donald D. Shack, one of our
directors, the opportunity to purchase shares of its class A common stock. Mr.
Shack and four other stockholders in the law firm of Shack & Siegel, which is
general counsel to Holdings and G+G Retail, each purchased 20 shares of class A
common stock for an aggregate purchase price of $11,822. See "Principal
Stockholders."
In connection with the acquisition, some of our officers also purchased class A
common stock as follows:
. Michael Kaplan purchased 600 shares for a total purchase price of $70,813;
. Jeffrey Galin purchased 840 shares for a total purchase price of $99,138;
. James Dodd purchased 150 shares for a total purchase price of $17,703; and
. Robert Tinbergen purchased 150 shares for a total purchase price of $17,703.
To fund their purchases of stock, each of these officers borrowed from
Holdings, on a full recourse basis, the total purchase price of the stock
purchased, less the $0.001 par value of the stock that was paid in cash. The
total principal amount of each officer's loan is due on the earlier of:
. the fifth anniversary of the date of the loan; or
. 30 days following the date on which the officer is no longer an officer of
Holdings or any of its subsidiaries.
The outstanding principal amount of each loan bears interest at the prime rate
announced in New York City by Citibank, N.A. from time to time, payable on a
quarterly basis. Each of these loans is secured by a pledge of the purchased
stock.
We believe that the terms of this transaction were no less favorable to
Holdings and G+G Retail than could have been obtained in an arms-length
transaction with an unrelated third party.
Acquisition Closing Fees
In connection with the closing of the acquisition, TGV Partners received a
closing fee in the amount of $1,250,000. The closing fee was payment for the
financial advisory services provided by TGV Partners in connection with the
acquisition. We believe that the terms of this transaction were no less
63
<PAGE>
favorable to G+G Retail than could have been obtained in an arms-length
transaction with an unrelated third party.
Private Placement Fee
We paid Pegasus Investors a $1.0 million fee for financial advisory services in
connection with the private placement. We believe that the terms of this
transaction were no less favorable to G+G Retail than could have been obtained
in an arms-length transaction with an unrelated third party.
Stockholder Agreements; Management Fees
Affiliates of Pegasus Investors are parties to a stockholders agreement with a
number of management stockholders of Holdings, including Jay Galin and Scott
Galin. Under the stockholders agreement, each management stockholder is
prohibited from transferring class A common stock of Holdings on or before
August 28, 2002 without the consent of holders of a majority of the outstanding
class A and class B common stock, except in limited circumstances. After August
28, 2002, all transfers of class A common stock by management stockholders are
subject to a right of first refusal in favor of Holdings and the affiliates of
Pegasus Investors. In addition, if the affiliates of Pegasus Investors propose
to sell at least 80% of the common equity of Holdings that they hold, the
management stockholders may be required by the affiliates of Pegasus Investors
to sell shares of class A common stock in the same sale to the same purchaser
on the same terms. Furthermore, if one or more of the affiliates of Pegasus
Investors proposes to sell at least 5% of the common equity of Holdings, the
management stockholders will be entitled to sell the same percentage of their
shares of class A common stock in the same sale and on the same terms.
Jay Galin and Scott Galin made representations and warranties to the affiliates
of Pegasus Investors in the stockholders agreement relating to the
representations and warranties made to us in connection with the acquisition.
Messrs. Galin agreed to indemnify the affiliates of Pegasus Investors for
damages exceeding $1,750,000 that result from any breach of their
representations and warranties, provided that the aggregate amount of damages
exceeds $3,500,000.
Holdings has granted the affiliates of Pegasus Investors preemptive rights in
connection with equity issuances by Holdings, with limited exceptions. The
affiliates of Pegasus Investors waived these preemptive rights with respect to
the warrants issued by Holdings in the private placement. Holdings has also
granted to the affiliates of Pegasus Investors and the management stockholders
demand and piggyback registration rights. Affiliates of Pegasus Investors or
our management stockholders who hold at least 33% of outstanding class B common
stock of Holdings are entitled to demand registration of their shares after the
consummation of a qualified public offering, which means a public offering of
common stock of which at least 20% of the then outstanding shares of the class
are publicly held and which is listed or admitted for trading on a national
securities exchange or quoted on the Nasdaq National Market. The affiliates of
Pegasus Investors who hold at least 33% of the outstanding class B common stock
of Holdings are also entitled to demand registration of their shares beginning
on August 28, 2002. Any demand registration must be reasonably expected to
yield aggregate gross proceeds of at least $20,000,000 to the stockholders
exercising their registration rights. The affiliates of Pegasus Investors as a
group are entitled to two demand registrations, and the management stockholders
as a group are entitled to one demand registration. The affiliates of Pegasus
Investors and the management stockholders are each entitled to piggyback
registration rights in connection with any registration statement filed by
Holdings, with limited exceptions.
In addition to their rights to elect directors, under the stockholders
agreement, the affiliates of Pegasus Investors may have the right to appoint an
observer for meetings of the board of directors of Holdings. See "Management--
Directors, Executive Officers and Key Employees."
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Under the stockholders agreement, if we terminate any management stockholder's
employment for cause or if any management stockholder terminates employment
without good reason, each of Holdings and the affiliates of Pegasus Investors
has the right to purchase the relevant management stockholder's shares of class
A common stock of Holdings at the lower of the management stockholder's initial
purchase price per share or the fair market value per share on the effective
date of termination. The right to purchase Jay Galin's shares terminates upon
the earlier of:
. the consummation of a qualified public offering; or
. August 28, 2000.
The right to purchase Scott Galin's shares terminates upon the earlier of:
. the consummation of a qualified public offering; or
. August 28, 2003.
The right to purchase shares of other management stockholders terminates upon
the consummation of a qualified public offering.
The affiliates of Pegasus Investors and Holdings are also parties to a
stockholders agreement with G & G Shops that requires G & G Shops and its
permitted assigns to first offer to sell to Holdings and the affiliates of
Pegasus Investors, on specified terms, any class C common stock of Holdings
that G & G Shops and its permitted assigns, as class C holders, desire to sell.
If Holdings and the affiliates of Pegasus Investors do not elect to purchase
the shares, the class C holders may sell them to a third party on terms no more
favorable than the terms proposed to Holdings and the affiliates of Pegasus
Investors. If the proposed third party purchaser is primarily in the retail
apparel business but not primarily in the girls' and/or women's retail apparel
business, the class C holders must again offer to sell the shares to Holdings
and the affiliates of Pegasus Investors. If Holdings and the affiliates of
Pegasus Investors again elect not to purchase the shares, the class C holders
may sell them to the proposed third party on terms no more favorable than the
proposed terms.
If the affiliates of Pegasus Investors propose to sell at least 50% of the
common equity of Holdings that they hold, they may require the class C holders
to sell Holdings class C common stock in the same sale to the same purchaser on
the same terms. In addition, if one or more of the affiliates of Pegasus
Investors proposes to sell at least 15% of the common equity of Holdings, class
C holders are entitled to sell the same percentage of their class C common
stock in the same sale and on the same terms.
Class C holders are also entitled to certain demand and piggyback registration
rights subject to specified limitations, holders of at least 50% of outstanding
class C common stock are entitled to demand registration of their shares
following the earlier to occur of:
. a qualified public offering; or
. August 28, 2003.
The class C holders as a group are entitled to:
. one demand registration; and
. piggyback registration rights in connection with any registration statement
that is filed by Holdings, with limited exceptions.
In connection with any initial public offering by Holdings, class C holders are
entitled to include on a priority basis in the registration up to one-third of
the registrable shares that they hold, with some limitations. In addition,
Holdings may not, without the consent of holders of a majority of its class C
common stock, grant any demand or piggyback registration rights that have
priority over or are inconsistent with the registration rights granted to class
C holders.
We believe that the terms of these transactions are no less favorable to G+G
Retail and Holdings than could have been obtained in an arms-length transaction
with an unrelated third party.
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DESCRIPTION OF REVOLVING CREDIT FACILITY
Our revolving credit facility provides us with a line of credit of up to $20.0
million, including a sublimit of $10.0 million for letters of credit, and
matures in October 2001. The facility may be used for general operating,
working capital and other proper corporate purposes. Our ability to borrow and
obtain letters of credit under the revolving credit facility is subject to
compliance with a borrowing base, calculated as 80% or, during peak borrowing
periods, 85% of eligible inventory, and other customary conditions, including
accuracy of representations and warranties, compliance with covenants and
absence of defaults. We are in compliance with the covenants under our
revolving credit facility on the date of this prospectus.
Interest on amounts advanced under the revolving credit facility accrues at the
adjusted Eurodollar rate plus 1.75% or at the prime rate (8% as of July 31,
1999).
The revolving credit facility contains a $39.0 million minimum tangible net
worth covenant and other customary covenants, including limitations on changes
of ownership, transactions with affiliates, dividends, additional indebtedness,
creation of liens, asset sales, acquisitions, conduct of business and capital
expenditures. The revolving credit facility also contains customary events of
default, including defaults on our other indebtedness, including the notes.
Our obligations under the revolving credit facility are secured by a lien on
substantially all of our assets.
If the revolving credit facility is terminated before its stated maturity, a
termination fee may be payable as follows:
.$150,000 for a termination on or before October 1999;
.$100,000 for a termination on or before October 2000; and
.approximately $67,000 for a termination before October 2001.
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DESCRIPTION OF THE NOTES
You can find definitions of the capitalized terms used in this description in
"--Definitions." We issued the outstanding notes and will issue the exchange
notes under an indenture with U.S. Bank Trust National Association, as trustee.
We have filed a copy of the indenture as an exhibit to the registration
statement of which this prospectus is a part. This description is a summary of
only the material provisions of the indenture. It does not restate the
indenture. Therefore, we urge you to read the indenture. You should also read
the registration rights agreement, a copy of which has been filed as an exhibit
to the registration statement of which this prospectus is a part.
Brief Description
The notes are:
. our general unsecured obligations;
. effectively subordinate to any existing or future debt secured by our
assets;
. equal in rank in right of payment with all of our existing and future senior
indebtedness;
. senior in right of payment to all of our existing and future subordinated
indebtedness; and
. unconditionally guaranteed by each of our subsidiaries that execute a
subsidiary guarantee.
The notes will be guaranteed by each of our domestic Restricted Subsidiaries
that we or any of our Restricted Subsidiaries acquire or create and by any
subsidiary that guarantees any of our or our subsidiary guarantors'
indebtedness. Each guarantee is:
. our subsidiary guarantor's general unsecured obligation and therefore is
subordinate to all of our subsidiary guarantor's secured indebtedness;
. equal in rank in right of payment with all our subsidiary guarantor's
existing and future senior indebtedness; and
. senior in right of payment to all our subsidiary guarantor's existing and
future subordinated indebtedness.
As of the date of this prospectus, we have only one subsidiary, G & G Retail of
Puerto Rico. We have no domestic subsidiaries, and our one foreign subsidiary
does not guarantee the outstanding notes or the exchange notes.
In the event of a bankruptcy, liquidation or reorganization of any of our
Unrestricted Subsidiaries that are not subsidiary guarantors, each of them must
pay its general creditors and trade creditors before it can distribute any
assets to us.
As of the date of the indenture, our sole subsidiary was a Restricted
Subsidiary. However, our board of directors may designate our sole subsidiary
as an Unrestricted Subsidiary if the designation complies with the terms of the
indenture. Unrestricted Subsidiaries are not subject to many of the restrictive
covenants in the indenture and will not guarantee the notes. See "--Covenants--
Designation of Restricted and Unrestricted Subsidiaries."
Principal, Maturity and Interest
Under the indenture, we may issue notes with a maximum aggregate principal
amount of $107.0 million. We issued the outstanding notes, and will issue the
exchange notes, in denominations of $1,000 and integral multiples of $1,000.
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The notes will mature on May 15, 2006.
Interest on the notes accrues at the rate of 11% per annum. We will make semi-
annual interest payments in arrears on May 15 and November 15, beginning
November 15, 1999. We will make each interest payment to you if you were a
holder of record on the immediately preceding May 1 and November 1.
Interest on the notes accrues from the date the notes were originally issued.
If we have already paid interest, then interest accrues from the date interest
was most recently paid. Interest will be computed on the basis of a 360-day
year with 12 months of 30 days.
Methods of Receiving Payments on the Notes
If you have given wire transfer instructions to us, we will pay all principal,
interest and premium on your notes and any liquidated damages under the
indenture according to your instructions. All other payments will be made at
the office or agency of the paying agent and registrar within the City and
State of New York or by check mailed to your address as listed in the register
of holders.
Paying Agent and Registrar for the Notes
The trustee currently acts as paying agent and registrar. We may change the
paying agent or registrar without notifying you, and we or any of our
subsidiaries may act as paying agent or registrar.
Transfer and Exchange
You may transfer or exchange notes according to the terms of the indenture. The
registrar and the trustee may require you to provide appropriate endorsements
and transfer documents, and other materials, in order to complete the transfer
or exchange. We may require you to pay any taxes and fees required by law or
permitted by the indenture. We are not required to transfer or exchange any
note that we choose to redeem. We are also not required to transfer or exchange
any notes during the 15 days before we choose notes to redeem.
We will treat you as the owner of a note for all purposes if you are the
registered holder.
Subsidiary Guarantees
We currently have no subsidiaries that guarantee the notes. In the future, we
may create subsidiaries that would become guarantors. We may, however,
designate subsidiaries as Unrestricted Subsidiaries if the designation will not
cause a default under the indenture. Unrestricted Subsidiaries are not
guarantors of the notes. We may also redesignate Unrestricted Subsidiaries as
Restricted Subsidiaries, in which case they would have to become guarantors of
the notes.
Our subsidiary guarantors, if any, both individually and as a group, will
guarantee our obligations under the notes. Each subsidiary guarantor's
obligations under its subsidiary guarantee will be limited to the extent
necessary to prevent that guarantee from being a fraudulent conveyance under
applicable law. See "Risk Factors."
Subsidiary guarantors may not sell or otherwise dispose of all or substantially
all of their assets to, or consolidate with or merge with or into, another
person or entity, other than us or another subsidiary guarantor, unless:
. immediately after that transaction takes effect, no default or event of
default exists; and
. either:
. the person or entity acquiring the property, or the person or entity
formed by or surviving the consolidation or merger, assumes all of the
subsidiary guarantor's obligations under the indenture, its guarantee
and the registration rights agreement according to a supplemental
indenture satisfactory to the trustee; or
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. the net proceeds of the sale or other disposition are applied according
to the asset sale provisions in the indenture.
A guarantee will be released if:
. all or substantially all of the assets of the subsidiary guarantor are
transferred in a sale or other disposition, including by merger or
consolidation, to a person or entity that is not one of our subsidiaries
either before or after the transaction, and if the subsidiary guarantor
applies the net proceeds of that sale or other disposition according to the
asset sale provisions in the indenture;
. all of the capital stock of the subsidiary guarantor is sold to a person or
entity that is not one of our subsidiaries either before or after the
transaction and if we apply the net proceeds of that sale according to the
indenture's asset sale provisions; or
. our board of directors properly designates any Restricted Subsidiary that is
a subsidiary guarantor as an Unrestricted Subsidiary.
See "--Repurchase at Your Option--Asset Sales."
Optional Redemption
Before May 15, 2002, we may redeem, on any one or more occasions, up to 35% of
the aggregate principal amount of the notes with the net cash proceeds of
Public Equity Offerings. We will pay a redemption price of 111% of the
principal amount of the notes, plus accrued and unpaid interest and any
liquidated damages under the indenture up to the redemption date; provided
that:
. at least 65% of the aggregate principal amount of the notes remains
outstanding, excluding the amount of the notes that we and our subsidiaries
hold, immediately after the redemption; and
. the redemption occurs within 60 days of the closing date of the Public
Equity Offering.
Except as stated in the above paragraph, we may not redeem the notes before May
15, 2003.
On or after May 15, 2003, we may redeem all or a part of the notes by giving 30
to 60 days' notice at the following redemption prices, plus accrued and unpaid
interest and any liquidated damages under the indenture up to the applicable
redemption date:
<TABLE>
<CAPTION>
Percentage
of
Principal
Period Amount
------ ----------
<S> <C>
May 15, 2003--May 14, 2004..................................... 105.50%
May 15, 2004--May 14, 2005..................................... 102.75%
May 15, 2005 and thereafter.................................... 100.00%
</TABLE>
Mandatory Redemption
We are not required to make mandatory redemption or sinking fund payments on
the notes.
Repurchase at Your Option
Change of Control
If a Change of Control occurs, you will have the right to require us to
repurchase all or any part of your notes in multiples of $1,000 according to
the change of control offer provisions in the indenture. Under those
provisions, we will offer a cash payment equal to 101% of the aggregate
principal amount of notes repurchased, plus accrued and unpaid interest and any
liquidated damages under the indenture up to the date of repurchase.
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Within ten days following any Change of Control, we will mail to you a notice
that describes the transaction that constitutes the Change of Control, with an
offer to repurchase notes on a date 30 to 60 days from when the notice is
mailed.
We will comply with the requirements of Rule 14e-1 under the Securities
Exchange Act of 1934 and any other securities laws and regulations that are
applicable to the repurchase. If the provisions of any securities laws or
regulations conflict with the Change of Control provisions in the indenture, we
will follow the applicable securities laws and regulations. In following the
law, we will not be deemed to have breached our obligations under the
indenture.
On the repurchase date, to the extent lawful, we will:
. accept for repurchase all notes or portions of notes that are properly
tendered;
. deposit with the paying agent the repurchase price for all notes or portions
of notes that you tender; and
. deliver or cause to be delivered to the trustee the accepted notes with an
officers' certificate stating the aggregate principal amount of notes or
portions of notes that we are repurchasing.
The paying agent will promptly mail to you the repurchase price. The trustee
will promptly authenticate and mail, or have transferred by book entry, to you
a new note equal in principal amount to any unpurchased portion of the notes
that you surrendered; provided that each new note will be in a principal amount
of $1,000 and/or an integral multiple of $1,000.
We will publicly announce the results of the change of control offer on or as
soon as practicable after the repurchase date.
The provisions that require us to make a change of control offer are not
exclusive and apply despite the applicability of any other indenture provision.
These provisions are the only provisions that give you the right to require us
to repurchase or redeem the notes in the event of a takeover, recapitalization
or similar transaction.
We are not required to make a change of control offer when a Change of Control
occurs if a third party makes an offer to purchase in the manner, at the times
and in every way follows the requirements in the indenture that apply to a
change of control offer and purchases all of the notes properly tendered and
not withdrawn under the change of control offer.
The agreements governing our other debt contain prohibitions of events,
including those that result in a Change of Control. In addition, your exercise
of your right to require us to repurchase the notes upon a Change of Control
could cause a default under these other agreements, even if the Change of
Control itself does not, because of the financial effect of the repurchases on
our business. Our ability to pay cash to you may be limited by our then
existing financial resources. See "Risk Factors."
Asset Sales
We will not, and will not permit any of our Restricted Subsidiaries to,
complete an Asset Sale unless:
. we or our Restricted Subsidiary receive consideration at the time of the
Asset Sale at least equal to the fair market value of the assets or equity
interests issued or sold or otherwise disposed of;
. the fair market value is determined by our board of directors and evidenced
by a resolution of our board of directors described in an officers'
certificate delivered to the trustee; and
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. at least 85% of the consideration that we or our Restricted Subsidiary
receive is in cash.
For purposes of this clause, each of the following is cash:
. as shown on the most recent balance sheets, other than contingent
liabilities and liabilities that are subordinated to the notes or to any
subsidiary guarantee, any of our or our Restricted Subsidiary's liabilities
that the transferee of the assets assumes under a customary novation
agreement that releases us or our Restricted Subsidiary from further
liability; and
. any securities, notes or other obligations that we or our Restricted
Subsidiary receive and convert into cash, to the extent of the cash received
in that conversion, within 90 days following the closing of the Asset Sale.
Within 180 days after receiving any net proceeds from an Asset Sale, we may
apply any of the net proceeds to:
. repay any indebtedness under our credit facilities to the extent that the
indebtedness is secured by a lien on our assets or equity interests issued,
sold or otherwise disposed of in the Asset Sale;
. acquire all or substantially all of the assets of, or a majority of the
voting stock of, another Permitted Business;
. make a capital expenditure in a Permitted Business; or
. acquire other long-term assets that are used or useful in a Permitted
Business.
Pending the final application of the net proceeds, we may reduce revolving
credit borrowings temporarily or otherwise invest the net proceeds in any way
not prohibited by the indenture.
All net proceeds from Asset Sales that are not applied or invested will be
excess proceeds. When the aggregate amount of excess proceeds exceeds $5.0
million, we will make an asset sale offer to you and to all holders of other
indebtedness that is equal in rank with the notes and that is covered by
similar provisions regarding offers to repurchase with the proceeds of asset
sales.
The offer price in any asset sale offer will be 100% of principal amount, plus
accrued and unpaid interest, and any liquidated damages under the indenture to
the date of purchase, and will be payable in cash. If any excess proceeds
remain after completion of an asset sale offer, we may use the remaining excess
proceeds for any purpose not prohibited by the indenture. If the aggregate
principal amount of the notes and other debt that is equal in rank tendered in
the asset sale offer exceeds the amount of excess proceeds, the trustee will
select the notes and other debt to be purchased on a pro rata basis based on
the principal amount of the notes and other debt tendered. Upon completion of
each asset sale offer, the amount of excess proceeds shall be reset at zero.
We will comply with the requirements of Rule 14e-1 under the Securities
Exchange Act of 1934 and any other securities laws and regulations. If the
provisions of any securities laws or regulations conflict with the asset sales
provisions of the indenture, we will follow the applicable securities laws and
regulations. In following the law, we will not be deemed to have breached our
obligations under the indenture.
The agreements governing our other indebtedness contain prohibitions of events,
including those that result in an Asset Sale. In addition, your exercise of
your right to require us to repurchase the notes upon the occurrence of an
Asset Sale could cause a default under these other agreements, even if the
Asset Sale itself does not, because of the financial effect of the repurchases
on us. Our ability to pay cash to you may be limited by our then existing
financial resources.
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Selection and Notice
If not all of the notes are to be redeemed at one time, the trustee will choose
notes for redemption:
. following the requirements of the principal national securities exchange on
which the notes are listed; or
. if the notes are not listed, on a pro rata basis, by lot or by any other
method that the trustee believes is fair and appropriate.
Redemption notices will be mailed to you by first class mail 30 to 60 days
before the redemption date at your registered address. Redemption notices
cannot contain conditions.
Notes or portions of notes must be redeemed in amounts or multiples of $1,000
unless all of your notes are being redeemed.
If the trustee chooses to redeem one of your notes in part only, the redemption
notice relating to that note will state the portion of the principal amount
being redeemed. A new note in a principal amount of the unredeemed portion of
the original note will be issued in your name when the original note is
canceled. Notes that the trustee calls for redemption are due on the redemption
date. On and after the redemption date, interest stops accruing on the notes,
or portion of the notes, that are redeemed.
Covenants
Restricted Payments
We will not, and will not permit any of our Restricted Subsidiaries to:
. declare or pay any dividend, or make any other payment or distribution, on
the equity interests of G+G Retail or of any of our Restricted Subsidiaries
or to the holders of the equity interests of G+G Retail or of any of our
Restricted Subsidiaries, other than dividends or distributions payable in
equity interests, besides Disqualified Stock;
. purchase, redeem or otherwise acquire or retire for value any equity
interests of G+G Retail or Holdings;
. make any payment on, or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any indebtedness that is subordinated
to the notes or the subsidiary guarantees, except a payment of interest or
principal at the Stated Maturity; or
. make any Restricted Investment;
unless, at the time of and after giving effect to a restricted payment:
. no default or event of default under the indenture has occurred and is
continuing, or would occur as a consequence;
. at the time of the restricted payment, and after giving pro forma effect as
if the restricted payment had been made at the beginning of the applicable
four-quarter period, we would have been permitted to incur at least $1.00 of
additional indebtedness under the Fixed Charge Coverage Ratio test; and
. the restricted payment, combined with all other restricted payments made by
us and our Restricted Subsidiaries after the date of the indenture,
excluding Restricted Payments permitted by the second, third and fourth
clauses of the following paragraph, is less than the sum, without
duplication, of:
. 50% of our Consolidated Net Income for the period stretching from the
beginning of the first fiscal quarter that begins after the date of the
indenture to the end of the most recently ended fiscal quarter at the
time of the restricted payment or, if our Consolidated Net Income for
that period is a deficit, less 100% of the deficit; plus
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. 100% of the total net cash proceeds:
. that we have received since the date of the indenture as a contribution
to our common equity capital; or
. from the issue or sale of our equity interests, other than Disqualified
Stock, or of our convertible or exchangeable Disqualified Stock or
convertible or exchangeable debt securities that have been converted
into or exchanged for the equity interests, other than equity interests
or Disqualified Stock or debt securities sold to one of our
subsidiaries; plus
. to the extent that any Restricted Investment made after the date of the
indenture is sold for cash, or otherwise liquidated or repaid for cash, the
lesser of:
. the cash return of capital on the Restricted Investment, less the cost
of disposition, if any; and
. the initial amount of the Restricted Investment; plus
. in the event that any Unrestricted Subsidiary is designated as a Restricted
Subsidiary, the lesser of:
. the total fair market value of all outstanding Investments that we and
our Restricted Subsidiaries own in the subsidiary at the time of the
designation; or
. the total amount of Restricted Investments made in the Unrestricted
Subsidiary since the date of the indenture.
As long as no default has occurred and is continuing or will result under the
indenture, the above provisions do not prohibit:
. the payment of any dividend within 60 days after the date it is declared, if
the payment would have complied with the indenture on the date that it was
declared;
. the redemption, repurchase, retirement, defeasance or other acquisition of
any of our or of any of our subsidiary guarantor's subordinated indebtedness
or of any of our equity interests in exchange for, or out of the net cash
proceeds of the almost simultaneous sale, other than to one of our
subsidiaries, of our equity interests other than Disqualified Stock;
provided that the amount of any net cash proceeds that are used will be
excluded from the total net proceeds calculation described above;
. the defeasance, redemption, repurchase or other acquisition of our or any of
our subsidiary guarantor's subordinated indebtedness using the net cash
proceeds from incurring Permitted Refinancing Indebtedness;
. the payment of any dividend by one of our Restricted Subsidiaries to the
holders of its common equity interests on a pro rata basis;
. payments to Holdings to enable Holdings to repurchase, redeem or otherwise
acquire or redeem for value any of its equity interests that are held by any
of our or our Restricted Subsidiaries' current or former management or
directors; provided that the aggregate price paid for the equity interests
does not exceed $500,000 in any 12-month period, excluding loans incurred to
finance the purchase of the equity interests that are repaid;
. payments to Holdings to enable Holdings to:
. pay franchise taxes and other fees and expenses necessary to maintain
its corporate existence;
. pay reasonable fees to its directors; and
. perform accounting, legal, corporate reporting and other administrative
functions in the ordinary course of business;
provided that these payments do not exceed $1.0 million in the aggregate; and
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. payments to Holdings to enable Holdings to fund payments under any plan
implemented in the ordinary course of business to compensate our or any of
our Restricted Subsidiaries' management based on the value of the common
stock of Holdings.
The amount of all restricted payments, other than cash, is the fair market
value on the date that the restricted payment of the assets or securities is
transferred or issued to or by us or the Restricted Subsidiary. The relevant
board of directors will determine the fair market value of any assets or
securities that are valued under these provisions and deliver to the trustee
resolutions evidencing the determination. The board of directors must base its
determination on an opinion or appraisal issued by an accounting, appraisal or
investment banking firm of national standing if the fair market value exceeds
$5.0 million.
Incurrence of Debt and Issuance of Preferred Stock
We will not, and will not permit any of our Restricted Subsidiaries to, create,
incur, issue, assume, guarantee or otherwise become liable for any debt.
Additionally, we will not issue any Disqualified Stock and will not permit any
of our Subsidiaries to issue any preferred stock, except that we may incur debt
or issue Disqualified Stock if the Fixed Charge Coverage Ratio for our most
recently ended four full fiscal quarters would have been at least 2.5 to 1,
determined on a pro forma basis as if the additional indebtedness had been
incurred, or Disqualified Stock had been issued, at the beginning of the four-
quarter period.
The above provisions do not prohibit:
. the incurrence by us and our Restricted Subsidiaries of additional debt
under credit facilities in an aggregate principal amount at any one time not
to exceed the lesser of:
. $30.0 million less the aggregate amount of all net proceeds of Asset
Sales that we or any of our Restricted Subsidiaries apply to repay
indebtedness under a credit facility and to effect a corresponding
commitment reduction under the credit facility as described in "--
Repurchase at Your Option--Asset Sales"; and
. the amount of the Borrowing Base as of the date of the incurrence;
. the incurrence by us and our Restricted Subsidiaries of the Existing
Indebtedness;
. the incurrence by us and or subsidiary guarantors of indebtedness
represented by the notes and the subsidiary guarantees;
. the incurrence by us or any of our Restricted Subsidiaries of indebtedness
represented by Capital Lease Obligations, mortgage financings or purchase
money obligations incurred for the purpose of financing all or any part of
the purchase price or cost of construction or improvement of property, plant
or equipment, in an aggregate principal amount not to exceed $5.0 million at
any one time;
. the incurrence by us or any of our Restricted Subsidiaries of indebtedness
represented by Capital Lease Obligations or purchase money obligations
incurred for the purpose of financing all or any part of the purchase price
of point of sale equipment, in an aggregate principal amount not to exceed
$5.0 million;
. the incurrence by us or any of our Subsidiaries of Permitted Refinancing
Indebtedness in exchange for, or the net proceeds of which are used to
refund, refinance or replace indebtedness, other than intercompany
indebtedness, that was permitted by specified provisions of the indenture;
. the incurrence by us or any of our Restricted Subsidiaries of intercompany
indebtedness between or among us and any of our Wholly Owned Restricted
Subsidiaries or a subsidiary guarantor, except that:
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. if we or any of our subsidiary guarantors is the obligor on the
intercompany indebtedness and the obligor is not a guarantor or G+G
Retail, the intercompany indebtedness must be expressly subordinated to
the prior payment in full in cash of all obligations with respect to the
notes, in our case, or the guarantee, in the case of a subsidiary
guarantor; and
. any subsequent issuance or transfer of equity interests that results in
any intercompany indebtedness being held by a person or entity other
than us or one of our Wholly Owned Restricted Subsidiaries or a
subsidiary guarantor or any sale or other transfer of any intercompany
indebtedness to a person or entity that is not G+G Retail or one of our
Wholly Owned Restricted Subsidiaries or a subsidiary guarantor will
constitute an incurrence of the intercompany indebtedness by us or the
Restricted Subsidiary that is not permitted;
. the incurrence by us or any of our Restricted Subsidiaries of Hedging
Obligations that are incurred for the purpose of fixing or hedging:
. interest rate risk with respect to any floating rate indebtedness that
is permitted by the indenture; or
. currency values with respect to transactions that we or a Restricted
Subsidiary enter into in the ordinary course of business;
. the guarantee by us or any of our subsidiary guarantors of our or a
Restricted Subsidiary's debt to the extent that the debt was otherwise
permitted to be incurred by the indenture;
. the accrual of interest, the accretion or amortization of original issue
discount, the payment of interest on any indebtedness in the form of
additional indebtedness with the same terms, and the payment of dividends on
Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock, as long as the amount is included in our Fixed Charges
as accrued;
. the incurrence by us or any of our Restricted Subsidiaries of indebtedness
consisting of performance, bid or advance payment bonds, surety bonds,
custom bonds, utility bonds and similar obligations arising in the ordinary
course of business;
. the incurrence by us or any of our Restricted Subsidiaries of indebtedness
arising from agreements that provide for indemnification, adjustment of
purchase price or similar obligations that are incurred or assumed in
connection with the disposition of any business asset or subsidiary of G+G
Retail, as long as the maximum assumable indebtedness does not exceed at any
time the gross proceeds actually received by us and our Restricted
Subsidiaries in connection with the disposition; and
. the incurrence by us or any of our Restricted Subsidiaries of additional
indebtedness in an aggregate principal amount, or accreted value, at any one
time not to exceed $5.0 million.
We will not incur any indebtedness that is contractually subordinated in right
of payment to any of our other indebtedness, unless the indebtedness is also
contractually subordinated in right of payment to the notes on substantially
identical terms.
For purposes of determining our compliance with this covenant, if an item of
proposed indebtedness meets the criteria of more than one of the categories of
permitted debt described above, or is entitled to be incurred pursuant to the
first paragraph, we will be permitted to classify the item of indebtedness on
the date of its incurrence, or to reclassify later all or a portion of the item
of indebtedness, in any manner that complies with these provisions.
Indebtedness under credit facilities outstanding on the date on which the notes
were first issued and authenticated under the indenture is deemed to have been
incurred on that date.
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Liens
We will not, and will not permit any of our Restricted Subsidiaries to, create,
incur, assume or suffer to exist any lien of any kind on any asset now owned or
that will be acquired, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
We will not, and will not permit any of our Restricted Subsidiaries to, create
or permit to exist or become effective, any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to:
. pay dividends or make any other distributions on its capital stock to us or
any of our Restricted Subsidiaries, or with respect to any other interest or
participation in, or measured by, its profits, or pay any indebtedness owed
to us or any of our Restricted Subsidiaries;
. make loans or advances to us or any of our Restricted Subsidiaries; or
. transfer any of its properties or assets to us or any of our Restricted
Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or due to:
. Existing Indebtedness in effect on the date of the indenture and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings of Existing Indebtedness, as long
as the amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings are not more
restrictive, taken as a whole, with respect to dividend and payment
restrictions than those contained in the Existing Indebtedness in effect on
the date of the indenture;
. the indenture, the notes and the guarantees;
. applicable law;
. any instrument governing indebtedness or capital stock of a person or entity
acquired by us or any of our Restricted Subsidiaries as is in effect at the
time of its acquisition, except to the extent the indebtedness was incurred
in connection with or in contemplation of that acquisition, where the
encumbrance or restriction does not apply to any person or entity, or the
properties or assets of any person or entity, other than the person or
entity acquired, as long as in the case of indebtedness, the indenture
permitted its issuance;
. customary non-assignment provisions in leases and other agreements entered
into in the ordinary course of business and consistent with past practices;
. purchase money obligations for property acquired in the ordinary course of
business that impose restrictions on the acquired property;
. any agreement for the sale or other disposition of a Restricted Subsidiary
that restricts distributions by that Restricted Subsidiary pending its sale
or other disposition;
. Permitted Refinancing Indebtedness, as long as the restrictions contained in
the agreements governing the Permitted Refinancing Indebtedness are no more
restrictive, taken as a whole, than those contained in the agreements
governing the debt being refinanced;
. liens securing indebtedness that limit the debtor's right to dispose of the
assets subject to the lien;
. provisions with respect to the disposition or distribution of assets or
property in joint venture agreements, assets sale agreements, stock sale
agreements and other similar agreements entered into in the ordinary course
of business; or
. restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business.
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Merger, Consolidation or Sale of Assets
We may not:
. consolidate or merge with or into another person or entity; or
. sell, assign, transfer, convey or otherwise dispose of all or substantially
all of the properties or assets of G+G Retail and our Restricted
Subsidiaries taken as a whole, in one or more related transactions, to
another person or entity;
unless:
. either:
. we are the surviving corporation; or
. the person or entity, other than G+G Retail, formed by or surviving the
consolidation or merger, other than G+G Retail, or to which the sale,
assignment, transfer, conveyance or other disposition will be made is a
corporation organized or existing under the laws of the United States,
or any state thereof or the District of Columbia;
. the person or entity formed by or surviving the consolidation or merger, if
other than G+G Retail, or to which the sale, assignment, transfer,
conveyance or other disposition will be made, assumes all of our obligations
under the notes, the indenture and the registration rights agreement under
agreements reasonably satisfactory to the trustee;
. immediately after the transaction, no default or event of default exists
under the indenture; and
. we or the person or entity formed by or surviving the consolidation or
merger, if other than G+G Retail, or to which the sale, assignment,
transfer, conveyance or other disposition shall have been made, will:
. have a Consolidated Net Worth immediately after the transaction equal to
or greater than our Consolidated Net Worth immediately preceding the
transaction; and
. on the date of the transaction, after giving pro forma effect to the
transaction and to any related financing transactions as if the same had
occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional indebtedness pursuant to
the Fixed Charge Coverage Ratio test.
In addition, we may not lease all or substantially all of our properties or
assets to any other person or entity. These provisions do not apply to a sale,
assignment, transfer, conveyance, lease or other disposition of assets between
or among us and any of our Wholly Owned Restricted Subsidiaries.
Transactions with Affiliates
We will not, and will not permit any of our Restricted Subsidiaries to:
. make any payment to, or sell, lease, transfer or otherwise dispose of any of
our properties or assets to any of our Affiliates;
. purchase any property or assets from any of our Affiliates; or
. enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
of our Affiliates;
unless:
. the transaction is on terms that are no less favorable to us or the
Restricted Subsidiary than terms that would be obtained in a comparable
transaction with an unrelated person or entity; and
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. we deliver to the trustee:
. if the transaction or series of related transactions involves an
aggregate consideration of more than $1.0 million, a resolution of the
relevant board of directors set forth in an officers' certificate
certifying that the transaction complies with these provisions and that
the transaction has been approved by a majority of the disinterested
members of the board of directors; or
. if the transaction or series of related transactions involves an
aggregate consideration of more than $5.0 million, an opinion as to the
fairness of the transactions to noteholders from a financial point of
view that is issued by an accounting, appraisal or investment banking
firm of national standing.
The following items are not deemed to be transactions with Affiliates and,
therefore, will not be subject to the provisions of the prior paragraph:
. any employment agreement entered into by us or any of our Restricted
Subsidiaries in the ordinary course of business and consistent with past
practice;
. any consulting, advisory or management agreement entered into by us or any
of our Restricted Subsidiaries, as long as the aggregate compensation paid
to Affiliates of ours, our Restricted Subsidiaries or Related Parties under
all of the agreements, but excluding our consulting agreement with Jay
Galin, does not exceed $500,000 in any 12-month period;
. transactions between or among us or our Restricted Subsidiaries;
. agreements in effect on the date of the indenture and any modification to
those agreements or any transaction contemplated by them in any replacement
agreement, as long as any modification or replacement is no more
disadvantageous to you in any material respect than the original agreement
as in effect on the date of the indenture;
. our consulting agreement with Jay Galin;
. payments to Holdings to enable Holdings to pay, and payments by us or any of
our Restricted Subsidiaries of, fees and compensation paid to, and indemnity
provided on behalf of, the respective officers, directors, employees or
consultants for their service to us or our Restricted Subsidiaries;
. sales of equity interests, other than Disqualified Stock, to our Affiliates;
and
. restricted payments that are permitted by the indenture as described in "--
Restricted Payments."
Additional Subsidiary Guarantees
If we or any of our Restricted Subsidiaries acquire or create another domestic
Restricted Subsidiary after the date of the indenture, then within ten business
days of the date on which it was acquired or created that newly acquired or
created Restricted Subsidiary must:
. become a subsidiary guarantor; and
. execute a supplemental indenture and deliver an opinion of counsel to the
trustee.
If any subsidiary that is not a subsidiary guarantor guarantees our or a
subsidiary guarantor's debt, we will cause that subsidiary to execute and
deliver a supplemental indenture under which it will guarantee the payment of
the notes.
Designation of Restricted and Unrestricted Subsidiaries
Our board of directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a default under the
indenture.
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If a Restricted Subsidiary is designated as an Unrestricted Subsidiary, the
total fair market value of all outstanding investments owned by us and our
Restricted Subsidiaries in the designated subsidiary will be deemed an
investment made at the time of the designation. As a result, we at our option
will reduce either:
. the amount available for restricted dividend payments as described in "--
Restricted Payments"; or
. the amount available for future Permitted Investments.
The designation will only be permitted if the investment would be permitted at
that time and if the Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary.
Our board of directors may redesignate any Unrestricted Subsidiary to be a
Restricted Subsidiary if the redesignation would not cause a default under the
indenture. Within ten business days of the designation date, any subsidiary
that our board of directors designates as a Restricted Subsidiary must:
. become a subsidiary guarantor;
. execute a supplemental indenture; and
. deliver an opinion of counsel to the trustee.
Sale and Leaseback Transactions
We will not, and will not permit any of our Restricted Subsidiaries to, enter
into any sale and leaseback transaction unless:
. we or the Restricted Subsidiary could have incurred indebtedness in the
amount of the Attributable Debt relating to the sale and leaseback
transaction under the Fixed Charge Coverage Ratio test;
. the gross cash proceeds of the sale and leaseback transaction are at least
equal to the fair market value of the property that is the subject of the
sale and leaseback transaction, as determined in good faith by the relevant
board of directors and set forth in an officers' certificate delivered to
the trustee; and
. the transfer of assets in the sale and leaseback transaction is permitted
by, and we apply the proceeds of, the transaction as described in "--
Repurchase at Your Option--Asset Sales."
Limitation on Issuances and Sales of Equity Interests in Wholly Owned
Restricted Subsidiaries
We will not, and will not permit any of our Restricted Subsidiaries to,
transfer, convey, sell, lease or otherwise dispose of any equity interests in
any of our Wholly Owned Restricted Subsidiaries to any person or entity, other
than to us or one of our Wholly Owned Restricted Subsidiaries, unless:
. the transfer, conveyance, sale, lease or other disposition is of all the
equity interests in the Wholly Owned Restricted Subsidiary or, if not, then
the transfer, conveyance, sale, lease or other disposition is made in
compliance with the provisions described in "--Restricted Payments"; and
. the cash net proceeds are applied as described in "--Repurchase at Your
Option--Asset Sales."
In addition, we will not permit any of our Wholly Owned Restricted Subsidiaries
to issue any equity interests, other than shares of its capital stock that are
qualifying shares of directors, to any person or entity other than us or one of
our Wholly Owned Restricted Subsidiaries.
Business Activities
We will not, and will not permit any of subsidiary to, engage in any business
other than Permitted Businesses, except where immaterial to us and our
Restricted Subsidiaries taken as a whole.
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Payments for Consent
We will not, and will not permit any of our Restricted Subsidiaries to, pay or
cause to be paid any consideration to noteholders or for the benefit of
noteholders in order to induce noteholders to consent to, waive or amend any of
the terms or provisions of the indenture or the notes, unless the consideration
is offered to be paid to all holders that consent, waive or agree to amend in
the time frame stated in the solicitation documents for your consent, waiver or
agreement.
Reports
As long as any notes are outstanding, we will provide to you the following:
. all quarterly and annual financial information required by Forms 10-Q and
10-K; and
. all current reports that reporting companies are required to file on Form 8-
K.
After this exchange offer is consummated, we will:
. even if not required by the SEC, file with the SEC a copy, unless the SEC
will not accept a filing of this type, of all of the information and reports
required by Forms 10-Q, 10-K and 8-K; and
. provide this information to securities analysts and prospective investors at
their request.
Additionally, we and our subsidiary guarantors will provide to you, and to
securities analysts and prospective investors upon their request, the
information required to be delivered by Rule 144A(d)(4) under the Securities
Act of 1933.
Events of Default and Remedies
Each of the following is an event of default:
. default for 30 days in the payment when due of interest on, or any
liquidated damages under the indenture with respect to, the notes;
. default in payment when due of the principal of, or any premium on the
notes;
. failure by us or any of our Restricted Subsidiaries to comply with any of
the provisions described in "--Repurchase at Your Option," "--Covenants--
Restricted Payments," "--Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock" or "--Covenants--Merger, Consolidation or Sale of
Assets";
. failure by us or any of our Significant Subsidiaries for 60 days after
notice from the trustee, or holders of at least 25% in principal amount of
the notes then outstanding, to comply with any other covenant,
representation, warranty or other agreement in the indenture;
. default under any mortgage, indenture or instrument under which there may
be issued, or by which there may be secured or evidenced, any indebtedness
for money borrowed by us or any of our Significant Subsidiaries, or the
payment of which is guaranteed by us or any of our Significant
Subsidiaries, whether the indebtedness or guarantee now exists or is
created after the date of the indenture, if that default:
. is caused by a failure to pay principal of, or interest or premium on,
the indebtedness within the grace period provided in the indebtedness;
or
. results in the acceleration of the indebtedness before its express
maturity;
as long as, in each case of payment default, the principal amount of the
indebtedness, together with the principal amount of any other indebtedness
under which there has been a payment default or the maturity of which has
been so accelerated, aggregates $5.0 million or more;
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. failure by us or any of our Significant Subsidiaries to pay final judgments
totaling more than $5.0 million;
. except as permitted by the indenture, if any guarantee that is held to be
unenforceable or invalid in any judicial proceeding ceases to be in full
force and effect for any reason, or any subsidiary guarantor, or any person
or entity acting on behalf of any subsidiary guarantor, denies or
disaffirms its obligations under its guarantee; or
. some events of bankruptcy or insolvency occur with respect to us or any of
our Significant Subsidiaries, or any group of subsidiaries that, taken as a
whole, would constitute a Significant Subsidiary.
In the case of an event of default due to bankruptcy or insolvency with respect
to us, any of our Significant Subsidiaries or any group of our subsidiaries
that together would constitute a Significant Subsidiary, all outstanding notes
will become due and payable immediately without any further action or notice.
If any other event of default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then outstanding notes may
declare all the notes to be due and payable immediately.
You may not enforce the indenture or the notes except as provided in the
indenture. However, subject to several limitations, holders of a majority in
principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power.
The trustee may withhold from holders notice of any continuing default or event
of default under the indenture, except a default or event of default relating
to the payment of principal, premium or interest on any note, if the trustee
determines in good faith that withholding notice is in the holders' interest.
The holders of a majority in aggregate principal amount of the outstanding
notes, by giving notice to the trustee on behalf of the holders of all of the
notes, may waive any existing default or event of default and its consequences
under the indenture, except a continuing default or event of default in the
payment of the principal of, or premium and any liquidated damages under the
indenture or interest on, the notes.
If any event of default occurs because of any willful action or inaction taken
or not taken by us or on our behalf with the intent to avoid payment of the
premium that we would have had to pay if we then had elected to redeem the
notes under the indenture, then an equivalent premium will also become
immediately due and payable to the extent permitted by law upon the
acceleration of the notes.
If an event of default occurs before May 15, 2003 due to any willful action or
inaction as above taken or not taken to avoid the prohibition on redemption of
the notes before May 15, 2003, then additional premium specified in the
indenture will become due and payable to the extent permitted by law upon the
acceleration of the notes.
We are required to deliver to the trustee annually a statement regarding
compliance with the indenture. If we become aware of any default or event of
default under the indenture, we are required to deliver to the trustee a
statement specifying the default or event of default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of G+G Retail or
any subsidiary guarantor will be liable for:
. any obligations of G+G Retail or the subsidiary guarantors under the notes,
the indenture or the guarantees; or
. for any claim based on, in respect of, or by reason of, the notes or
guarantees or their creation.
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By accepting a note, you waive and release all personal liability as described
above. The waiver and release are part of the consideration for issuance of the
notes. However, the waiver may not be effective to waive liabilities under the
federal securities laws.
Legal Defeasance and Covenant Defeasance
Legal Defeasance
We may, at our option and at any time, elect to have our obligations discharged
with respect to all of the notes, and subsidiary guarantors' obligations
discharged with respect to their respective guarantees, except for:
. your right to receive payments of the principal of, any premium and interest
and any liquidated damages under the indenture on, your notes when these
payments are due solely from the defeasance trust described below;
. our obligations with respect to the notes concerning the issuance of
temporary notes, the transfer and registration of notes, the replacement of
mutilated, destroyed, lost or stolen notes and the maintenance of an office
or agency in New York, New York where notes may be surrendered for transfer
or exchange and where notices and demands may be served;
. the rights, powers, trusts, duties and immunities of the trustee, and our
obligations in connection with the trustee; and
. the legal and covenant defeasance provisions of the indenture.
Covenant Defeasance
In addition, we may, at our option and at any time, elect to be and to have our
subsidiary guarantors released from our obligations under some of the covenants
that are described in the indenture. After our election, any omission to comply
with those covenants that are released will not constitute a default or event
of default under the indenture with respect to the notes and guarantees. As a
result, if covenant defeasance occurs, some events other than non-payment,
bankruptcy, receivership, rehabilitation and insolvency events will no longer
constitute an event of default.
Exercise of Legal Defeasance and Covenant Defeasance
In order to exercise either legal defeasance or covenant defeasance:
. we will irrevocably deposit with the trustee, in trust, for the benefit of
the noteholders, cash in United States dollars, non-callable government
securities, or a combination of the two, in an amount that will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, or interest and premium and any
liquidated damages under the indenture on, the outstanding notes on the
stated payment date or the applicable redemption date, as the case may be,
and we must specify whether the notes are being defeased to maturity or to a
particular redemption date;
. in the case of legal defeasance, we will deliver to the trustee an opinion
of counsel reasonably acceptable to the trustee confirming that:
. a ruling has been received from or published by the Internal Revenue
Service; or
. since the date of the indenture, there has been a change in the
applicable federal income tax law;
in either case to the effect that:
. noteholders will not recognize income, gain or loss for federal income
tax purposes as a result of the legal defeasance; and
. noteholders will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
the legal defeasance had not occurred;
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. in the case of covenant defeasance, we will deliver to the trustee an
opinion of counsel reasonably acceptable to the trustee confirming that:
. noteholders will not recognize income, gain or loss for federal income
tax purposes as a result of the covenant defeasance; and
. noteholders will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
the covenant defeasance had not occurred;
. no default or event of default under the indenture will have occurred and be
continuing either:
. on the date of the deposit, other than a default or event of default
under the indenture resulting from the borrowing of funds to be applied
to the deposit; or
. insofar as events of default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the
date of deposit;
. the legal defeasance or covenant defeasance will not result in a breach or
violation of, or constitute a default under any material agreement or
instrument to which we or any of our subsidiaries are a party or by which we
or any of our subsidiaries are bound;
. we will deliver to the trustee an opinion of counsel to the effect that,
assuming:
. no intervening bankruptcy of our business or any of our subsidiary
guarantors between the date of deposit and the 91st day following the
deposit; and
. that no holder is an "insider" of our business under applicable
bankruptcy law;
after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
. we will deliver to the trustee an officers' certificate stating that the
deposit was not made by us with the intent of preferring noteholders over
our other creditors with the intent of defeating, hindering, delaying or
defrauding our creditors or other persons or entities; and
. we must deliver to the trustee an officers' certificate and an opinion of
counsel, each stating that all conditions to the legal defeasance or the
covenant defeasance are satisfied.
Amendment, Supplement and Waiver
Except as provided in the following paragraphs:
. the indenture and the notes may be amended or supplemented with the consent
of the holders of at least a majority in principal amount of the notes then
outstanding; and
. with some exceptions, any existing default or event of default, or
compliance with any provision of the indenture or the notes, may be waived
with the consent of the holders of a majority in principal amount of the
then outstanding notes.
Without the consent of each holder affected, an amendment or waiver may not,
with respect to any notes held by a non-consenting holder:
. reduce the principal amount of notes whose holders must consent to an
amendment, supplement or waiver;
. with some exceptions, reduce the principal or change the fixed maturity of
any note or alter the provisions with respect to the redemption of the
notes, other than the provisions described in "--Repurchase at Your Option";
. reduce the rate of or change the time for payment of interest on any note;
. waive a default or event of default in the payment of the principal of, or
interest and premium and any liquidated damages under the indenture on, the
notes, except a rescission of acceleration of the notes by the holders of at
least a majority in aggregate principal amount of the notes and a waiver of
the payment default that resulted from the acceleration;
. make any note payable in money other than that stated in the notes;
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. make any change in the provisions of the indenture relating to waivers of
past defaults or the rights of holders of notes to receive payments of
principal of, or interest or premium or any liquidated damages under the
indenture on the notes;
. waive a redemption payment with respect to any note, other than a required
payment described in "--Repurchase at Your Option";
. release any subsidiary guarantor from any of its obligations under its
guarantee or the indenture, except according to the terms of the indenture;
or
. make any change in:
. the above amendment and waiver provisions;
. the right of the holders of at least a majority in aggregate principal
amount of the notes to waive a default or event of default and its
consequences under the indenture; or
. your right to receive payment of principal, premium and any liquidated
damages and interest on your note on or after the due dates expressed in
your note or to bring suit to enforce any payment on or after its due
date.
Notwithstanding the above, without the consent of any holder, we, our
subsidiary guarantors and the trustee may amend or supplement the indenture or
the notes:
. to cure any ambiguity, defect or inconsistency;
. to provide for uncertificated notes in addition to, or in place of,
certificated notes;
. to provide for the assumption of our obligations to holders by our
successor, in the case of a merger or consolidation or sale of all or
substantially all of our assets;
. to make any change that would provide any additional rights or benefits to
the holders or that does not adversely affect the holders' legal rights
under the indenture; or
. to comply with requirements of the SEC in order to effect or maintain the
qualification of the indenture under the Trust Indenture Act of 1939.
Concerning the Trustee
If the trustee becomes a creditor of G+G Retail or any of our subsidiary
guarantors, the indenture limits some rights of the trustee to obtain payment
of claims or to realize on some property received in respect of any claims as
security or otherwise. The trustee will be permitted to engage in other
transactions. If, however, the trustee acquires any conflicting interest, it
must:
. eliminate the conflict within 90 days;
. apply to the SEC for permission to continue; or
. resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
limited exceptions. In case an event of default occurs and continues, the
trustee must use the degree of care of a prudent man in the conduct of his own
affairs. Subject to the prudent man standard, the trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request of any holder, unless the holder has offered to the trustee reasonable
security and indemnity against any loss, liability or expense.
Definitions
The following are summaries of terms defined in the indenture. You should refer
to the indenture for a full definition of all terms used in this prospectus or
the indenture.
"Acquired Debt" means, with respect to any specified person or entity, the
indebtedness:
. of any other person or entity that exists at the time that other person is
merged with or into or became a subsidiary of the specified person or
entity; or
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. secured by a lien on any asset acquired by the specified person or entity.
"Affiliate" of any specified person or entity means any other person or entity
controlling or controlled by, or under direct or indirect common control with,
the specified person or entity. For purposes of this definition, "control"
means having the power to direct the management or policies of the other person
or entity. Beneficial ownership of 10% or more of the voting stock of a person
or entity is deemed control.
"Asset Sale" means:
. the sale, lease, conveyance or other disposition of any assets or rights,
other than sales of inventory in the ordinary course of business consistent
with past practices, as long as the sale, conveyance or other disposition of
all or substantially all of our and our Restricted Subsidiaries' assets
taken as a whole is governed by the provisions of the indenture described in
"--Repurchase at Your Option--Change of Control" or "--Covenants--Merger,
Consolidation or Sale of Assets"; and
. the issuance of equity interests in any of our Restricted Subsidiaries or
the sale of equity interests in any of our subsidiaries.
The following are not Asset Sales:
. any single transaction or series of related transactions that involves
assets having a fair market value of less than $1.0 million;
. a transfer of assets between or among us and any of our Wholly Owned
Restricted Subsidiaries;
. an issuance of equity interests by a Wholly Owned Restricted Subsidiary to
us or to another Wholly Owned Restricted Subsidiary;
. the sale or lease of equipment, inventory, accounts receivable or other
assets in the ordinary course of business;
. the sale or other disposition of cash or Cash Equivalents;
. a restricted payment or Permitted Investment as described in "--Covenants--
Restricted Payments"; and
. the sale and leaseback of any assets within 90 days of the acquisition of
the assets.
"Attributable Debt" means, in a sale and leaseback transaction, the present
value of the lessee's obligation for net rental payments during the remaining
term of the lease included in the sale and leaseback transaction, including any
extension period. Present value will be calculated using a discount rate equal
to the rate of interest that is implied in the transaction. All rates will be
determined in accordance with generally accepted accounting principles (known
as GAAP).
"Borrowing Base" means, as of any date, an amount equal to 85%, or 90% for
July, August, October and November, of the book value of all inventory that we
owned at the end of the most recent fiscal quarter preceding that date.
"Capital Lease Obligation" means the amount of the liability on a capital lease
that would be required at that time to be capitalized on a balance sheet in
accordance with GAAP.
"Cash Equivalents" means:
. United States dollars;
. securities issued, or directly and fully guaranteed or insured, by the
United States government or any of its agencies or instrumentalities that
mature within one year of the acquisition date, as long as the full faith
and credit of the United States is pledged;
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. certificates of deposit and Eurodollar time deposits that mature within six
months of the acquisition date, bankers' acceptances that mature within one
year and overnight bank deposits with any lender in our revolving credit
facility or with any qualifying domestic commercial bank;
. repurchase obligations with at most a seven-day term for underlying
securities of the types described in the above clauses, entered into with
any qualifying financial institution;
. commercial paper that has the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Rating Services and that
matures within 270 days after the date on which it is acquired; and
. money market funds of which at least 95% of the assets are otherwise Cash
Equivalents.
"Change of Control" means any of the following events:
. the sale, transfer, conveyance or other disposition, excluding mergers and
consolidations, of all or substantially all of our or our Restricted
Subsidiaries' properties or assets as a whole to any "person" or "group," as
these terms are used in Section 13(d)(3) of the Securities Exchange Act of
1934, other than the Principals and the Related Parties;
. the adoption of a plan relating to our liquidation or dissolution;
. the consummation of any transaction that results in any "person," as this
term is used in Section 13(d)(3) of the Securities Exchange Act of 1934,
other than the Principals and the Related Parties, becoming the Beneficial
Owner of more than a majority of the voting stock of G+G Retail or Holdings,
measured by voting power rather than number of shares;
. the first day that a majority of the members of the board of directors of
G+G Retail or Holdings are not Continuing Directors; or
. the first day that Holdings no longer owns 100% of the outstanding equity
interests in G+G Retail.
The definition of Change of Control uses the phrase "all or substantially all."
Although there is case law interpreting that phrase, there is no established
definition for it under applicable law. Therefore, your ability to require us
to repurchase the notes in a sale, lease, transfer, conveyance or other
disposition of less than all of our and our subsidiaries' assets taken as a
whole may be uncertain.
"Consolidated Cash Flow" means, with respect to any specified person or entity
for any period, the Consolidated Net Income for the period plus:
. the amount of any extraordinary loss plus any net loss realized by the
person or entity or any of its Restricted Subsidiaries in an Asset Sale, to
the extent that losses were deducted in computing Consolidated Net Income;
. any provision for taxes based on income or profits of the person or entity
and its Restricted Subsidiaries for the period, to the extent that the
provision was deducted in computing Consolidated Net Income;
. the consolidated interest expense of the person or entity and its Restricted
Subsidiaries for the period, to the extent that the expense was deducted in
computing Consolidated Net Income; and
. any depreciation, amortization and other non-cash expenses of the person or
entity and its Restricted Subsidiaries for the period, to the extent that
the depreciation, amortization and other non-cash expenses were deducted in
computing the Consolidated Net Income;
minus any non-cash items that increase the Consolidated Net Income for the
period, other than the accrual of revenue in the ordinary course of business.
All calculations will be made on a consolidated basis and determined in
accordance with GAAP.
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"Consolidated Net Income" means, with respect to any specified person or entity
for any period, the total net income of the person or entity and its Restricted
Subsidiaries for the period on a consolidated basis and determined in
accordance with GAAP; as long as:
. the net income, but not loss, of any person or entity that is not a
Restricted Subsidiary, or that is accounted for by the equity method of
accounting, will be included only to the extent of the dividends or
distributions paid in cash to the specified person or entity or its Wholly
Owned Restricted Subsidiary;
. the net income of any Restricted Subsidiary will be excluded to the extent
that the payment of dividends or similar distributions by that Restricted
Subsidiary of the net income is not permitted:
. because the necessary prior governmental approval has not been obtained;
or
. by operation of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation that can be
applied to that Restricted Subsidiary or its stockholders;
. the net income of any person or entity acquired in a pooling of interests
transaction for any period before the acquisition date will be excluded;
. the cumulative effect of a change in accounting principles, and any
continuing non-cash effect from a change since the date of the indenture
during the time period in which goodwill relating to the acquisition may be
amortized, will be excluded; and
. the net income of any Unrestricted Subsidiary will be excluded.
"Consolidated Net Worth" means, with respect to any specified person or entity
on any date, the sum of:
. the consolidated equity of the common stockholders of the person or entity
and its consolidated subsidiaries as of that date; and
. the amounts reported on the balance sheet of the person or entity as of that
date for any series of preferred stock, other than Disqualified Stock, that
is not entitled to dividend payments, unless the dividends are declared and
paid only out of net earnings in the year of the declaration and payment,
but only for cash received by the person or entity when the preferred stock
is issued.
"Continuing Directors" means any member of the board of directors of G+G Retail
or Holdings who:
. was a member of the board of directors on the date of the indenture; or
. was nominated for election or elected to the board of directors with the
approval of either:
. a majority of the board of directors who were members of that board
either:
. on the date of the indenture; or
. at the time of the nomination or election; or
. one or more Principals and Related Parties as long as:
. the Principals, together with the Related Parties, beneficially own
at least 35% of our outstanding voting stock; and
. no other person or entity or group, other than the Principals and the
Related Parties, beneficially owns more voting stock of Holdings than
the Principals and the Related Parties.
"Disqualified Stock" means any capital stock that matures or is mandatorily
redeemable, or redeemable at the option of the holder, within 91 days of the
maturity date. However, any capital stock that is Disqualified Stock only
because the holder has the right to require us to repurchase the capital stock
upon a Change of Control or an Asset Sale is not Disqualified Stock if the
terms of the capital stock provide that we may not repurchase or redeem the
capital stock unless we comply as described in "--Covenants--Restricted
Payments."
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"Existing Indebtedness" means our and our subsidiaries' debt, other than debt
under the revolving credit facility, that existed on the date of the indenture.
"Fixed Charge Coverage Ratio" means, with respect to any specified person or
entity for any period, the ratio of the Consolidated Cash Flow of the person or
entity and its Restricted Subsidiaries to the Fixed Charges of the person or
entity and its Restricted Subsidiaries. If the specified person or entity or
any of its Restricted Subsidiaries:
. incurs, assumes, guarantees, repays, repurchases or redeems any
indebtedness, other than ordinary working capital borrowings; or
. issues, repurchases or redeems preferred stock after the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated and on
or before the date of the event for which the calculation of the Fixed
Charge Coverage Ratio is made;
then the Fixed Charge Coverage Ratio will be calculated giving pro forma effect
to the transaction and the use of the proceeds as if the transaction had
occurred at the beginning of the four-quarter reference period.
"Fixed Charges" means, with respect to any specified person or entity for any
period, the sum, without duplication, of:
. the consolidated interest expense of the person or entity and its Restricted
Subsidiaries for the period, and net of all payments made or received under
Hedging Obligations;
. the consolidated interest of the person or entity and its Restricted
Subsidiaries that was capitalized during the period;
. any interest expense on indebtedness of another person or entity that is
guaranteed by that person or entity or one of its Restricted Subsidiaries,
or secured by a lien on assets of that person or entity or one of its
Restricted Subsidiaries; and
. the amount of:
. all dividends on any series of preferred stock of the person or entity
or any of its Restricted Subsidiaries, other than dividends on equity
interests paid in our equity interests besides Disqualified Stock or
paid to us or one of our Restricted Subsidiaries; times
. a fraction, the numerator of which is one and the denominator of which
is the then current combined federal, state and local statutory tax
rate, expressed as a decimal.
"Hedging Obligations" means, with respect to any specified person or entity,
the obligations of the person or entity under:
. interest rate swap agreements, interest rate cap agreements, interest rate
collar agreements, foreign exchange contracts and currency swap agreements;
and
. other agreements or arrangements designed to protect the person or entity
against fluctuations in interest rates and/or currency values.
"Investments" means, with respect to any person or entity, all investments by
the person or entity in other persons or entities in the form of loans,
advances or capital contributions, purchases or other acquisitions and all
items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP. If we or any of our Restricted Subsidiaries
sell or otherwise dispose of any equity interests of any of our subsidiaries so
that, after giving effect to the sale or disposition, either:
. the person or entity is no longer our Restricted Subsidiary; or
. if the subsidiary was a Wholly Owned Subsidiary immediately preceding the
sale or disposition and is no longer a Wholly Owned Subsidiary;
then in each case, we have made an Investment on the date of the sale or
disposition of the fair market value of the equity interests of the subsidiary
not sold or disposed of. The acquisition by us or any of
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our Restricted Subsidiaries of a person or entity that holds an Investment in a
third person or entity will be deemed an Investment.
"Net Income" means, with respect to any specified person or entity, the net
income or loss of the person or entity, calculated before any reduction for
preferred stock dividends, excluding:
. any gain, and any related provision for taxes on the gain, realized on:
.any Asset Sale; or
. the disposition of any securities by, or the extinguishment of any
indebtedness of, the person or entity or any of its Restricted
Subsidiaries; and
. any extraordinary gain and any related provision for taxes on the
extraordinary gain.
"Non-Recourse Debt" means indebtedness:
. for which neither we nor our Restricted Subsidiaries:
. provide credit support of any kind;
. are liable as guarantors; or
. are the lender;
. no default with respect to which would permit upon notice, lapse of time or
both any holder of any of our or our Restricted Subsidiaries' other debt
besides the notes to declare a default on the other debt or cause the
payment of the other debt to be accelerated or payable before its stated
maturity; and
. of which the lenders have been notified in writing that they will have no
recourse.
"Permitted Business" means the business conducted by us and our Restricted
Subsidiaries on the date that the original offering of the notes under the
indenture was closed.
"Permitted Investments" means:
. any Investment in us or in one of our Wholly Owned Restricted Subsidiaries;
. any Investment in Cash Equivalents;
. any Investment by us or any of our Restricted Subsidiaries in a person or
entity, if as a result of the Investment:
. the person or entity becomes one of our Wholly Owned Restricted
Subsidiaries; or
. the person or entity is merged into or consolidated with, transfers
substantially all of its assets to or is liquidated into, us or one of
our Wholly Owned Restricted Subsidiaries;
. any Investment made as a result of receiving non-cash consideration from an
Asset Sale;
. any acquisition of assets solely in exchange for the issuance of our equity
interests, other than Disqualified Stock;
. Hedging Obligations;
. the incurrence by us or any of our Restricted Subsidiaries of performance,
bid or advance payment bonds, surety bonds, custom bonds, utility bonds and
similar obligations arising in the ordinary course of business;
. endorsements of instruments for collection or deposit in the ordinary course
of business;
. loans and advances to employees and officers not to exceed $500,000 total at
any one time that are incurred in the ordinary course of business;
. loans to employees, directors and officers in connection with the purchase
by the persons or entities of equity interests of Holdings, as long as the
cash proceeds of the purchase received by Holdings are contemporaneously
remitted to us by Holdings as a capital contribution;
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. investments in account debtors arising from the bankruptcy or
reorganization, or the settlement of delinquent obligations, of customers;
. existing investments on the date of the indenture; and
. other Investments in any person or entity having a total fair market value,
measured on the date the Investment was made, taken together with all other
Investments made under this clause that are outstanding, not to exceed $5.0
million.
"Permitted Liens" means:
. liens on our and our subsidiary guarantors' assets securing debt and other
obligations under credit facilities permitted by the indenture;
. liens in our and our subsidiary guarantors' favor;
. liens on property of a person or entity existing at the time the person or
entity is merged with or into or consolidated with us or any of our
subsidiaries; as long as the liens were in existence before the
contemplation of the merger or consolidation and do not extend to any assets
other than those of the person or entity;
. liens on property existing at the time that we or any of our subsidiaries
acquired the property as long as the liens were in existence prior to the
contemplation of the acquisition of the property;
. liens to secure the performance of statutory obligations, surety or appeal
bonds, performance bonds or other similar obligations incurred in the
ordinary course of business;
. liens to secure some types of Indebtedness;
. liens existing on the date of the indenture;
. liens for taxes, assessments or governmental charges or claims that are not
yet delinquent or that are being contested in good faith, as long as any
reserve or other appropriate provision required under existing GAAP has been
made;
. zoning restrictions, easements, licenses, covenants and other similar
restrictions and encumbrances affecting the use of real property not
interfering in any material respect with the ordinary conduct of our and our
Restricted Subsidiaries' business;
. judgment liens that will not result in an event of default under the
indenture;
. liens, rights of setoff and credit balances on deposit accounts and other
Cash Equivalents;
. deposits with the owner or lessor of premises leased and operated in the
ordinary course of business;
. nonconsensual liens that do not detract materially from the value or
transferability of our and any of our Restricted Subsidiaries' assets, or
impair materially the use of the assets in the operation of the respective
businesses;
. liens securing Hedging Obligations; and
. liens incurred in the ordinary course of our or our subsidiaries' business
on obligations that do not exceed $5.0 million at any one time.
"Permitted Refinancing Indebtedness" means our or our Restricted Subsidiaries'
debt that is exchanged or issued in order to generate proceeds that can be used
to extend, refinance, renew, replace, defease or refund other indebtedness
besides intercompany debt as long as:
. the principal amount or accreted value of the Permitted Refinancing
Indebtedness does not exceed the principal amount or accreted value of the
refinanced debt;
. the Permitted Refinancing Indebtedness has a final maturity date not earlier
than the final maturity date of, and has a Weighted Average Life to Maturity
equal to or greater than the Weighted Average Life to Maturity of, the
refinanced debt;
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. if the refinanced debt is subordinated in right of payment to the notes,
then the Permitted Refinancing Indebtedness is subordinated in right of
payment to the notes on terms at least as favorable to you as the terms in
the documentation governing the refinanced debt; and
. the debt is incurred either by us or by our subsidiary as the obligor on the
refinanced debt.
"Principals" means:
. each of:
. Pegasus Partners;
. Pegasus Related Partners; and
. Pegasus G&G Retail and Pegasus G&G Retail II for as long as they are
directly or indirectly controlled by or under common control with either
Pegasus Partners or Pegasus Related Partners; and
. Jay Galin and Scott Galin.
"Public Equity Offering" means an underwritten public offering of the capital
stock of Holdings or G+G Retail, other than Disqualified Stock, under a
registration statement filed with the Securities and Exchange Commission, as
long as in the event of a Public Equity Offering by Holdings, Holdings will
contribute to us sufficient net cash proceeds to redeem the notes that must
then be redeemed.
"Related Party" means:
. any controlling general partner or controlling stockholder, at least 80%
owned subsidiary or, in the case of an individual, immediate family members
of any Principal;
. any trust, corporation, partnership or other entity whose beneficiaries,
stockholders, partners, owners or persons or entities beneficially holding
at least an 80% controlling interest consist of Principals or Related
Parties; or
. any controlling general partner or controlling stockholder of any Related
Party described in the first clause or any controlling general partner or
controlling stockholder of those Related Parties.
In addition:
. each of Jay Galin and Scott Galin is a Related Party of the other; and
. each of Pegasus G&G Retail and Pegasus G&G Retail II is a Related Party of
the other.
"Restricted Investment" means an Investment other than a Permitted Investment.
"Restricted Subsidiary" of a person or entity means any subsidiary of the
person or entity that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any subsidiary that is a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X enacted under
the Securities Act of 1933.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of indebtedness, the date that the payment of interest
or principal is scheduled to be made as stated in the documentation governing
the debt.
"Unrestricted Subsidiary" means any of our subsidiaries that is designated by
our board of directors as an Unrestricted Subsidiary pursuant to a board
resolution, but only to the extent that the subsidiary:
. has no indebtedness other than Non-Recourse Debt;
. is not party to any agreement, contract, arrangement or understanding with
us or any of our Restricted Subsidiaries, unless the terms are no less
favorable to us or our Restricted Subsidiary than those that might be
obtained at the time from persons or entities who are not our Affiliates;
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. is a person or entity to which neither we nor any of our Restricted
Subsidiaries owe any obligation:
. to subscribe for additional equity interests; or
. to maintain or preserve the person's or entity's financial condition or
to cause the person or entity to achieve any specified levels of
operating results; and
. has not guaranteed or otherwise provided credit support for any of our or
our Restricted Subsidiaries' indebtedness.
"Weighted Average Life to Maturity" means, when applied to any indebtedness at
any date, the number of years arrived at by dividing:
. the product of:
. the amount of each remaining required payment of principal, including
payment at final maturity; times
. the number of years, calculated to the nearest one-twelfth, that will
elapse between the date and the making of the payment; by
. the then outstanding principal amount of the indebtedness.
"Wholly Owned Restricted Subsidiary" of any specified person or entity means a
Restricted Subsidiary of the person or entity all of whose outstanding capital
stock or other ownership interests, other than directors' qualifying shares,
are owned by the person or entity or by one or more of its Wholly Owned
Restricted Subsidiaries.
Registration Rights Agreement
We and the initial purchasers of the outstanding notes entered into a
registration rights agreement in connection with the private placement. The
registration rights agreement has been filed as an exhibit to the registration
statement of which this prospectus is a part. This description is a summary of
the material terms of the registration rights agreement. It does not restate
the registration rights agreement. Therefore, we urge you to read the
registration rights agreement. Under the registration rights agreement, we
agreed:
. to file with the Securities and Exchange Commission within 90 days after the
outstanding notes were issued a registration statement relating to an
exchange offer for the outstanding notes under the Securities Act of 1933;
and
. to use our reasonable best efforts to cause the registration statement to be
declared effective under the Securities Act of 1933 within 150 days after
the issuance of the outstanding notes.
We are making this exchange offer to satisfy our obligations under the
registration rights agreement.
Under the registration rights agreement, we also agreed to use our reasonable
best efforts to cause the SEC to declare effective a shelf registration
statement regarding the resale of the outstanding notes and to keep that
registration statement effective for at least two years after their issuance,
or until they have all been sold, if:
. applicable law does not permit us to effect this exchange offer;
. any holder of outstanding notes notifies us within 20 business days after
the deadline for completing this exchange offer that law or SEC policy
prohibits the holder from participating in this exchange offer;
. any holder of outstanding notes notifies us within 20 business days after
the deadline for completing this exchange offer that the holder may not
resell the exchange notes to the public without delivering a prospectus, and
this prospectus is not appropriate or available for use in resales by the
holder; or
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. any holder of outstanding notes notifies us within 20 business days after
the deadline for completing this exchange offer that the holder is a broker-
dealer and holds outstanding notes acquired directly from us or any of our
"affiliates," as defined in Rule 144 under the Securities Act of 1933.
We will use our reasonable best efforts to have the SEC declare the
registration statement of which this prospectus is a part or, if applicable,
the shelf registration statement effective as promptly as practicable after the
filing. Unless this exchange offer would not be permitted by an SEC policy, we
will commence this exchange offer and use our reasonable best efforts to
consummate this exchange offer as promptly as practicable, but in any event
within 30 business days of the effective date of the registration statement. If
applicable, we will use our reasonable best efforts to keep the shelf
registration statement effective for a period of at least two years after the
date that the outstanding notes are issued or for a shorter period if all
outstanding notes covered by the shelf registration statement have been sold.
If:
. the applicable registration statement is not filed on or before the date
specified for such filing;
. the SEC Commission does not declare effective either or both of the
registration statements by the target effective date;
. this exchange offer is not consummated within 30 business days of the target
effective date; or
. either or both registration statements filed and declared effective later
ceases to be effective, or fail to be usable for their intended purposes,
during the time that we are obligated to maintain their effectiveness,
without being followed immediately by an effective post-effective amendment
that cures the failure;
then we will be obligated to pay liquidated damages. For the first 90-day
period immediately following the first registration default, the amount of
liquidated damages will be $0.05 per week per $1,000 in principal amount of
outstanding notes that you hold for each week or partial week that the
registration default continues. For each subsequent 90-day period, the amount
of liquidated damages will increase by an additional $0.05 per week per $1,000
in principal amount of outstanding notes until all registration defaults have
been cured, up to a maximum amount of liquidated damages of $0.25 per week per
$1,000 in principal amount of outstanding notes. In no event will we be
required to pay liquidated damages for more than one registration default at
any given time. Liquidated damages payable cease when all registration defaults
are cured.
Under the registration rights agreement, we will:
. make available to broker-dealers for a period of one year after the
consummation of this exchange offer, or a shorter period if all transfer
restricted securities have been sold, a prospectus that meets the
requirements of the Securities Act of 1933 for use in resales of the
exchange notes;
. pay all expenses related to our performance under the registration rights
agreement; and
. reimburse tendering noteholders for reasonable fees and disbursements for
not more than one counsel.
In addition, the holders of notes agree to indemnify each other against
liabilities including those under the Securities Act of 1933.
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BOOK-ENTRY; DELIVERY AND FORM
The notes will be issued only in fully registered form, without interest
coupons, in minimum denominations of $1,000 and integral multiples in excess of
$1,000.
The exchange notes initially will be represented by one or more notes in
registered, global form, referred to as global notes. The global notes will be
deposited upon their issuance with the trustee as custodian for The Depositary
Trust Company, known as DTC, in New York, New York, and registered in the name
of DTC, or its nominee, for credit to an account of a direct or indirect
participant in DTC as described below.
Transfers of beneficial interests in the global notes will be subject to the
applicable rules and procedures of DTC and its direct or indirect participants,
which may change from time to time.
Except as set forth below, the global notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the global notes may not be exchanged for
notes in certificated form except in the limited circumstances described in "--
Exchanges of Book-Entry Notes for Certificated Notes."
Exchanges of Book-Entry Notes for Certificated Notes
A beneficial interest in a global note may not be exchanged for a note in
certificated form unless:
. DTC:
.notifies us that it is unwilling or unable to continue as depositary for
the global note;
. has ceased to be a clearing agency registered under the Securities
Exchange Act of 1934; and
.in either case, we fail to appoint a successor depositary within 90 days;
. at our option, we notify the trustee in writing that we elect to cause the
issuance of the exchange notes in certificated form; or
. there has occurred, and is continuing, an event of default or any event that
after notice or lapse of time or both would be an event of default with
respect to the notes.
In all cases, certificated notes delivered in exchange for any global note or
beneficial interests in any global note will be registered in the names, and
issued in any approved denominations, requested by or on behalf of DTC, in
accordance with its customary procedures.
Book-Entry Procedures For Global Notes
The descriptions of the operations and procedures of DTC that follow are
provided solely as a matter of convenience. These operations and procedures are
solely within the control of DTC and are subject to changes by DTC from time to
time. We take no responsibility for these operations and procedures and urge
investors to contact DTC or its participants directly to discuss these matters.
DTC has advised us as follows:
. DTC is:
.a limited purpose trust company organized under the laws of the State of
New York;
.a member of the Federal Reserve System;
.a "clearing corporation" within the meaning of the Uniform Commercial
Code; and
. a "clearing agency" registered under the provisions of Section 17A of
the Securities Exchange Act of 1934;
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. DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between participants
using electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical transfer and delivery of certificates;
. participants include securities brokers and dealers, banks, trust companies
and clearing corporations and may include other organizations;
. some participants or their representatives together with other entities, own
DTC; and
. indirect access to the DTC system is available to other entities such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
DTC has advised us that its current practice is upon the issuance of a global
note, to credit the respective principal amount of the individual beneficial
interests represented by a global note to
the accounts with DTC of the participants through which interests are to be
held. Ownership of beneficial interests in the global note by participants will
be shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominees. With respect to the interests of
persons other than participants, ownership and transfers of ownership interests
will be shown on and effected through the records of participants and indirect
participants.
As long as DTC or its nominee is the registered holder of a global note, DTC or
its nominee will be considered the sole owner and holder of the notes
represented by the global note for all purposes under the indenture and the
notes. Except in the limited circumstances described in "--Exchanges of Book-
Entry Notes for Certificated Notes," owners of beneficial interests in a global
note will not:
. be entitled to have any portion of that global note registered in their
names;
. receive or be entitled to receive physical delivery of notes in definitive
form; and
. be considered the owners or holders of the global note under the indenture.
Therefore, in order to execise any rights of a holder under the indenture, each
person owning a beneficial interest in the global note must rely on the
procedures of DTC and, if such person is not a participant, the procedures of
the participant through which that person owns his interest.
Investors may hold their interests in the global note directly through DTC if
they are participants, or indirectly through organizations that are
participants. All interests in a global note will be subject to the procedures
and requirements of DTC.
The laws of some states require physical delivery of securities owned in
definitive form. The ability to transfer beneficial interests in a global note
may be limited, because global notes are not represented by physical
certificates. Since DTC can act only on behalf of its participants, which in
turn act on behalf of indirect participants and banks, the lack of a physical
certificate may also adversely affect the ability of a person or entity owning
a beneficial interest in a global note to pledge his interest to non-
participants, or otherwise to take actions in respect of those interests.
Cash payment of the principal of, premium on, interest on, or the redemption or
repurchase of the global note will be made to DTC or its nominee, as the case
may be, as the registered owner of the global note by wire transfer of
immediately available funds on each relevant payment date. Neither we, the
trustee nor any of our or their respective agents will have any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in a global note, including any delay
by DTC or any participant or indirect participant in identifying the beneficial
ownership interests. We and the trustee under the indenture may conclusively
rely on, and will be protected in relying on, instructions from DTC for all
purposes.
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We expect that DTC or its nominee will credit participants' accounts
immediately upon receipt of any cash payment of principal of, or premium or
interest on, or the redemption or repurchase price in respect of, a global note
representing any notes, in amounts proportionate to their respective beneficial
interests in the principal amount of the global note as shown on the records of
DTC or its nominee. We expect that adjustments will be made as necessary so
that such payments are made with respect of whole notes only, unless DTC has
reason to believe that it will not receive payment on the payment date. We also
expect that payments by participants to the owners of beneficial interests in
the global note held through the participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name." These payments will
be the responsibility of those participants.
Redemption notices will be sent to DTC or its nominee. If less than all the
notes are being redeemed, DTC's practice is to determine by lot the amount of
each participant's holdings in the issue to be redeemed.
Neither DTC nor its nominee will consent or vote with respect to the notes. DTC
usually mails an omnibus proxy to the issuer as soon as possible after the
record date. The omnibus proxy assigns consenting or voting rights of DTC or
its nominee to those participants to whose accounts the notes are credited on
the record date. Those participants are identified in a listing attached to the
omnibus proxy.
Interests in the global notes will trade in DTC's Same-Day Funds Settlement
System, and secondary market trading activity in those interests therefore will
settle in immediately available funds, subject in all cases to the rules and
procedures of DTC and its participants. Transfers between participants in DTC
will be effected in accordance with DTC's procedures and will be settled in
same-day funds.
DTC has advised us that it will take any action permitted to be taken by a note
holder, including the presentation of notes for exchange as described below and
the conversion of notes:
. only at the direction of one or more participants to whose account DTC
interests in the global notes are credited; and
. only in respect of the portion of the aggregate principal amount of the
notes that the participant(s) has given direction.
However, if there is an event of default under the notes, DTC reserves the
right to exchange the global notes for notes in certificated form and to
~distribute the notes to its participants.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of beneficial ownership interests in the global note among DTC
participants, it is under no obligation to perform or continue to perform those
procedures, and those procedures may be discontinued at any time.
None of us, the trustee under the indenture nor any of our or their respective
agents will have any responsibility for the performance by DTC, its
participants or indirect participants of their respective obligations under the
rules and procedures governing its operations, including maintaining,
supervising or reviewing the records relating to, or payments made on account
of, beneficial ownership interests in global notes.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of material United States federal income
tax consequences associated with the exchange of the outstanding notes for the
exchange notes in the exchange offer and the ownership and disposition of the
exchange notes. This summary applies to you only if you are a holder of an
outstanding note who acquired an outstanding note from an initial purchaser for
the original offering price and are now acquiring the exchange note in the
exchange offer. This discussion is based on provisions of the Internal Revenue
Code of 1986, Department of Treasury regulations and administrative and
judicial interpretations of the Internal Revenue Code and the regulations, all
as in effect as of the date of this prospectus and all of which are subject to
change, possibly with retroactive effect. This discussion does not address the
tax consequences to subsequent purchasers of the exchange notes and applies to
you only if you hold the exchange note as a capital asset. Your treatment as a
noteholder may vary depending upon your situation. For example, if you are an
insurance company, tax-exempt organization, financial institution, broker-
dealer, are subject to the alternative minimum tax provisions of the Internal
Revenue Code and hold notes as part of a hedge, straddle or other risk
reduction or constructive sale transaction or are a nonresident alien or
foreign corporation subject to net-basis United States federal income tax on
income or gain derived from a note because the income or gain is effectively
connected with the conduct of a United States trade or business, then you may
be subject to special rules not discussed below.
You should consult your tax advisor regarding the particular tax consequences
of your exchange of outstanding notes for exchange notes and the ownership and
disposition of the exchange notes, as well as any tax consequences that may
arise under the laws of any relevant foreign, state, local or other taxing
jurisdiction.
Exchange Offer
The exchange of an outstanding note for an exchange note in the exchange offer
will not constitute a significant modification of the outstanding note for
United States federal income tax purposes. Therefore, the exchange note that
you receive will be treated as a continuation of the outstanding note in your
hands. As a result, there will be no United States federal income tax
consequences to you upon the exchange of an outstanding note for an exchange
note in the exchange offer, and you will have the same adjusted tax basis and
holding period in the exchange note as you had in the outstanding note
immediately before the exchange.
Other Tax Considerations
United States Holders
If you are a "United States Holder," as defined below, this section applies to
you. Otherwise, the next section, "Non-United States Holders," applies to you.
Definition of United States Holder. You are a "United States Holder" if you
hold the notes, and you are:
. a citizen or resident of the United States, including an alien individual
who is a lawful permanent resident of the United States or meets the
"substantial presence" test under Section 7701(b) of the Internal Revenue
Code;
. a corporation or partnership created or organized in the United States or
under the laws of the United States or of any political subdivision of the
United States;
. an estate, the income of which is subject to United States federal income
tax regardless of its source; or
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. a trust, if a United States court can exercise primary supervision over the
administration of the trust and one or more United States persons can
control all substantial decisions of the trust, or if the trust was in
existence on August 20, 1996 and has elected to continue to be treated as a
United States person.
Taxation of Stated Interest. Subject to the discussion below regarding
original issue discount known as OID, you generally must pay federal income tax
on the interest on the notes:
. when it accrues, if you use the accrual method of accounting for United
States federal income tax purposes; or
. when you receive it, if you use the cash method of accounting for United
States federal income tax purposes.
Taxation of Original Issue Discount. The outstanding notes were issued with
original issue discount for federal income tax purposes and therefore the
exchange notes will also have OID for federal income tax purposes. As a result,
you will be required to include OID in gross income for federal income tax
purposes as it accrues in advance of the receipt of cash payments on the notes,
regardless of whether you are a cash or accrual basis taxpayer.
The amount of OID with respect to each note will be the excess of its "stated
redemption price at maturity" over its "issue price." The "issue price" of a
note is equal to the first price at which a substantial amount of the
outstanding notes and warrants to purchase the class D common stock of Holdings
were sold to the public, reduced by the portion of the purchase price allocable
to the warrants. We allocated the purchase price of a unit between the warrant
and the outstanding note based on their relative fair market values. This
allocation is binding upon you, as a United States Holder, unless you disclose
on a statement attached to your income tax return that you are using a
different allocation. The "stated redemption price at maturity" of each note
will include all cash payments required to be made under the notes until and at
maturity other than the stated interest.
The total OID for the period from original issuance of the notes until their
maturity will accrue based on a constant yield to maturity and will be
allocated to each "accrual period." An "accrual period" is each semi-annual
period following the date on which the notes were issued. The OID allocated to
an accrual period will be further apportioned to each day within the accrual
period on a pro rata basis. You are required to include an amount of OID in
income in each taxable year equal to the sum of the "daily portions" of OID for
each day during the taxable year in which you are a holder.
Sale or Other Taxable Disposition of the Notes. You must recognize taxable
gain or loss on the sale, exchange, redemption, retirement or other taxable
disposition of a note. The amount of your gain or loss equals the difference
between the amount you receive for the note (in cash or other property, valued
at fair market value), minus the amount attributable to accrued interest on the
note and your adjusted tax basis in the note. Your initial tax basis in a note
equals the portion of the issue price of the unit allocated to the note and
will be increased by OID previously included in or currently excluded from,
your gross income to the date of any disposition and decreased by any payments,
other than payments of stated interest on the notes.
Your gain or loss will generally be a long-term capital gain or loss if you
have held the note for more than one year. Otherwise, it will be a short-term
capital gain or loss. Payments attributable to accrued interest which you have
not yet included in income will be taxed as ordinary interest income.
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Backup Withholding. You may be subject to a 31% backup withholding tax when
you receive interest payments on a note or proceeds upon the sale or other
disposition of a note. Some holders generally are not subject to backup
withholding. In addition, the 31% backup withholding tax will not apply to you
if you provide your taxpayer identification number, known as TIN, unless:
. the Internal Revenue Service, known as the IRS, notifies us or our agent
that the TIN you provided is incorrect;
. you fail to report interest and dividend payments that you receive on your
tax return and the IRS notifies us or our agent that withholding is
required; or
. you fail to certify under penalties of perjury that you are not subject to
backup withholding.
If the 31% backup withholding tax does apply to you, you may use the amounts
withheld as a refund or credit against your United States federal income tax
liability as long as you provide specified information to the IRS.
Non-United States Holders
Definition of Non-United States Holder. A "Non-United States Holder" is any
person other than a United States Holder. If you are subject to United States
federal income tax on a net basis on income or gain with respect to a note
because the income or gain is effectively connected with the conduct of a
United States trade or business, this disclosure does not cover the United
States federal tax rules that apply to you.
Portfolio Interest Exemption. In general, you will not have to pay United
States federal income tax on interest paid on the notes because of the
"portfolio interest exemption" if either:
. you represent that you are not a United States person for United States
federal income tax purposes and you provide your name and address to us or
our paying agent on a properly executed Internal Revenue Service Form W-8 or
a suitable substitute form signed under penalties of perjury; or
. a securities clearing organization, a bank or other financial institution
that holds customers' securities in the ordinary course of its business
holds the note on your behalf, certifies to us or our agent under penalties
of perjury that it has received Form W-8 or a suitable substitute form from
you, or from another qualifying financial institution intermediary, and
provides a copy to us or our agent.
You will not, however, qualify for the portfolio interest exemption described
above if:
. you own, actually or constructively, 10% or more of the total combined
voting power of all classes of our capital stock;
. you are a controlled foreign corporation of which we are a "related person"
within the meaning of Section 864(d)(4) of the Internal Revenue Code; or
. you are a bank receiving interest described in Section 881(c)(3)(A) of the
Internal Revenue Code.
Withholding Tax if the Interest Is Not Portfolio Interest. If you do not
claim, or do not qualify for, the benefit of the portfolio interest exemption,
you may be subject to a 30% withholding tax on interest payments made on the
notes. However, you may be able to claim the benefit of a reduced withholding
tax rate under an applicable income tax treaty. The required information for
claiming treaty benefits is generally submitted, under current regulations, on
Form 1001. Successor forms will require additional information, as discussed in
"--New Withholding Regulations."
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Reporting. We may report annually to the IRS and to you the amount of
interest paid to, and any tax withheld from, you.
Sale or Other Disposition of the Notes. You will generally not be subject to
United States federal income tax or withholding tax on gain recognized on a
sale, exchange, redemption, retirement, or other disposition of a note. You
may, however, be subject to tax on a gain if:
. you are an individual who was present in the United States for 183 days or
more in the taxable year of the disposition, in which case you may have to
pay a United States federal income tax of 30% (or a reduced treaty rate) on
the gain; or
. you are an individual who is a former citizen or resident of the United
States, your loss of citizenship or residency occurred within the last ten
years (and, if you are a former resident, on or after February 6, 1995) and
one of your principal purposes of losing citizenship or residency is the
avoidance of United States tax, in which case you may be taxed on the net
gain from the sale under the graduated United States federal income tax
rates that are applicable to United States citizens and resident aliens, and
you may be subject to withholding under some circumstances.
United States Federal Estate Taxes. If you qualify for the portfolio interest
exemption under the rules described above at the time of death, the notes will
not be included in your estate for United States federal estate tax purposes.
Backup Withholding and Information Reporting. If you receive payments of
interest or principal directly from us or through the United States office of a
custodian, nominee, agent or broker, there is a possibility that you will be
subject to both backup withholding at a rate of 31% and information reporting.
With respect to interest payments made on a note, however, backup withholding
and information reporting will not apply if you certify, usually on Form W-8 or
a substitute form, that you are not a United States person in the manner
described in "--Portfolio Interest Exemption," as along as the payor does not
have actual knowledge that the payee is a United States person.
Moreover, with respect to proceeds received on the sale, exchange, redemption
or other disposition of a note, backup withholding or information reporting
generally will not apply if you properly provide, usually on Form W-8 or a
substitute form, a statement that you are an "exempt foreign person" for
purposes of the broker reporting rules and other required information. If you
are not subject to United States federal income or withholding tax on the sale
or other disposition of a note, as described in "--Sale or Other Disposition of
the Notes," you generally will qualify as an "exempt foreign person" for
purposes of the broker reporting rules.
If payments of principal or interest are made to you outside the United States
by or through the foreign office of your foreign custodian, nominee or other
agent, or if you receive the proceeds of the sale of a note through a foreign
office of a "broker," as defined in the pertinent Treasury regulations, then
you generally will not be subject to backup withholding or information
reporting. Under new withholding regulations discussed below, however, that
will be effective for payments made after December 31, 2000, you will be
subject to backup withholding and information reporting if the foreign
custodian, nominee, agent or broker has actual knowledge or reason to know that
the payee is a United States person. You will also be subject to information
reporting under the new withholding regulations, but not backup withholding, if
the payment is made by a foreign office of a custodian, nominee, agent or
broker that is a United States person or a controlled foreign corporation for
United States federal income tax purposes, or that derives 50% or more of its
gross income from the conduct of a United States trade or business for a
specified three-year period, unless the broker has in its records documentary
evidence that you are a Non-United States Holder and other conditions are met.
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Any amounts withheld under the backup withholding rules may be refunded or
credited against the Non-United States Holder's United States federal income
tax liability, provided that the required information is furnished to the IRS.
New Withholding Regulations. New regulations relating to withholding tax or
income paid to foreign persons generally will be effective for payments made
after December 31, 2000. The new withholding regulations modify and, in
general, unify the way that you establish your status as a non-United States
"beneficial owner" that is eligible for withholding exemptions, including the
portfolio interest exemption, a reduced treaty rate or an exemption from backup
withholding. For example, the new regulations will require new forms that you
generally will have to provide earlier than you would have had to provide
replacements for existing forms that are expiring.
The new withholding regulations clarify withholding agents' reliance standards.
They also require additional certifications for claiming treaty benefits. The
new withholding regulations also provide different procedures for foreign
intermediaries and flow-through entities (such as foreign partnerships) to
claim the benefit of applicable exemptions on behalf of non-United States
beneficial owners for which they receive payments. Additionally, the new
withholding regulations amend the foreign broker office definition as it
applies to partnerships.
When you exchange your outstanding notes for exchange notes, you will be
required to submit to us certification that complies with current Treasury
regulations in order to obtain an available exemption from or reduction in
withholding tax. The new withholding regulations provide that certifications
satisfying the requirements of the new withholding regulations will be deemed
to satisfy the requirement of the Treasury regulations now in effect. In any
case, you generally will be required to provide certifications that comply with
the provisions of the new withholding regulations, where required, not later
than the earlier of (1) the date after December 31, 1999 on which your
certification is no longer accurate or has expired and (2) December 31, 2000 if
you remain as a holder of the notes on that date, unless you receive payments
on the notes through a qualified intermediary that has provided a proper
certification on your behalf. If you are a Non-United States Holder claiming
benefit under an income tax treaty, and you are not relying on the portfolio
interest exemption with respect to interest payments on the notes, you should
be aware that you may be required to obtain a TIN and to certify your
eligibility under the limitations on benefits article in order to comply with
the certification requirements of the new withholding regulations.
The new withholding regulations are complicated, and this summary does not
completely describe them. Please consult your tax advisor to determine how the
new withholding regulations will affect your particular circumstances.
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PLAN OF DISTRIBUTION
Each broker-dealer that received exchange notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of those exchange notes. This prospectus, as it may be amended
or supplemented, may be used by a broker-dealer in connection with resales of
exchange notes that are received in exchange for outstanding notes only where
the outstanding notes were acquired as a result of market-making activities or
other trading activities. We will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
resale for:
. a period of one year from the date on which we close this exchange offer; or
. any shorter period if all outstanding notes that broker-dealers acquired for
their own accounts as a result of market-making activities or other trading
activities have been exchanged for exchange notes and the exchange notes
have been resold by such broker-dealers.
We will not receive any proceeds from any sale of exchange notes by broker-
dealers. Exchange notes received by broker-dealers for their own account in the
exchange offer may be sold from time to time in one or more transactions:
. in the over-the-counter market, in negotiated transactions, through the
writing of options on the exchange notes, or a combination of those methods
of resale; and
. at market prices prevailing at the time of resale, prices related to such
prevailing market prices or negotiated prices.
Any resale may be made directly to purchasers or to or through other broker-
dealers. Any broker-dealer that resells exchange notes that were received by it
for its own account under the exchange offer, and any other broker-dealer that
participates in a distribution of the exchange notes, may be deemed to be an
"underwriter" within the meaning of the Securities Act of 1933. Therefore, any
profit on any resale of exchange notes, and any commissions or concessions,
received by any of those persons may be deemed to be underwriting compensation
under the Securities Act of 1933. The letter of transmittal states that by
acknowledging that it will deliver, and by delivering, a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter."
In order to resell outstanding notes or exchange notes, broker-dealers that
acquired their notes from us may not rely on the SEC staff interpretations
described in this prospectus and therefore must comply with the registration
and prospectus delivery requirements of the Securities Act of 1933. As result,
they will be named as selling noteholders.
We have agreed to pay all expenses incident to the exchange offer. We also will
indemnify the holders of outstanding notes, including any broker-dealers,
against liabilities including those under the Securities Act of 1933.
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LEGAL MATTERS
The validity of the exchange notes offered by this prospectus will be passed
upon for us by Kaye, Scholer, Fierman, Hays & Handler, LLP, New York, New York.
EXPERTS
The combined financial statements of G & G Shops at January 31, 1998 and for
the seven months ended August 28, 1998 and each of the two years in the period
ended January 31, 1998 appearing in this prospectus and registration statement,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and have been included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing. The consolidated financial statements of G+G Retail,
Inc. at January 30, 1999 and for the five months ended January 30, 1999
appearing in this prospectus and registration statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and have been included in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-4 under the
Securities Act of 1933 with respect to the exchange notes. This prospectus does
not contain all of the information in the registration statement and the
exhibits and schedules to the registration statement. For additional
information about us and the exchange notes, you should refer to the
registration statement and its exhibits and schedules. Statements contained in
this prospectus regarding the contents of any contract or any other document to
which we make reference are not necessarily complete. In each instance, we make
reference to a copy of the contract or other document that has been filed as an
exhibit to the registration statement, and each statement is qualified in all
respects by this reference. You may inspect a copy of the registration
statement and the exhibits and schedules to the registration statement without
charge at the offices of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain copies of all or any part of the
registration statement from the Public Reference Section of the SEC, 450 Fifth
Street, N.W., Washington, D.C. 20549 upon the payment of the prescribed fees.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website
(www.sec.gov) that contains reports, proxy and information statements and other
information regarding registrants like us that file electronically with the
SEC.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
G+G RETAIL, INC.
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheet as of January 30, 1999......................... F-3
Consolidated Statement of Income for the Five Months Ended January 30,
1999..................................................................... F-4
Consolidated Statement of Stockholder's Equity for the Five Months Ended
January 30, 1999......................................................... F-5
Consolidated Statement of Cash Flows for the Five Months Ended January 30,
1999..................................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
G+G RETAIL, INC.
Condensed Consolidated Balance Sheets as of July 31, 1999 and January 30,
1999..................................................................... F-16
Condensed Consolidated Statement of Operations of G+G Retail, Inc. for the
Six Months Ended July 31, 1999 and Condensed Combined Statement of
Operations of G & G Shops, Inc. for the Six Months Ended August 1, 1998.. F-17
Condensed Consolidated Statement of Cash Flows of G+G Retail, Inc. for the
Six Months Ended July 31, 1999 and Condensed Combined Statement of Cash
Flows of G & G Shops, Inc. for the Six Months Ended August 1, 1998....... F-18
Notes to Unaudited Condensed Consolidated Financial Statements............ F-19
G & G SHOPS, INC.
Report of Independent Auditors............................................ F-21
Combined Balance Sheet as of January 31, 1998............................. F-22
Combined Statements of Income for the Seven Months Ended August 28, 1998
and for each of the Two Years in the Period Ended January 31, 1998....... F-23
Combined Statements of Shareholder's Deficit for the Seven Months Ended
August 28, 1998 and for each of the Two Years in the Period Ended January
31, 1998................................................................. F-24
Combined Statements of Cash Flows for the Seven Months Ended August 28,
1998 and for each of the Two Years in the Period Ended January 31, 1998.. F-25
Notes to Combined Financial Statements.................................... F-26
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
G+G Retail, Inc.
We have audited the accompanying consolidated balance sheet of G+G Retail, Inc.
and its subsidiary (collectively, the "Company") as of January 30, 1999 and the
related consolidated statements of income, stockholder's equity and cash flows
for the five months ended January 30, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at January 30, 1999 and the consolidated results of its operations and
its cash flows for the five months ended January 30, 1999, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
April 14, 1999
MetroPark, New Jersey
F-2
<PAGE>
G+G RETAIL, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands)
January 30, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and short-term investments..................................... $ 13,129
Accounts receivable................................................. 718
Merchandise inventories............................................. 12,578
Prepaid expenses.................................................... 794
Deferred tax assets................................................. 645
--------
Total current assets................................................. 27,864
Property and equipment, net.......................................... 22,560
Intangible assets, net............................................... 116,625
Deferred tax assets.................................................. 410
Other assets......................................................... 205
--------
Total assets......................................................... $167,664
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.................................................... $ 13,338
Accrued expenses.................................................... 11,155
Income taxes payable................................................ 1,330
--------
Total current liabilities............................................ 25,823
Long-term debt....................................................... 90,000
--------
Total liabilities.................................................... 115,823
Commitments and contingencies
Stockholder's equity:
Class B common stock, par value $.01 per share, 1,000 shares
authorized, 10 shares issued and outstanding....................... --
Additional paid-in capital.......................................... 49,828
Retained earnings................................................... 2,013
--------
Total stockholder's equity........................................... 51,841
--------
Total liabilities and stockholder's equity........................... $167,664
========
</TABLE>
See accompanying notes.
F-3
<PAGE>
G+G RETAIL, INC.
CONSOLIDATED STATEMENT OF INCOME
(In Thousands)
Five months ended January 30, 1999
<TABLE>
<S> <C>
Net sales............................................................. $131,567
Cost of sales (including occupancy costs)............................. 79,267
Selling, general, administrative and buying expense................... 36,170
Depreciation and amortization expense................................. 5,141
--------
Operating income...................................................... 10,989
Interest expense...................................................... 7,520
Interest income....................................................... 125
--------
Income before provision for income taxes.............................. 3,594
Provision for income taxes............................................ 1,581
--------
Net income............................................................ $ 2,013
========
</TABLE>
See accompanying notes.
F-4
<PAGE>
G+G RETAIL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(In Thousands)
Five months ended January 30, 1999
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Retained Stockholder's
Stock Capital Earnings Equity
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance--August 28, 1998............... $ -- $ -- $ -- $ --
Capital contribution, net.............. 49,828 49,828
Net income............................. 2,013 2,013
------ ------- ------ -------
Balance--January 30, 1999.............. $ -- $49,828 $2,013 $51,841
====== ======= ====== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
G+G RETAIL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Five months ended January 30, 1999
<TABLE>
<S> <C>
Operating activities
Net income.......................................................... $ 2,013
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 6,245
Write-off of deferred financing costs............................. 390
Deferred income taxes............................................. (340)
Changes in assets and liabilities:
Accounts receivable............................................. (349)
Merchandise inventories......................................... 6,124
Prepaid expenses................................................ (784)
Other assets.................................................... (98)
Income taxes payable............................................ 1,330
Accounts payable and accrued expenses........................... (2,588)
--------
Net cash provided by operating activities........................... 11,943
Investing activities
Capital expenditures, net........................................... (2,779)
Acquisition of business, net of cash acquired....................... (132,000)
Payment of acquisition costs........................................ (2,879)
--------
Net cash used in investing activities............................... (137,658)
Financing activities
Proceeds from notes payable......................................... 5,000
Proceeds from long-term debt........................................ 90,000
Proceeds from initial capital contribution.......................... 50,528
Repayment of notes payable.......................................... (5,000)
Payment of debt issuance costs...................................... (2,759)
Payment on behalf of Holdings....................................... (700)
--------
Net cash provided by financing activities........................... 137,069
--------
Net increase in cash and short-term investments..................... 11,354
Cash and short-term investments, beginning of period................ 1,775
--------
Cash and short-term investments, end of period...................... $ 13,129
========
Supplemental cash flow disclosures
Cash paid during the five months ended January 30, 1999:
Interest.......................................................... $ 5,381
========
Income taxes...................................................... $ 570
========
</TABLE>
See accompanying notes.
F-6
<PAGE>
G+G RETAIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 30, 1999
1. Organization and Business
G+G Retail, Inc. ("G+G" or the "Company") was incorporated on June 26, 1998. On
August 28, 1998, G&G Retail Holdings, Inc. ("Holdings" or the "Parent") made a
capital contribution to the Company in the amount of $50.5 million in exchange
for 100% of G+G's outstanding common stock. Concurrently with such contribution
to capital, the Company made a payment on behalf of the Parent in the amount of
$700,000. Simultaneous with the initial capital contribution, the Company
acquired (the "Acquisition") substantially all of the assets and certain
liabilities of G & G Shops, Inc. ("G & G Shops" or the "Predecessor") and
certain other subsidiaries of Petrie Retail, Inc. ("Petrie") from Petrie. The
Acquisition was accounted for as a purchase; accordingly, the accompanying
consolidated balance sheet reflects the preliminary allocation of the purchase
price to tangible and intangible assets acquired and liabilities assumed (Note
3). The purchase price paid in the Acquisition totaled $133.1 million,
consisting of net cash of $132.0 million and Class C nonvoting common stock of
Holdings valued at $1.1 million. The Company also assumed liabilities of $23.3
million in the Acquisition. In addition, the Company incurred Acquisition-
related costs of approximately $2.8 million. Holdings has no operations other
than owning all of the capital stock of the Company and is dependent on the
cash flows from the Company to meet its obligations, including with respect to
the mandatory redeemable preferred stock due 2008.
Prior to August 28, 1998, G+G's business was conducted by G & G Shops, a
wholly-owned subsidiary of Petrie, and certain other subsidiaries of Petrie. As
part of the Acquisition, 15,000 shares of Class C non-voting common stock of
Holdings were issued to the Predecessor. These shares, which represent 15% of
Holdings common stock on a fully-diluted basis, were transferred to the
liquidating trustee who oversees the bankruptcy proceedings for Petrie and its
subsidiaries in connection with the confirmation of Petrie's plan of
reorganization.
On October 12, 1995, Petrie filed petitions under Chapter 11 of the Bankruptcy
Code ("Chapter 11") in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court"), on behalf of itself and its
subsidiaries, including G & G Shops (collectively, the "Debtors"), seeking
relief to reorganize under Chapter 11. The Debtors managed their affairs and
operated their business under Chapter 11 as debtors-in-possession until the
Acquisition and Plan of Reorganization (on December 18, 1998 the Bankruptcy
Court issued an order confirming the Debtors' plan of reorganization).
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying financial statements include the consolidated operations of
G+G and its wholly-owned subsidiary. All significant intercompany transactions
and balances have been eliminated in consolidation.
Nature of Business
The Company owns and operates a chain of young women's specialty apparel stores
in the United States, Puerto Rico and the U.S. Virgin Islands.
Short-Term Investments
Short-term investments of $11.6 million consist of time deposits, U.S. treasury
money market funds, and commercial paper of less than ninety days maturity.
There were no short-term investments as of August 29, 1998.
F-7
<PAGE>
G+G RETAIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
related to certain accounts, such as inventory, accounts receivable, income
taxes and various other reserves, that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
Concentration of Risk
The Company operates a distribution center that depends on employees under a
collective bargaining agreement with a union. Historically, the Company has not
experienced labor disruptions as a result of disputes with its union workers.
The Company has significant merchandise purchases from vendors who utilize
factors. Approximately 36% of the Company's merchandise purchases are from
three vendors. In addition, approximately 16% of the stores are leased from a
single landlord.
Fiscal Year
The Company's fiscal year ends on the Saturday nearest January 31. The fiscal
period ended January 30, 1999 began on August 29, 1998 and consisted of twenty-
two weeks.
Inventories
Merchandise inventories, which consist of finished goods, are valued at the
lower of cost as determined by the retail inventory method (average cost basis)
or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization of
property and equipment are computed principally by the straight-line method
based on the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Leasehold costs and
improvements Term of lease or 10 years, whichever is less, straight-line
Store fixtures and
equipment 1 to 10 years, straight-line
</TABLE>
Deferred Financing Costs
The Company capitalizes debt issuance costs. Such costs are amortized on a
straight-line basis over the lives of the related debt.
Intangible Assets
Excess of cost over net assets acquired (i.e., goodwill and trademarks) is
being amortized on the straight-line method over thirty years. The Company
assesses the recoverability of these intangible assets at each balance sheet
date by determining whether the amortization of the balance of the intangibles
over their remaining useful life can be recovered through projected
undiscounted future operating cash flows.
Long-Lived Assets
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company
reviews the recoverability of intangibles and other long-lived assets whenever
events and circumstances indicate that the carrying amount may not be
recoverable. The carrying amount of long-lived assets is reduced by the
difference between the carrying amount and estimated fair value. No impairment
losses on long-lived assets were required for the five months ended January 30,
1999.
F-8
<PAGE>
G+G RETAIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rental Expense
Rental escalations are averaged over the term of the related lease in order to
provide level recognition of rental expense. Rent concessions received from
landlords are recognized on a straight-line basis over the remaining term of
the respective lease agreements.
Income Taxes
Income taxes are accounted for by the liability method. Under this method,
deferred tax assets and liabilities are determined based on the difference
between financial reporting and tax basis of assets and liabilities and are
measured using the current enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Revenue Recognition
Retail merchandise sales are recognized at the point of sale. A reserve is
provided for projected returns based on prior experience. Income from layaway
sales is recognized after final payment from the customer has been received.
Preopening Costs
Store opening costs are charged to operations as incurred.
Advertising and Promotion
All costs associated with advertising and promotion are expensed as incurred.
Advertising and promotion expense was $928,000 in the fiscal period.
Segments Reporting
In 1998, the Company adopted Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"). SFAS 131 superseded SFAS 14,
Financial Reporting for Segments of a Business Enterprise. The adoption of SFAS
131 did not affect the results of the Company's operation or financial
position.
The Company operates a chain of 422 young women's specialty apparel stores in
the United States, Puerto Rico and the U.S. Virgin Islands. Primarily all of
the 422 stores are mall based and the customers served are young women
principally between the ages of thirteen and nineteen years old. All of the
Company's merchandise is distributed to its stores from the same distribution
center.
The Company conducts business in one operating segment. The Company determined
its operating segment based on individual stores that the chief operating
decision maker reviews for purposes of assessing performance and making
operational decisions. These individual operations have been aggregated into
one segment because the Company believes it helps the users to understand the
Company's performance. The combined operations have similar economic
characteristics and each operation has similar products, services, customers
and distribution network.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133
establishes a new model for accounting for derivatives and hedging activities.
The Company is required to adopt SFAS No. 133 beginning January 1, 2000. The
adoption of SFAS No. 133 is not expected to have a material effect on the
Company's consolidated financial position or results of operations.
F-9
<PAGE>
G+G RETAIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. The Acquisition
On August 28, 1998, senior management of the Predecessor, in conjunction with
an investor group, acquired from Petrie substantially all of the assets and
certain of the liabilities of G & G Shops and certain other subsidiaries of
Petrie. The Company accounted for the Acquisition as a purchase. Accordingly,
the acquired assets and assumed liabilities have been recorded at their
estimated fair values at the date of acquisition as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired:
Current assets, excluding cash................................... $ 19,323
Property, plant and equipment.................................... 23,280
Purchase price in excess of tangible net assets acquired......... 116,633
Less liabilities assumed:
Accounts payable and accrued expenses............................ (23,257)
Less common stock paid to the seller:
Class C common stock of Holdings................................. (1,100)
--------
Net cash paid (including acquisition costs of $2,879).............. $134,879
========
</TABLE>
The unaudited pro forma results, which assume that the consummation of the
Acquisition and the planned $107.0 million debt offering (Note 6) had occurred
on February 1, 1998 and 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal
-----------------
1999 1998
-------- --------
<S> <C> <C>
Net sales.................................................. $294,390 $286,938
Net income................................................. 1,652 4,417
</TABLE>
The pro forma results are not necessarily indicative of the results of
operations that would have occurred had the acquisitions taken place at the
beginning of the periods presented nor are they intended to be indicative of
results that may occur in the future.
4. Property and Equipment
Property and equipment consist of the following at January 30, 1999 (in
thousands):
<TABLE>
<S> <C>
Leasehold costs, improvements and store fixtures and equipment..... $26,059
Less accumulated depreciation and amortization..................... (3,499)
-------
$22,560
=======
</TABLE>
5. Intangible Assets
Intangible assets consist of the following at January 30, 1999 (in thousands):
<TABLE>
<S> <C>
Goodwill........................................................... $ 64,833
Trademarks......................................................... 51,800
Deferred financing................................................. 2,759
Less accumulated amortization...................................... (2,767)
--------
$116,625
========
</TABLE>
Amortization of deferred financing costs, which is included in interest expense
in the consolidated statement of income, totaled approximately $1.5 million for
the five months ended January 30, 1999.
F-10
<PAGE>
G+G RETAIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Long-Term Debt
On August 28, 1998, in connection with the Acquisition, the Company entered
into a Loan Agreement (the "Loan Agreement") which, subject to the terms and
conditions thereof, provided the Company with $90.0 million of financing (the
"Loan").
Outstanding borrowings under the Loan Agreement bear interest per annum at
LIBOR (5.6% at January 30, 1999), plus 600 basis points, and are guaranteed by
Holdings.
The Loan Agreement contains customary covenants including limitations on change
of ownership, transactions with affiliates, dividends, additional indebtedness,
creation of liens, asset sales, acquisitions and capital expenditures. The
formation of G & G Retail of Puerto Rico, Inc., the Company's Puerto Rican
service subsidiary, caused technical defaults under the Loan Agreement. The
Company has obtained waivers with respect to such technical defaults. The Loan
was subsequently repaid with the proceeds from the sale of Senior Notes (Note
12).
Interest, which is payable monthly, totaled approximately $4.4 million in
fiscal 1999. An additional fee equal to 1% of the aggregate unpaid principal
amount of the Loan is payable on a quarterly basis which totaled approximately
$1.5 million in fiscal 1999. The Loan bears interest at a variable rate,
accordingly, the carrying amount of the Loan approximates fair value at January
30, 1999.
Under certain circumstances, pursuant to the Loan Agreement, the Loan may
convert into a rollover note ("Rollover") on August 28, 1999 (the "Exchange
Date"). If the Loan is not repaid before the Exchange Date, the Company must
extend the financing for an additional six years under the Rollover. The
Rollover would be payable in full at the end of the six year term. Management
intends to repay the Loan with proceeds from a planned debt offering prior to
the Exchange Date and write off the related deferred financing costs.
Notes Payable
On August 28, 1998, the Company entered into a Loan and Security Agreement (the
"Facility") which provided for the extension of credit up to $10.0 million,
plus 50% of the aggregate cost or market of inventory, not to exceed $5.0
million of additional borrowings, as defined therein. Interest on the Facility
accrued at a per annum rate at LIBOR, plus 500 basis points which approximated
the weighted average rate on the outstanding borrowings for the period.
On October 30, 1998, the Company entered into a new Loan and Security Agreement
(the "New Facility") which replaced the Facility. The New Facility, which
expires in October 2001, provides, subject to the terms and conditions thereof,
for the extension of credit subject to eligible inventory (as defined therein)
not to exceed $20.0 million, of which $10.0 million can be used for letters of
credit. There were no borrowings under the New Facility outstanding at January
30, 1999.
Interest on amounts advanced under the New Facility accrues at a rate equal to
specified margins over the adjusted Eurodollar Rate or at the Prime Rate (7.75%
at January 30, 1999). Outstanding letters of credit under the New Facility
totalled approximately $640,000 at January 30, 1999.
The New Facility contains a minimum tangible net worth covenant and other
customary covenants including limitations on change of ownership, transactions
with affiliates, dividends, additional indebtedness, creation of liens, asset
sales, acquisitions, conduct of business and capital expenditures. The New
Facility also contains customary events of default including defaults on the
Company's other indebtedness (which includes the Loan). The formation of G & G
Retail of Puerto Rico, Inc., the Company's Puerto Rican service subsidiary,
caused technical defaults under the New Facility. The Company has obtained
waivers with respect to such technical defaults.
F-11
<PAGE>
G+G RETAIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's obligations under the New Facility are secured by a lien on all
or substantially all of the Company's assets.
If the New Facility is terminated prior to the stated maturity, a termination
fee is payable. The fee payable for termination on or prior to October 1999
would be $150,000, on or prior to October 2000 would be $100,000 and prior to
October 2001 would be approximately $67,000.
In connection with the termination of the Facility, the Company wrote off
approximately $390,000 in deferred financing costs, which is included in
interest expense in the consolidated statement of operations.
7. Related Party Transactions
In connection with the closing of the Acquisition, a partnership of which an
indirect investor in Holdings, and a director of the Company and Holdings, is a
general partner earned a closing fee in the amount of $1,250,000 ($1,000,000 of
this fee was paid at closing and the remaining $250,000 was to be paid over a
two-year period, $160,000 of which is outstanding at January 30, 1999). The
closing fee constituted consideration for financial advisory services in
connection with the Acquisition and is included in the calculation of goodwill.
Additional fees totaling approximately $2.1 million were paid to U.S. Bancorp
Libra ("Libra"), investment banking advisors who have an indirect ownership
interest in Holdings. Of this amount, $1.4 million was paid to Libra in
connection with the $90.0 million loan obtained on August 28, 1998 and included
in deferred financing costs which are amortized over the twelve month life of
the loan. The remaining $700,000 was paid to Libra by the Company on behalf of
Holdings in connection with the issuance of preferred stock by Holdings
(Note 1).
Two directors ("Directors") of the Company and Holdings, who are also officers
of the Company and Holdings and shareholders of Holdings, were entitled to
receive a success fee (the "Success Fee") aggregating approximately $3.3
million from G & G Shops in connection with their assistance in the sale of
G & G Shops' business. The obligation to pay the Success Fee was assumed by the
Company and paid prior to January 30, 1999. In addition, the Company paid
approximately $286,000 of legal fees for these Directors in conjunction with
the Success Fee.
8. Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The following is a summary of the provision for income taxes for the five
months ended January 30, 1999 (in thousands):
<TABLE>
<S> <C>
Current income taxes:
Federal............................................................ $1,170
State and Puerto Rico.............................................. 751
Deferred income taxes:
Federal............................................................ (134)
State and Puerto Rico.............................................. (206)
------
Total provision for income taxes..................................... $1,581
======
</TABLE>
F-12
<PAGE>
G+G RETAIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the income tax provision to the amount of the provision
that would result from applying the federal statutory rate (34%) to income
before taxes is as follows:
<TABLE>
<CAPTION>
Five months
ended
January
30, 1999
-----------
<S> <C>
Provision for income taxes at federal statutory rate................ 34.0%
State income taxes, net of federal tax benefit...................... 4.6
Effect of higher Puerto Rico tax rates.............................. 4.7
Other............................................................... .6
----
Effective tax rate.................................................. 43.9%
====
</TABLE>
Deferred income taxes reflect the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's net deferred tax asset as of January 30, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
January
30, 1999
--------
<S> <C>
Current deferred tax asset:
Accrued expenses.................................................. $ 222
Inventory cost capitalization..................................... 423
------
$ 645
======
Long-term deferred tax asset:
Difference between book and tax basis of fixed assets............. $1,060
Intangible asset.................................................. (650)
------
$ 410
======
</TABLE>
9. Employee Benefit Plans
G+G maintains a profit sharing plan for all eligible employees that is funded
on a current basis through discretionary contributions. Profit sharing expense
was $250,000 for the five months ended January 30, 1999.
G+G also maintains a 401(k) plan covering certain of its employees. The Company
at its discretion can make contributions to the plan; however, no contributions
were made for the five months ended January 30, 1999.
G+G also maintains a defined contribution plan covering certain of its union
employees at its distribution center. Contribution expense was approximately
$40,000 for the five months ended January 30, 1999.
10. Commitments and Contingencies
The Company has employment agreements with certain key employees, providing for
minimum aggregate annual compensation of approximately $1.6 million per annum
with contract terms up to five years. Additionally, such employment agreements
provide for various incentive compensation payments as determined by the
Company's Board of Directors.
F-13
<PAGE>
G+G RETAIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Commitments and Contingencies (continued)
The Company is committed under operating leases for its stores and warehouse
facility, and equipment leases having initial terms of one year or more
expiring on various dates to 2008. Certain leases provide for additional
rentals based on a percentage of sales and for additional payments covering
real estate taxes, common area charges and other occupancy costs. Rent
concessions recognized in the five months ended January 30, 1999 totaled
approximately $400,000.
A summary of rental expense under all leases is as follows for the five months
ended January 30, 1999 (in thousands):
<TABLE>
<S> <C>
Fixed minimum........................................................ $ 9,058
Percentage rentals................................................... 1,020
Equipment rentals.................................................... 273
-------
$10,351
=======
</TABLE>
Minimum annual lease commitments (excluding percentage rents) under non-
cancelable operating leases for subsequent periods are as follows (in
thousands):
<TABLE>
<S> <C>
Fiscal year ending in:
2000................................................................. $18,504
2001................................................................. 13,574
2002................................................................. 11,259
2003................................................................. 8,626
2004................................................................. 5,433
Thereafter........................................................... 9,178
-------
$66,574
=======
</TABLE>
Litigation
The Company is a defendant in various lawsuits arising in the ordinary course
of its business. While the ultimate liability, if any, arising from these
claims cannot be predicted with certainty, the Company is of the opinion that
the resolution of the lawsuits will not likely have a material adverse effect
on the Company's consolidated financial statements.
11. Accrued Liabilities
Accrued liabilities consist of the following at January 30, 1999 (in
thousands):
<TABLE>
<S> <C>
Salaries and employee benefit costs................................. $ 4,338
Rent/occupancy costs................................................ 2,678
Corporate and store operating costs................................. 2,664
Other............................................................... 1,475
-------
$11,155
=======
</TABLE>
F-14
<PAGE>
G+G RETAIL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Subsequent Event (Unaudited)
On May 17, 1999, G+G and Holdings sold 107,000 units consisting of $107.0
million face amount of 11% Senior Notes due May 15, 2006, less original issue
discount of $7.3 million, and warrants of Holdings with an estimated fair value
of $470,000, at an exercise price of $0.01 per share, to purchase 8,209 shares
of nonvoting Holdings Class D Common Stock in connection with the refinancing
of the Company's then existing indebtedness. The Company paid Pegasus Investors
L.P., affiliates of which are stockholders of Holdings and officers of which
are directors of Holdings and the Company, a $1.0 million fee in consideration
for financial advisory services provided by Pegasus Investors L.P. to the
Company in connection with the private placement of the units.
Before May 15, 2002, the Company may redeem up to 35% of the aggregate
principal amount of the Senior Notes with the cash proceeds of a public
offering by the Company or Holdings at a redemption price of 111% of the
principal amount of the notes, plus accrued and unpaid interest and any
liquidated damages. On or after May 15, 2003, the Company may redeem all or a
part of the Senior Notes as follows: from May 15, 2003 through May 14, 2004 at
105.50% of their principal amount; from May 15, 2004 through May 4, 2005 at
102.75% of their principal amount and on and after May 15, 2005 at 100.00% of
their principal amount, in each case in addition to accrued and unpaid interest
and any liquidated damages.
Each of the Company's domestic subsidiaries (other than any subsidiaries which
the Company may designate as unrestricted) is required to guarantee, on a
senior but unsecured basis, the Company's obligations under the Senior Notes.
Currently, the Company has only one subsidiary, G & G Retail of Puerto Rico,
Inc., which is a foreign subsidiary and is not a guarantor. Each subsidiary
guarantor's obligations under its guarantee will be limited to the extent
necessary to prevent that guarantee from being a fraudulent conveyance under
applicable law. All subsidiary guarantors will be limited in their ability to
sell or otherwise dispose of all or substantially all of their assets to, or
consolidate with or merge with or into, a person other than the Company or
another subsidiary guarantor. Subsidiary guarantees may be released under
limited circumstances.
Any Class D Common Stock outstanding will be automatically converted into one
class of voting Common Stock upon the consummation of an initial public
offering which results in at least 20% of Holdings' Common Stock becoming
publicly traded ("IPO"). The warrants will expire upon the earlier of the
consummation of an IPO (as defined) or ten years from the date of issuance.
F-15
<PAGE>
G+G RETAIL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
July 31, 1999 January 30, 1999
------------- ----------------
(In thousands)
<S> <C> <C>
Assets
Current assets:
Cash and short-term investments................ $ 11,275 $ 13,129
Accounts receivable............................ 711 718
Merchandise inventories........................ 25,141 12,578
Prepaid expenses............................... 854 794
Deferred tax assets............................ 645 645
-------- --------
Total current assets............................ 38,626 27,864
Property and equipment, net..................... 27,640 22,560
Intangible assets, net.......................... 118,624 116,625
Deferred tax assets............................. 1,160 410
Other assets.................................... 220 205
-------- --------
Total assets.................................... $186,270 $167,664
======== ========
Liabilities and stockholder's equity
Current liabilities:
Accounts payable............................... $ 17,068 $ 13,338
Accrued expenses............................... 15,251 10,555
Accrued interest............................... 2,452 600
Income taxes payable........................... 912 1,330
-------- --------
Total current liabilities....................... 35,683 25,823
Capital Lease................................... 93 --
Long-term debt.................................. 99,354 90,000
-------- --------
Total liabilities............................... 135,130 115,823
Commitments and contingencies
Stockholder's equity:
Class B common stock, par value $.01 per share,
1,000 shares authorized, 10 shares issued and
outstanding................................... -- --
Additional paid-in capital..................... 50,298 49,828
Retained earnings.............................. 842 2,013
-------- --------
Total stockholder's equity...................... 51,140 51,841
-------- --------
Total liabilities and stockholder's equity...... $186,270 $167,664
======== ========
</TABLE>
See accompanying notes.
F-16
<PAGE>
G+G RETAIL, INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Consolidated Combined
G+G Retail, Inc. G & G Shops, Inc.
("Successor") ("Predecessor")
---------------- -----------------
Six months Six months
ended ended
July 31, 1999 August 1, 1998
---------------- -----------------
(In thousands)
<S> <C> <C>
Net sales.................................. $150,266 $138,032
Cost of sales (including occupancy costs).. 96,750 90,458
Selling, general, administrative and buying
expenses.................................. 42,198 39,639
Depreciation and amortization expense...... 6,172 2,451
-------- --------
Operating income........................... 5,146 5,484
Interest expense........................... 6,667 --
Interest income............................ 234 --
-------- --------
(Loss) income before extraordinary loss and
(benefit from) provision for income
taxes..................................... (1,287) 5,484
(Benefit) provision for income taxes....... (566) 2,259
-------- --------
(Loss) income before extraordinary loss.... (721) 3,225
Extraordinary loss, net of $354,000 of
income taxes.............................. (450) --
-------- --------
Net (loss) income.......................... $ (1,171) $ 3,225
======== ========
</TABLE>
See accompanying notes.
F-17
<PAGE>
G+G RETAIL, INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Consolidated Combined
G+G Retail, Inc. G & G Shops, Inc.
("Successor") ("Predecessor")
---------------- -----------------
Six months Six months
ended ended
July 31, 1999 August 1, 1998
---------------- -----------------
(In thousands)
<S> <C> <C>
Operating activities
Net (loss) income.......................... $(1,171) $ 3,225
Adjustments to reconcile net (loss) income
to net cash (used in) provided by
operating activities:
Depreciation and amortization expense.... 6,172 2,451
Amortization of debt issuance costs...... 931 --
Deferred taxes........................... (750) --
Extraordinary loss, net of income tax.... 450 --
Changes in assets and liabilities:
Accounts receivable, net, prepaid
expenses and other assets.............. (68) (2,301)
Merchandise inventories................ (12,563) (10,443)
Accounts payable, accrued expenses and
accrued interest.......................... 10,258 16,190
Income taxes payable................... (64) (110)
------- --------
Net cash provided by operating activities.. 3,195 9,012
Investing activities
Capital expenditures, net.................. (9,324) (3,090)
------- --------
Net cash used in investing activities...... (9,324) (3,090)
Financing activities
Issuance of senior notes................... 107,000 --
Original issue discount on senior notes.... (7,340) --
Payment of senior bridge notes............. (90,000) --
Payment of debt issuance costs............. (5,496) --
Other...................................... 111 --
Distributions to the Parent................ -- (139,416)
Distributions from the Parent.............. -- 133,494
------- --------
Net cash provided by (used in) financing
activities................................ 4,275 (5,922)
------- --------
Net decrease in cash and short-term
investments............................... (1,854) --
Cash and short-term investments, beginning
of period................................. 13,129 --
------- --------
Cash and short-term investments, end of
period.................................... $11,275 $ --
======= ========
Supplemental cash flow disclosures
Cash paid for:
Interest................................. $ 3,886 $ --
======= ========
Income taxes............................. $ 269 $ --
======= ========
</TABLE>
See accompanying notes.
F-18
<PAGE>
G+G RETAIL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1
The accompanying consolidated financial statements include G+G Retail, Inc.
(the "Company") and its wholly owned subsidiary. The Company was incorporated
on June 26, 1998. The combined statement of operations and statement of cash
flow for the six months ended August 1, 1998 are those of the Company's
predecessor, G & G Shops, Inc. and its subsidiaries and certain other
subsidiaries of its parent, Petrie Retail Inc. (collectively the
"Predecessor").
On August 28, 1998, G&G Retail Holdings, Inc. ("Holdings" or the "Parent") made
a capital contribution to the Company in the amount of $50.5 million.
Concurrently with such contribution to capital, the Company made a payment on
behalf of the Parent in the amount of $700,000. Simultaneous with the initial
capital contribution, the Company acquired (the "Acquisition") substantially
all of the assets and assumed certain liabilities of the Predecessor from
Petrie Retail, Inc. ("Petrie"). The Acquisition was accounted for as a
purchase; accordingly, the accompanying consolidated balance sheets reflect the
preliminary allocation of the purchase price to tangible and intangible assets
acquired and liabilities assumed. The Acquisition purchase price totaled
$133.1 million, consisting of net cash of $132.0 million and Class C nonvoting
common stock of Holdings valued at $1.1 million. The Company also assumed
liabilities of $23.3 million. In addition, the Company incurred Acquisition-
related costs of approximately $2.8 million.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of the
Company's management, the accompanying unaudited financial statements contain
all adjustments (consisting only of normal recurring accruals) considered
necessary to present fairly its financial position as of July 31, 1999 and the
results of its operations for the three and six months ended July 31, 1999 and
cash flows for the six months ended July 31, 1999 and the results of the
Predecessor's operations for the three and six months ended August 1, 1998 and
cash flows for the six months ended August 1, 1998. The balance sheet at
January 30, 1999 has been derived from financial statements at that date but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. These
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in Amendment No. 2 to the
Company's Registration Statement on Form S-4 filed on September 28, 1999. The
interim operating results are not necessarily indicative of the results that
may be expected for an entire year.
Note 2
On August 28, 1998, in connection with the Acquisition, the Company entered
into a Senior Bridge Note Agreement (the "Senior Bridge Note") which provided
the Company with $90.0 million of financing (the "Loan").
On May 17, 1999, the Company and Holdings completed a private placement of
107,000 units consisting in the aggregate of $107.0 million face amount of 11%
Senior Notes due May 15, 2006 of the Company with interest payable semi-
annually, and warrants to purchase 8,209 shares of nonvoting Class D Common
Stock of Holdings at an exercise price of $.01 per share. The warrants were
valued at $470,000, using the Black-Scholes Option Valuation Model, which
assumed a risk-free interest rate of 4.6% and a volatility factor of 15%. The
net proceeds from the placement were approximately $94.0 million, after
deducting the original issue discount of $7.3 million and $5.7 million of
estimated fees. The net proceeds were used to repay the Loan, and the balance
of the net proceeds will be used
F-19
<PAGE>
G+G RETAIL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for general corporate purposes. The unamortized finance fees of $450,000 (net
of income taxes of $354,000) related to the Senior Bridge Note were written off
as an extraordinary loss in the second quarter consolidated statement of
operations for fiscal 2000.
Note 3
The Company is a party to a Loan and Security Agreement, which expires in
October 2001, and provides for a revolving credit facility ("Facility") subject
to eligible inventory not to exceed $20.0 million, of which $10.0 million can
be used for letters of credit. There were no outstanding borrowings under the
Facility at July 31, 1999. Outstanding letters of credit under the Facility
totaled approximately $925,000 at July 31, 1999.
Interest on amounts advanced under the Facility accrues at a rate equal to
specified margins over the adjusted Eurodollar Rate or at the Prime Rate (8% at
July 31, 1999).
Note 4
Effective March 15, 1999, Holdings adopted its 1999 Stock Option Plan (the
"Option Plan"), which provides for the granting of options to purchase shares
of its Class A Common Stock to its employees and employees of its subsidiaries
including the Company. The Option Plan is administered by the Board of
Directors of Holdings which is authorized to grant incentive stock options
and/or non-qualified stock options to purchase up to 7,000 shares of Class A
Common Stock. As of July 31, 1999, Holdings had granted, under the Option Plan,
ten-year options to purchase 5,000 shares of its Class A Common Stock at an
exercise price of $300 per share, of which 1,250 are currently exercisable and
the remaining 3,750 shares vest equally over three years following the date of
grant. The option prices exceeded the fair market value of Holdings common
stock on the date of grant.
Note 5
The pro forma results (a) for the six months ended July 31, 1999, which assume
the consummation of the $107.0 million private placement on February 1, 1998,
and (b) for the six months ended August 1, 1998, which assume the consummation
of the Acquisition and the $107.0 million private placement on February 1,
1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
-------------------
July 31, August 1,
1999 1998
-------- ---------
<S> <C> <C>
Net sales............................................... $150,266 $138,032
Operating income........................................ 5,146 2,837
Net loss................................................ (737) (2,303)
</TABLE>
The pro forma results are not necessarily indicative of the results of
operations that would have occurred had the Acquisition and the private
placement taken place at the beginning of the periods presented, nor are they
intended to be indicative of results that may occur in the future.
F-20
<PAGE>
Report of Independent Auditors
The Board of Directors
G & G Shops, Inc.
We have audited the accompanying combined balance sheet of G & G Shops, Inc.
and its subsidiaries (collectively, the "Company") as of January 31, 1998, and
the combined statements of income, shareholder's deficit, and cash flows for
the seven months ended August 28, 1998 and the two years in the period ended
January 31, 1998. These combined financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Company at January 31, 1998, and the combined results of its operations and
its cash flows for the seven months ended August 28, 1998 and the two years in
the period ended January 31, 1998, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
April 14, 1999
MetroPark, New Jersey
F-21
<PAGE>
G & G SHOPS, INC.
COMBINED BALANCE SHEET
(In Thousands)
January 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Accounts receivable................................................. $ 542
Merchandise inventories............................................. 10,091
Prepaid expenses.................................................... 157
--------
Total current assets................................................. 10,790
Property and equipment, net.......................................... 17,170
Other assets......................................................... 197
--------
Total assets......................................................... $ 28,157
========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable (including bank overdrafts of $1.7 million)........ $ 9,172
Accrued expenses.................................................... 14,705
--------
Total current liabilities............................................ 23,877
Long-term liabilities:
Liabilities subject to compromise................................... 20,866
--------
Total liabilities.................................................... 44,743
Commitments and contingencies
Shareholder's deficit:
Paid-in capital..................................................... 5,637
Retained earnings................................................... 28,922
Net distributions to Parent......................................... (51,145)
--------
Total shareholder's deficit.......................................... (16,586)
--------
Total liabilities and shareholder's deficit.......................... $ 28,157
========
</TABLE>
See accompanying notes.
F-22
<PAGE>
G & G SHOPS, INC.
COMBINED STATEMENTS OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Seven
months Year ended
ended -----------------
August January February
28, 1998 31, 1998 1, 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales.......................................... $162,823 $286,938 $266,362
Cost of sales (including occupancy costs).......... 106,056 177,765 166,636
Selling, general, administrative and buying
expenses.......................................... 48,231 77,437 73,374
Depreciation and amortization expense.............. 2,845 4,489 4,526
Royalty expense.................................... 1,012 1,834 1,749
Store closing expenses............................. 87 431 1,561
-------- -------- --------
Income before income taxes......................... 4,592 24,982 18,516
Income taxes....................................... 1,892 10,293 7,629
-------- -------- --------
Net income......................................... $ 2,700 $ 14,689 $ 10,887
======== ======== ========
</TABLE>
See accompanying notes.
F-23
<PAGE>
G & G SHOPS, INC.
COMBINED STATEMENTS OF SHAREHOLDER'S DEFICIT
(In Thousands)
<TABLE>
<CAPTION>
Net Total
Paid-In Retained Distributions Shareholder's
Capital Earnings to Parent Deficit
------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Balance--February 3, 1996......... $5,637 $ 3,346 $(13,531) $ (4,548)
Net distributions............... (18,545) (18,545)
Net income...................... 10,887 10,887
------ ------- -------- --------
Balance--February 1, 1997......... 5,637 14,233 (32,076) (12,206)
Net distributions............... (19,069) (19,069)
Net income...................... 14,689 14,689
------ ------- -------- --------
Balance--January 31, 1998......... 5,637 28,922 (51,145) (16,586)
Net distributions............... (14,140) (14,140)
Net income...................... 2,700 2,700
------ ------- -------- --------
Balance--August 28, 1998.......... $5,637 $31,622 $(65,285) $(28,026)
====== ======= ======== ========
</TABLE>
See accompanying notes.
F-24
<PAGE>
G & G SHOPS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Seven
months Year ended
ended ------------------
August January February
28, 1998 31, 1998 1, 1997
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income...................................... $ 2,700 $ 14,689 $ 10,887
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 2,845 4,489 4,526
Store closing expenses........................ -- 203 695
Loss on disposal of equipment................. 16 220 --
Changes in assets and liabilities:
Accounts receivable......................... 177 (460) 10
Merchandise inventories..................... (8,611) (388) 656
Prepaid expenses and other assets........... 144 91 94
Accounts payable and accrued expenses....... 18,363 6,444 1,848
Liabilities subject to compromise........... 159 300 1,327
-------- -------- --------
Net cash provided by operating activities....... 15,793 25,588 20,043
Investing activities
Capital expenditures, net....................... (3,400) (7,005) (1,952)
-------- -------- --------
Net cash used in investing activities........... (3,400) (7,005) (1,952)
Financing activities
Cash transferred to Parent...................... (166,359) (292,746) (275,944)
Cash received from Parent....................... 152,219 273,677 257,399
-------- -------- --------
Net cash used in financing activities........... (14,140) (19,069) (18,545)
-------- -------- --------
Net decrease in cash............................ (1,747) (486) (454)
Cash, beginning of period....................... -- 486 940
-------- -------- --------
Cash (bank overdraft), end of period............ $ (1,747) $ -- $ 486
======== ======== ========
</TABLE>
See accompanying notes.
F-25
<PAGE>
G & G SHOPS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
August 28, 1998
1. Organization and Business
The accompanying combined financial statements include the accounts of G & G
Shops, Inc. ("G & G" or the "Company"), a subsidiary of Petrie Retail, Inc.
("Petrie Retail" or the "Parent") and certain store assets owned by Petrie
Retail.
On December 9, 1994, PS Stores Acquisition Corp. acquired (the "Acquisition")
all of the issued and outstanding shares of Petrie Retail from Petrie Stores
Corporation pursuant to the terms of a Stock Purchase Agreement (the
"Agreement"). In accordance with the Agreement, for accounting purposes the
transaction was accounted for as of November 26, 1994.
The Acquisition was accounted for as a purchase. The bargain purchase element
associated with the transaction was pushed down to the Company based on the
fair value of the Company's property and equipment at the date of acquisition
relative to the consolidated property and equipment. The estimated portion of
the purchase accounting liabilities deemed to be attributable to the Company
have been reflected in these combined financial statements.
On October 12, 1995 (the "Petition Date"), Petrie Retail filed petitions under
Chapter 11 ("Chapter 11") of the Bankruptcy Code (the "Bankruptcy Code") in the
United States Bankruptcy Court for the Southern District of New York, on behalf
of itself and its subsidiaries, including G & G (collectively, the "Debtors"),
seeking relief to reorganize under Chapter 11. The Debtors managed the affairs
and operated the business of G & G under Chapter 11 as debtors-in-possession
until August 28, 1998 when substantially all of the assets of G & G were
acquired. On August 28, 1998, substantially all of the Company's assets and
certain liabilities were sold to an investor group including the management of
G & G (the "Sale") (Note 11).
2. Summary of Significant Accounting Policies
Nature of Business
The Company owns and operates a chain of young women's specialty apparel stores
in the United States, Puerto Rico and the U.S. Virgin Islands.
Fiscal Year
The Company's fiscal year ends on the Saturday nearest January 31. The fiscal
period ended August 28, 1998 began on February 1, 1998 and consisted of thirty
weeks. Each of the fiscal years ended January 31, 1998 and February 1, 1997
consisted of fifty-two weeks.
Principles of Combination
The accompanying combined financial statements include the accounts of the
Company and certain store assets owned by subsidiaries of Petrie Retail but
operated as stores of the Company. All significant intercompany activity
between the various entities included in these financial statements has been
eliminated in combination.
F-26
<PAGE>
G & G SHOPS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
related to certain accounts, such as inventory, accounts receivable, income
taxes and various other reserves, as well as liabilities subject to compromise,
that affect the amounts reported in the combined financial statements and
accompanying notes. Actual results could materially differ from those
estimates.
Concentration of Risk
The Company operates a distribution center that depends on employees under a
collective bargaining agreement with a union. Historically, the Company has not
experienced labor disruptions as a result of disputes with its union workers.
The Company has significant merchandise purchases from vendors who utilize
factors. Approximately 36% of the Company's merchandise purchases are from
three vendors. In addition, approximately 16% of the stores are leased from a
single landlord.
Inventories
Merchandise inventories, which consist of finished goods, are valued at the
lower of cost as determined by the retail inventory method (average cost basis)
or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization of
property and equipment are computed principally by the straight-line method
based on the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Leasehold costs and
improvements Term of lease or 10 years, whichever is less, straight-line
Store fixtures and
equipment 1 to 10 years, straight-line
</TABLE>
Preopening Costs
Store opening costs are charged to operations as incurred.
Accrued Expenses and Long-Term Liabilities
Included in accrued expenses and liabilities subject to compromise are certain
costs associated with the acquisition, as well as other acquisition related
liabilities primarily related to estimated tax and pension liabilities for
matters which existed at the Acquisition date. These amounts are classified as
liabilities subject to compromise in the combined balance sheet.
Income Taxes
Income taxes are accounted for by the liability method. Under this method,
deferred tax assets and liabilities are determined based on the difference
between financial reporting and tax basis of assets and liabilities and are
measured using the current enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Revenue Recognition
Retail merchandise sales are recognized at the point of sale. A reserve is
provided for projected returns based on prior experience. Income from layaway
sales is recognized after final payment from the customer has been received.
F-27
<PAGE>
G & G SHOPS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Net Distributions to Parent
Net distributions to the Parent consist of the intercompany activity between
the Company and the Parent principally resulting from the Company transferring
substantially all operating cash flow to the Parent, net of certain
expenditures made by the Parent on behalf of the Company. No interest has been
imputed on transactions with the Parent.
Long-Lived Assets
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company
reviews the recoverability of its long-lived assets on a store by store basis
whenever events and circumstances indicate that the carrying amount may not be
recoverable. The carrying amount of long-lived assets is reduced by the
difference between the carrying amount and the estimated fair value. No
impairment losses on long-lived assets were required for the period ended
August 28, 1998 or for the fiscal years 1998 or 1997.
Rental Expense
Rental escalations are averaged over the term of the related lease in order to
provide level recognition of rental expense. Rent concessions received from
landlords are recognized on a straight line basis over the remaining term of
the respective lease agreements.
Advertising and Promotion
All costs associated with advertising and promotion are expensed in the year
incurred. Advertising and promotion expense was $794,000 for the seven months
ended August 28, 1998 and $1.1 million and $1.4 million in fiscal 1998 and
fiscal 1997, respectively.
Reclassifications
Certain prior year balances have been reclassified to conform with the current
year's presentation.
3. Property and Equipment
Property and equipment consist of the following at January 31, 1998 (in
thousands):
<TABLE>
<S> <C>
Leasehold cost, improvements and store fixtures and equipment....... $30,899
Less accumulated depreciation....................................... 13,729
-------
$17,170
=======
</TABLE>
4. Income Taxes
PS Stores Acquisition Corp. and its subsidiaries, including the Company, file a
consolidated federal income tax return and, where applicable, combined state
and local income tax returns. As a result, the Company is jointly and severally
liable for all tax claims arising from the consolidated and combined returns to
which it is a party. However, after the Sale, Petrie Retail retained all of the
income tax liabilities. (Note 11).
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-28
<PAGE>
G & G SHOPS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
In accordance with a tax sharing agreement, the provision for income taxes
recorded by the Company represents the amount calculated on a separate return
basis. All taxes are paid by the Parent with the applicable expenses related to
the Company allocated through the intercompany account.
At August 28, 1998, January 31, 1998, and February 1, 1997 approximately $5.0
million of income tax reserves are classified as liabilities subject to
compromise.
The following is a summary of the components of the Company's income tax
provision (in thousands):
<TABLE>
<CAPTION>
Seven
months Year ended
ended ------------------
August January February
28, 1998 31, 1998 1, 1997
-------- -------- --------
<S> <C> <C> <C>
Current income taxes:
Federal........................................ $1,342 $ 7,231 $5,395
State and Puerto Rico.......................... 822 4,574 3,681
Deferred income taxes:
Federal........................................ (212) (1,179) (1,128)
State and Puerto Rico.......................... (60) (333) (319)
------ ------- ------
Total provision for income taxes................. $1,892 $10,293 $7,629
====== ======= ======
</TABLE>
The deferred income tax provision is principally due to the differences in the
depreciation methods used for financial statement and tax purposes, and to
various accrual and reserve accounts.
The significant components of the Company's deferred tax asset are as follows:
<TABLE>
<S> <C>
Property and equipment............................................... $4,545
Inventory............................................................ 340
Pension and other accrued liabilities................................ 760
------
$5,645
======
</TABLE>
The net current and deferred income tax assets have been included in the net
distributions to the Parent account in the accompanying combined balance sheet.
A reconciliation of the income tax provision to the provision that would result
from applying the federal statutory rate (34%) to income before taxes is as
follows:
<TABLE>
<CAPTION>
Seven
months Year ended
ended -----------------
August January February
28, 1998 31, 1998 1, 1997
-------- -------- --------
<S> <C> <C> <C>
Provision for income taxes at federal statutory
rate.......................................... 34.0% 34.0% 34.0%
State income taxes, net of federal tax
benefit....................................... 4.6 4.6 4.6
Other.......................................... .1 .1 .1
Effect of higher Puerto Rico tax rates......... 2.5 2.5 2.5
---- ---- ----
Effective tax rate............................. 41.2% 41.2% 41.2%
==== ==== ====
</TABLE>
F-29
<PAGE>
G & G SHOPS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
5. Store Closing Expense
Store closing expense and the results of operations and number of the stores
closed in the respective years have been included in the accompanying Combined
Statements of Income as follows (dollars in thousands):
<TABLE>
<CAPTION>
Seven
months Year ended
ended -----------------
August January February
28, 1998 31, 1998 1, 1997
-------- -------- --------
<S> <C> <C> <C>
Store closing expense........................... $87 $431 $ 1,561
=== ==== =======
Results of operations of closed stores (loss)... 67 (56) (1,100)
=== ==== =======
Number of stores closed......................... 2 12 32
=== ==== =======
</TABLE>
There were no stores pending closure at the end of these fiscal years.
The store closing expense for the seven months ended August 28, 1998
principally consists of losses on disposal of property and equipment.
The fiscal 1998 store closing expense of approximately $431,000 consists of a
$228,000 provision for lease rejection claims and $203,000 of losses on
disposal of property and equipment. The lease rejection obligations of $228,000
(amount included in liabilities subject to compromise) were calculated taking
into account provisions in the Bankruptcy Code which primarily resulted in an
accrual of one year's rent payments.
The fiscal 1997 store closing expense of approximately $1.6 million consists of
an $866,000 provision for lease rejection claims and $695,000 of losses on
disposal of property and equipment. The lease rejection obligations of $866,000
(amount included in liabilities subject to compromise) were calculated taking
into account provisions in the Bankruptcy Code which primarily resulted in an
accrual of one year's rent payments.
The cumulative lease rejection liability at January 31, 1998 and February 1,
1997 totaled $2.1 million and $1.9 million, respectively. The lease rejection
claims for each of the fiscal years were not paid and were retained by Petrie
Retail in connection with the August 28, 1998 transaction (Note 11). The losses
on disposal of property and equipment were recognized upon closure of the
stores in each of the fiscal years through a direct writeoff of the net book
value of the respective assets.
6. Liabilities Subject to Compromise
Petrie Retail and its subsidiaries each filed a voluntary petition on October
12, 1995 with the United States Bankruptcy Court for relief under Chapter 11.
As a result, the Debtors' obligations with respect to their prepetition
liabilities were stayed with certain exceptions concerning the Debtors'
prepetition secured bank debt. In addition, the Debtors received authority to
pay certain prepetition liabilities for payroll, employee benefits and certain
other expenses. Certain prepetition obligations are collateralized by both real
and personal property of the Debtors; however, these obligations are recorded
as liabilities subject to compromise, as the ultimate adequacy of security for
any secured prepetition debt will be determined in the claim allowance or plan
confirmation process. Additional claims will arise by reason
F-30
<PAGE>
G & G SHOPS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
of current and future terminations of various contractual obligations and as
certain contingent and/or disputed claims are asserted or settled. Those claims
and liabilities could materially exceed the amounts recorded.
In Chapter 11 cases, substantially all liabilities as of the Petition Date are
subject to compromise or other treatment under a plan or plans of
reorganization. For financial reporting purposes, these liabilities and
obligations whose disposition is dependent on the outcome of the Chapter 11
cases have been segregated and classified as liabilities subject to compromise
under reorganization proceedings in the combined balance sheet. Generally,
actions to enforce or otherwise effect repayment of all pre-Chapter 11
liabilities as well as all litigation pending as of the Petition Date against
the Debtors are stayed while the Debtors continue their business operations as
debtors-in-possession. Schedules have been filed by the Debtors with the
Bankruptcy Court setting forth the assets and liabilities of the Debtors as of
the Petition Date as reflected in the Debtors' accounting records. Differences
between amounts reflected in such schedules and claims filed by creditors will
be investigated and either amicably resolved or adjudicated. The ultimate
amount of and settlement terms for such liabilities are subject to the claims
allowance process and the terms of a plan or plans of reorganization and,
accordingly, are not presently determinable. Additional liabilities subject to
compromise may become fixed or liquidated subsequent to the Petition Date as a
result of claims filed by parties affected by the Debtors' rejection of
executory contracts, including leases, and from the Bankruptcy Court's
resolution of asserted claims, including contingent claims and other disputed
accounts. The date by which certain prepetition creditors of the Debtors were
required to file proof of their prepetition claims was December 29, 1997.
Under the Bankruptcy Code, the Debtors may elect to assume or reject real
estate leases, employment contracts, personal property leases, service
contracts, and other prepetition executory contracts or leases, subject to
Bankruptcy Court approval. The liabilities subject to compromise include a
provision for the estimated amount that may be claimed by lessors and allowed
by the Bankruptcy Court in connection with rejected real estate leases.
Executory contracts assumed by the Company may create additional administrative
expenses. Accordingly, such liabilities may be subject to material changes
(Note 11).
The Company's liabilities subject to compromise consist of the following at
January 31, 1998 (in thousands):
<TABLE>
<S> <C>
Long-term liabilities:
Accounts payable-trade............................................ $ 3,934
Accrued expenses and other........................................ 14,828
Lease rejection claims............................................ 2,104
-------
$20,866
=======
</TABLE>
Included in accrued expenses and other are $5.0 million and $1.9 million of
estimated tax and pension liabilities, respectively, for matters which existed
at the Acquisition date.
F-31
<PAGE>
G & G SHOPS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
7. Accrued Expenses
Accrued expenses consist of the following at January 31, 1998 (in thousands):
<TABLE>
<S> <C>
Royalty............................................................. $ 2,420
Taxes (other than income taxes)..................................... 1,299
Corporate and store operating costs................................. 2,652
Rent/occupancy costs................................................ 4,435
Salaries and employee benefit costs................................. 3,899
-------
$14,705
=======
</TABLE>
In connection with the Sale (Note 11), only certain current liabilities were
acquired and all liabilities subject to compromise were retained by Petrie
Retail.
8. Employee Benefit Plans
G & G maintains a profit sharing plan for all eligible employees that is funded
on a current basis by discretionary contributions. Profit sharing expense was
$348,000, $600,000 and $420,000, respectively, for the seven months ended
August 28, 1998 and the fiscal years ended January 31, 1998 and February 1,
1997.
The Company also maintains a 401(k) plan covering certain employees. The
Company does not match employee contributions to the plan.
Certain of the Company's employees are also covered by a union sponsored,
collectively bargained, multi-employer defined benefit pension plan (the
"Plan"). Effective January 31, 1995 the Company withdrew from the Plan. In
addition, other employers withdrew from the Plan. The combination of these
events resulted in the imposition of a mass withdrawal liability on the Company
(Note 6). An estimate of the ultimate withdrawal liability for the Plan was
recorded by the Company at the Acquisition date and has been recorded as a
liability subject to compromise in the accompanying combined balance sheet. In
connection with the Sale, the estimated ultimate withdrawal liability was
retained by Petrie Retail.
9. Transactions with Related Parties
The Company performs most of the functions as a stand-alone company; however,
franchise and income tax services, real estate management, payroll processing,
benefits and risk management services and certain legal services were performed
by Petrie Retail without allocating these costs to the Company. The Company's
financial statements include an estimate for these costs for which there was no
allocation by Petrie Retail. The estimated costs reflected in the combined
financial statements for these additional services are $300,000 for the seven
months ended August 28, 1998, and $600,000 for each of the fiscal years ended
January 31, 1998 and February 1, 1997. Management's estimate is based on the
actual costs for outside services or employee costs to perform these services.
Management believes the amount allocated and the method of allocation is
reasonable.
F-32
<PAGE>
G & G SHOPS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following is a summary of the intercompany activity reflected in the net
distribution to the Parent account (in thousands):
<TABLE>
<CAPTION>
Seven Months
ended Year ended
August 28, January 31, February 1,
1998 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Payroll and related taxes............. $ 11,410 $ 20,284 $ 13,464
Health insurance...................... 1,325 2,366 2,361
Income taxes.......................... 1,892 10,293 7,629
Other................................. 1,052 2,703 4,075
-------- -------- --------
Total expenditures paid by the Parent
on behalf of the Company............. 15,679 35,646 27,529
Unallocated costs..................... 300 600 600
Net cash transferred to the Parent.... (30,119) (55,315) (46,674)
-------- -------- --------
Net activity.......................... $(14,140) $(19,069) $(18,545)
======== ======== ========
</TABLE>
All of the Company's excess cash was transferred to the Parent. The average
amount due to the Company from Petrie Retail as of August 28, 1998, January 31,
1998 and February 1, 1997 was $44.1 million, $27.5 million and $9.3 million,
respectively.
Included in the Combined Statement of Operations is royalty expense, which
represents an amount charged by the Parent for the use of trademarks owned by
the Parent.
Two officers of the Company were entitled to receive a success fee aggregating
approximately $3.3 million from the Company in connection with their assistance
in the sale of the Company's business (Note 11). This fee has been included in
selling, general, administrative and buying expenses in the combined statement
of income for the seven months ended August 28, 1998.
10. Commitments and Contingencies
The Company and its subsidiaries are committed under operating leases for their
stores and warehouse facility and equipment leases having initial terms of one
year or more expiring on various dates to 2008. Certain leases provide for
additional rentals based on a percentage of sales and for additional payments
covering real estate taxes, common area charges and other occupancy costs.
A summary of rental expense under all leases was as follows (in thousands):
<TABLE>
<CAPTION>
Seven Year ended
months ----------------
ended January
August 28, 31, February
1998 1998 1, 1997
---------- ------- --------
<S> <C> <C> <C>
Fixed minimum.................................... $11,214 $18,153 $18,435
Percentage rentals............................... 1,618 3,033 2,259
Equipment rentals................................ 314 562 513
------- ------- -------
$13,146 $21,748 $21,207
======= ======= =======
</TABLE>
Rent concessions recognized for the seven month period ended August 28, 1998
and fiscal years ended January 31, 1998 and February 1, 1997 totaled
approximately $600,000, $1.5 million and $1.8 million, respectively.
F-33
<PAGE>
G & G SHOPS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Minimum annual lease commitments (excluding percentage rents) under
noncancelable operating leases for subsequent periods are as follows (in
thousands):
<TABLE>
<S> <C>
Fiscal year ending in:
2000................................................................ $17,468
2001................................................................ 12,893
2002................................................................ 10,468
2003................................................................ 8,033
2004................................................................ 4,851
Thereafter.......................................................... 7,580
-------
$61,293
=======
</TABLE>
As disclosed in Note 6, the Debtors filed a voluntary petition on October 12,
1995 with the Bankruptcy Court for relief under Chapter 11. As debtors-in-
possession, the Debtors have the right, subject to Bankruptcy Court approval
and certain other limitations, to assume or reject executory contracts,
including unexpired leases. These amounts are included in lease rejection
claims (Note 6).
The Company is involved in litigation associated with the bankruptcy
proceedings and its reorganization efforts, as well as matters related to its
ordinary conduct of business. If such litigation resulted in unfavorable
outcomes to the Company, they could have a material impact on its combined
financial statements. Management believes it has meritorious defenses
associated with the litigation. In conjunction with the Sale, Petrie Retail
retained all liabilities associated with this litigation.
11. Subsequent Event
On August 28, 1998, substantially all of the assets (the "Purchased Assets") of
the junior women's apparel retail business (the "Business") conducted under the
trade names "G+G" and "Rave" and certain liabilities were sold by Petrie Retail
to an investment group including the management of the Company (the
"Acquirer"). The acquisition was effectuated pursuant to an asset purchase
agreement dated as of July 6, 1998, as amended, between Petrie Retail and the
Acquirer, which was approved by the Bankruptcy Court on August 24, 1998. On
October 12, 1995, the Debtors filed petitions under Chapter 11 in the
Bankruptcy Court, seeking relief to reorganize under Chapter 11. On August 28,
1998, substantially all of the Company's assets and certain liabilities were
sold in the Sale.
The purchase price paid for the Purchased Assets was $133.1 million, consisting
of $132.0 million in cash and the issuance of 15,000 shares of class C
nonvoting common stock with a fair value of approximately $1.1 million. In
addition, $23.3 million of liabilities were assumed by the Acquirer. The
Purchased Assets included, among other things: (a) all right, title and
interest in over 400 store leases, as well as leases for the Business'
headquarters and distribution center, and other contracts related to the
Business, (b) inventories and other tangible personal property related to the
Business, (c) equipment and fixtures related to the Business, (d) accounts
receivable, notes receivable and other claims for money or obligations due to
Petrie Retail in connection with the Business, and (e) intellectual property
and goodwill associated with the Business.
Liabilities and contingencies not assumed by the Acquirer were retained by
Petrie Retail and are managed by the trustee who oversees the bankruptcy
proceedings for Petrie Retail and its subsidiaries. Petrie Retail retained all
liabilities subject to compromise (Note 6), pension liabilities (Note 8), tax
liabilities (Note 4) and assumed all pending and threatened litigation as of
August 28, 1998.
F-34
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No broker-dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to issue the exchange notes that we are offering only under
circumstances and in jurisdictions where it is lawful to do so. The information
contained in this prospectus is correct only as of its date.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 7
The Exchange Offer................... 15
The Acquisition...................... 24
Use of Proceeds...................... 24
Capitalization....................... 25
Unaudited Pro Forma Consolidated
Financial Statements................ 26
Selected Financial and
Operating Data...................... 31
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 34
Business............................. 43
Management........................... 52
Principal Stockholders............... 60
Related Transactions................. 62
Description of Revolving Credit
Facility............................ 66
Description of the Notes............. 67
Book-Entry; Delivery and Form........ 94
Material Federal Income Tax
Considerations...................... 97
Plan of Distribution................. 102
Legal Matters........................ 103
Experts.............................. 103
Where You Can Find More Information.. 103
Index to Financial Statements........ F-1
</TABLE>
Until , 1999 (90 days after the date of this prospectus), all broker-
dealers effecting transactions in the exchange notes, whether or not
participating in this distribution, may be required to deliver a prospectus.
This requirement is in addition to the obligation of dealers to deliver a
prospectus when selling exchange notes received in exchange for outstanding
notes held for their own account.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$107,000,000
G+G Retail, Inc.
Offer to Exchange All Outstanding 11% Senior Notes Due 2006 for 11% Senior
Notes Due 2006 Registered Under the Securities Act of 1933
---------------------------------
PROSPECTUS
---------------------------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Set forth below is a description of certain provisions of the Delaware General
Corporation Law, also known as the DGCL, our certificate of incorporation and
the indemnification agreements dated August 28, 1998 between us and each of our
directors, as those provisions relate to our indemnification of the directors
and officers. This description is intended only as a summary and is qualified
in its entirety by reference to the applicable provisions of the DGCL, our
certificate of incorporation and the indemnification agreements, all of which
are filed as exhibits to this registration statement.
Section 145 of the DGCL provides that a corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative, other than an action by or in the right of
that corporation, by reason of the fact that the person is or was a director,
officer, employee or agent of the corporation, or is or was serving at its
request in such capacity at another corporation or business organization,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by that person in connection
with that action, suit or proceeding, provided that the person acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interest of the corporation, and, with respect to any criminal proceeding,
had no reasonable cause to believe that his conduct was unlawful. A Delaware
corporation may indemnify directors and officers against expenses, including
attorneys' fees, in an action by or in the right of the corporation under the
same conditions, except that no indemnification is permitted without judicial
approval if the director or officer is adjudged to be liable to the
corporation. Where a director or officer is successful on the merits or
otherwise in the defense of any action described above, the corporation must
indemnify him against the expenses that he actually and reasonably incurred.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director shall not be personally liable to
the corporation or its stockholders for monetary damages for breach of his
fiduciary duty as a director except any liability of the director (1) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) under Section 174 of
the DGCL or (4) for any transaction from which the director derived an improper
personal benefit.
Our certificate of incorporation provides for the elimination of personal
liability of a director for breach of fiduciary duty to the full extent
permitted by the DGCL. Our certificate of incorporation also provides that we
shall indemnify our directors and officers to the full extent permitted by the
DGCL.
We have entered into separate, identical indemnification agreements with each
of our directors. Under each indemnification agreement, we agreed to hold
harmless and indemnify the director to the fullest extent provided by Sections
145(a) and 145(b) of the DGCL, against all expenses, judgments, fines and
amounts paid in settlement reasonably incurred by the director in connection
with any threatened, pending or completed civil or criminal action, suit or
proceeding, including derivative actions, to which the director is, was or
becomes a party, or is threatened to be made a party, as a result of being a
director or former director of G+G Retail, Inc. Our obligation to indemnify a
director is subject to the conditions that the director acted in good faith and
in a manner he reasonably believed to be in the best interest of and not
opposed to G+G Retail and, with respect to a criminal proceeding, had no reason
to believe his conduct was unlawful. In addition, our obligation to indemnify a
director is subject to limited exclusions set forth in each indemnification
agreement. Under each indemnification agreement, a director also is entitled to
receive from us an advance for expenses incurred by him in defending any
action, suit or proceeding, which advance is subject to repayment if a court
ultimately determines that the director was not entitled to be indemnified.
II-1
<PAGE>
Our directors and officers are covered under directors' and officers' liability
insurance policies maintained by us.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.01 Purchase Agreement, dated as of May 6, 1999, by and among U.S. Bancorp
Investments, Inc., CIBC World Markets Corp., G+G Retail, Inc. and G&G
Retail Holdings, Inc.*
2.01 Asset Purchase Agreement, dated as of July 6, 1998, among G & G Shops,
Inc., the subsidiaries of G & G Shops, Inc. named therein, the
subsidiaries of Petrie Retail, Inc. named therein, PSL, Inc. and G+G
Retail, Inc.*
2.02 Amendment No. 1 to the Asset Purchase Agreement, dated as of July 27,
1998, among G & G Shops, Inc., the subsidiaries of G & G Shops, Inc.
named therein, the subsidiaries of Petrie Retail, Inc. named therein,
PSL, Inc. and G+G Retail, Inc.*
2.03 Amendment to the Asset Purchase Agreement, dated August 24, 1998,
among G & G Shops, Inc., the subsidiaries of G & G Shops, Inc. named
therein, the subsidiaries of Petrie Retail, Inc. named therein, PSL,
Inc. and G+G Retail, Inc.*
3.01 Certificate of Incorporation of G+G Retail, Inc.*
3.02 Amended and Restated By-Laws of G+G Retail, Inc.*
4.01 Indenture, dated as of May 17, 1999, by and between G+G Retail, Inc.,
as issuer, and U.S. Bank Trust National Association, as trustee.*
4.02 Form of 11% Senior Note due 2006 of G+G Retail, Inc.*
4.03 A/B Exchange Registration Rights Agreement, dated as of May 17, 1999,
by and between G+G Retail, Inc. and U.S. Bancorp Libra.*
5.01 Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP as to the
legality of the securities being registered.*
10.01 Agreement of Lease, dated November 28, 1988, between Hartz 83rd Street
Associates and
G & G Shops of Woodbridge, Inc.*
10.02 Lease Addendum, dated April 10, 1990, between Hartz 83rd Street
Associates and G & G Shops of Woodbridge, Inc.*
10.03 Second Lease Modification Agreement, dated February 24, 1994, between
Hartz 83rd Street Associates and G & G Shops of Woodbridge, Inc.*
10.04 Notification Letter, dated November 20, 1995, re: assignment of
landlord's interest under the Agreement of Lease dated November 28,
1988 between Hartz 83rd Street Associates and
G & G Shops of Woodbridge, Inc., as amended.*
10.05 Assignment and Assumption Agreement, dated as of August 28, 1998, by
and among G & G Shops, Inc., the subsidiaries of G & G Shops, Inc.
named therein, the subsidiaries of Petrie Retail, Inc. named therein,
PSL, Inc. and G+G Retail, Inc.*
10.06 Employment Agreement, dated as of August 28, 1998, by and between G+G
Retail, Inc. and Jay Galin.*
10.07 Employment Agreement, dated as of August 28, 1998, by and between G+G
Retail, Inc. and Scott Galin.*
10.08 Indemnification Agreement, dated August 28, 1998, between G+G Retail,
Inc. and Jay Galin.*
10.09 Indemnification Agreement, dated August 28, 1998, between G+G Retail,
Inc. and Scott Galin.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.10 Indemnification Agreement, dated August 28, 1998, between G+G Retail,
Inc. and Craig Cogut.*
10.11 Indemnification Agreement, dated August 28, 1998, between G+G Retail,
Inc. and Lenard Tessler.*
10.12 Indemnification Agreement, dated August 28, 1998, between G+G Retail,
Inc. and Donald D. Shack.*
10.13 Letter Agreement, dated October 12, 1998, by and between G+G Retail,
Inc. and Michael Kaplan.*
10.14 Letter Agreement, dated October 12, 1998, by and between G+G Retail,
Inc. and Jeffrey Galin.*
10.15 Loan and Security Agreement, dated October 30, 1998, by and between
Congress Financial Corporation, G+G Retail, Inc. and the additional
parties thereto.*
10.16 Amendment No. 1 to Employment Agreement, dated as of November 30,
1998, by and between G+G Retail, Inc. and Jay Galin.*
10.17 Amendment No. 1 to Employment Agreement, dated as of November 30,
1998, by and between G+G Retail, Inc. and Scott Galin.*
10.18 Bonus Plan for Senior Management Employees of G+G Retail, Inc.,
effective February 2, 1999.*
10.19 NCR Corporation Master Agreement, effective as of February 9, 1999,
between NCR Corporation and G+G Retail, Inc.*
10.20 Discount Addendum, effective as of February 26, 1999, between NCR
Corporation and G+G Retail, Inc.*/**
10.21 G&G Retail Holdings, Inc. 1999 Stock Option Plan, effective as of
March 15, 1999.*
10.22 Option Agreement, dated as of March 15, 1999, by and between G&G
Retail Holdings, Inc. and Jay Galin.*
10.23 Option Agreement, dated as of March 15, 1999, by and between G&G
Retail Holdings, Inc. and Scott Galin.*
10.24 Service Agreement, dated April 1, 1999, between G+G Retail, Inc. and G
& G Retail of Puerto Rico, Inc.*
10.25 Master Lease Purchase Agreement, dated as of May 4, 1999, by and
between Chase Equipment Leasing, Inc. and G+G Retail, Inc.*
10.26 Addendum to Master Lease Purchase Agreement, effective as of May 4,
1999, by and between Chase Equipment Leasing, Inc. and G+G Retail,
Inc.*
10.27 Form of Exchange Agent Agreement between U.S. Bank Trust National
Association, as exchange agent, and G+G Retail, Inc.*
12.01 Statement regarding the computation of ratio of earnings to fixed
charges for G+G Retail, Inc.*
21.01 Subsidiaries of G+G Retail, Inc.*
23.01 Consent of Ernst & Young LLP.
23.02 Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (contained in
Exhibit 5.01).
24.01 Power of attorney (included on signature page to the Registration
Statement).*
25.01 Statement of eligibility of trustee.*
27.01 Financial data schedule.*
27.02 Financial data schedule.*
99.01 Form of Letter of Transmittal.*
99.02 Form of Notice of Guaranteed Delivery.*
</TABLE>
- --------
* Previously filed.
** Portions of exhibit 10.20 have been omitted pursuant to a confidential
treatment request and filed separately with the Securities and Exchange
Commission.
II-3
<PAGE>
(b) Financial Statement Schedules.
All schedules for which provision is made in Regulation S-X of the Securities
and Exchange Commission are not required under the related instructions or are
inapplicable, or the required information is included in the financial
statements or notes thereto and, therefore, have been omitted.
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424(b) of
the Securities Act if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of Form S-4 within one business day of receipt of
such request and to send the incorporated documents by first class mail
II-4
<PAGE>
or other equally prompt means. This information includes information contained
in documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this Amendment No. 2 to its registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on September 28, 1999.
G+G RETAIL, INC.
/s/ Scott Galin
By: _________________________________
Scott Galin
President and Chief Operating
Officer
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.01 Purchase Agreement, dated as of May 6, 1999, by and among U.S. Bancorp
Investments, Inc., CIBC World Markets Corp., G+G Retail, Inc. and G&G
Retail Holdings, Inc.*
2.01 Asset Purchase Agreement, dated as of July 6, 1998, among G & G Shops,
Inc., the subsidiaries of G & G Shops, Inc. named therein, the
subsidiaries of Petrie Retail, Inc. named therein, PSL, Inc. and G+G
Retail, Inc.*
2.02 Amendment No. 1 to the Asset Purchase Agreement, dated as of July 27,
1998, among G & G Shops, Inc., the subsidiaries of G & G Shops, Inc.
named therein, the subsidiaries of Petrie Retail, Inc. named therein,
PSL, Inc. and G+G Retail, Inc.*
2.03 Amendment to the Asset Purchase Agreement, dated August 24, 1998,
among G & G Shops, Inc., the subsidiaries of G & G Shops, Inc. named
therein, the subsidiaries of Petrie Retail, Inc. named therein, PSL,
Inc. and G+G Retail, Inc.*
3.01 Certificate of Incorporation of G+G Retail, Inc.*
3.02 Amended and Restated By-Laws of G+G Retail, Inc.*
4.01 Indenture, dated as of May 17, 1999, by and between G+G Retail, Inc.,
as issuer, and U.S. Bank Trust National Association, as trustee.*
4.02 Form of 11% Senior Note due 2006 of G+G Retail, Inc.*
4.03 A/B Exchange Registration Rights Agreement, dated as of May 17, 1999,
by and between G+G Retail, Inc. and U.S. Bancorp Libra.*
5.01 Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP as to the
legality of the securities being registered.*
10.01 Agreement of Lease, dated November 28, 1988, between Hartz 83rd Street
Associates and
G & G Shops of Woodbridge, Inc.*
10.02 Lease Addendum, dated April 10, 1990, between Hartz 83rd Street
Associates and G & G Shops of Woodbridge, Inc.*
10.03 Second Lease Modification Agreement, dated February 24, 1994, between
Hartz 83rd Street Associates and G & G Shops of Woodbridge, Inc.*
10.04 Notification Letter, dated November 20, 1995, re: assignment of
landlord's interest under the Agreement of Lease dated November 28,
1988 between Hartz 83rd Street Associates and
G & G Shops of Woodbridge, Inc., as amended.*
10.05 Assignment and Assumption Agreement, dated as of August 28, 1998, by
and among G & G Shops, Inc., the subsidiaries of G & G Shops, Inc.
named therein, the subsidiaries of Petrie Retail, Inc. named therein,
PSL, Inc. and G+G Retail, Inc.*
10.06 Employment Agreement, dated as of August 28, 1998, by and between G+G
Retail, Inc. and Jay Galin.*
10.07 Employment Agreement, dated as of August 28, 1998, by and between G+G
Retail, Inc. and Scott Galin.*
10.08 Indemnification Agreement, dated August 28, 1998, between G+G Retail,
Inc. and Jay Galin.*
10.09 Indemnification Agreement, dated August 28, 1998, between G+G Retail,
Inc. and Scott Galin.*
10.10 Indemnification Agreement, dated August 28, 1998, between G+G Retail,
Inc. and Craig Cogut.*
10.11 Indemnification Agreement, dated August 28, 1998, between G+G Retail,
Inc. and Lenard Tessler.*
10.12 Indemnification Agreement, dated August 28, 1998, between G+G Retail,
Inc. and Donald D. Shack.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.13 Letter Agreement, dated October 12, 1998, by and between G+G Retail,
Inc. and Michael Kaplan.*
10.14 Letter Agreement, dated October 12, 1998, by and between G+G Retail,
Inc. and Jeffrey Galin.*
10.15 Loan and Security Agreement, dated October 30, 1998, by and between
Congress Financial Corporation, G+G Retail, Inc. and the additional
parties thereto.*
10.16 Amendment No. 1 to Employment Agreement, dated as of November 30,
1998, by and between G+G Retail, Inc. and Jay Galin.*
10.17 Amendment No. 1 to Employment Agreement, dated as of November 30,
1998, by and between G+G Retail, Inc. and Scott Galin.*
10.18 Bonus Plan for Senior Management Employees of G+G Retail, Inc.,
effective February 2, 1999.*
10.19 NCR Corporation Master Agreement, effective as of February 9, 1999,
between NCR Corporation and G+G Retail, Inc.*
10.20 Discount Addendum, effective as of February 26, 1999, between NCR
Corporation and G+G Retail, Inc.*/**
10.21 G&G Retail Holdings, Inc. 1999 Stock Option Plan, effective as of
March 15, 1999.*
10.22 Option Agreement, dated as of March 15, 1999, by and between G&G
Retail Holdings, Inc. and Jay Galin.*
10.23 Option Agreement, dated as of March 15, 1999, by and between G&G
Retail Holdings, Inc. and Scott Galin.*
10.24 Service Agreement, dated April 1, 1999, between G+G Retail, Inc. and G
& G Retail of Puerto Rico, Inc.*
10.25 Master Lease Purchase Agreement, dated as of May 4, 1999, by and
between Chase Equipment Leasing, Inc. and G+G Retail, Inc.*
10.26 Addendum to Master Lease Purchase Agreement, effective as of May 4,
1999, by and between Chase Equipment Leasing, Inc. and G+G Retail,
Inc.*
10.27 Form of Exchange Agent Agreement between U.S. Bank Trust National
Association, as exchange agent, and G+G Retail, Inc.*
12.01 Statement regarding the computation of ratio of earnings to fixed
charges for G+G Retail, Inc.*
21.01 Subsidiaries of G+G Retail, Inc.*
23.01 Consent of Ernst & Young LLP.
23.02 Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (contained in
Exhibit 5.01).
24.01 Power of attorney (included on signature page to the Registration
Statement).*
25.01 Statement of eligibility of trustee.*
27.01 Financial data schedule.*
27.02 Financial data schedule.*
99.01 Form of Letter of Transmittal.*
99.02 Form of Notice of Guaranteed Delivery.*
</TABLE>
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*Previously filed.
** Portions of exhibit 10.20 have been omitted pursuant to a confidential
treatment request and filed separately with the Securities and Exchange
Commission.
2
<PAGE>
EXHIBIT 23.01
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated April 14, 1999, in Amendment No. 2 to the Registration
Statement on Form S-4 and related Prospectus of G+G Retail, Inc. for the
registration of $107 million of 11% Senior Notes due 2006.
/s/ Ernst & Young LLP
MetroPark, New Jersey
September 28, 1999
