<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended October 30, 1999
Commission File Number 333-81307
G+G Retail, Inc.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 22-3596083
- ---------------------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
520 Eighth Avenue, New York, New York 10018
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (212) 279-4961
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
<TABLE>
<S> <C>
Class B Outstanding at December 8, 1999
- -------------------------------- ----------------------------------------------
Common $.01 par value 10 shares
</TABLE>
<PAGE>
Contents
<TABLE>
<CAPTION>
Page No.
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<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - October 30, 1999 and January 30, 1999 3
Condensed Consolidated and Combined Statements of
Operations - Three Months Ended October 30, 1999, the
period August 2, 1998 to August 28, 1998 and the
period August 29, 1998 to October 31, 1998 4
Condensed Consolidated and Combined Statements of
Operations - Nine Months Ended October 30, 1999, the
period February 1, 1998 to August 28, 1998 and the
period August 29, 1998 to October 31, 1998 5
Condensed Consolidated and Combined Statements of Cash
Flows - Nine Months Ended October 30, 1999, the period
February 1, 1998 to August 28, 1998 and the period
August 29, 1998 to October 31, 1998 6
Notes to Unaudited Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
G+G Retail, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
October January
30, 1999 30, 1999
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<S> <C> <C>
Assets
Current assets:
Cash and short-term investments $ 11,370 $ 13,129
Accounts receivable 1,125 718
Merchandise inventories 23,591 12,578
Prepaid expenses 700 794
Deferred tax assets 645 645
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Total current assets 37,431 27,864
Property and equipment, net 31,772 22,560
Intangible assets, net 117,946 116,625
Deferred tax assets 1,535 410
Other assets 226 205
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Total assets $188,910 $167,664
======================================
Liabilities and stockholder's equity
Current liabilities:
Accounts payable $ 16,066 $ 13,338
Accrued expenses 15,749 10,555
Accrued interest 5,395 600
Income taxes payable 326 1,330
Current portion of capital lease 170 -
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Total current liabilities 37,706 25,823
Capital lease 876 -
Long-term debt 99,535 90,000
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Total liabilities 138,117 115,823
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 495 2,013
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Total stockholder's equity 50,793 51,841
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Total liabilities and stockholder's equity $188,910 $167,664
======================================
</TABLE>
See accompanying notes.
3
<PAGE>
G+G Retail, Inc.
Condensed Consolidated and Combined Statements of Operations
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Consolidated Combined Consolidated
G+G Retail, Inc. G&G Shops, Inc. G+G Retail, Inc.
("Successor") ("Predecessor") ("Successor")
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Three months August 2, 1998 August 29, 1998
ended to to
October 30, 1999 August 28, 1998 October 31, 1998
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<S> <C> <C> <C>
Net sales $77,056 $24,791 $44,457
Cost of sales (including occupancy costs) 49,308 15,598 29,300
Selling, general, administrative and buying expenses 22,561 9,691 13,670
Depreciation and amortization expense 2,553 394 1,251
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Operating income (loss) 2,634 (892) 236
Interest expense 3,393 - 2,923
Interest income 138 - 35
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Loss before benefit for income taxes (621) (892) (2,652)
Benefit for income taxes (274) (367) (1,167)
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Net loss $ (347) $ (525) $ (1,485)
===========================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
G+G Retail, Inc.
Condensed Consolidated and Combined Statements of Operations
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Consolidated Combined Consolidated
G+G Retail, Inc. G&G Shops, Inc. G+G Retail, Inc.
("Successor") ("Predecessor") ("Successor")
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Nine months February 1, 1998 August 29, 1998
ended to to
October 30, 1999 August 28, 1998 October 31, 1998
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<S> <C> <C> <C>
Net sales $227,322 $162,823 $44,457
Cost of sales (including occupancy costs) 146,058 106,056 29,300
Selling, general, administrative and buying expenses 64,759 49,330 13,670
Depreciation and amortization expense 8,725 2,845 1,251
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Operating income 7,780 4,592 236
Interest expense 10,060 - 2,923
Interest income 372 - 35
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(Loss) income before extraordinary loss and (benefit)
provision for income taxes (1,908) 4,592 (2,652)
(Benefit) provision for income taxes (840) 1,892 (1,167)
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(Loss) income before extraordinary loss (1,068) 2,700 (1,485)
Extraordinary loss, net of $354,000 of income taxes (450)
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Net (loss) income $ (1,518) $ 2,700 $ (1,485)
===================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
G+G Retail, Inc.
Condensed Consolidated and Combined Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Consolidated Combined Consolidated
G+G Retail, Inc. G&G Shops,Inc. G+G Retail, Inc.
("Successor") ("Predecessor") ("Successor")
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Nine months February 1, 1998 August 29, 1998
ended to to
October 30, 1999 August 28, 1998 October 31, 1998
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<S> <C> <C> <C>
Operating activities
Net (loss) income $(1,518) $2,700 $(1,485)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization expense 8,725 2,845 1,251
Amortization of debt issuance costs 1,349 - 84
Write-off of deferred financing costs - - 390
Deferred income taxes (1,125) - -
Extraordinary loss, net of income tax 450 - -
Changes in assets and liabilities:
Accounts receivable, net, prepaid expenses and other assets (334) 321 (745)
Income taxes receivable - - (1,167)
Merchandise inventories (11,013) (8,611) (1,967)
Accounts payable, and other liabilities 12,066 18,522 2,898
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Net cash provided by (used in) operating activities 8,600 15,777 (741)
Investing activities
Capital expenditures, net (15,318) (3,384) (1,579)
Acquisition of business, net of cash acquired - - (132,000)
Payment of acquisition costs - - (2,879)
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Net cash used in investing activities (15,318) (3,384) (136,458)
Financing activities
Issuance of senior notes 107,000 - -
Proceeds from senior bridge note - - 90,000
Proceeds from note payable - - 5,000
Proceeds from initial capital contribution - - 50,528
Proceeds from capital lease 1,047 - -
Payment of senior bridge note (90,000) - -
Payment of note payable - - (5,000)
Original issue discount on senior notes (7,340) - -
Payment of debt issuance costs (5,748) - (2,759)
Payment on behalf of Holdings - - (700)
Distributions to parent - (166,360) -
Distributions from parent - 152,220 -
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Net cash provided by (used in) financing activities 4,959 (14,140) 137,069
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Net decrease in cash and short-term investments (1,759) (1,747) (130)
Cash and short-term investments, beginning of period 13,129 - 1,775
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Cash and short-term investments, end of period $11,370 $(1,747) $1,645
=========================================================
Supplemental cash flow disclosures Cash paid for:
Interest $3,924 $ - $1,767
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Income taxes $956 $ - $ -
=========================================================
</TABLE>
See accompanying notes
6
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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 period February 1, 1998
to August 28, 1998 and the statement of operations for the period
August 2, 1998 to August 28, 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
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 $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: (1) its financial position as of October 30, 1999, (2)
the results of its operations for the three and nine months ended
October 30, 1999 and the period August 29, 1998 to October 31, 1998,
(3) its cash flows for the nine month period ended October 30, 1999 and
the period August 29, 1998 to October 31, 1998, (4) the results of the
Predecessor's operations for the period August 2, 1998 to August 28,
1998 and the period February 1, 1998 to August 28, 1998, (5) the
Predecessor's cash flow for the period February 1, 1998 to August 28,
1998. The balance sheet at January 30, 1999 has been derived from
financial
7
<PAGE>
G+G Retail, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
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 the Company's Registration
Statement on Form S-4 filed on October 4, 1999. The interim
operating results are not necessarily indicative of the results that
may be expected for an entire year.
Note 2 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 ("Senior Notes"). On November
2, 1999, all of the "Senior Notes" were exchanged for an equal amount
of exchange notes that are freely tradable.
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 million,
of which $10 million can be used for letters of credit. There were no
outstanding borrowings under the Facility at October 30, 1999.
Outstanding letters of credit under the Facility totaled
approximately $700,000 at October 30, 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 (8.25% at October 30, 1999).
Note 4 The pro forma results (a) for the nine months ended October 30,
1999, which assume the issuance of the $107.0 million "Senior Notes"
on February 1, 1998, and (b) for the nine months ended October 31,
1998, which assume the consummation of the Acquisition and the
issuance of the $107.0 million "Senior Notes" on February 1, 1998,
are as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
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October 30, 1999 October 31, 1998
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<S> <C> <C>
Net sales $227,322 $207,280
Operating income 7,780 1,734
Net loss (1,116) (5,243)
</TABLE>
8
<PAGE>
G+G Retail, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(continued)
The pro forma results are not necessarily indicative of the results
of operations that would have occurred had the Acquisition and the
issuance of the "Senior Notes" have taken place at the beginning of
the periods presented, nor are they intended to be indicative of
results that may occur in the future.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
We are a leading national mall-based retailer of popular price female junior
apparel. For over 30 years, we and our predecessors have built a reputation for
providing fashion apparel and accessories distinctly targeted primarily at
teenaged women. Our core customers are young women principally between the ages
of 13 to 19 years old. We sell substantially all of our merchandise under
private label names including Rave, Rave Up, In Charge, R4R and Rave City, which
provide our customers with fashionable, quality apparel and accessories at lower
prices than brand name merchandise. Our emphasis on sourcing merchandise
domestically and our efficient distribution system allow for short inventory
lead times, which facilitates quick response to the latest fashion trends. As of
October 30, 1999, we had 455 operating stores principally located 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 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 teenaged customers.
In July 1999, we opened our first Rave Girl store, which is a market test of
stores targeted to serve the 8-to-12 year old girl. At October 30, 1999, there
were five Rave Girl stores in operation. Two more stores opened in November,
which will bring the total to seven Rave Girl stores in operation for the
Christmas period.
Results of Operations
Comparison of Third Quarter Fiscal 2000 and Third Quarter Fiscal 1999
The statement of operations for the three months ended October 30, 1999 is not
comparable to the three months ended October 31, 1998 because of the change in
basis of accounting that resulted from the August 28, 1998 acquisition of
substantially all of the assets and assumption of certain liabilities of G&G
Shops, Inc. and its subsidiaries and certain other subsidiaries of Petrie Retail
Inc. Since the acquisition took place during the third quarter of fiscal 1999
(August 28, 1998), we only incurred additional depreciation and amortization
expense associated with the acquisition and interest expense associated with the
financing of the acquisition from August 29, 1998 through October 31, 1998.
Interest expense for the aforementioned period reflects interest associated with
the senior bridge notes, while interest expense for the third quarter of fiscal
2000 reflects interest associated with the senior notes for the full third
quarter. Except for depreciation, amortization, and interest expense noted
above, the statement of operations for the third quarter of fiscal 2000 is
comparable to the third quarter of fiscal 1999.
10
<PAGE>
Net sales increased $7.9 million or 11.4% to $77.1 million in the third quarter
of fiscal 2000 as compared to $69.2 million in the third quarter of fiscal 1999.
The increase in net sales was due to the opening of new stores which contributed
$7.6 million to net sales in the third quarter of fiscal 2000 and approximately
$300,000, or 0.5% was due to an increase in same store sales compared to the
third quarter of fiscal 1999. Average sales per gross square foot increased 2.9%
to $70 in the third quarter of fiscal 2000 from $68 in the third quarter of
fiscal 1999. We operated 455 stores at the end of the third quarter of fiscal
2000 as compared to 420 stores at the end of the third quarter of fiscal 1999,
as a result of closing 13 stores and opening 48 new stores.
Cost of sales, including occupancy costs, increased 9.8% to $49.3 million in the
third quarter of fiscal 2000 from $44.9 million in the third quarter of fiscal
1999. As a percentage of net sales, cost of sales including occupancy costs
decreased from 64.9% in the third quarter of fiscal 1999 to 63.9% in the third
quarter of fiscal 2000. This 1.0% decrease resulted from a 1.2% decrease in cost
of sales, offset in part by a slight increase in occupancy costs. The decrease
in the cost of sales as a percentage of net sales was due to an increase in the
initial mark-on. The increase in occupancy costs as a percentage of net sales
resulted primarily from the increase in new stores, which have slightly higher
rents than older stores.
In the third quarter of fiscal 2000, selling, general, administrative and buying
expenses decreased by 3.4% to $22.6 million compared to $23.4 in the third
quarter of fiscal 1999. Fiscal 1999 selling, general, administrative and buying
expenses reflect a non-recurring $3.3 million success fee obligation recorded
for two of our officers in connection with their assistance with the
acquisition, as well as a $160,000 royalty charge from Petrie for the use of
certain trademarks which were owned by Petrie. We purchased these trademarks in
connection with the acquisition. Third quarter fiscal 2000 expenses reflect
additional selling costs related to new store openings, an increase in same
store selling expenses and an increase in administrative costs.
Depreciation and amortization expense for the third quarter fiscal 2000 was $2.6
million. Depreciation and amortization expense for the period August 2, 1998 to
August 28, 1998 and the period August 29, 1998 to October 31, 1998 was
approximately $394,000 and $1.3 million, respectively. 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.
11
<PAGE>
Interest expense in the third quarter of fiscal 2000 was $3.4 million or 4.4% of
net sales as compared to $2.9 million or 6.5% of net sales for the period August
29, 1998 to October 31, 1998. The third quarter of fiscal 2000 reflects interest
on the senior notes and amortization of the $7.3 million original issue
discount, the $470,000 value assigned to the warrants issued by G&G Retail
Holdings, Inc, our parent company, and deferred financing costs for the full
quarter. The third quarter of fiscal 1999 reflects interest on the senior bridge
note and amortization of related issuance costs from August 29, 1998 through
October 31, 1998 and write-off of deferred financing costs of approximately
$390,000 in connection with the termination and replacement of our Loan and
Security Agreement. We had no borrowings for the period August 2, 1998 to August
28, 1998.
The income tax benefit for the third quarter of fiscal 2000 was approximately
$274,000. The income tax benefit was $367,000 and $1.2 million for the period
August 2, 1998 to August 28, 1998 and the period August 29, 1998 to October 31,
1998, respectively. The decrease in the tax benefit was due to a larger pre-tax
loss in the third quarter of fiscal 1999. The income tax benefit rate for the
third quarter of fiscal 2000 was 44.0% as compared to 41.1% for the period
August 2, 1998 to August 28, 1998 and 44.0% for the period August 29, 1998 to
October 31, 1998. The higher rate was principally attributable to the fact that
our legal structure is different from the legal structure of the companies from
which we acquired our business.
Net loss decreased from $2.0 million in the third quarter of fiscal 1999 to a
loss of approximately $347,000 in the third quarter of fiscal 2000 due to the
factors discussed above.
Comparison of First Nine Months Fiscal 2000 and First Nine Months Fiscal 1999
The statement of operations for the nine months ended October 30, 1999 is not
comparable to the nine months ended October 31, 1998 because of the change in
basis of accounting that resulted from the August 28, 1998 acquisition of
substantially all of the assets and assumption of certain liabilities of G&G
Shops, Inc. and its subsidiaries and certain other subsidiaries of Petrie Retail
Inc. Since the acquisition took place on August 28, 1998, we only incurred
additional depreciation and amortization expense associated with the acquisition
and interest expense associated with the financing of the acquisition from
August 29, 1998 through October 31, 1998. Interest expense for the
aforementioned period reflects interest associated with the senior bridge notes.
Interest expense for the first nine months of fiscal 2000 reflects interest
associated with the senior bridge notes through May 17, 1999 and interest
associated with the senior notes for the period May 18, 1999 through October 30,
1999. Except for depreciation, amortization, and interest expense noted above,
the statement of operations for the first nine months of fiscal 2000 is
comparable to the first nine months of fiscal 1999.
12
<PAGE>
Net sales increased to $227.3 million in the first nine months of fiscal 2000
from $207.3 million in the first nine months of fiscal 1999. The $20.0 million
or 9.6% increase in net sales was due to the opening of new stores which
contributed $16.3 million to the net sales increase in fiscal 2000 and a $3.7
million, or 1.8% increase in same store sales compared to the first nine months
of fiscal 1999. Average sales per gross square foot increased 3.4% to $214 in
the first nine months of fiscal 2000 from $207 in the first nine months fiscal
1999.
Cost of sales, including occupancy costs, increased 7.9% to $146.1 million in
the first nine months of fiscal 2000 from $135.4 million in the first nine
months of fiscal 1999. As a percentage of net sales, cost of sales including
occupancy costs decreased 1.0% from 65.3% in the first nine months of fiscal
1999 to 64.3% in the first nine months of fiscal 2000. This 1.0% decrease
resulted from a 1.1% decrease in cost of sales was offset in part by a slight
increase 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.
In the first nine months of fiscal 2000, selling, general, administrative and
buying expenses totaled $64.8 million compared to $63.0 million in the first
nine months of fiscal 1999. Fiscal 2000 expenses reflects additional selling
costs related to new store openings, an increase in same store selling expenses
and an increase in administrative costs which is partially offset by a gain from
insurance proceeds received in the second quarter from a prior year hurricane
loss of approximately $300,000 Fiscal 1999 expenses reflect a non-recurring $3.3
million success fee obligation recorded for two of our officers in connection
with their assistance with the acquisition, as well as a $1.0 million royalty
charge from Petrie for the use of certain trademarks which were owned by Petrie.
We purchased these trademarks in connection with the acquisition.
Depreciation and amortization expense for the first nine months fiscal 2000 was
$8.7 million. Depreciation and amortization expense for the period February 1,
1998 to August 28, 1998 and the period August 29, 1998 to October 31, 1998 was
$2.8 million and $1.3 million, respectively. 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 nine months of fiscal 2000 was $10.1 million or
4.4% of net sales as compared to $2.9 million or 6.5% of net sales for the
period August 29, 1998 to October 31, 1998. The period January 31, 1999 through
May 17, 1999 reflects interest on the senior bridge notes and amortization of
the related issuance costs. The period May 18, 1999 through October 30, 1999
reflects interest on the senior notes, the amortization
13
<PAGE>
of the $7.3 million original issue discount, the $470,000 value assigned to the
warrants issued by our parent company and deferred financing costs. Interest
expense for the period August 29, 1998 to October 31, 1998 reflects interest on
the senior bridge note and amortization of related issuance costs and write-off
of deferred financing costs of approximately $390,000 in connection with the
termination and replacement of our Loan and Security Agreement. We had no
borrowings for the period February 1, 1998 to August 28, 1998.
The income tax benefit for the first nine months of fiscal 2000 was
approximately $840,000, excluding $354,000 of income tax expense on the
extraordinary loss. The income tax expense was $1.9 million and the income tax
benefit was $1.2 million, respectively, for the period February 1, 1998 to
August 28, 1998 and the period August 29, 1998 to October 31, 1998. The tax
benefit for the first nine months of fiscal 2000 as compared to a tax expense
for the first nine months of fiscal 1999 was due to a pre-tax loss in the first
nine months of fiscal 2000 resulting from interest expense on the debt and the
amortization of intangible assets for the full nine month period versus the
period from August 29, 1998 to October 31, 1998 for fiscal 1999. The income tax
benefit rate for the first nine months of fiscal 2000 was 44.0% as compared to
an income tax expense rate of 41.2% for the period February 1, 1998 to August
28, 1998 and an income tax benefit rate of 44.0% for the period August 29, 1998
to October 31, 1998. The higher rate was principally 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 the write-off of the unamortized finance fees related to the senior bridge
notes. These notes were repaid in the second quarter of fiscal 2000.
Net income decreased from $1.2 million in the first nine months of fiscal 1999
to a loss of $1.5 in the first nine months of fiscal 2000 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: (i) seasonal working capital, (ii) the construction of new stores,
(iii) the remodeling or upgrading of existing stores as necessary, and (iv)
upgrading and maintaining our computer system. 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 nonvoting Class D Common Stock at an exercise price of $0.01 per
share.
14
<PAGE>
The net proceeds from this private placement were approximately $94.0 million,
after deducting the original issue discount of $7.3 million and fees of $5.7
million. We used the net proceeds to repay the senior bridge notes and the
balance of the net proceeds was used for general corporate purposes. On November
2, 1999, the private placement notes were exchanged for exchange notes that are
freely tradable.
Net cash provided by operating activities in the first nine months of fiscal
2000 was $8.6 million as compared to $15.0 million in the first nine months of
fiscal 1999. The decrease in net cash provided by operating activities was
principally due to the fact that accounts payable and other accrued liabilities
increased $9.4 million more during the first nine months of fiscal 1999 as
compared to the first nine months of fiscal 2000 because Petrie used
substantially all of the Predecessor's excess cash to fund Petrie's own cash
needs.
Capital expenditures for the first nine months of fiscal 2000 and the first nine
months of fiscal 1999 were $15.3 million and $5.0 million, respectively.
Management estimates that capital expenditures for the remaining three months of
fiscal 2000 will be $2.0 million, of which, $1.0 million will be used for new
point-of-sale equipment and software and $1.0 million will be used to open an
additional eight new stores (40 stores have been opened during the nine month
period ended October 30, 1999) and to upgrade existing stores. We have an
agreement from a lending institution for $5.0 million of capital lease financing
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 expire
five years from the date of the initial equipment financed. As of October 30,
1999, $1.1 million of lease financing was incurred under this arrangement. For
fiscal 2001, management estimates capital expenditures of $21.0 million,
inclusive of $3.0 million of capital lease financing.
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, seven stores in the first nine months of fiscal 2000 and anticipate
closing an additional five stores during fiscal 2000. We closed two stores in
the first nine months of fiscal 1999.
As of October 30, 1999, we had $11.4 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 which are
promptly converted to cash.
15
<PAGE>
As of October 30, 1999, our indebtedness under the senior notes totaled $99.5
million, which reflects the aggregate face amount of the notes of $107.0
million, net of $7.0 of unamortized original issue discount, and approximately
$440,000 of unamortized 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)
and 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 certain 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 (8.25% at October 30,
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 all
or substantially all of our assets. As of October 30, 1999, we had no borrowings
outstanding under the revolving credit facility, but had $700,000 of letters of
credit outstanding, and $18.7 million of availability thereunder.
We have minimum annual rental commitments of approximately $21.7 million in
fiscal 2000 under existing store leases and the leases for our corporate
headquarters and distribution center.
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 2001. 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. The sufficiency of our cash flow is affected by
numerous factors affecting our operations, including factors beyond our control.
See the statement regarding forward looking disclosures.
If a "change of control" occurs, we will be required under the indenture to
offer to repurchase all 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. We
may not be able to raise enough money to finance the change of control offer
required by the indenture related to the notes. If there is a change in control,
we could be in default under the indenture.
16
<PAGE>
In addition, upon a change of control, our parent company may not have
sufficient funds to redeem its preferred stock unless we pay a dividend of such
amount to them.
Seasonality and Quarterly Operating Results
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 29.6% of 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.
Year 2000 Compliance
We have completed a review of our own information technology and non-information
technology systems to determine whether they are year 2000 compliant. We have
expended approximately $50,000 on testing and remediation and believe that all
of 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 end 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 obtained from this vendor, these systems are compliant with the
year 2000.
We have converted approximately 50% of our stores to new point-of-sale equipment
during fiscal 2000 and will convert the remaining stores during the first half
of fiscal 2001. We believe that the stores that have not been converted to the
new point-of-sale equipment will continue to support our store operations
adequately and will permit us to obtain authorization of third-party credit
cards in the year 2000.
17
<PAGE>
We distributed a questionnaire relating to year 2000 compliance to all
merchandise vendors that had annual volume with us of over $1.0 million. We are
not aware of any third-party year 2000 issue relating to our vendors that would
materially impact our business, financial condition or results of operations.
However, we have no means of ensuring that our suppliers will be year 2000
compliant. The inability of suppliers to complete their year 2000 resolution
process in a timely fashion could materially impact our business. Vendors 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, we could
experience system failure of our management information systems. This would
cause disruptions in our operations, including temporary inability to process
financial information or credit card transactions, receive shipments or timely
deliver our merchandise to our stores. We could experience increased expenses
associated with stabilization of operations after critical systems failure. In
addition, a significant number of our vendors could 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 could
likely result in a loss of income and otherwise have a material adverse effect
on our business and operating results.
We have not developed contingency plans to handle these worst case year 2000
scenarios. We expect, however, in the event of a failure of our management
information systems over a sustained period we could revert to a number of
manual systems for recording sales, ordering merchandise and replenishing our
store inventory levels. Further, in the event of a loss, of a significant number
of vendors we would 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.
Inflation
We do not believe that inflation has had a material effect on the results of
operations during the past three fiscal years. However, our business may be
affected by inflation in the future.
18
<PAGE>
Statement Regarding Forward Looking Disclosure
Certain sections of this Report, including the preceding "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
contain various forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, and Section 21E of the Securities Exchange Act of
1934, which represent our expectations or beliefs concerning future events. We
caution that these statements are further qualified by important factors that
could cause actual results to differ materially from those in the forward
looking statements, including, without limitation, the retention of our
suppliers, our ability to expand and to continue to increase comparable store
sales, the sufficiency of our working capital and cash flows from operating
activities, a decline in the demand for our merchandise, our ability to locate
and obtain acceptable store sites and lease terms or renew existing leases, our
ability to obtain adequate merchandise supply, our ability to hire and train
employees, our ability to gauge the fashion tastes of our customers and provide
merchandise that satisfies customer demand, our management's ability to manage
expansion, the effect of economic conditions, the effect of severe weather or
natural disasters and the effect of competitive pressures from other retailers.
For a discussion of these and other factors that could cause results to differ
from the expectations and projections expressed in this report, see the Risk
Factors section of Amendment No. 5 to our registration statement on Form S-4,
filed with the SEC on October 4, 1999 (File No. 333-81307).
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable
19
<PAGE>
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits
<TABLE>
<S> <C>
3.01 Certificate of Incorporation of G+G Retail, Inc., incorporated by
reference to the registrant's Registration Statement of Form S-4,
declared effective by the SEC on October 4, 1999 (File No.
333-81307) (the "S-4").
3.02 Amended and Restated By-Laws of G+G Retail, Inc., incorporated by
reference to the S-4.
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, incorporated by reference to the S-4.
4.02 Form of 11% Senior Note due 2006 of G+G Retail, Inc., incorporated
by reference to the S-4.
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,
incorporated by reference to the S-4.
27.01 Financial data schedule.
</TABLE>
(b) Reports on Form 8-K
None
20
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
G+G RETAIL, INC.
<TABLE>
<S> <C>
Date December 8, 1999 By /s/ Michael Kaplan
---------------- -------------------------
Michael Kaplan, Chief Financial Officer
(signing on behalf of the registrant and
as principal financial officer)
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
3.01 Certificate of Incorporation of G+G Retail, Inc., incorporated by
reference to the registrant's Registration Statement of Form S-4,
declared effective by the SEC on October 4, 1999 (File No.
333-81307) (the "S-4").
3.02 Amended and Restated By-Laws of G+G Retail, Inc., incorporated by
reference to the S-4.
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, incorporated by reference to the S-4.
4.02 Form of 11% Senior Note due 2006 of G+G Retail, Inc., incorporated
by reference to the S-4.
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,
incorporated by reference to the S-4.
27.01 Financial data schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> OCT-30-1999
<CASH> 11,370
<SECURITIES> 0
<RECEIVABLES> 1,125
<ALLOWANCES> 0
<INVENTORY> 23,591
<CURRENT-ASSETS> 37,431
<PP&E> 31,772
<DEPRECIATION> 0
<TOTAL-ASSETS> 188,910
<CURRENT-LIABILITIES> 37,706
<BONDS> 99,535
0
0
<COMMON> 0
<OTHER-SE> 50,793
<TOTAL-LIABILITY-AND-EQUITY> 188,910
<SALES> 227,322
<TOTAL-REVENUES> 227,322
<CGS> 146,058
<TOTAL-COSTS> 64,759
<OTHER-EXPENSES> 8,725
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,060
<INCOME-PRETAX> (1,908)
<INCOME-TAX> (840)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (450)
<CHANGES> 0
<NET-INCOME> (1,518)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
