10-Q 1 a31333.txt G&G RETAIL 10-Q 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 August 4, 2001 -------------- Commission File Number 333-81307 --------- G+G Retail, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 22-3596083 ------------------------------------ ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 520 Eighth Avenue, New York, New York 10018 ------------------------------------------------------------ (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 X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Class B Outstanding at September 14, 2001 ---------------------- ----------------------------------- Common $.01 par value 10 shares Contents

Part I. Financial Information Item 1. Financial Statements G+G Retail, Inc. Condensed Consolidated Balance Sheets (Unaudited) (In thousands)

See accompanying notes. 3 G+G Retail, Inc. Condensed Consolidated Statements of Operations (Unaudited) (In thousands)

See accompanying notes. 4 G+G Retail, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)

5 See accompanying notes G+G Retail, Inc. Notes to Unaudited Condensed Consolidated Financial Statements Note 1 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 August 4, 2001, (2) the results of its operations for the three and six months ended August 4, 2001 and July 29, 2000 and (3) its cash flows for the six month period ended August 4, 2001 and July 29, 2000. The balance sheet at February 3, 2001 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 the Company's Form 10-K for the fiscal year ended February 3, 2001 filed on May 4, 2001. 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 G+G Retail Holdings, Inc. ("Holdings" or the "Parent") completed a private placement of 107,000 units consisting in the aggregate of $107.0 million face amount of 11% Senior Notes ("Senior Notes") due May 15, 2006 with interest payable semi-annually and warrants to purchase 8,209 shares of non-voting class D Common Stock of Holdings at an exercise price of $.01 per share. 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 May 2004, and provides for a revolving credit facility ("Facility"), subject to eligible inventory and credit card receivables, not to exceed $30.0 million, of which $10.0 million can be used for letters of credit. There were $1.9 million of outstanding borrowings under the Facility at August 4, 2001. Outstanding letters of credit under the Facility totaled $641,000 at August 4, 2001. Interest on outstanding borrowings can range either from Prime to Prime plus .25% or from 1.50% over the Eurodollar Rate to a maximum 2.25% over the Eurodollar Rate, based on the profitability and amount of indebtedness of the Company. 6 Note 4 In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2003. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income. During fiscal 2003, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of February 2, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. 7 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 and pre-teen apparel. For over 30 years, we and our predecessors have built a reputation for providing fashion apparel and accessories distinctly targeted 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, Rave City and Rave Girl, 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 August 4, 2001, we had 539 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, Rave and Rave Girl 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 started our Rave Girl chain of stores, which sells fashion apparel and accessories targeted at girls aged 7 to 12 years old. At August 4, 2001, there were 78 Rave Girl stores in operation throughout the United States and Puerto Rico. Our Rave Girl stores are approximately 2,000 gross square feet and are designed with bright colors, unique lighting and exciting graphics. In August 1998, we acquired the business of G&G Shops, Inc. and the stores operated by subsidiaries of Petrie Retail, Inc. and the trademarks and other assets used in that business. We obtained financing for the acquisition by a net capital contribution by G+G Retail Holdings, Inc., our parent company, to us of $49.8 million and by borrowing $90.0 million under senior bridge notes that we subsequently repaid with the issuance of our senior notes. We accounted for the acquisition under the purchase method of accounting. Results of Operations Comparison of The Second Quarter of Fiscal 2002 and The Second Quarter of Fiscal 2001 Net sales increased $12.9 million or 16.8% to $89.5 million in the second quarter of fiscal 2002 as compared to $76.6 million in the second quarter of fiscal 2001. The increase in net sales was due to a $2.5 million, or 3.3%, increase in same store sales compared to the second quarter of fiscal 2001 and the opening of new stores which contributed $10.4 million to net sales in the second quarter of fiscal 2002. Average sales per gross square foot increased 6.2% to $69 in the second quarter of fiscal 2002 from $65 in the second quarter fiscal 2001. We operated 539 stores at the end of the second quarter of fiscal 2002 as compared to 492 stores at the end of the second quarter of fiscal 2001, as a result of opening 65 new stores and closing 18 stores. 8 Cost of sales, including occupancy costs, increased 11.3% to $59.9 million in the second quarter of fiscal 2002 from $53.8 million in the second quarter of fiscal 2001. As a percentage of net sales, cost of sales including occupancy costs decreased from 70.2% in the second quarter of fiscal 2001 to 66.9% in the second quarter of fiscal 2002. This 3.3% decrease resulted from a 3.2% decrease in cost of merchandise and a 0.1% decrease in occupancy costs. The decrease in the cost of merchandise as a percentage of net sales was due to an increase in the initial mark-on and a decrease in markdowns as a percent of sales. Selling, general, administrative and buying expenses increased 16.7% from $25.1 million in the second quarter of fiscal 2001 to $29.3 million in the second quarter of fiscal 2002. As a percentage of net sales, these expenses decreased to 32.7% in the second quarter of fiscal 2002 as compared to 32.8% in the second quarter of fiscal 2001. The $4.2 million increase resulted from 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 second quarter of fiscal 2002 was $3.8 million as compared to $3.3 million for the second quarter of fiscal 2001. The increase of $500,000 is attributable to the additional depreciation and amortization expense related to new stores, remodels and relocations. Interest expense in the second quarter of fiscal 2002 was $3.7 million or 4.1% of net sales as compared to $3.5 million or 4.6% of net sales for the second quarter of fiscal 2001. Interest expense for both the second quarter of fiscal 2002 and 2001 reflects interest on the capital lease, short-term borrowings, senior notes and amortization of the $7.3 million original issue discount, the $470,000 value assigned to the warrants issued by Holdings, our parent company, and the deferred financing costs. The income tax benefit for the second quarter of fiscal 2002 was $3.0 million as compared to $3.8 million in the second quarter of fiscal 2001. The income tax benefit rate was 42.6% in both fiscal quarters. The net loss decreased from $5.2 million in the second quarter of fiscal 2001 to a loss of $4.1 million in the second quarter of fiscal 2002 due to the factors discussed above. Comparison of The First Six Months of Fiscal 2002 and The First Six Months of Fiscal 2001 Net sales increased $23.3 million or 15.5% to $174.0 million in the first six months of fiscal 2002 as compared to $150.7 million in the first six months of fiscal 2001. The increase in net sales was due to the opening of new stores, which contributed $19.7 million to net sales in the first six months of fiscal 2002, and a $3.6 million or 2.5% increase in same store sales. Average sales per gross square foot increased 5.4% to $136 in the first six months of fiscal 2002 from $129 in the first six months of fiscal 2001. Cost of sales, including occupancy costs, increased 12.1% to $113.6 million in the first six months of fiscal 2002 from $101.3 million in the first six months of fiscal 2001. As a percentage of net sales, cost of sales including occupancy costs decreased 1.9% from 9 67.2% in the first six months of fiscal 2001 to 65.3% in the first six months of fiscal 2002. This 1.9% decrease resulted from a 2.2% decrease in the cost of merchandise and a 0.3% increase in occupancy costs as a percent of sales. The decrease in the cost of merchandise as a percentage of net sales was due to an increase in the initial mark-on and a decrease in markdowns as a percent of sales. The occupancy cost increase as a percent of sales resulted primarily from an overall increase in occupancy costs. In the first six months of fiscal 2002, selling, general, administrative and buying expenses totaled $57.4 million compared to $49.5 million in the first six months of fiscal 2001. As a percent of sales, these expenses increased from 32.9% in the first six months of fiscal 2001 to 33.0% in the first six months of fiscal 2002. The $7.9 million increase resulted from 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 first six months of fiscal 2002 was $7.4 million as compared to $6.3 for the first six months of fiscal 2001. The increase is attributable to additional depreciation and amortization expense related to new stores, remodels and relocations. Interest expense in the first six months of fiscal 2002 was $7.2 million or 4.1% of net sales as compared to $7.0 million or 4.6% of net sales for the first six months of fiscal 2001. Interest expense for the first six months of fiscal 2002 and 2001 reflects interest on the capital lease, short-term borrowings, senior notes and amortization of the $7.3 million original issue discount, the $470,000 value assigned to the warrants issued by Holdings, our parent company, and the deferred financing costs. The income tax benefit for the first six months of fiscal 2002 was $4.9 million as compared to $5.6 million for the first six months of fiscal 2001. The income tax benefit rate was 42.6% in both six month periods. The net loss decreased from $7.5 million in the first six months of fiscal 2001 to a loss of $6.6 million in the first six months of fiscal 2002 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. Our revolving credit facility provides for a line of credit in an amount of up to $30.0 million (including a sub limit of $10.0 million for letters of credit) and matures in May 2004. We may use the revolving credit facility for general operating, working capital and other ordinary corporate purposes. Amounts available under the revolving credit facility are subject to the value of our eligible inventory and credit card receivables, subject to certain conditions. The borrowing base provides for seasonal fluctuations in inventory with peak borrowing availability during the months of July through November. Interest on outstanding borrowings can range either from Prime to Prime plus .25% or from 10 1.50% over the Eurodollar Rate to a maximum 2.25% over the Eurodollar Rate, based on our profitability and amount of indebtedness. The revolving credit facility subjects us to a minimum net worth covenant (as defined) of $40.0 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, excluding our leasehold interests. As of August 4, 2001, we had $1.9 million of borrowings outstanding under the revolving credit facility and $641,000 of letters of credit outstanding. Net cash used in operating activities in the first six months of fiscal 2002 was $7.5 million as compared to $8.4 million in the first six months of fiscal 2001. The decrease in net cash used in operating activities was principally due to the decrease in our loss and the fact that our inventory build in the first half of fiscal 2002 was less than in the first half of fiscal 2001, which was offset by our increase in prepaid expenses. August 2001 rents were paid in the second quarter of fiscal 2002 due to the quarter ending date of August 4th, as opposed to the prior year when August rents were paid in the third quarter of fiscal 2001. Capital expenditures for the first six months of fiscal 2002 and the first six months of fiscal 2001 were $8.3 million and $16.5 million, respectively. Management estimates that capital expenditures for the remaining six months of fiscal 2002 will be approximately between $3.0 million and $4.0 million. We have an agreement from a lending institution for $6.5 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 amount of equipment leased. The lease terms include variable interest rates based on the purchase date and expire five years from the date of the initial equipment financed. The capital lease obligation outstanding as of August 4, 2001 was $4.9 million. We review the operating performance of our stores on an ongoing basis to determine which stores, if any, to expand or close. We closed nineteen stores in fiscal 2001, eight stores in the first six months of fiscal 2002 and anticipate closing approximately ten additional stores during fiscal 2002. We closed nine stores in the first six months of fiscal 2001. 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. 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. The net proceeds from this private placement were $93.9 million, after deducting the original issue discount of $7.3 million and fees of $5.8 million. We used the net proceeds to repay the senior bridge notes and for general corporate purposes. On November 2, 1999, our privately placed notes were exchanged for notes that are freely tradable. As of August 4, 2001, our indebtedness under our senior notes totaled $101.0 million, which reflects the aggregate face amount of the notes of $107.0 million, net of $5.7 of unamortized original issue discount, and approximately 11 $322,000 of unamortized value assigned to the warrants issued by Holdings. The interest on the notes is 11% per annum, payable semi-annually. We have minimum annual rental commitments of approximately $26.0 million in fiscal 2002 under existing store leases and the leases for our corporate headquarters and distribution center. We believe that our cash flow from operating activities, and borrowings available under the revolving credit facility will be sufficient to meet our operating requirements and currently planned capital expenditures through the end of fiscal 2002. In addition, we believe that cash flow from operations will be sufficient to cover the interest expense arising from the revolving credit facility, capital lease 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 the statement regarding forward looking disclosures. If a "change of control" (as defined in the indenture agreement for our senior notes) 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 senior notes. If there is a change in control, we could be in default under the indenture. In addition, upon a change of control (as defined in the Holdings Certificate of Incorporation), Holdings 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 2001, our first quarter and fourth quarter accounted for approximately 21.2% and 32.5% of annual net sales, respectively. 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, weather fluctuations and general economic conditions. 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. 12 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, our ability to expand and 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 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 Forward Looking Statements and Factors Affecting Future Performance section of the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 2001, filed with the Securities and Exchange Commission on May 4, 2001. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable 13 Part II. Other Information Item 6 - Exhibits and Reports on Form 8-K: (a) Exhibits 3.01 Certificate of Incorporation of G+G Retail, Inc., incorporated by reference to the registrant's Registration Statement on 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. (b) Reports on Form 8-K None 14 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. G+G RETAIL, INC. Date September 17, 2001 By /s/ Michael Kaplan -------------------- -------------------------------------- Michael Kaplan, Chief Financial Officer (signing on behalf of the registrant and as principal financial officer) 15 EXHIBIT INDEX

G&G RETAIL INC 10-Q