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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FIFTY-TWO WEEKS ENDED JANUARY 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-23071
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THE CHILDREN'S PLACE RETAIL STORES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1241495
(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
ONE DODGE DRIVE
WEST CALDWELL, NEW JERSEY 07006
(Address of Principal Executive Offices) (Zip Code)
(973) 227-8900
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock.
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of voting stock held by non-affiliates was
$177,313,000 at the close of business on February 15, 1999.
Indicate the number of outstanding shares of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, par value $0.10
per share, outstanding at February 15, 1999: 24,975,101 shares.
Documents Incorporated by Reference: None.
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THE CHILDREN'S PLACE RETAIL STORES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FIFTY-TWO WEEKS ENDED JANUARY 30, 1999
TABLE OF CONTENTS
PAGE
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PART I
1. Business..................................................................................... 2
2. Properties................................................................................... 20
3. Legal Proceedings............................................................................ 20
4. Submissions of Matters to a Vote of Security Holders......................................... 21
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 22
6. Selected Financial Data...................................................................... 22
7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 24
7A. Quantitative and Qualitative Disclosures about Market Risk................................... 32
8. Financial Statements and Supplementary Data.................................................. 32
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures........ 32
PART III
10. Directors and Executive Officers of the Registrant........................................... 33
11. Executive Compensation....................................................................... 36
12. Security Ownership of Certain Beneficial Owners and Management............................... 43
13. Certain Relationships and Related Party Transactions......................................... 45
PART IV
14. Exhibits, Financial Statements and Reports on Form 8-K....................................... 47
PART I
ITEM 1.--BUSINESS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF FEDERAL SECURITIES LAWS WHICH ARE INTENDED TO BE COVERED BY THE
SAFE HARBORS CREATED THEREBY. THOSE STATEMENTS INCLUDE, BUT MAY NOT BE LIMITED
TO, THE DISCUSSIONS OF THE COMPANY'S OPERATING AND GROWTH STRATEGY. INVESTORS
ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH UNDER THE CAPTION
"RISK FACTORS." ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING
THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE REASONABLE, ANY OF THE
ASSUMPTIONS COULD PROVE TO BE INACCURATE, AND THEREFORE, THERE CAN BE NO
ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS ANNUAL REPORT ON
FORM 10-K WILL PROVE TO BE ACCURATE. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES
INHERENT IN THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN, THE INCLUSION OF
SUCH INFORMATION SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR
ANY OTHER PERSON THAT THE OBJECTIVES AND PLANS OF THE COMPANY WILL BE ACHIEVED.
THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO ANY
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT EVENTS AND CIRCUMSTANCES
OCCURRING AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED
EVENTS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
AUDITED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL
REPORT ON FORM 10-K.
OVERVIEW
The Children's Place Retail Stores, Inc. is a growing specialty retailer of
apparel and accessories for children from newborn to twelve years of age. We
design, source and market our products under our proprietary "The Children's
Place" brand name for sale exclusively in our stores. Our merchandising
objective is to provide our customers with high-quality products at prices that
represent substantial value relative to our competitors. We seek to position our
stores in areas of high pedestrian traffic and design them to be very accessible
inviting and easy-to-shop. As of February 15, 1999, we operated 211 stores in 26
states, located primarily in regional shopping malls in the eastern half of the
United States.
We provide high-quality products that appeal to customers from a broad range
of socioeconomic and demographic profiles. We believe that the combination of
our distinctive approach to merchandising, the inherent value we offer our
customers and the growing strength of our proprietary brand generates this broad
appeal. Our designers interpret current fashion trends and combine them with a
broad color palette to develop a selection of coordinated outfits specifically
designed for children. We create freshness in our stores by generally
introducing a new merchandise line each month. These lines are designed to
convey a unified theme across a season by incorporating consistent color
palettes into merchandise that our customers can easily combine into coordinated
and interchangeable outfits and accessories. We believe that our updated
merchandise styling, coordinated, high-quality products and consistent value
pricing have created name recognition and customer loyalty for "The Children's
Place" brand.
In fiscal 1996, we began to implement an aggressive store opening campaign
to capitalize on our business strengths and our strong store economics. During
fiscal 1997 and fiscal 1998, we opened 47 and 54 new stores, respectively. Our
comparable store sales have increased for each of the past five fiscal years.
This has contributed to our overall growth and yielded an increase in our net
sales per gross square foot from $259 in fiscal 1994 to $382 in fiscal 1998. Our
net sales have increased at a compound annual growth rate of approximately 27.3%
from $108.0 million in fiscal 1994 to $283.9 million in fiscal 1998. Over that
same period of time, our operating income margin has increased from 2.2% to
12.5%.
We intend to continue our expansion program and plan to open at least 70
stores during fiscal 1999 and at least 90 stores during fiscal 2000. Our broad
merchandise appeal and consistent value pricing result in a highly portable
store concept which we believe can operate profitably in a wide
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variety of geographic and demographic regions. In fiscal 1998, our new stores
that were operating for their first full fiscal year generated a cash-on-cash
return on investment of approximately 86.1%. We believe that we have the
opportunity to significantly increase our domestic store base from the 211
stores we currently operate.
THE CHILDREN'S APPAREL INDUSTRY
According to the U.S. Bureau of the Census, the U.S. population from newborn
to 13 years of age comprised 54.9 million children or 20.3% of the total U.S.
population in 1998. In addition, the birthrate in the United States is
approximately 4.0 million per year. According to industry sources, retail sales
of apparel for newborn to 13 year old children have grown at a compound annual
rate of approximately 5.8% from $25.5 billion in 1995 to $30.1 billion in 1998.
In 1998, average apparel expenditures per child were approximately $550,
reflecting a compound annual growth rate of approximately 5.2% since 1995. We
believe that average apparel expenditures per child will continue to grow due to
several demographic factors, including (1) births among an increasing number of
older, working women with greater disposable income for expenditures on children
and (2) an increasing number of grandparents who represent a key consumer
segment for infant and toddler products. The growth in children's apparel sales
in specialty retail stores has outpaced the overall children's apparel industry,
growing at a compound annual rate of approximately 14.1% from $3.4 billion in
1995 to $5.1 billion in 1998 and increasing as a percentage of the overall
children's apparel market from 13.5% to 16.9% during the same period of time.
Since children typically require new clothes every season as they grow, we
believe that the children's apparel market is price-sensitive. Consequently, we
believe that the value created by the price and quality of our merchandise has
enabled us to establish a desirable market position. We currently represent less
than one percent of the children's apparel market and believe that we have the
opportunity to significantly increase our market share.
COMPETITIVE ADVANTAGES
We believe that the following strengths have contributed to our success and
provide us with a competitive advantage:
MERCHANDISING STRATEGY. Our merchandising strategy is built on offering a
collection of interchangeable outfits and accessories to create a coordinated
look distinctive to The Children's Place. We offer a focused assortment of
styles in a variety of colors and patterns, with the aim of consistently
creating a fresh, youthful feel that we believe distinguishes "The Children's
Place" brand. We divide the year into four three-month merchandising
seasons--spring, summer, back-to-school and holiday. Within each season we
typically introduce a new merchandise line each month to continually generate
freshness in our stores. Each line is built around a central seasonal theme and
includes a stylish assortment of coordinated basic and fashion apparel with
complementary accessories designed to encourage multiple item purchases and
wardrobe building.
VALUE STRATEGY. We offer high-quality clothing and accessories under "The
Children's Place" brand name at prices generally 20% to 30% below most of our
direct mall-based competitors. We employ this consistent value pricing strategy
across our entire merchandise offering. We believe that the consistent value
pricing of our high-quality products has enabled us to build a broad and loyal
base of customers who regularly purchase from us as their children grow. To
generate increased customer traffic through a sense of urgency and heightened
excitement among our customers, we began a program in the second half of fiscal
1998 of running promotions on select seasonal merchandise for a limited time,
augmented by periodic targeted promotions of key individual items.
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STRONG BRAND IMAGE. We believe that we have built a strong brand image for
"The Children's Place" by (1) offering high-quality products, (2) providing a
distinctive collection of coordinated and interchangeable outfits and
accessories, (3) maintaining a consistent merchandise presentation and an
easy-to-shop store layout, (4) employing aspirational images in our marketing
visuals and (5) selling our merchandise exclusively in our stores. We believe
these factors foster consumer loyalty to "The Children's Place" brand name. In
our continuing efforts to enhance the appeal and recognition of our brand name,
we have recently increased our emphasis on merchandise with logos. Our logo
merchandise bears our "Place," "Place Sport," "P," "Place Jeans" or other logos,
together with our "The Children's Place" label. Our goal is to make "The
Children's Place" the first name in the minds of consumers when they think of
children's apparel.
LOW-COST SOURCING. We control the design, sourcing and presentation of our
products, all of which are marketed under our proprietary brand name. We believe
that this control is essential in assuring the consistency and quality of our
merchandise and brand image, as well as in our ability to deliver value to our
customers. We have established close, long-standing and mutually beneficial
relationships with numerous manufacturers, buying agents and trading companies.
Through these relationships and our management team's extensive knowledge of the
material and manufacturing costs of apparel, we believe that we are able to
procure high-quality merchandise at low cost, which enables us to maintain our
gross margin levels while offering our customers high-quality products at value
prices. We further believe that our integrated merchandise approach, from
in-house design to in-store presentation, enables us to identify and respond to
market trends, uphold rigorous product quality standards, manage the cost of our
merchandise and strengthen our brand name. We plan to open a Hong Kong office in
fiscal 1999 to further enhance our ability to capitalize on new sourcing
opportunities, to increase our quality assurance standards and compliance and to
respond to changing merchandise trends and supplier base dynamics more
effectively and efficiently.
EXPERIENCED MANAGEMENT TEAM. Our 15-member management team is led by Ezra
Dabah, Stanley Silver and Clark Hinkley, each of whom has over 25 years of
experience in the apparel or retail industry. Mr. Dabah guides the management of
The Children's Place using his broad apparel merchandising and buying knowledge
refined during his lengthy tenure in the apparel market, including more than 15
years in the children's segment of the market. Mr. Dabah provides the foundation
for our low-cost product procurement and substantial sourcing relationships in
the Far East, from which he has been sourcing products since 1972. Mr. Silver
contributes his financial expertise and extensive knowledge of store operations
and real estate procurement derived from his experiences at Grand Met PLC,
Mothercare PLC and The Limited and is instrumental in the growth and development
of our business. Mr. Hinkley, through his significant management and
merchandising experience developed while he served in various management
positions with The Talbot's, Inc. and Dayton Hudson Corporation, greatly
strengthens our merchandising capabilities. In addition, the other members of
our management team have an average of 17 years of retail or apparel industry
experience and an average of eight years with The Children's Place.
GROWTH STRATEGIES
NEW STORE OPENINGS. In fiscal 1996, we began an aggressive store opening
campaign to capitalize further on our competitive advantages and strong store
economics. We intend to open at least 70 new stores in fiscal 1999 and at least
90 new stores in fiscal 2000. In fiscal 1998, our new stores that were operating
for their first full fiscal year generated average net sales of approximately
$1.3 million and generated a cash contribution of approximately $309,000. Our
average investment for these stores, including capital expenditures (net of
landlord contribution), initial inventory (net of merchandise payables) and
pre-opening costs, was approximately $359,000. As a result, these stores
generated a cash-on-cash return on investment of approximately 86.1% in their
first full fiscal year of operation. We expect to develop clusters of new stores
in markets where we currently do not have a presence such as
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Colorado, Utah and northern Florida in fiscal 1999, and northern California,
Washington, Oregon, Louisiana and Texas in fiscal 2000. We also expect to
continue to open new stores in our existing markets. We will continue to
increase our store base as rapidly as we deem prudent.
NEW MERCHANDISING AND MARKETING INITIATIVES. To optimize sell-through, we
continually evaluate our approach to (1) our merchandise offering, (2) visual
presentation of our merchandise and (3) our marketing initiatives. In fiscal
1999, we expect to undertake three major merchandising and marketing
initiatives.
(1) REFORMATTING OF MERCHANDISE PRESENTATION. We will reformat the merchandising
of our stores beginning with our fiscal 1999 back-to-school season.
Historically, we have segmented merchandise within our stores into five
areas: big boys sizes 5 to 16; big girls sizes 5 to 16; little boys sizes 18
months to 5; little girls sizes 18 months to 5; and newborn sizes 0 to 24
months. Beginning in the second quarter of fiscal 1999, we will begin to
transition to a store merchandise presentation format that features three
segments: boys sizes 4 to 16; girls sizes 4 to 16; and newborn sizes 0 to 36
months. This new format will enable us to reduce duplicate stock keeping
units ("SKUs") and sizes within each store, while also providing a clearer
merchandise statement to our customers. By consolidating all merchandise of
a particular style into one area of the store, we will be able to display
merchandise in a fashion that conveys our commitment to key items in a more
compelling manner.
(2) STORE REFIXTURING. We plan to upgrade the fixtures and other elements of our
store design in approximately two-thirds of our existing stores in an effort
to enhance the perceived value of our merchandise by presenting our products
in a more upscale environment. This upgrade also will feature "babyPlace"
signage in the rear of the store to designate the area in which newborn
merchandise can be found. With this refixturing and the reformatting of our
merchandise presentation, we expect to increase the open space within the
store, particularly the aisles, to enhance the shopping experience of our
customers by making it easier for them to view our product offerings and by
facilitating stroller access.
(3) INCREASING OUR EXTERNAL MARKETING EFFORTS. To date, we have utilized
in-store and in-mall marketing materials and, to a lesser extent,
direct-mail marketing to promote "The Children's Place" image and brand
name. These marketing efforts have contributed to our increases in
comparable store sales and our net sales per gross square foot over our past
five fiscal years. To capitalize on our increased store base, we have
recently decided to expand and enhance our external marketing efforts. To do
so, we are pursuing two primary courses of action.
BROADCAST AND PRINT ADVERTISING. Beginning in March 1999, we expect
to launch a test in selected markets of our first broadcast advertising
campaign in anticipation of a more extensive broadcast and print
advertising campaign in most of our major markets for our fiscal 1999
back-to-school season. We believe that our new advertising initiatives
will be an important tool in raising consumer awareness of our
high-quality, value-priced products and in strengthening "The Children's
Place" brand name.
DIRECT-MAIL MARKETING. We have recently increased our emphasis on
our direct-mail marketing campaign. We target existing customers through
our private label credit card database and reverse appending of our
customers who pay by credit card and check. In fiscal 1998, we undertook
a 400,000 customer mailing. Recipients of the mailing were given a
preferred customer status that allowed them to purchase certain
merchandise below our ticketed price upon the presentation of the mailing
for a limited time. Data on respondents was gathered through the tracking
of bar codes on the mailers and retained in our database for future
reference. Customer response to our 1998 mailing exceeded industry
averages and our initial expectations. We have since expanded our
database to over 800,000 customers and intend to expand the reach and
strengthen the content of this campaign.
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NEW DISTRIBUTION CENTER. We are moving into a new automated distribution
center in the second quarter of fiscal 1999 that we believe will support
approximately 500 stores. We expect this increased automation will enable us to
provide merchandise replenishment much more efficiently than is permitted by our
current distribution system and to better coordinate our introduction of new
merchandise lines across our stores in different geographic regions. We believe
that this heightened efficiency should yield fewer missed sales opportunities
due to out of stock positions.
MERCHANDISING
Our merchandising strategy is built on offering a collection of
interchangeable outfits and accessories to create a coordinated look distinctive
to The Children's Place. We offer a focused assortment of styles in a variety of
colors and patterns, with the aim of consistently creating a fresh, youthful
feel that we believe distinguishes the "The Children's Place" brand. In fiscal
1998, we derived approximately 40%, 30%, 17% and 13% of our net sales from girls
apparel, boys apparel, newborn apparel and accessories, respectively. We divide
the year into four three-month merchandising seasons and within each season we
typically introduce a new merchandise line each month. Approximately 80% of each
new line is delivered to the stores with the introduction of each line and the
remainder is reserved for replenishment throughout the month.
To execute our merchandising strategy, we rely on the coordinated efforts of
our merchandise management team, our design and product development team and our
merchandise planning team. These teams consist of a total of 43 full-time
employees. These teams, in conjunction with senior management, review our prior
season results to determine the specific styles and numbers of products that we
will offer in upcoming seasons. The merchandise management team selects specific
styles for production from the assortment of designs that are created by the
design and product development team each season. Then, based upon the production
quantities determined by the merchandise managers and the merchandise planning
team, the sourcing and procurement team arranges for the manufacture of the
selected styles.
Our design and product development team consists of our Vice President of
Trend Development, our Trend Manager, our Vice President of Design and Product
Development, and designers, assistant designers, graphic designers and other
artists. This team analyzes and interprets current and emerging fashion trends,
translating them into a broad selection of children's clothing and accessories
in an array of fashionable colors and patterns that are appropriate for upcoming
seasons. Work on each of our seasonal lines begins approximately nine months
before the season, with the gathering of market intelligence on fashion trends.
This process involves extensive European and domestic market research, the
purchase of prototype samples, media, trade shows, fashion magazines, the
services of fashion and color forecast organizations and analysis of prior
season performance. After the Vice President of Trend Development and the Trend
Manager, in consultation with senior management and the Vice President of Design
and Product Development, arrive at a consensus regarding the fashion themes for
a coming season, the designers and other artists translate these themes into an
assortment of basic and fashion designs that seek to reflect the fresh and
youthful image of "The Children's Place" brand. These interpretations include
variations in fabric and other materials, product color, decoration and
age-appropriate silhouette. Potential items are designed using computer aided
design technology, giving us the opportunity to consider a wide range of style
and fashion options.
The merchandise management team creates a detailed purchasing plan with the
assistance of the merchandise planning team for the season covering each
department, category and key basic item, based on historical and current selling
trends. The merchandise planning team consists of our Vice President of
Merchandise Planning and Allocation, a director of planning, a director of
allocation, four merchandise planners and store planners and allocators.
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We typically order the quantities contemplated by the purchasing plan six
months before the season, while retaining the flexibility to order additional
merchandise to respond quickly to new fashion trends and demand for key basic
items. The production process takes approximately six months from order
confirmation to receipt of merchandise at our distribution facility. The
merchandise planning team monitors current and future inventory levels on a
weekly basis and analyzes sales patterns to predict future demand for various
categories. We regularly monitor sales of each style and color and maintain some
flexibility to adjust merchandise on order for future seasons or to accelerate
delivery of merchandise. The merchandise allocation team is responsible for
planning and allocating merchandise to each store based on sales volume levels
and other factors.
In addition to our season-to-season development of merchandise, we regularly
evaluate opportunities for selective product extensions and new product
introductions. In fiscal 1998, we expanded our offerings of outerwear, underwear
and denim merchandise. We also introduced bath products into our stores. We
expect to continue to seek opportunities to expand our customer base and
increase sales in our stores through further development of existing merchandise
categories and continued introduction of new merchandise classifications.
SOURCING AND PROCUREMENT
We combine management's extensive sourcing experience with a cost-based
buying strategy in order to lower costs and increase margins. Management
believes it has a thorough understanding of the economics of apparel
manufacturing, including costs of materials and components. This knowledge
enables us to determine the most cost-effective country and manufacturer from
which to source each item and obtain low prices. Relying on our supplier
relationships and management's knowledge of manufacturing costs, we believe we
have been able to arrange for the manufacture of high-quality products at low
cost. One important aspect of our sourcing strategy is that our Chief Executive
Officer, Ezra Dabah, who has over 25 years of apparel buying and merchandising
experience, frequently travels to meet with our agents and manufacturers. In
addition, we are in the process of opening, through a wholly-owned Hong Kong
subsidiary, an office in Hong Kong which will employ eight to ten people and for
which our annual expense will initially be approximately $1.0 million. We
believe the Hong Kong office will enable us to obtain more favorable material
and manufacturing costs and better identify and act on new supply opportunities.
We expect the opening of our Hong Kong office will also help us to foster
stronger relationships with suppliers, manufacturers, agents and trading
companies in the Far East.
Our sourcing team makes on-site visits to our independent agents and various
manufacturers to negotiate product costs, finalize technical specifications of
each product and confirm delivery of merchandise manufactured to our
specifications. Our apparel is produced to our specifications by more than 60
independent manufacturers located primarily in the Far East and elsewhere in
Asia. In fiscal 1998, the majority of our merchandise was produced in Taiwan,
Hong Kong, China and Turkey. The remainder of our merchandise was produced in
Thailand, the United States, South Korea, the Philippines, Cambodia and other
countries. We continue to pursue sourcing opportunities.
We have no exclusive or long-term contracts with our manufacturers and
typically transact business on an item-by-item basis under purchase orders at
freight on board cost in U.S. dollars. We are parties to agency agreements with
commissioned independent agents elsewhere in the Far East and in Turkey to
oversee our production, assist in sourcing and pre-production approval, quality
inspection and ensuring timely delivery of merchandise. We also purchase
approximately 35% of our merchandise through a Hong Kong-based trading company,
with which we have no formal written agreement, for most of our procurements
from manufacturers located in Hong Kong, China, the Philippines and Cambodia.
Although they are not contractually obligated to do so, the Hong Kong-based
trading company, and a commissioned independent agent in Taiwan through which we
purchase approximately 30% of our products, each have exclusive arrangements
with The Children's Place. We have developed long-term,
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continuous relationships with key individual manufacturers and material
suppliers which have yielded numerous benefits, including quality control and
low costs, and have afforded us flexible working arrangements and a steady flow
of merchandise supply. The establishment of our Hong Kong office should enable
us to strengthen these relationships, facilitate the development of new ones and
improve quality control and product costs.
We employ a tracking system that enables us to anticipate potential delivery
delays in our orders and take action to mitigate the impact of such delays. By
using this system together with our purchase order and advanced shipping
notification systems, we and our independent agents actively monitor the status
of each purchase order from order confirmation to merchandise receipt. We
experience occasional shipment delays, but no such delay has had a material
adverse effect on our business. We continue to pursue software technologies to
further enhance communication of the production and pre-approval status of our
work-in-process directly from our overseas agents.
To ensure quality and promote consumer confidence in our products, we
utilize our own, in-house quality assurance laboratory to test and evaluate
fabric, trimming materials and pre-production samples against a comprehensive
range of physical performance standards before production begins. The quality
control personnel of our independent agents visit the various manufacturing
facilities to monitor and improve the quality control and production process,
which is augmented by our director of quality control. With this focus on
pre-production quality approval, we are generally able to detect and correct
quality-related problems before bulk production begins. We do not accept our
finished apparel products until each purchase order receives formal
certification of compliance from our agents' inspectors. We anticipate that the
opening of our Hong Kong office will enhance our quality control by enabling us
to monitor component and manufacturing quality at close range and address
related problems at an early stage.
COMPANY STORES
EXISTING STORES. As of February 15, 1999, we operated 211 stores in 26
states, primarily located in the eastern half of the United States. Most of our
stores are clustered in and around major metropolitan areas. Our stores are
concentrated in major regional malls, with the exception of 15 outlet stores and
ten urban street and strip center stores. The following table sets forth the
number of stores in each state as of February 15, 1999:
# OF # OF
STATE STORES STATE STORES
- --------------------------------------------- ------------- --------------------------------------------- -------------
Connecticut.................................. 8 Minnesota.................................... 4
Delaware..................................... 3 Missouri..................................... 2
Georgia...................................... 5 Nebraska..................................... 1
Florida...................................... 1 New Hampshire................................ 4
Illinois..................................... 16 New Jersey................................... 21
Indiana...................................... 7 New York..................................... 36
Iowa......................................... 1 North Carolina............................... 6
Kansas....................................... 1 Ohio......................................... 13
Kentucky..................................... 3 Pennsylvania................................. 20
Maine........................................ 3 South Carolina............................... 4
Maryland..................................... 12 Tennessee.................................... 6
Massachusetts................................ 14 Virginia..................................... 7
Michigan..................................... 11 Wisconsin.................................... 2
STORE ENVIRONMENT. Over the past five years, our prototype store has been
reduced in size from approximately 5,500 square feet to approximately 3,800
square feet, which we believe is the most efficient size for our stores. Our
prototype features a design that incorporates light maple wood floors,
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fixtures and trim set against white walls. We believe that the environment
created by our "apple-maple" prototype store promotes a shopping experience that
is inviting and friendly. The store is brightly lit, featuring floor-to-ceiling
glass windows that allow our colorful fashions to attract customers from the
outside. A customized grid system throughout the store's upper perimeter
displays featured merchandise, marketing photographs and key basic item prices.
Each merchandise line is displayed as a separate collection of coordinated basic
and fashion items, with matching accessories. We continually refine our
merchandise presentation strategy to improve the shopping experience of our
customers. In fiscal 1999, we are installing new wood fixtures and display
tables which we believe will further enhance the shopping experience at The
Children's Place. In addition, we expect that the new departmental structure we
are implementing in fiscal 1999 will allow us to simplify and facilitate The
Children's Place shopping experience and present our merchandise more clearly by
eliminating duplicative merchandise displays and creating more space for
customers within our stores. We believe that our merchandise presentation
effectively displays "The Children's Place" distinctive look and creates a
visually attractive selling environment that maximizes customer convenience and
encourages the purchase of multiple items.
To achieve uniform merchandise presentation and to maximize sales of
coordinated items, store management is provided monthly with detailed written
and visual store plans that specify merchandise placement. Standardization of
store design, merchandise presentation and window displays also promotes
effective usage and productivity of selling space and maximizes customer
convenience in merchandise selection. By seeking a uniform appearance in store
design and merchandise presentation, we believe that we are able to maintain and
enhance "The Children's Place" brand image.
As of February 15, 1999, approximately 85% of our stores (excluding outlet
stores) have the same design element as our "apple-maple" prototype. We
generally remodel our stores to the prototype specifications as their leases are
renewed. In some cases, conversion to the prototype involves relocation within a
mall as well as a reduction in space.
Our 15 outlet stores generally measure in excess of 5,000 square feet and
represent approximately 7% of our store base. The outlet stores are located in
outlet centers and are strategically placed within each market to serve as a
vehicle to consolidate markdown merchandise from our other stores.
STORE OPERATIONS. Our store operations are directed by our Vice President
of Store Operations, four regional managers and approximately 30 district
managers. Individual stores are managed by a store manager and up to three
co-managers depending on sales volume. A typical store employs one to two
full-time sales associates and several part-time sales associates. We hire
additional part-time associates based on seasonal needs.
Regional and district managers spend a majority of their work week on store
selling floors, providing direction, motivation, training and support to field
personnel. Store managers are responsible for achieving planned store sales
goals, staff scheduling and supervising customer service, store presentation
standards, payroll productivity and inventory shrink. Customer service is a
major focus for store management and sales associates, and continuing efforts
are made to maximize selling productivity. We engage in an ongoing process of
training management and sales associates in the areas of customer service,
selling skills, merchandise presentation, procedures and controls, utilizing
visual aids, training manuals and training workshops.
In order to motivate our regional, district and store managers, we offer an
incentive compensation plan. Under the plan, managers of our stores who meet
planned monthly goals for sales, payroll productivity and inventory shrink are
awarded a sliding bonus based upon the amount by which their respective stores
exceed such targets. District and regional managers receive bonuses based upon
the incentive compensation awarded to their store managers and management
turnover.
9
Management maintains a high level of communication between our corporate
headquarters and stores. Frequent communication downloads through the
point-of-sale ("POS") registers, biweekly mail packs to each store, voicemail
and district manager conference calls augment the frequent store visits by the
regional and district managers. In addition, home office and district manager
meetings engender a strong team culture. We continue to improve the
communication between our corporate headquarters and our stores with the use of
new technology. To this end, and to enhance customer service, we are taking
steps to replace our POS software and hardware during fiscal 1999.
STORE EXPANSION PROGRAM
In fiscal 1996, we began to implement an aggressive growth strategy designed
to capitalize on our business strengths and strong store economics. In the last
three fiscal years we increased our number of stores from 91 to 209, opening 47
and 54 stores in fiscal 1997 and fiscal 1998, respectively. We intend to
continue our store expansion program and currently plan to open at least 70
stores in fiscal 1999 and at least 90 stores in fiscal 2000.
In fiscal 1998, new stores for which fiscal 1998 was the first full year of
operations had average net sales of approximately $1.3 million. The average
investment for these new stores, including capital expenditures (net of landlord
contribution), initial inventory (net of merchandise payables) and pre-opening
costs, was approximately $359,000. In fiscal 1998, store level operating cash
flow for these stores was approximatley $309,000 (23.8% of net sales), yielding
a cash-on-cash return on investment of approximately 86.1%.
Our expansion strategy focuses primarily on mall-based locations. The
regional malls which we target are typically high volume centers, generally
having at least three department stores or other anchor tenants and various
specialty retailers, as well as several entertainment features (such as
restaurants, a food court and/or movie theaters). We conduct extensive on-site
visits and analyses of potential store sites, taking into account the
performance of other specialty retail tenants, the existing anchor stores and
other stores, the size, type and average sales per square foot of the mall and
the demographics of the surrounding area. Our most important considerations in
evaluating a store location within a mall are placement of the store relative to
mall traffic patterns and proximity to other children's retailers. In addition,
we continuously evaluate opportunities to add stores in other types of
locations, including urban street locations and outlet and strip centers.
Our expansion strategy is to establish clusters of stores in states in which
we already have stores or in contiguous states in order to strengthen "The
Children's Place" brand name recognition. We plan to open stores in Colorado,
Utah and northern Florida in fiscal 1999, and in northern California,
Washington, Oregon, southern Florida, Louisiana and Texas in fiscal 2000.
MARKETING
ADVERTISING AND PROMOTION. We strive to enhance our reputation and image in
the marketplace and build recognition and equity in "The Children's Place" brand
name by advertising our image, product and value message through in-store
photographs, product displays and direct mail. To date, we have primarily relied
on pedestrian traffic and our reputation, loyal customer base and brand image to
generate sales. We have recently selected an advertising agency to assist us in
developing a new advertising campaign, including television, radio, print and
outdoor advertising, that is expected to be launched during fiscal 1999. We
believe that this advertising campaign will strengthen "The Children's Place"
brand name recognition. In fiscal 1999, we expect to spend approximately $6.0
million to $8.0 million on this campaign. Our point of purchase marketing
strategy uses aspirational images to highlight the individual departments and
seasonal fashion looks, promoting key basic items at price points representing
substantial value, and focusing on store-front and window displays and signage
to attract customers into the stores. We also occasionally offer promotions on
certain items to attract customers
10
and increase sales. To encourage larger purchases, we periodically distribute
through direct mail coupons providing a discount on purchases above a specified
minimum.
PRIVATE LABEL CREDIT CARD. We view the use of a private label credit card
as an important marketing and communication tool and introduced "The Children's
Place" credit card in January 1995, with Hurley State Bank, through a third
party credit card service. Pursuant to a merchant services agreement with The
Children's Place, Hurley State Bank issues to our customers private label credit
cards for use exclusively at our stores and extends credit to such customers on
a non-recourse basis to The Children's Place. Hurley State Bank's agent, SPS
Payment Services, Inc., administers the approval, issuance and administration of
the credit card program. In connection with our efforts to increase the number
of cardholders and encourage use of our private label credit card, during fiscal
1999 we may consider changing these arrangements to provide for either full or
partial recourse. For its services, we pay to Hurley State Bank a merchant fee
which is calculated as a percentage of sales under the credit card and certain
other fees related to cardholder sales volume. In fiscal 1998, we paid
approximately $2.0 million to Hurley State Bank in fees. The number of holders
of our private label credit card has grown to over 460,000, of which
approximately 130,000 cardholders currently have a positive account balance.
Sales on the private label credit card accounted for approximately 12% of our
fiscal 1998 net sales. We believe that our private label credit card promotes
affinity and loyalty among those customers who use the card and facilitates
communication with such customers through delivery of coupons and promotional
materials. We market our private label credit card by offering customers who
apply for a card a 15% discount on their initial purchase using the card and a
10% discount on a subsequent purchase. Our average dollar sale to customers
using "The Children's Place" card has been substantially higher than our overall
average dollar sale.
MANAGEMENT INFORMATION SYSTEMS
Our management information and electronic data processing systems consist of
a full range of retail, financial and merchandising systems, including purchase
order management, advance shipping notification, inventory planning and control,
inventory distribution, sales reporting and accounts payable. These systems
operate on an IBM mainframe computer and utilize a combination of third party
and proprietary software packages. Management views technology as an important
tool in efficiently supporting our rapid growth and maintaining a competitive
industry position.
Unit and dollar sales information is updated daily in the merchandise
reporting systems by polling each store's POS terminals. Through automated
nightly two-way electronic communication with each store, sales information,
payroll hours and store inventory transfers are uploaded to the host system, and
price changes and other information are downloaded through the POS devices.
Information obtained from such daily polling generally results in automatic
merchandise replenishment in response to the specific SKU requirements of each
store. We evaluate information obtained through daily reporting to identify and
respond to sales trends and to implement merchandising decisions regarding
markdowns and allocation of merchandise.
We are committed to utilizing technology to further enhance our competitive
position. In this regard, we are scheduled to install an automated warehouse
management system during fiscal 1999 in connection with the planned relocation
of our distribution center. We are also taking steps to replace our POS software
and hardware and upgrade our back office software during fiscal 1999 to enhance
customer service and communication between our corporate headquarters and our
stores.
COMPETITION
The children's apparel retail business is highly competitive. We compete in
substantially all of our markets with GapKids, BabyGap and Old Navy (each of
which is a division of The Gap, Inc.), The Gymboree Corporation, Limited Too (a
division of The Limited, Inc.), J.C. Penney Company, Inc.,
11
Sears, Roebuck and Co. and other department stores that sell children's apparel
and accessories, as well as certain discount stores such as Wal-Mart Stores,
Inc., Kmart Corporation, Target (a division of Dayton Hudson Corporation) and
Kids "R" Us (a division of Toys "R" Us, Inc.). We also compete with a wide
variety of specialty stores, other national and regional retail chains, catalog
companies and Internet retailers. One or more of our competitors are present in
substantially all of the malls in which we have stores. Many of our competitors
are larger than The Children's Place or have access to significantly greater
financial, marketing and other resources than we have.
We believe that the principal factors of competition in our marketplace are
perceived value, price, quality, merchandise assortment, brand name recognition,
customer service, and a friendly store environment. We believe that we have been
able to effectively compete in the children's apparel industry because of our
reputation in the marketplace and consistent merchandise offering of
high-quality, coordinated basic and fashion outfits for children at consistent
value prices, sold in a friendly environment.
TRADEMARKS AND SERVICE MARKS
"The Children's Place," "Baby Place," "Place," "The Place," "TCP" and
certain other marks have been registered as a trademarks and/or a service marks
with the United States Patent and Trademark Office. The registration of the
trademarks and the service marks may be renewed to extend the original
registration period indefinitely, provided the marks are still in use. We intend
to continue to use and protect our trademarks and service marks and maintain
their registrations. We are taking steps to register our trademarks in certain
foreign countries. We believe our trademarks and service marks have received
broad recognition and are of significant value to our business.
EMPLOYEES
As of February 15, 1999, we had approximately 1,100 full-time employees, of
whom approximately 285 are based at our distribution center and corporate
headquarters, and approximately 2,600 part-time employees. None of our employees
is covered by a collective bargaining agreement. We believe our relations with
our employees are good.
12
RISK FACTORS
Investors in the Company should consider the following risk factors as well
as the other information contained herein.
RISK OF INABILITY TO SUSTAIN AGGRESSIVE GROWTH STRATEGY
Our net sales have grown significantly during the past several years,
primarily as a result of the opening of new stores and, to a lesser extent, due
to increases in our comparable store sales. We intend to continue to pursue an
aggressive growth strategy for the foreseeable future, and our future operating
results will depend largely upon our ability to open and operate new stores
successfully and to manage a larger business profitably. We anticipate opening
at least 70 new stores during fiscal 1999 and at least 90 new stores during
fiscal 2000.
We are subject to a variety of business risks generally associated with
rapidly growing companies. Our ability to open and operate new stores
successfully depends on many factors, including, among others, the availability
of suitable store locations, the ability to negotiate acceptable lease terms,
the ability to timely complete necessary construction, the ability to
successfully integrate new stores into our existing operations, the ability to
hire and train store personnel and the ability to recognize and respond to
regional differences in customer preferences (such as climate-related
preferences).
We cannot assure you that we will be able to continue to achieve our planned
expansion on a timely and profitable basis or that we will be able to achieve
results similar to those achieved in existing locations in prior periods. In
addition, as our business grows, we anticipate that we will not be able to
sustain the current annual growth rate of our store base of approximately 30%.
Operating margins may also be adversely affected during periods in which we have
incurred expenses in anticipation of new store openings. Furthermore, we need to
continually evaluate the adequacy of our store management and our management
information and distribution systems to manage our planned expansion. Any
failure to successfully and profitably execute our expansion plans could have a
material adverse effect on our business.
We expect to spend approximately $45.0 million in fiscal 1999 on capital
expenditures. We believe that cash generated from operations and funds available
under our working capital revolving credit facility will be sufficient to fund
our capital and other cash flow requirements for at least the next 12 months. We
expect to amend our existing working capital revolving credit facility in fiscal
1999 to provide greater financial flexibility. However, we may not be able to
amend the credit facility. Furthermore, it is possible that as we continue to
grow we may be required to seek additional funds for our capital and other cash
flow needs, and we cannot assure you that we will be able to obtain such funds.
POTENTIAL DISRUPTIONS IN RECEIVING AND DISTRIBUTION INCLUDING RELOCATION OF
DISTRIBUTION FACILITY
We plan to move into a larger distribution center and corporate headquarters
facility in Secaucus, New Jersey during the second quarter of fiscal 1999. In
connection with this move, we are implementing a new automated warehouse
management system. It is possible that delays, cost overruns or other
complications in the relocation to the new distribution center or in the
implementation of the new warehouse management system could result in a
significant interruption in the receipt and distribution of our merchandise. Any
such disruption could have a material adverse effect on our business.
Our merchandise is shipped directly from manufacturers through freight
consolidators to our distribution center in West Caldwell, New Jersey. Our
operating results depend in large part on the orderly operation of our receiving
and distribution process, which depends on manufacturers' adherence to shipping
schedules and our effective management of our distribution facility. In
addition, we cannot assure you that we have anticipated, or will be able to
anticipate, all of the changing demands which our expanding operations will
impose on our receiving and distribution system. Furthermore, it is
13
possible that events beyond our control, such as a strike or other disruption
affecting the parcel service that delivers substantially all of our merchandise
to our stores, could result in delays in delivery of merchandise to our stores.
Any such event could have a material adverse effect on our business.
NEED TO ANTICIPATE AND RESPOND TO MERCHANDISE TRENDS
Our continued success will depend in part on our ability to anticipate and
respond to fashion trends and consumer preferences. Our design, manufacturing
and distribution process generally takes up to nine months, during which time
fashion trends and consumer preferences may change. If we fail in any way to
anticipate, identify or respond to future fashion trends, such a failure may
adversely affect customer acceptance of our products or require substantial
markdowns, which could have a material adverse effect on our business. In
addition, certain public school districts in various markets in which we have
stores are increasingly requiring that their grade school students wear
uniforms, which may have a material adverse effect on our business.
RELIANCE ON INFORMATION SYSTEMS
We rely on various information systems to manage our operations and
regularly make investments to upgrade, enhance or replace such systems. In
connection with the planned relocation of our distribution center, we intend to
install an automated warehouse management system to facilitate more efficient
receipt and distribution of inventory. We also intend to replace our current
point-of-sale ("POS") software and hardware with an upgraded system during
fiscal 1999. Any delays or difficulties in transitioning to these or other new
systems, or in integrating these systems with our current systems, or any other
disruptions affecting our information systems, could have a material adverse
effect on our business.
UNCERTAINTY OF SUCCESS OF NEW MERCHANDISE PRESENTATION
In fiscal 1999, we intend to implement a new merchandise presentation
strategy, through which we will consolidate separate departments for older and
younger boys and girls into one boys and one girls department, while expanding
our newborn department. We are also upgrading the display fixtures in
approximately two-thirds of our existing stores and installing these fixtures in
our new stores. We believe these initiatives should simplify, facilitate and
enhance the shopping experience of our customers by eliminating duplicative
displays and creating more space within our stores. However, we have not tested
these changes and therefore cannot predict the impact they will have on
customers familiar with our current layout and departmental structure. The
failure of our new merchandise presentation initiatives could have a material
adverse effect on our business.
DEPENDENCE ON UNAFFILIATED MANUFACTURERS AND INDEPENDENT AGENTS
We do not own or operate any manufacturing facilities and therefore are
dependent upon independent third parties for the manufacture of all of our
products. Our products are currently manufactured to our specifications,
pursuant to purchase orders, by more than 60 independent manufacturers located
primarily in Asia. We have no exclusive or long-term contracts with our
manufacturers and compete with other companies for manufacturing facilities. In
addition, we have no formal written agreement with the Hong Kong-based trading
company through which we purchase approximately 35% of our products. We also
purchase approximately 30% of our products from a single agent in Taiwan, which
has an exclusive arrangement with us. Although we believe that we have
established close relationships with our principal manufacturers and independent
agents, the inability to maintain such relationships or to find additional
sources to cover future growth could have a material adverse effect on our
business.
14
RISKS OF USING FOREIGN MANUFACTURERS; POSSIBLE ADVERSE IMPACT OF UNAFFILIATED
MANUFACTURERS' FAILURE TO COMPLY WITH ACCEPTABLE LABOR PRACTICES
Our business is subject to the risks generally associated with purchasing
from foreign countries. Some of these risks are foreign governmental
regulations, political instability, currency and exchange risks, quotas on the
amounts and types of merchandise which may be imported into the United States
from other countries, disruptions or delays in shipments and changes in economic
conditions in countries in which our manufacturing sources are located. We
cannot predict the effect that such factors will have on our business
arrangements with foreign manufacturing sources. If any of these factors
rendered the conduct of business in a particular country undesirable or
impractical, or if our current foreign manufacturing sources ceased doing
business with us for any reason, our business could be materially adversely
affected. Our business is also subject to the risks associated with changes in
U.S. legislation and regulations relating to imported apparel products,
including quotas, duties, taxes and other charges or restrictions on imported
apparel. We cannot predict whether such changes or other charges or restrictions
will be imposed upon the importation of our products in the future, or the
effect any such event would have on our business. However, if China were to lose
its Most Favored Nation trading status with the United States, that event could
have a material adverse effect on our business.
We require our independent manufacturers to operate in compliance with
applicable laws and regulations and our internal requirements. While our
purchasing guidelines promote ethical business practices, we do not control
these manufacturers or their labor practices. The violation of labor or other
laws by one of the independent manufacturers we use or the divergence of an
independent manufacturer's labor practices from those generally accepted as
ethical in the United States could have a material adverse effect on our
business.
EFFECT OF FLUCTUATIONS IN QUARTERLY RESULTS AND SEASONALITY ON INCOME
As is the case with many apparel retailers, we experience seasonal
fluctuations in our net sales and net income. Our net sales and net income are
generally weakest during the first two fiscal quarters, and are lower during the
second fiscal quarter than during the first fiscal quarter. For example, in
fiscal 1998, 21.8%, 17.7%, 28.6% and 31.9% of our net sales for stores open for
the full fiscal year occurred in the first, second, third and fourth quarters,
respectively. We generally experience second quarter losses and, in the past,
have experienced first quarter losses. We expect to continue to experience
second quarter losses in the future. Our first quarter results are heavily
dependent upon sales during the period leading up to the Easter holiday and weak
sales during this period could have a material adverse effect on our business.
Our third quarter results are heavily dependent upon back-to-school sales and
our fourth quarter results are heavily dependent upon sales during the holiday
season. Weak sales during either of these periods could have a material adverse
effect on our business.
Our quarterly results of operations may also fluctuate significantly from
quarter to quarter as a result of a variety of other factors, including the
timing of new store openings and related pre-opening and other start-up costs,
net sales contributed by new stores, increases or decreases in comparable store
sales, weather conditions, shifts in timing of certain holidays, changes in our
merchandise mix and overall economic conditions. Any failure by us to meet our
business plans for, in particular, the third and fourth quarter of any fiscal
year would have a material adverse effect on our earnings, which in all
likelihood would not be offset by satisfactory results achieved in other
quarters of the same fiscal year. In addition, because our expense levels are
based in part on expectations of future sales levels, a shortfall in expected
sales could result in a disproportionate decrease in our net income.
CHANGES IN COMPARABLE STORE SALES RESULTS FROM PERIOD TO PERIOD
Numerous factors affect our comparable store sales results including, among
others, weather conditions, fashion trends, merchandise assortment, the retail
sales environment, economic conditions and
15
our success in executing our business strategy. Our quarterly comparable store
sales results have fluctuated significantly in the past and we anticipate that
our quarterly comparable store sales will continue to fluctuate in the future.
In addition, we do not expect our comparable store sales to continue to increase
at rates similar to those experienced in fiscal 1998. Moreover, comparable store
sales for any particular period may decrease in the future. Comparable store
sales results are often followed closely by the investment community and
significant fluctuations in such results may affect the price of our Common
Stock. Any such variations in our comparable store sales results could have a
material adverse effect on our business and on the market price of our Common
Stock.
FOREIGN CURRENCY FLUCTUATIONS
We conduct our business in U.S. dollars. However, because we purchase
substantially all of our products overseas, the cost of these products may be
affected by changes in the values of the relevant currencies. To date, we have
not considered it necessary to hedge against foreign currency fluctuations.
Although foreign currency fluctuations have had no material adverse effect on
our business in the past, we cannot predict whether such fluctuations will have
such an effect in the future.
DEPENDENCE ON KEY PERSONNEL
The leadership of Ezra Dabah, our Chief Executive Officer and Chairman of
the Board, Stanley Silver, our President and Chief Operating Officer, and Clark
Hinkley, our Executive Vice President, Merchandising, has been instrumental in
our success. The loss of the services of Mr. Dabah, Mr. Silver or Mr. Hinkley
could have a material adverse effect on our business. We have entered into
employment agreements with Messrs. Dabah, Silver and Hinkley, but we cannot
assure you that we will be able to retain their services. In addition, other
members of management have substantial experience and expertise in our business
and have made significant contributions to its growth and success. The loss of
services of one or more of these individuals, or the inability to attract
additional qualified managers or other personnel as we grow, could have a
material adverse effect on our business. We are not protected by any key-man or
similar life insurance for any of our executive officers.
COMPETITION
The children's apparel retail business is highly competitive. We compete in
substantially all of our markets with GapKids, BabyGap and Old Navy (each of
which is a division of The Gap, Inc.), The Gymboree Corporation, Limited Too (a
division of The Limited, Inc.), J.C. Penney Company, Inc., Sears, Roebuck and
Co. and other department stores that sell children's apparel and accessories, as
well as certain discount stores such as Wal-Mart Stores, Inc., Kmart
Corporation, Target (a division of Dayton Hudson Corporation) and Kids "R" Us (a
division of Toys "R" Us, Inc.). We also compete with a wide variety of specialty
stores, other national and regional retail chains, catalog companies and
Internet retailers. One or more of our competitors are present in substantially
all of the malls in which we have stores. Many of our competitors are larger
than The Children's Place and have access to significantly greater financial,
marketing and other resources than we have. We cannot assure you that we will be
able to compete successfully against existing or future competition.
UNCERTAINTY OF NET OPERATING LOSS CARRYFORWARDS
We utilized $11.6 million, $8.1 million and $39.9 million of our net
operating loss carryforwards ("NOLs") to offset taxable income that we earned in
our 1996, 1997 and 1998 taxable years, respectively, leaving NOLs of
approximately $0.1 million which we expect to utilize in our 1999 taxable year.
As the amount and availability of these NOLs are subject to review by the
Internal Revenue Service, we cannot assure you that the NOLs will not be reduced
or their use limited as the result of an audit of our tax returns. If the amount
of these NOLs were reduced or their availability limited, we could be
16
liable for additional taxes with respect to our 1996 through 1998 taxable years.
Any such reduction or restriction could have a material adverse effect on our
business.
CONTROL BY CERTAIN STOCKHOLDERS
As of February 15, 1999, Ezra Dabah and certain members of his family
beneficially own 11,370,164 shares of our Common Stock, constituting
approximately 45.3% of the outstanding Common Stock. Two funds managed by
Saunders Karp & Megrue, L.P. ("SKM"), The SK Equity Fund, L.P. and SK Investment
Fund, L.P. (collectively, the "SK Funds"), own 7,566,553 shares or approximately
30.3% of the outstanding Common Stock. After giving effect to a proposed
secondary offering of our Common Stock, Ezra Dabah and certain members of his
family will beneficially own 10,170,164 shares of our Common Stock, constituting
approximately 40.5% of the outstanding Common Stock (or 9,990,164 shares or
approximately 39.8% of the outstanding Common Stock if the over-allotment option
in such offering is fully exercised), and the SK Funds will beneficially own
4,866,553 shares or approximately 19.5% of the outstanding Common Stock (or
4,461,553 shares or approximately 17.9% of the outstanding Common Stock if the
over-allotment option in such offering is fully exercised). Under a stockholders
agreement, the SK Funds and certain other stockholders, who following this
offering will own in the aggregate a majority of the outstanding Common Stock,
have agreed to vote for the election of two nominees of the SK Funds and three
nominees of Ezra Dabah to our Board of Directors in any election of directors.
As a result, the SK Funds and Ezra Dabah are, and will continue to be, able to
control the election of our directors. In addition, if the SK Funds and Mr.
Dabah were to vote together, they would be able to determine the outcome of any
matter submitted to a vote of our stockholders for approval.
SENSITIVITY TO ECONOMIC, REGIONAL AND OTHER BUSINESS CONDITIONS
Our business is sensitive to customers' spending patterns which, in turn,
are subject to prevailing regional and national economic conditions such as
interest rates, taxation and consumer confidence. We are, and will continue to
be, susceptible to changes in regional economic conditions, weather conditions,
demographic and population characteristics, consumer preferences and other
regional factors. We are also dependent upon the continued popularity of malls
as shopping destinations and the ability of mall anchor tenants and other
attractions to generate customer traffic in the malls where our stores are
located. Any economic or other conditions decreasing the retail demand for
apparel or the level of mall traffic could have a material adverse effect on our
business.
RISK OF GEOGRAPHIC EXPANSION
Most of our stores are located in the northeastern and mid-Atlantic United
States. In the past, we have typically expanded our operations in states where
we presently have operations or in contiguous states. In fiscal 1999 and fiscal
2000, in addition to continuing this expansion strategy, we expect to open
stores in new markets and in markets that we have recently penetrated. As a
result, we are, and will continue to be, susceptible to differences in
demographic and population characteristics, regional economic conditions,
climate and other weather-related conditions, consumer preferences and other
geographical factors. We cannot assure you that, as we expand into new regions,
we will be able to achieve results comparable to those we have achieved in prior
periods in regions where we already conduct business.
POSSIBILITY OF CHANGE OF TERMS IN PRIVATE LABEL CREDIT CARD
Sales under "The Children's Place" credit card program represented
approximately 12% of our net sales in fiscal 1998. Our private label credit card
program is operated by an unaffiliated third party, Hurley State Bank, through
its agent, SPS Payment Services, Inc., on terms that currently do not provide
for recourse against The Children's Place. In connection with our efforts to
increase the
17
number of cardholders and encourage use of our private label credit card, we
may, from time to time, consider changing these arrangements to provide for
either full or partial recourse. Any such changes may subject us to losses from
unpaid charges and could have a material adverse effect on our business.
FAILURE OF OUR SYSTEMS TO RECOGNIZE YEAR 2000
The Year 2000 issue exists because many computer applications currently use
two-digit date fields to designate a year. As the century date occurs, date
sensitive systems may not properly recognize and process the Year 2000 which
could cause a system failure or other computer errors leading to disruptions in
normal business processing. Although we are taking prudent business precautions
and developing contingency plans to minimize any business disruption caused by
the Year 2000, we cannot predict whether we will be adversely impacted by a
failure caused by the Year 2000. These risks include, but are not limited to,
power and communications disruptions, failures of our information technology
systems, the ability of any of our significant domestic or foreign suppliers,
service providers, agents or trading companies to become Year 2000 compliant and
disruptions in the distribution channels including both domestic and foreign
ports, customs and transportation vendors.
STOCK PRICE VOLATILITY
Our Common Stock, which is quoted on the Nasdaq National Market, has
experienced and is likely to experience in the future significant price and
volume fluctuations which could adversely affect the market price of the Common
Stock without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in our financial results, our comparable
store sales results, announcements by other apparel retailers, the overall
economy and the condition of the financial markets could cause the price of our
Common Stock to fluctuate substantially.
ANTI-TAKEOVER PROVISIONS OF APPLICABLE DELAWARE LAW AND OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
Certain provisions of our Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation") and Amended and Restated ByLaws (the
"ByLaws") may have anti-takeover effects and may discourage, delay or prevent a
takeover attempt that a stockholder might consider in its best interest. These
provisions, among other things, (1) classify our Board of Directors into three
classes, each of which will serve for different three year periods, (2) provide
that only the Chairman of the Board of Directors may call special meetings of
the stockholders, (3) provide that a director may be removed by stockholders
only for cause by a vote of the holders of more than two-thirds of the shares
entitled to vote, (4) provide that all vacancies on our Board of Directors,
including any vacancies resulting from an increase in the number of directors,
may be filled by a majority of the remaining directors, even if the number is
less than a quorum, (5) establish certain advance notice procedures for
nominations of candidates for election as directors and for stockholder
proposals to be considered at stockholders' meetings, and (6) require a vote of
the holders of more than two-thirds of the shares entitled to vote in order to
amend the foregoing provisions and certain other provisions of the Certificate
of Incorporation and ByLaws. In addition, the Board of Directors, without
further action of the stockholders, is permitted to issue and fix the terms of
preferred stock which may have rights senior to those of the Common Stock.
Moreover, we are subject to the provisions of Section 203 of the Delaware
General Corporation Law, as amended (the "DGCL"), which would require a
two-thirds vote of stockholders for any business combination (such as a merger
or sales of all or substantially all of our assets) between The Children's Place
and an "interested stockholder," unless such transaction is approved by a
majority of the disinterested directors or meets certain other requirements. In
certain circumstances, the existence of these provisions which inhibit or
discourage takeover attempts could reduce the market value of our Common Stock.
18
ITEM 2.--PROPERTIES
Throughout fiscal 1998, all merchandise was received, inspected, processed
and distributed through our 90,000 square foot leased distribution facility and
corporate headquarters in West Caldwell, New Jersey. We also lease a facility in
nearby Fairfield, New Jersey of approximately 35,000 square feet. The bulk of
the merchandise is collected at our distribution facility and shipped as a
complete line to the stores once each month for each department. Replenishment
merchandise is shipped directly to stores each weekday by commercial carrier as
needed. We have experienced occasional shipment delays, but no such delay has
had a material adverse effect on The Children's Place.
We have entered into an eight-year lease with a three-year option period for
a 204,000 square foot distribution center and corporate headquarters facility in
Secaucus, New Jersey, approximately 18 miles from our present location, which we
intend to move into in the second quarter of 1999. Our current lease expires on
May 31, 1999. In conjunction with the move to the new distribution center, we
intend to implement a new automated warehouse management system which will
employ radio frequency technology, a conveyor system and automated flow through
slot location and product putaway. The new warehouse management system will also
support a distribution center reserve inventory that will be utilized to enhance
merchandise replenishment to the stores. We believe this new facility will
provide adequate space to support our growth over the next several years.
All of our existing store locations are leased by us, with lease terms
expiring betwen 1999 and 2011 and with an average unexpired lease term of 7.2
years. The leases for most of the existing stores are for terms of ten years and
provide for contingent rent based upon a percentage of sales in excess of
specific minimums. Leases for future stores will likely include similar
contingent rent provisions.
ITEM 3.--LEGAL PROCEEDINGS
STOCKHOLDER LITIGATION
On October 16, 1997, Stephen Brosious and Rudy Pallastrone, who allegedly
purchased shares of our Common Stock in our initial public offering in September
1997 (the "IPO"), filed a lawsuit against The Children's Place, several of our
directors and officers, and the underwriters of the IPO (the "Defendants") in
the United States District Court for the District of New Jersey (the "Court").
The named plaintiffs purport to maintain a class action on behalf of all
persons, other than the Defendants, who purchased our Common Stock issued in
connection with the IPO on or about September 19, 1997 through October 13, 1997.
The complaint alleges that the Defendants violated federal securities laws by
making false or misleading statements and/or omissions in connection with the
IPO. The plaintiffs seek monetary damages of an unspecified amount, rescission
or rescissory damages and fees and costs. Since October 16, 1997, 15 additional
putative class actions making substantially similar allegations and seeking
substantially similar relief have been filed against some or all of the
Defendants. On or about January 13, 1998, the 16 putative class actions were
consolidated in the Court and on February 26, 1998, the plaintiffs served and
filed their amended consolidated complaint. On April 16, 1998, the Defendants
moved to dismiss the complaint. On September 4, 1998 the Court entered an order
granting the motion to dismiss in part and denying it in part. The Court also
dismissed the case against the underwriters without prejudice. On October 5,
1998, the plaintiffs filed an amended complaint against all Defendants including
the underwriters. We filed our answer to the amended complaint on October 26,
1998. The parties have commenced discovery.
On October 27, 1997, Bulldog Capital Management, L.P., a limited partnership
that serves as a general partner for a series of investment funds which
allegedly purchased shares of The Children's Place's Common Stock issued in
connection with the IPO, also filed a lawsuit against The Children's Place and
several of our directors and officers in the Superior Court of New Jersey, Essex
County Division. The complaint also alleges that by making false or misleading
statements and/or omissions in
19
connection with the IPO, The Children's Place and several of our directors and
officers violated provisions of federal and state law. The plaintiff seeks
monetary damages of an unspecified amount, rescission or rescissory damages and
fees and costs. This action and the federal action described above have been
coordinated for purposes of discovery.
We believe that the allegations made in the complaints described above are
untrue and totally without merit and intend to defend them vigorously. We do not
believe that any ultimate liability arising out of the actions described above
will have a material adverse effect on our business; however we can give no
assurance as to the ultimate resolution of the proceedings or the amount to be
paid, if any, in the disposition of the actions.
OTHER LITIGATION
We are also involved in various legal proceedings arising in the normal
course of our business. In the opinion of management, any ultimate liability
arising out of such proceedings will not have a material adverse effect on our
business.
ITEM 4.--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
PART II
ITEM 5.--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is listed on the Nasdaq National Market under the symbol
"PLCE." The following table sets forth the range of high and low closing sales
prices on the Nasdaq National Market of our Common Stock for the calendar
periods indicated.
HIGH LOW
--------- ---------
1997
Third Quarter (from September 19, 1997).................................... $ 15.75 $ 14.13
Fourth Quarter............................................................. 14.25 4.44
1998
First Quarter.............................................................. 9.06 5.06
Second Quarter............................................................. 11.38 8.13
Third Quarter.............................................................. 11.00 8.06
Fourth Quarter............................................................. 25.13 9.13
1999
First Quarter (through February 23, 1999).................................. 33.25 24.63
On February 23, 1999, the last reported sale price of our Common Stock was
$33.25 per share. As of February 23, 1999, there were approximately 1,600
holders of record of our Common Stock.
We have never paid dividends on our Common Stock and do not anticipate
paying dividends on our Common Stock in the foreseeable future. Our Board of
Directors presently intends to retain any future earnings of The Children's
Place to finance our operations and the expansion of our business. Our working
capital revolving credit facility with Foothill Capital Corporation prohibits
any payment of dividends. Any determination in the future to pay dividends will
depend upon our earnings, financial condition, cash requirements, future
prospects, covenants in our working capital revolving credit facility and any
future debt instruments and such other factors as the Board of Directors deems
appropriate at the time.
21
ITEM 6.--SELECTED FINANCIAL DATA
The following table sets forth certain historical financial and operating
data for The Children's Place. The selected historical financial data is
qualified by reference to, and should be read in conjunction with Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the financial statements and notes thereto included elsewhere in
this report. Certain prior fiscal year balances set forth below have been
reclassified to conform to fiscal 1998 presentation.
FISCAL YEAR ENDED (1)
---------------------------------------------------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30,
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA (IN THOUSANDS, EXCEPT PER SHARE
DATA):
Net sales...................................................... $ 107,953 $ 122,060 $ 143,838 $ 192,557 $ 283,853
Cost of sales.................................................. 74,229 83,434 90,071 123,556 166,449
----------- ----------- ----------- ----------- -----------
Gross profit................................................... 33,724 38,626 53,767 69,001 117,404
Selling, general and administrative expenses................... 27,873 30,757 35,966 46,451 70,313
Pre-opening costs.............................................. 178 311 982 2,127 3,030
Depreciation and amortization.................................. 3,344 3,496 4,017 5,958 8,607
----------- ----------- ----------- ----------- -----------
Operating income............................................... 2,329 4,062 12,802 14,465 35,454
Interest expense, net.......................................... 1,303 1,925 2,884 2,647 324
Other expense, net............................................. 0 447 396 139 110
----------- ----------- ----------- ----------- -----------
Income before income taxes and extraordinary item.............. 1,026 1,690 9,522 11,679 35,020
Provision (benefit) for income taxes (2)....................... 54 36 (20,919) 4,695 14,358
----------- ----------- ----------- ----------- -----------
Income before extraordinary item............................... 972 1,654 30,441 6,984 20,662
Extraordinary gain (loss) (3).................................. 490 0 0 (1,743) 0
----------- ----------- ----------- ----------- -----------
Net income..................................................... $ 1,462 $ 1,654 $ 30,441 $ 5,241 $ 20,662
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted income per common share before extraordinary item...... $ 0.29 $ 0.80
----------- -----------
Extraordinary item............................................. (0.07) 0.00
----------- -----------
Diluted net income per common share (4)........................ $ 0.22 $ 0.80
----------- -----------
----------- -----------
Diluted weighted average common shares outstanding (4)......... 24,358 25,909
SELECTED OPERATING DATA:
Number of stores open at end of period......................... 87 91 108 155 209
Comparable store sales increase (5) (6)........................ 13% 10% 9% 2% 14%
Average net sales per store (in thousands) (6) (7)............. $ 1,264 $ 1,362 $ 1,479 $ 1,487 $ 1,569
Average square footage per store (8)........................... 4,786 4,528 4,284 4,123 4,055
Average net sales per gross square foot (6) (9)................ $ 259 $ 292 $ 335 $ 350 $ 382
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30,
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA (IN THOUSANDS):
Working capital (deficit)...................................... $ (10,398) $ (17,630) $ 11,951 $ 20,238 $ 35,531
Total assets................................................... 26,556 32,073 64,479 79,353 110,761
Long-term debt................................................. 21,626 15,735 20,504 26 2
Stockholders' equity (deficit)................................. (13,388) (11,735) 27,298 58,467 80,607
(FOOTNOTES ON FOLLOWING PAGE)
22
- ------------------------
(1) All references to our fiscal years refer to the 52- or 53-week year ended
on the Saturday nearest to January 31 of the following year. For example,
references to fiscal 1998 mean the fiscal year ended January 30, 1999.
Fiscal 1995 was a 53-week year.
(2) The provision (benefit) for income taxes for fiscal 1996 reflected the
reversal of a valuation allowance of $21.0 million on a net deferred tax
asset.
(3) The extraordinary gain during fiscal 1994 represented the forgiveness of
debt in connection with a debt restructuring undertaken with the consent of
our creditors. The extraordinary loss in fiscal 1997 represented the
write-off of unamortized deferred financing costs and unamortized debt
discount as a result of the repayment of long-term debt in conjunction with
our initial public offering in September 1997.
(4) Diluted net income per common share is calculated by dividing net income by
the diluted weighted average common shares and common share equivalents
outstanding. The weighted average common shares outstanding and common share
equivalents used in computing diluted net income per common share for fiscal
1997 are based on the number of common shares and common share equivalents
as if our recapitalization at the time of our initial public offering had
occurred on the first day of fiscal 1997. During and prior to the fiscal
year ended February 1, 1997, our Common Stock was not publicly traded and
the significant changes in our capital structure resulting from a private
placement of our Common Stock in July 1996 (as discussed in Note 3--1996
Private Placement in the Notes to the Consolidated Financial Statements)
(the "1996 Private Placement"), earnings per share for that year and earlier
periods is not presented due to a lack of comparability.
(5) We define comparable store sales as net sales from stores that have been
open for more than 14 full months and that have not been substantially
remodeled during that time.
(6) For purposes of determining the comparable store sales increase, average net
sales per store and average net sales per gross square foot, fiscal 1995
results were recalculated based on a 52-week year.
(7) Represents net sales from stores open throughout the full period divided by
the number of such stores.
(8) Average square footage per store represents the square footage of stores
open on the last day of the period divided by the number of such stores.
(9) Represents net sales from stores open throughout the full period divided by
the gross square footage of such stores.
23
ITEM 7.--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR AUDITED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED AS ITEM 14. THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT REFLECT OUR PLANS, ESTIMATES
AND BELIEFS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND ELSEWHERE
IN THIS REPORT, PARTICULARLY IN "RISK FACTORS."
OVERVIEW
The Children's Place Retail Stores, Inc. is a specialty retailer of apparel
and accessories for children from newborn to twelve years of age. As of February
15, 1999, we operated 211 stores in 26 states, located primarily in regional
shopping malls in the eastern half of the United States. In fiscal 1996, we
began to implement an aggressive growth strategy designed to capitalize on our
business strengths and strong store economics. From July 1, 1996 through the end
of fiscal 1996, we opened 16 stores and closed one store, growing to 108 stores.
During fiscal 1997 and fiscal 1998, we opened a total of 47 and 54 new stores,
respectively. The majority of these stores were opened in existing and
contiguous markets. In fiscal 1998, we also entered into several new markets,
including Atlanta, St. Louis and Kansas City.
We intend to continue our expansion program and currently plan to open at
least 70 stores in fiscal 1999 and at least 90 stores in fiscal 2000. Our store
expansion program will continue to focus on expanding our presence in existing
and contiguous markets. We also plan to open stores in several new
markets--Colorado, Utah and northern Florida in fiscal 1999, and northern
California, Washington, Oregon, southern Florida, Louisiana and Texas in fiscal
2000.
Our net sales have grown significantly during the past several years,
primarily as a result of new store openings and, to a lesser extent, increases
in comparable store sales. We define our comparable store sales as net sales
from stores that have been open for more than 14 full months and that have not
been substantially remodeled during that time. We reported comparable store
sales growth over prior years of 13%, 10%, 9%, 2% and 14% during fiscal 1994,
1995, 1996, 1997 and 1998, respectively. We believe that these increases were
primarily the result of successful merchandising and operational programs,
together with well-positioned store real estate. We do not expect our comparable
store sales to continue to increase at rates similar to those experienced in
fiscal 1998.
In order to support our aggressive growth strategy, we continue to assess
and build our administrative infrastructure and our management information and
distribution systems. During fiscal 1998, we added resources in virtually all of
our administrative functions to support our present and planned store growth.
During fiscal 1999, we plan to implement an automated warehouse management
system and to replace our point-of-sale software and hardware. During the second
quarter of fiscal 1999, we also plan to move to a larger distribution center and
corporate headquarters in Secaucus, New Jersey. This relocation will support our
need for additional space for our distribution center and administrative staff.
Since our current facilities and equipment have a low net book value, we expect
only a small write-off in conjunction with this move.
In fiscal 1999, we also plan to implement a new merchandise presentation
strategy, and to upgrade the display fixtures and other elements of our store
design in approximately two-thirds of our existing stores, in order to simplify,
facilitate and enhance the shopping experience of our customers. During fiscal
1998, we accelerated depreciation expense by approximately $0.8 million for
store fixtures that will be eliminated in connection with the refixturing. We
expect to accelerate depreciation expense by approximately $1.2 million during
fiscal 1999 to complete this program. Also in fiscal 1999, we plan, through a
wholly-owned Hong Kong subsidiary, to open an office in Hong Kong, which will
initially employ eight to ten people, and for which we initially expect to incur
an annual cost of $1.0 million.
24
We have selected an advertising agency to assist us in developing a new
advertising campaign that will include television, print, radio and outdoor
advertising. In fiscal 1999, we expect to spend approximately $6.0 million to
$8.0 million on this campaign. We also view the use of our private label credit
card as an important marketing and communication tool. Our private label card
sales accounted for approximately 12% of our fiscal 1998 net sales.
Giving effect to the expenditures to be made in the second quarter of fiscal
1999 specified above, we may report a higher net loss for the second quarter of
fiscal 1999 than we reported for the second quarter of fiscal 1998.
Consequently, during the second quarter of fiscal 1999, we may report a higher
loss per share than we did for the second quarter of fiscal 1998. In addition,
the occupancy expense of a larger distribution center and corporate
headquarters, the overlap in rent expense between our old and new facility and
the cost of relocating to the new facility will adversely affect our results of
operations for the second quarter of fiscal 1999.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected income
statement data expressed as a percentage of net sales:
FISCAL YEAR ENDED
-------------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
------------- ------------- -------------
Net sales.................................................................. 100.0% 100.0% 100.0%
Cost of sales.............................................................. 62.6 64.2 58.6
----- ----- -----
Gross profit............................................................... 37.4 35.8 41.4
Selling, general and administrative expenses............................... 25.0 24.1 24.8
Pre-opening costs.......................................................... 0.7 1.1 1.1
Depreciation and amortization.............................................. 2.8 3.1 3.0
----- ----- -----
Operating income........................................................... 8.9 7.5 12.5
Interest expense, net...................................................... 2.0 1.4 0.1
Other expense, net......................................................... 0.3 0.1 0.1
----- ----- -----
Income before income taxes and extraordinary item.......................... 6.6 6.0 12.3
Provision (benefit) for income taxes....................................... (14.5) 2.4 5.0
Extraordinary loss......................................................... -- 0.9 --
----- ----- -----
Net income................................................................. 21.1% 2.7% 7.3%
----- ----- -----
----- ----- -----
Number of stores, end of period............................................ 108 155 209
YEAR ENDED JANUARY 30, 1999 COMPARED TO YEAR ENDED JANUARY 31, 1998
Net sales increased by $91.3 million, or 47%, to $283.9 million during
fiscal 1998 from $192.6 million during fiscal 1997. Net sales for the 54 new
stores opened, as well as other stores that did not qualify as comparable
stores, contributed $67.1 million of the sales increase. As of January 30, 1999,
The Children's Place operated 209 stores in 26 states primarily located in
regional shopping malls in the eastern half of the United States. During fiscal
1998, we entered several new markets, including Atlanta, St. Louis and Kansas
City. Our comparable store sales increased 14% and contributed $24.2 million to
the net sales increase during fiscal 1998. Comparable store sales increased 2%
during fiscal 1997. Our fiscal 1998 comparable store sales increase was
experienced across all major merchandise departments.
Gross profit increased by $48.4 million to $117.4 million during fiscal 1998
from $69.0 million during fiscal 1997. As a percentage of net sales, gross
profit increased to 41.4% during fiscal 1998 from
25
35.8% during fiscal 1997. The increase in gross profit as a percentage of net
sales was principally due to higher initial markups achieved through more
effective product sourcing and a stronger dollar, as well as to lower markdowns.
As a percentage of net sales, gross profit was also favorably impacted by a
leveraging of store occupancy, buying and distribution expenses over a higher
sales base.
Selling, general and administrative expenses increased $23.8 million to
$70.3 million during fiscal 1998 from $46.5 million during fiscal 1997. As a
percentage of net sales, selling, general and administrative expenses increased
to 24.8% of net sales during fiscal 1998 from 24.1% of net sales during fiscal
1997. The increase was primarily due to increases in our administrative
infrastructure to support our growth and higher marketing expenses to promote
consumer recognition of "The Children's Place" brand. In addition, our incentive
payouts in fiscal 1998 were higher, and higher as a percentage of net sales, as
our increased operating performance for that year resulted in the payment of
higher incentive bonuses than were paid in fiscal 1997. The increase in selling,
general and administrative expenses as a percentage of net sales was partially
offset by the leveraging of store expenses over a higher sales base.
During fiscal 1998, pre-opening costs were $3.0 million, or 1.1% of net
sales, as compared to $2.1 million, or 1.1% of net sales, during fiscal 1997.
The increase in pre-opening costs in fiscal 1998 reflected the opening of 54
stores, as compared to 47 stores during fiscal 1997. Pre-opening expenses for
fiscal 1998 also reflect certain expenses incurred for approximately 26 stores
we plan to open during the first quarter of fiscal 1999.
Depreciation and amortization amounted to $8.6 million, or 3.0% of net
sales, during fiscal 1998 as compared to $6.0 million, or 3.1% of net sales,
during fiscal 1997. The increase in depreciation and amortization primarily was
a result of the increase in stores. The decrease as a percentage of net sales
during fiscal 1998 reflects the leverage of depreciation and amortization
expense over a higher sales base.
Interest expense, net, for fiscal 1998 was $0.3 million, or 0.1% of net
sales, as compared to $2.6 million, or 1.4% of net sales, during fiscal 1997.
The decrease in interest expense, net, was primarily due to the elimination of
interest expense on our long-term debt, which was repaid with a portion of the
proceeds from our initial public offering, and lower borrowings and effective
interest rates under our working capital revolving credit facility.
Other expense, net, for fiscal 1998 and fiscal 1997 was $0.1 million and
consisted of anniversary fees related to our working capital revolving credit
facility during both periods.
During fiscal 1998, a provision for income taxes of $14.4 million was
recorded, as compared to $4.7 million during fiscal 1997. Due to the utilization
of our NOLs, the majority of our 1998 tax provision will not be paid in cash.
However, we expect to make cash payments of approximately $2.3 million for our
fiscal 1998 taxes related to the payment of taxes based on the federal
alternative minimum tax, state minimum taxes and state taxes for states in which
we did not have NOLs. We expect to utilize the remaining $0.1 million of our
NOLs during fiscal 1999.
As a result of the repayment of our long-term debt with a portion of the net
proceeds from our initial public offering, we recorded a non-cash extraordinary
item of $1.7 million, net of taxes, for fiscal 1997 that represented the
write-off of unamortized deferred financing costs and unamortized debt discount.
The Children's Place had net income of $20.7 million and $5.2 million in
fiscal 1998 and fiscal 1997, respectively.
YEAR ENDED JANUARY 31, 1998 COMPARED TO YEAR ENDED FEBRUARY 1, 1997
Net sales increased by $48.8 million, or 34%, to $192.6 million during
fiscal 1997 from $143.8 million during fiscal 1996. Net sales for the 47 new
stores opened, as well as other stores that did not
26
qualify as comparable stores, contributed $46.2 million of the sales increase,
partially offset by the closing of one store during 1996 which contributed $0.4
million of net sales during fiscal 1996. Our comparable store sales increased 2%
and contributed $3.0 million of the sales increase during fiscal 1997.
Comparable store sales increased 9% during fiscal 1996. The Company's fiscal
1997 comparable store sales increase was primarily attributable to strength in
the infant and big girl departments, partially offset by weaker sales in the
little boy and little girl departments.
Gross profit increased by $15.2 million to $69.0 million during fiscal 1997
from $53.8 million during fiscal 1996. As a percentage of net sales, gross
profit decreased to 35.8% during fiscal 1997 from 37.4% during fiscal 1996. The
decrease in gross profit as a percentage of net sales was principally due to
higher markdowns which were required to clear excess inventory. As a percentage
of net sales, gross profit was also unfavorably impacted by higher store
occupancy costs partially offset by a higher initial markup. The increased store
occupancy costs resulted from new stores that had not been open long enough to
leverage their rent through an established sales base.
Selling, general and administrative expenses increased $10.5 million to
$46.5 million during fiscal 1997 from $36.0 million during fiscal 1996. As a
percentage of net sales, selling, general and administrative expenses decreased
to 24.1% of net sales during fiscal 1997 from 25.0% of net sales during fiscal
1996. The decrease as a percentage of net sales was primarily due to lower
corporate administrative expenses which benefited from the leverage of the
increased sales base, partially offset by higher store payroll and other store
expenses.
During fiscal 1997, pre-opening costs were $2.1 million, or 1.1% of net
sales, as compared to $1.0 million, or 0.7% of net sales, during fiscal 1996.
The increase in pre-opening costs in fiscal 1997 reflected the opening of 47
stores, as compared to 18 stores during fiscal 1996, partially offset by cost
saving measures implemented in fiscal 1997 to reduce store pre-opening costs.
Depreciation and amortization amounted to $6.0 million, or 3.1% of net
sales, during fiscal 1997 as compared to $4.0 million, or 2.8% of net sales,
during fiscal 1996. The increase in depreciation and amortization primarily was
a result of the increase in stores.
Interest expense, net, for fiscal 1997 was $2.6 million, or 1.4% of net
sales, as compared to $2.9 million, or 2.0% of net sales, during fiscal 1996.
The decrease in interest expense, net, was primarily due to the repayment of our
long-term debt with a portion of the proceeds from our initial public offering.
Other expense, net, for fiscal 1997 amounted to $0.1 million, or 0.1% of net
sales, as compared to $0.4 million, or 0.3% of net sales, during fiscal 1996.
During fiscal 1997 and fiscal 1996, other expenses were comprised primarily of
an anniversary fee and other miscellaneous fees related to our working capital
revolving credit facility. During fiscal 1996, other expenses also contained
credit agreement amendment fees related to our working capital revolving credit
facility.
Our provision for income taxes for fiscal 1997 was $4.7 million, as compared
with an income tax benefit of $20.9 million in the prior year. Our provision for
income taxes for fiscal 1997 reflected a provision based on effective statutory
rates. Throughout fiscal 1996, our provision for income taxes provided for the
payment of federal alternative minimum taxes and minimum taxes in most states
due to the utilization of our NOLs. During the fourth quarter of fiscal 1996, we
reversed a $21.0 million valuation allowance on our deferred tax asset on our
balance sheet. The majority of the fiscal 1997 tax provision was not paid in
cash. However, we made cash tax payments for the federal alternative minimum
tax, state minimum taxes and state taxes for states in which we did not have
NOLs.
As a result of the repayment of our long-term debt with a portion of the net
proceeds from the initial public offering, we recorded a non-cash extraordinary
item of $1.7 million, net of taxes, for fiscal 1997 that represented the
write-off of unamortized deferred financing costs and unamortized debt discount.
27
The Children's Place had net income of $5.2 million and $30.4 million in
fiscal 1997 and fiscal 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
DEBT SERVICE/LIQUIDITY
During fiscal 1998, our primary uses of cash were financing new store
openings and providing for working capital, which primarily represents the
purchase of inventory. Our working capital needs follow a seasonal pattern,
peaking during the second and third quarters when inventory is purchased for the
back-to-school and holiday merchandise lines. We have been able to meet our cash
needs principally by using cash flow from operations and borrowings under our
working capital revolving credit facility. Since our initial public offering, we
have had no long-term debt obligations other than obligations under capital
leases.
We have a working capital revolving credit facility with Foothill Capital
Corporation that provides for borrowings up to $30.0 million (including a
sublimit for letters of credit of $20.0 million). The amount that may be
borrowed under our working capital revolving credit facility depends upon our
levels of inventory and accounts receivable. Amounts outstanding under the
facility bear interest at a floating rate equal to the prime rate or, at our
option, the 30-day LIBOR Rate plus a pre-determined spread. The LIBOR spread is
1.50% or 2.00%, depending upon our financial performance from time to time.
Borrowings under the facility mature in July 2000 and provide for one year
automatic renewal options.
As of January 30, 1999, there were no borrowings under our working capital
revolving credit facility and, as of January 31, 1998, $1.1 million was borrowed
under the working capital revolving credit facility. In addition, as of January
30, 1999 and January 31, 1998, we had outstanding $10.6 million and $5.7
million, respectively, in letters of credit under our working capital revolving
credit facility. Availability under the working capital revolving credit
facility as of January 30, 1999 and January 31, 1998 was $19.3 million and $15.8
million, respectively. As of January 30, 1999 and January 31, 1998 the interest
rates charged under the working capital revolving credit facility were 7.75% and
8.50% per annum, respectively.
Our working capital revolving credit facility contains certain financial
covenants including, among others, the maintenance of minimum levels of tangible
net worth, working capital and current ratios, and imposes certain limitations
on our annual capital expenditures, as defined in the working capital revolving
credit facility, as well as a prohibition on the payment of dividends. Credit
extended under the working capital revolving credit facility is secured by a
first priority security interest in our present and future assets.
We were in compliance with all of the financial covenants under our working
capital revolving credit facility as of January 30, 1999.
CASH FLOWS/CAPITAL EXPENDITURES
Cash flows provided by operating activities were $35.0 million, $11.3
million and $7.8 million in fiscal 1998, 1997 and 1996, respectively. In fiscal
1998, cash flows from operating activities increased as a result of an increase
in operating earnings, the utilization of our NOLs and increases in current
liabilities, partially offset by an increased investment in inventory to support
the store expansion program. In fiscal 1997, cash flows from operating
activities increased as a result of an increase in operating earnings and
accounts payable, partially offset by an increased inventory investment.
Cash flows used in investing activities were $19.8 million, $17.2 million
and $8.5 million in fiscal 1998, 1997 and 1996, respectively. Cash flows used in
investing activities relate primarily to store openings and remodelings. In
fiscal 1998, 1997 and 1996, we opened 54, 47 and 18 stores while
28
remodeling 3, 10 and 5 stores, respectively. Cash flows used in investing
activities during fiscal 1998, 1997 and 1996 also include ongoing store capital
programs and computer equipment for our corporate headquarters. During fiscal
1998, capital expenditures also included capital expenditures related to the
upcoming relocation of the distribution center and corporate headquarters
facility, a warehouse management system, and new point-of-sale software and
hardware.
Cash flows provided by financing activities were $0.4 million, $3.3 million
and $3.5 million in fiscal 1998, 1997 and 1996, respectively. In fiscal 1998,
cash flows provided by financing activities reflected funds received from the
exercise of employee stock options and employee stock purchases partially offset
by a net repayment of our working capital revolving credit facility. In fiscal
1997, cash flows provided by financing activities resulted from our initial
public offering, offset by the repayment of our long-term debt and the
repurchase of certain warrants. In fiscal 1996, cash flows provided by financing
activities resulted from the 1996 Private Placement. The net proceeds of the
1996 Private Placement were used to redeem certain outstanding shares of Common
Stock, repay existing long-term debt and reduce outstanding borrowings under our
working capital revolving credit facility.
We have entered into an eight-year lease with a three-year option period for
a distribution center and corporate headquarters facility located in Secaucus,
New Jersey. The lease also provides us with an option to terminate the lease
after the fifth year. We plan to relocate our distribution center and corporate
headquarters during the second quarter of fiscal 1999. We believe this
distribution center will support approximately 500 stores. We expect to make a
cash outlay of approximately $8.0 million to renovate the facility, of which
$0.5 million was spent in fiscal 1998. We also plan to install a new warehouse
management system at a total cost of approximately $4.5 million, of which $2.1
million was spent in fiscal 1998. The existing distribution center and corporate
headquarters facility lease expires in March 1999. We have extended our lease
arrangement for our existing distribution and corporate headquarters to cover
the period until our operations are relocated to the new facility.
In a typical new store, capital expenditures (net of landlord contribution),
initial inventory (net of merchandise payables) and pre-opening costs
approximate $0.4 million. We anticipate that total capital expenditures will
approximate $45.0 million in fiscal 1999. These expenditures will relate
primarily to the opening of at least 70 stores, the renovation of our new
distribution center and corporate headquarters, store remodelings and
refixturings, ongoing store maintenance programs and computer and warehouse
systems and equipment. We plan to fund these capital expenditures primarily with
cash flow from operations.
We believe that cash generated from operations and funds available under our
working capital revolving credit facility will be sufficient to fund our capital
and other cash flow requirements for at least the next 12 months. In addition,
as we continue our store expansion program we will consider additional sources
of financing to fund our long-term growth. Although we are complying, and
believe that we will be able to comply, with the financial covenants under our
working capital revolving credit facility, we are seeking to provide greater
financial flexibility as we implement our growth strategy. Consequently, we have
requested an increase in our credit line under the working capital revolving
credit facility and amendments to the financial covenants contained in the
credit facility.
Our ability to meet our capital requirements will depend on our ability to
generate cash from operations and successfully implement our store expansion
plans.
QUARTERLY RESULTS AND SEASONALITY
Our quarterly results of operations have fluctuated and are expected to
continue to fluctuate materially depending on a variety of factors, including
the timing of new store openings and related pre-opening and other startup
costs, net sales contributed by new stores, increases or decreases in comparable
store sales, weather conditions, shifts in timing of certain holidays, changes
in our merchandise mix and overall economic conditions.
29
Our business is also subject to seasonal influences, with heavier
concentrations of sales during the back-to-school and holiday seasons. As is the
case with many retailers of apparel and related merchandise, we typically
experience lower net sales and net income during the first two fiscal quarters,
and net sales and net income are lower during the second fiscal quarter than
during the first fiscal quarter. Our first quarter results are heavily dependent
upon sales during the period leading up to the Easter holiday. Our third quarter
results are heavily dependent upon back-to-school sales and our fourth quarter
results are heavily dependent upon sales during the holiday season. We have
experienced first and second quarter losses in the past and expect to experience
second quarter losses in the future. Because of these fluctuations in net sales
and net income (loss), the results of operations of any quarter are not
necessarily indicative of the results that may be achieved for a full fiscal
year or any future quarter.
The following table sets forth certain statement of operations data and
operating data for each of our last eight fiscal quarters. The quarterly
statement of operations data and selected operating data set forth below were
derived from our unaudited financial statements and reflect, in our opinion, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the results of operations for these fiscal quarters.
FISCAL 1997
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR SHARE AND STORE
DATA)
Net sales........................................................ $ 39,203 $ 33,534 $ 54,489 $ 65,331
Operating income (loss).......................................... 2,618 (1,922) 6,656 7,113
Comparable store sales increase (decrease)....................... 5% (1%) 0% 5%
Stores open at end of period..................................... 119 134 151 155
FISCAL 1998
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR SHARE AND STORE
DATA)
Net sales........................................................ $ 55,999 $ 48,014 $ 82,496 $ 97,344
Operating income (loss).......................................... 4,682 (664) 14,619 16,817
Comparable store sales increase.................................. 7% 8% 18% 18%
Stores open at end of period..................................... 178 189 203 209
YEAR 2000 COMPLIANCE
The Year 2000 issue exists because many computer applications currently use
two-digit date fields to designate a year. As the century date occurs, date
sensitive systems may not properly recognize and process the Year 2000, which
could cause a system failure or other computer errors, leading to disruptions in
normal business processing. During fiscal 1997, we began a program to ensure
that our operations would not be adversely impacted by software and other system
and equipment failures related to the Year 2000.
During the second quarter of fiscal 1998, we engaged the services of a
consulting firm to help ensure that we had fully assessed the risks associated
with the Year 2000 and to assist in the development of a comprehensive
implementation plan. In addition, we established a project team to coordinate
and address the Year 2000 issue. The Year 2000 project has been divided into
four phases: (1) inventory and risk assessment; (2) remediation of non-compliant
systems, equipment and suppliers;
(3) implementation and testing; and (4) contingency planning.
The inventory and risk assessment phase of the Year 2000 project is
complete. During this phase, we assessed our information systems hardware and
software, equipment containing date-sensitive
30
embedded chips, electronic data interchange and the Year 2000 preparedness of
our key suppliers and service providers.
Our plans call for our critical information systems to be Year 2000
compliant by the end of the second quarter of fiscal 1999. We believe that
approximately 65% of our systems are currently Year 2000 compliant. We plan to
rely primarily on our existing management information systems staff supplemented
by outside consultants to modify, replace and test systems for Year 2000
compliance. During fiscal 1998, we incurred external costs of approximately $0.3
million in connection with our Year 2000 compliance and expect to incur an
additional $0.3 million in external costs in fiscal 1999. In addition, we
utilized approximately $0.4 million in internal management information systems
resources during fiscal 1998 and expect to utilize a similar amount of internal
management information systems resources in fiscal 1999. The cost of Year 2000
remediation is not expected to have a material adverse impact on our business in
future periods. Contingency plans are being developed to provide uninterrupted
management information systems support in the event that we are unable to
replace our warehouse management system, point-of-sale system and general ledger
systems.
We have completed our initial assessment of the Year 2000 preparedness of
our service providers and key suppliers through written communications, oral
communications and visual inspection. Despite these efforts, we cannot assure
the timely compliance of these service providers and suppliers and may be
adversely affected by a failure of a significant third party to become Year 2000
compliant. Additionally, since we procure most of our merchandise from foreign
sources, we are also at risk to the extent foreign suppliers and infrastructures
are not properly prepared to handle the Year 2000. Contingency plans are in
process to mitigate the risk of dependence on foreign suppliers and distribution
channels through an accelerated receipt of merchandise for the spring 2000
selling season. We anticipate that we will incur approximately $0.2 million in
additional inventory carrying costs associated with the earlier receipt of this
merchandise. We believe that the accelerated receipt of inventory should
mitigate the risk of a material failure to receive our merchandise for re-sale.
Although we are working to minimize any business disruption caused by the
Year 2000, we may be adversely impacted by a failure related to the Year 2000.
These risks include, but are not limited to, power and communications
disruptions, failures of our information technology systems, the inability of a
significant supplier or service provider to become Year 2000 compliant and
disruptions in the distribution channels including both foreign and domestic
ports, customs, and transportation vendors.
As noted above, we are currently developing our contingency plans which will
allow for the continuation of business operations in the event that we or any of
our significant suppliers or service providers do not properly address Year 2000
issues. We expect to have a completed plan by the end of the second quarter of
fiscal 1999. Where needed, we will modify our contingency plans based on the
test results of our information systems hardware and software, the timeliness of
replacement system implementations and the ongoing assessment of risk associated
with third party suppliers and service providers. The cost of the conversions
and the completion dates set forth above are based on management's estimates and
may be updated as additional information becomes available.
ITEM 7A.--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8.--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(See Item 14.)
ITEM 9.--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
31
PART III
ITEM 10.--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers and directors of The Children's Place:
NAME AGE POSITION
- -------------------------------- ----- ------------------------------------------------------------------------
Ezra Dabah...................... 45 Chairman of the Board of Directors and Chief Executive Officer
Stanley B. Silver............... 60 President, Chief Operating Officer and Director
Clark Hinkley................... 57 Executive Vice President, Merchandising
Seth L. Udasin.................. 42 Vice President, Finance, Chief Financial Officer and Treasurer
Steven Balasiano................ 36 Vice President, General Counsel and Secretary
Mario A. Ciampi................. 38 Vice President, Real Estate and Construction
Edward DeMartino................ 47 Vice President, Management Information Systems
Robert Finkelstein.............. 46 Vice President, Merchandising Planning and Allocation
Nina L. Miner................... 49 Vice President, Trend Development
Charles Messina................. 55 Vice President, Human Resources
Salvatore W. Pepitone........... 51 Vice President, Distribution Center
Mark L. Rose.................... 33 Vice President, Sourcing and Production
Susan F. Schiller............... 38 Vice President, Store Operations
Diane M. Timbanard.............. 53 Vice President, Design and Product Development
Michael Zahn.................... 35 Vice President, General Merchandise Manager
Stanley Silverstein............. 73 Director
John F. Megrue.................. 40 Director
David J. Oddi................... 29 Director
EZRA DABAH has been Chief Executive Officer since 1991 and Chairman of the
Board and a Director since purchasing The Children's Place in 1989 with certain
members of his family. Mr. Dabah has more than 25 years of apparel merchandising
and buying experience. From 1972 to May 1993, Mr. Dabah was a director and an
executive officer of The Gitano Group, Inc. and its affiliates (collectively,
"Gitano"), a company of which Mr. Dabah and certain members of his family were
principal stockholders and which became a public company in 1988. From 1973
until 1983, Mr. Dabah was in charge of product design, merchandising and
procurement for Gitano. In 1983, Mr. Dabah founded and became President of a
children's apparel importing and manufacturing division for Gitano which later
became an incorporated subsidiary, Eva Joia Incorporated, ("E.J. Gitano"). Mr.
Dabah is Stanley Silverstein's son-in-law and Nina Miner's brother-in-law.
STANLEY B. SILVER has been President and Chief Operating Officer since June
1996 and prior to that served as Executive Vice President and Chief Operating
Officer since joining The Children's Place in 1991. Mr. Silver has been a
Director since July 1996. Before joining The Children's Place in 1991, Mr.
Silver held various posts at Grand Met PLC and Mothercare PLC in the United
Kingdom and The Limited, Inc. in the United States. Mr. Silver has over 25 years
of retailing experience in Europe and the United States and currently serves as
Chairman of the Retail Council of New York State.
CLARK HINKLEY has been Executive Vice President, Merchandising since joining
The Children's Place in February 1998. Prior to joining The Children's Place,
Mr. Hinkley was the Executive Vice President and Chief Operating Officer of The
Talbots, Inc., a position he held since 1993. Mr. Hinkley has over 35 years of
retailing experience with over 25 years of senior level management and
merchandising experience. Prior to his 10 years with The Talbot's, Inc., Mr.
Hinkley was with Dayton Hudson Corporation and its predecessor company, J.L.
Hudson, for 24 years.
32
SETH L. UDASIN has been Vice President, Finance since 1994 and Chief
Financial Officer and Treasurer since 1996. Since joining The Children's Place
in 1983, Mr. Udasin has held various other positions, including Controller from
1988 to 1994.
STEVEN BALASIANO has been Vice President and General Counsel since joining
The Children's Place in December 1995 and Secretary since January 1996. Prior to
joining The Children's Place, Mr. Balasiano practiced law in the New York
offices of the national law firms of Stroock & Stroock & Lavan LLP from 1992 to
1995 and Kelley Drye & Warren from 1987 to 1992.
MARIO A. CIAMPI has been Vice President, Real Estate and Construction since
joining The Children's Place in June 1996. Prior to joining The Children's
Place, Mr. Ciampi was a principal of a private consulting firm, specializing in
retail and real estate restructuring, from 1991 to 1996, in which capacity he
was retained as an outside consultant on the Company's real estate activities
since 1991.
EDWARD DEMARTINO has been Vice President, Management Information Systems
since 1991. Mr. DeMartino began his career with The Children's Place in 1981 as
a System Development Project Manager and was subsequently promoted to
Director--MIS in 1989.
ROBERT FINKELSTEIN joined The Children's Place in 1989 as Vice President,
Merchandise Planning and Allocation. Immediately prior to joining The Children's
Place, Mr. Finkelstein was a Director of Distribution for Payless Shoe Stores.
NINA L. MINER has been Vice President, Trend Development since August 1998,
prior to which time she was Vice President, Design and Product Development since
joining The Children's Place in 1990. Before joining The Children's Place, Ms.
Miner held various management positions at E.J. Gitano. Ms. Miner is Stanley
Silverstein's daughter and Ezra Dabah's sister-in-law.
CHARLES MESSINA has been Vice President, Human Resources since September
1998. From 1996 to 1998, Mr. Messina was President of Basketeer Corp. Prior to
joining The Children's Place, Mr. Messina was Vice President Human Resources,
International Sourcing and Specialty Retailing at Meldisco/ Melville Corporation
from 1992 to 1996.
SALVATORE W. PEPITONE has been Vice President, Distribution Center since
joining The Children's Place in 1991. Prior to joining The Children's Place, Mr.
Pepitone was employed in a similar capacity by E.J. Gitano.
MARK L. ROSE has been Vice President, Sourcing and Production since 1992.
Mr. Rose joined The Children's Place in 1990 and was promoted to Senior Product
Buyer that year. Prior to joining The Children's Place, Mr. Rose held various
positions at Macy's.
SUSAN F. SCHILLER has been Vice President, Store Operations since 1994. Ms.
Schiller began her career with The Children's Place as an Assistant Store
Manager in 1985 and subsequently served in various positions, including Director
of Store Communications from 1991 to 1993 and Director of Store Operations from
1993 to 1994.
DIANE M. TIMBANARD has been Vice President, Design and Product Development
since August 1998, prior to which time she served as Vice President,
Merchandising Manager since joining The Children's Place in 1991. Prior to
joining The Children's Place, Ms. Timbanard held various merchandising and
management positions, including Vice President of Merchandising for Macy's.
MICHAEL ZAHN has been Vice President, General Merchandise Manager since
September 1998. Prior to joining The Children's Place, Mr. Zahn held various
merchandising positions at Ann Taylor from 1995 to 1998. From 1992 to 1995, Mr.
Zahn was a merchandiser with Warner Bros. Retail.
STANLEY SILVERSTEIN has been a Director of The Children's Place since July
1996. Mr. Silverstein also serves as Chairman of the Board of Directors of Nina
Footwear, a company he founded with his brother in 1952. Mr. Silverstein is the
father of Nina Miner and Ezra Dabah's father-in-law.
33
JOHN F. MEGRUE has been a Director of The Children's Place since July 1996.
Since 1992, Mr. Megrue has been a Partner of Saunders Karp & Megrue Partners,
L.L.C. (or its predecessor), which serves as the general partner of SKM
Partners, L.P., which serves as the general partner of the SK Funds and SKM.
From 1989 to 1992, Mr. Megrue was a Vice President and Principal at Patricof &
Co. and prior thereto he served as a Vice President at C.M. Diker Associates.
Mr. Megrue also serves as Vice Chairman of the Board and Director of Dollar Tree
Stores, Inc. and Chairman of the Board and Director of Hibbett Sporting Goods,
Inc.
DAVID J. ODDI has been a Director of The Children's Place since April 1997.
Mr. Oddi joined SKM as an Associate in 1994 and is currently a Partner of
Saunders Karp & Megrue Partners, L.L.C., which serves as the general partner of
SKM Partners, L.P., which serves as the general partner of the SK Funds and SKM.
Prior to joining SKM, Mr. Oddi served in the Leveraged Finance Group at Salomon
Brothers Inc.
Our Board of Directors is comprised of three classes, each of which serves
for three years, with one class being elected each year. The terms of Mr. Dabah
and Mr. Megrue will expire at the 1999 Annual Meeting of Stockholders. The term
of Mr. Silver will expire at the 2000 Annual Meeting of Stockholders. The terms
of Mr. Oddi and Mr. Silverstein will expire at the 2001 Annual Meeting of
Stockholders.
For a description of our stockholders agreement providing for certain voting
arrangements relating to the selection of directors, see Item 12--Security
Ownership of Certain Beneficial Owners and Management.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and directors, and persons who own
more than 10% of the Company's common stock to file reports of ownership and
changes in ownership with the Securities Exchange Commission and the Nasdaq
Stock Market. Officers, Directors and greater than ten-percent stockholders are
required by Securities and Exchange Commission regulations to furnish the
Company with copies of all such reports they file.
Based solely on a review of the copies of such reports furnished to the
Company, or written representations that no Form 5 was required, the Company
believes that all Section 16(a) filing requirements applicable to its officers,
directors and greater than ten-percent beneficial owners were complied with
through February 1, 1999.
34
ITEM 11.--EXECUTIVE COMPENSATION
SUMMARY OF EXECUTIVE COMPENSATION
The following table summarizes the compensation for fiscal 1998, fiscal 1997
and fiscal 1996 for the Company's Chief Executive Officer and each of its four
other most highly compensated executive officers:
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION(1) ----------- ALL OTHER
-------------------- SECURITIES COMPENSATION
FISCAL SALARY BONUS UNDERLYING ------------
NAME AND PRINCIPAL POSITION YEAR ($) ($) OPTIONS (#) ($)
- ---------------------------------------- ----------- --------- --------- ----------- ------------
Ezra Dabah.............................. 1998 $ 538,850 $ 551,500 0 $ 24,000(6)
Chairman of the Board and Chief 1997 528,008 120,648 99,660(2) 4,000(7)
Executive Officer 1996 490,403 383,604 0 708(7)
Stanley B. Silver....................... 1998 361,550 300,000 0 15,755(8)
President and Chief Operating Officer 1997 350,012 63,980 0 15,035(9)
1996 325,778 203,934 249,000(3) 133,980(10)
Clark Hinkley........................... 1998 406,233 240,000 200,000(3) 0
Executive Vice President,
Merchandising
Diane M. Timbanard...................... 1998 253,075 131,250 25,000(4) 4,000(7)
Vice President, Design and Product 1997 245,000 27,991 0 4,000(7)
Development 1996 228,846 89,396 99,600(3) 590(7)
Nina L. Miner........................... 1998 210,751 112,476 10,000(5) 3,929(7)
Vice President, Trend Development 1997 206,000 24,477 0 4,000(7)
1996 191,461 77,957 149,400(3) 456(7)
- ------------------------
(1) For fiscal 1998 and fiscal 1996, includes bonuses earned in such fiscal
year, portions of which were paid in the following fiscal year. For fiscal
1997, bonuses were earned and paid in fiscal 1997. Other annual compensation
did not exceed $50,000 or 10% of the total salary and bonus for any of the
named executive officers.
(2) Mr. Dabah's options become exercisable at the rate of 20% on or after
December 31, 1997 and 20% on or after each of the first, second, third and
fourth anniversaries of the date of the grant.
(3) Each of the options granted becomes exercisable at the rate of 20% on or
after six months following the date of grant and 20% on or after the first,
second, third and fourth anniversaries of the date of grant.
(4) Ms. Timbanard's 1998 option grant becomes exercisable at the rate of 15,000
shares on or after November 1, 1998 with an additional 5,000 shares
exercisable on or after June 28, 1999 and the remaining 5,000 shares
exercisable on or after June 28, 2000.
(5) Ms. Miner's 1998 option grant becomes exercisable at the rate of 20% on or
after September 18, 1999 with an additional 20% exercisable on the first,
second, third and fourth anniversaries of September 18, 1999.
(6) Reflects the value (i) of insurance premiums of $20,000 paid by the Company
with respect to term life insurance for the benefit of Mr. Dabah, and (ii)
Company matching contributions of $4,000 under The Children's Place 401(k)
Savings and Investment Plan.
(7) Amounts shown consist of the Company's matching contributions under The
Children's Place 401(k) Savings and Investment Plan.
35
(8) Reflects the value of (i) insurance premiums of $11,755 paid by the Company
with respect to term life insurance for the benefit of Mr. Silver, and (ii)
Company matching contributions of $4,000 under The Children's Place 401(k)
Savings and Investment Plan.
(9) Reflects the value of (i) insurance premiums of $11,035 paid by the Company
with respect to term life insurance for the benefit of Mr. Silver, and (ii)
Company matching contributions of $4,000 under The Children's Place 401(k)
Savings and Investment Plan.
(10) Reflects the value of (i) the purchase for $50,000, of shares of Common
Stock valued at approximately $173,600 at the time of purchase, pursuant to
an exercise of an option, and (ii) insurance premiums of $10,380 paid by the
Company with respect to term life insurance for the benefit of Mr. Silver.
STOCK OPTIONS
The following table sets forth certain information concerning options
granted during fiscal 1998 to Clark Hinkley, Diane Timbanard, and Nina Miner. No
options were granted during fiscal 1998 to the other executive officers named in
the Summary Compensation Table. To date, of those executive officers named in
the Summary Compensation Table, only Nina Miner has exercised options.
OPTIONS GRANTED IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PRICE APPRECIATION FOR
UNDERLYING % OF TOTAL EXERCISE OPTION TERM(5)
OPTIONS GRANTED IN PRICE EXPIRATION ------------------------------
NAME GRANTED FISCAL 1998 (4) DATE 5% 10%
- ---------------------------------------- --------- ------------- ----------- ---------- ------------- ---------------
Clark Hinkley........................... 200,000(1) 21.5% $ 7.31 2/2/08 $ 919,758.39 $ 2,330,848.35
Diane Timbanard......................... 25,000(2) 2.7% $ 9.75 10/21/08 153,293.07 388,474.72
Nina Miner.............................. 10,000(3) 1.1% $ 9.75 10/21/08 61,317.23 155,389.89
- ------------------------
(1) Mr. Hinkley's 1998 option grant becomes exercisable at the rate of 20% on or
after six months following the date of grant and 20% on or after each of the
first, second, third and fourth anniversaries of the date of grant.
(2) Ms. Timbanard's 1998 option grant becomes exercisable at the rate of 15,000
shares on or after November 1, 1998 with an additional 5,000 shares
exercisable on or after June 28, 1999 and the remaining 5,000 shares
exercisable on or after June 28, 2000.
(3) Ms. Miner's 1998 option grant becomes exercisable at the rate of 20% on or
after September 18, 1999 with an additional 20% exercisable on the first,
second, third and fourth anniversaries of September 18, 1999.
(4) The exercise price was fixed at the date of the grant and was equal to the
fair market value per share of Common Stock on such date in accordance with
the 1997 Plan.
(5) In accordance with the rules of the Securities and Exchange Commission, the
amounts shown on this table represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock appreciation of 5% and
10% compounded annually from the date the respective options were granted to
their expiration date and do not reflect the Company's estimates or
projections of future Common Stock prices. The gains shown are net of the
option exercise price, but do not include deductions for taxes or other
expenses associated with the exercise. Actual gains, if any, on stock option
exercises will depend on the future performance of the Common Stock, the
option holders' continued employment through the option period, and the date
on which the options are exercised.
36
The following table sets forth certain information with respect to stock
options exercised by the named executive officers during fiscal 1998, including
the aggregate value of gains on the date of the exercise. In addition, the table
sets forth the number of shares covered by stock options as of fiscal year end,
and the value of "in-the-money" stock options, which represents the positive
spread between the exercise price of a stock option and the year-end market
price of the shares subject to such option at fiscal year end. None of the named
executives hold stock appreciation rights (SARs).
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT 1/31/99 AT 1/31/99(1)
ON VALUE -------------------------- --------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ----------- ------------ ----------- ------------- --------------- ---------------
Ezra Dabah................. None -- 39,864 54,796 $ 517,235.40 $ 775,853.10
Stanley B. Silver.......... None -- 49,400 99,600 3,839,281.20 2,559,520.80
Diane M. Timbanard......... None -- 74,760 49,840 1,815,087.48 1,210,058.32
Nina L. Miner.............. 1,000 $ 24,010.50 88,640 70,760 2,277,870.72 1,747,660.48
Clark Hinkley.............. None -- 80,000 120,000 1,685,000.00 2,527,500.00
- ------------------------
(1) The market value of the Company's stock at the close of business on January
29, 1999 was $28.375.
EMPLOYMENT AGREEMENTS
The Children's Place is a party to employment agreements with Ezra Dabah,
Stanley Silver and Clark Hinkley.
EZRA DABAH
Mr. Dabah's employment agreement (the "Dabah Agreement") provides that he
will serve as Chairman and Chief Executive Officer of The Children's Place from
June 27, 1996 for successive three year periods, subject to termination in
accordance with the termination provisions of the Dabah Agreement. Mr. Dabah's
current salary is $575,000 per year, subject to annual review. Mr. Dabah is also
entitled to receive a semi-annual bonus in an amount equal to the product of (x)
50% of his semi-annual base salary multiplied by (y) a pre-determined bonus
percentage fixed by the Board of Directors for any stated six-month period of
not less than 20% nor more than 200%, based on our performance during such
six-month period. The Dabah Agreement also provides for certain insurance and
other benefits to be maintained and paid by The Children's Place.
The Dabah Agreement provides that if Mr. Dabah's employment is terminated by
The Children's Place without cause or for disability, or by Mr. Dabah for good
reason or following a change in control (as each such term is defined in the
Dabah Agreement), we will be required to pay Mr. Dabah three times his base
salary then in effect, which amount will be payable within 30 days following his
termination. Mr. Dabah also will be entitled to receive any accrued but unpaid
bonus compensation and all outstanding stock options under our stock option
plans will immediately vest. If Mr. Dabah's employment is terminated for any of
the above reasons, we also will be required, with certain exceptions, to
continue to maintain life insurance, medical benefits and other benefits for Mr.
Dabah for three years. The Dabah Agreement also provides that Mr. Dabah will
not, with certain exceptions, engage or be engaged in a competing business for a
period of five years following termination of his employment.
37
STANLEY B. SILVER
Mr. Silver's employment agreement (the "Silver Agreement") provides that he
will serve as President and Chief Operating Officer of The Children's Place from
June 27, 1996, and that such service shall continue unless terminated in
accordance with the termination provisions of the Silver Agreement. Mr. Silver's
current salary is $400,000 per year, subject to annual review. Mr. Silver also
is entitled to receive a semi-annual bonus in an amount equal to the product of
(x) 40% of his semi-annual base salary multiplied by (y) a pre-determined bonus
percentage fixed by the Board of Directors for any stated six-month period of
not less than 20% nor more than 200%, based on our performance during such
six-month period. The Silver Agreement also provides for certain insurance and
other benefits to be maintained and paid by The Children's Place.
The Silver Agreement provides that if Mr. Silver's employment is terminated
by us without cause (as such term is defined in the Silver Agreement), we will
be required to pay Mr. Silver an amount equal to his base salary then in effect
for two years, which amount is payable in equal monthly installments over a two
year period following his termination. Mr. Silver will also be entitled to
receive any accrued but unpaid bonus compensation and we will be required, with
certain exceptions, to continue to maintain life insurance, medical benefits and
other benefits for Mr. Silver for two years. If Mr. Silver's employment is
terminated without cause following a change in control, all outstanding stock
options issued to Mr. Silver under our stock option plans shall immediately
vest. The Silver Agreement also provides that Mr. Silver will not, with certain
exceptions, engage or be engaged in a competing business for a period of two
years following termination of his employment.
CLARK HINKLEY
Mr. Hinkley's employment agreement (the "Hinkley Agreement") provides that
he will serve as Executive Vice President, Merchandising of The Children's Place
from February 2, 1998, and that such service shall continue unless terminated in
accordance with the termination provisions of the Hinkley Agreement. Mr.
Hinkley's current salary is $430,000 per year, subject to annual review. Mr.
Hinkley also is entitled to receive a semi-annual bonus in an amount equal to
the product of (x) 30% of his semi-annual base salary multiplied by (y) a
pre-determined bonus percentage fixed by the Board of Directors for any stated
six-month period of not more than 200%, based on our performance during such
six-month period. For the first two years of Mr. Hinkley's employment, Mr.
Hinkley is guaranteed 50% of the target bonus payout. The Hinkley Agreement also
provides for certain insurance and other benefits to be maintained and paid by
The Children's Place.
The Hinkley Agreement provides that if Mr. Hinkley's employment is
terminated by us without cause (as such term is defined in the Hinkley
Agreement), we will be required to pay Mr. Hinkley an amount equal to his base
salary then in effect for one year, which amount is payable in equal monthly
installments over a one year period following his termination. Mr. Hinkley will
also be entitled to receive any accrued but unpaid bonus compensation and we
will be required, with certain exceptions, to continue to maintain life
insurance, medical benefits and other benefits for Mr. Hinkley for one year. The
Hinkley Agreement also provides that Mr. Hinkley will not, with certain
exceptions, engage or be engaged in a competing business for a period of two
years following termination of his employment.
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
COMPENSATION POLICY
The Company's employee compensation policy in general is to offer a package
including a competitive salary, an incentive bonus based upon performance goals,
competitive benefits, and an efficient workplace environment. The Company also
encourages broad-based employee ownership of the Company's Common Stock through
the Employee Stock Purchase Plan and by granting stock options to employees at
many levels within the Company.
38
The Compensation Committee of the Board of Directors reviews and approves
individual officer salaries, bonus plan and financial performance goals, and
stock option grants. The Compensation Committee also reviews guidelines for
compensation, bonus, and stock option grants for non-officer employees.
Key personnel of the Company are paid salaries in line with their
responsibilities. These salaries are structured to be competitive with salaries
paid by a peer group consisting of similar companies in the retail apparel
industry. Executives participate in the Company's Management Incentive Program,
which offers cash incentives based on the Company's performance. Under the
Company's 1996 and 1997 Stock Option Plans, and at the discretion of the Board
of Directors, the Company also grants executive officers stock options. The
Company's performance and return on equity are of vital importance to the
executive officers due to these equity holdings and cash incentives. Benefits
extended to the executive officers vary by recipient and may include disability
and life insurance, and participation in the Company's 401(k) Savings and
Investment Plan. Salaries for executive officers are adjusted based on
individual job performance and the Company's performance and, in certain cases,
changes in the individual's responsibilities.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The Compensation Committee reviews and approves the compensation of Ezra
Dabah, the Company's Chief Executive Officer. Pursuant to Mr. Dabah's Employment
Agreement and based on the Company's performance in the preceding fiscal year,
Mr. Dabah's base salary for the fiscal year ended January 30, 1999 was $538,850,
an increase of 2.1% from the prior year. In addition, Mr. Dabah is entitled to
receive a bonus based on the Company's earnings. Mr. Dabah's performance bonus
for the fiscal year ended January 30, 1999 was $551,500.
DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the Internal Revenue Code imposes a limitation on the
deductibility of nonperformance-based compensation in excess of $1 million paid
to executive officers. The Compensation Committee believes that the Company will
be able to continue to manage its executive compensation program to preserve
federal income tax deductions.
Submitted by the Compensation
Committee
Ezra Dabah John F. Megrue
39
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Members of the Compensation Committee from September 17, 1997 through the
end of the fiscal year ended January 30, 1999 were Messrs. Dabah and Megrue. Mr.
Dabah is the Chief Executive Officer and Chairman of the Board of Directors of
the Company, and has entered into certain related transactions with the Company
as disclosed below. Mr. Megrue is a general partner of SKM Partners, L.P., which
serves as the general partner of SKM, which has entered into an advisory
agreement with the Company, as disclosed below.
PERFORMANCE GRAPH
The following graph compares the cumulative stockholder return on the
Company's common stock with the return on the Total Return Index for the Nasdaq
Stock Market and the Nasdaq Retail Trade Stocks. The graph assumes that $100 was
invested on the date of the Company's initial public offering, September 18,
1997.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
THE CHILDREN'S PLACE RETAIL STORES, INC. -
"PLCE" NASDAQ STOCK MARKET (US) NASDAQ RETAIL TRADE STOCKS
09/18/1997 100.000 100.000 100.000
01/30/1998 52.236 97.255 96.957
01/29/1999 202.679 152.131 118.460
ITEM 12.--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information at February 15, 1999, with respect
to ownership of Common Stock by (1) each beneficial owner of five percent or
more of our Common Stock known to us, (2) each director of The Children's Place
and nominee for director, (3) each of our five most highly compensated executive
officers in fiscal 1998, (4) all directors and executive officers as a group.
For the purpose of computing the percentage of the shares of Common Stock owned
by each person or group listed in this table, any shares not outstanding which
are subject to options or warrants exercisable within 60 days after February 15,
1999 have been deemed to be outstanding and owned by such person or group, but
have not been deemed to be outstanding for the purpose of computing the
percentage of the shares of Common Stock owned by any other person. Except as
indicated in the footnotes to this
40
table, the persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OF CLASS
- ---------------------------------------------------------------------- ------------ -----------
The SK Equity Fund, L.P. (1) (2)...................................... 7,566,553 30.3%
SK Investment Fund, L.P. (1) (2)...................................... 7,566,553 30.3%
John F. Megrue (1) (2) (3)............................................ 7,568,553 30.3%
Allan W. Karp (1) (2) (4)............................................. 7,568,553 30.3%
Thomas A. Saunders III (1) (2)........................................ 7,566,553 30.3%
David J. Oddi (1) (5)................................................. 3,000 *
Ezra Dabah (6) (7).................................................... 8,480,244 33.9%
Stanley B. Silver (6) (8)............................................. 653,400 2.6%
Stanley Silverstein (6) (9)........................................... 6,199,360 24.8%
Clark Hinkley (6) (10)................................................ 80,000 *
Diane M. Timbanard (6) (10)........................................... 74,760 *
Nina L. Miner (6) (11)................................................ 96,140 *
All Directors and Executive Officers as a Group (18 persons) (10)..... 18,608,249 71.6%
- ------------------------
* Less than 1%
(1) The address of this person is Two Greenwich Plaza, Suite 100, Greenwich CT
06830.
(2) Includes (i) 7,458,445 shares owned by The SK Equity Fund, L.P., and (ii)
108,108 shares owned by SK Investment Fund, L.P. SKM Partners, L.P. is the
general partner of each of the SK Funds. Messrs. Karp, Megrue and Saunders
are Partners of Saunders Karp & Megrue Partners, L.L.C., which is the
general partner of SKM Partners, L.P., and therefore may be deemed to have
beneficial ownership of the shares shown as being owned by the SK Funds.
Messrs. Karp, Megrue and Saunders disclaim beneficial ownership of such
shares, except to the extent that any of them has a limited partnership
interest in SK Investment Fund, L.P.
(3) Includes 2,000 shares purchased by Mr. Megrue.
(4) Includes 2,000 shares purchased by Mr. Karp.
(5) Includes 3,000 shares purchased by Mr. Oddi and does not include shares
owned by The SK Equity Fund, L.P. or SK Investment Fund, L.P. Mr. Oddi is a
Partner of Saunders Karp & Megrue Partners, L.L.C., which is the general
partner of SKM Partners, L.P., which serves as the general partner of the SK
Funds and SKM and has a limited partnership interest in SK Investment Fund,
L.P.
(6) The address of this person is c/o The Children's Place Retail Stores, Inc.,
One Dodge Drive, West Caldwell, New Jersey 07006.
(7) Includes (i) 5,221,680 shares held by trusts or custodial accounts for the
benefit of Mr. Dabah's children and certain other family members, of which
Mr. Dabah or his wife is a trustee or custodian and as to which Mr. Dabah or
his wife, as the case may be, has voting control, and as to which shares Mr.
Dabah disclaims beneficial ownership, (ii) 37,600 shares held by Mr. Dabah's
wife, and (iii) 39,864 shares subject to options exercisable within 60 days
after February 15, 1999. Does not include (i) 1,048,480 shares beneficially
owned by Stanley Silverstein, Mr. Dabah's father-in-law, (ii) a total of
1,745,300 shares beneficially owned by other members of Mr. Dabah's family,
(iii) 88,640 shares issuable upon exercise of outstanding stock options
exercisable within
41
60 days after February 15, 1999, which are beneficially owned by Nina Miner,
Mr. Dabah's sister-in-law, (iv) 1,000 shares owned by Ms. Miner and (v)
6,500 shares owned by Ms. Miner's husband.
(8) Includes 149,400 shares issuable upon exercise of outstanding stock options
exercisable within 60 days of February 15, 1999.
(9) Includes 5,150,880 shares held by trusts for the benefit of Mr.
Silverstein's children and grandchildren, of which Mr. Silverstein's wife is
a trustee, and as to which Mrs. Silverstein has voting control, and as to
which shares Mr. Silverstein disclaims beneficial ownership. Does not
include (i) 3,181,100 shares beneficially owned by Ezra Dabah, Mr.
Silverstein's son-in-law, or Mr. Dabah's wife, (ii) 39,864 shares issuable
upon exercise of outstanding stock options exercisable within 60 days after
February 15, 1999, which are beneficially owned by Mr. Dabah, (iii) 88,640
shares issuable upon exercise of outstanding stock options exercisable
within 60 days after February 15, 1999, which are beneficially owned by Nina
Miner, Mr. Silverstein's daughter, (iv) 1,000 shares owned by Ms. Miner and
(v) 6,500 shares owned by Ms. Miner's husband.
(10) Reflects shares issuable upon exercise of outstanding stock options
exercisable within 60 days of February 15, 1999.
(11) Includes 6,500 shares purchased by Ms. Miner's husband, as to which Ms.
Miner disclaims beneficial ownership and 88,640 shares issuable upon
exercise of outstanding stock options exercisable within 60 days of February
15, 1999.
As of February 15, 1999, Ezra Dabah and certain members of his family
beneficially own 11,370,164 shares of our Common Stock, constituting
approximately 45.3% of the outstanding Common Stock. The SK Funds own 7,566,553
shares or approximately 30.3% of the outstanding Common Stock. Pursuant to the
Stockholders Agreement described below, the SK Funds and certain other
stockholders, who own in the aggregate a majority of the outstanding Common
Stock, have agreed to vote for the election of two nominees of the SK Funds and
three nominees of Ezra Dabah to our Board of Directors. As a result, the SK
Funds and Ezra Dabah are able to control the election of our directors. In
addition, if the SK Funds and Mr. Dabah were to vote together, they would be
able to determine the outcome of any matter submitted to a vote of our
stockholders for approval.
STOCKHOLDERS AGREEMENT
The Children's Place and certain of our stockholders, who currently own in
the aggregate a majority of the Common Stock, are parties to a Stockholders
Agreement (the "Stockholders Agreement"). The Stockholders Agreement places
certain limitations upon the transfer in privately negotiated transactions of
shares of Common Stock beneficially owned by Ezra Dabah, Stanley Silver and the
SK Funds. In addition, the Stockholders Agreement provides that (1) so long as
Ezra Dabah, together with members of his family, beneficially owns shares
representing at least 25% of the shares of Common Stock owned by such parties on
the date of the Stockholders Agreement, the stockholders party to the
Stockholders Agreement will be obligated to vote all shares as to which they
have voting rights in a manner such that the Board of Directors will at all
times include three directors nominated by Ezra Dabah and (2) so long as the SK
Funds beneficially own shares representing at least 25% of the shares of Common
Stock owned by such parties on the date of the Stockholders Agreement, the
stockholders party to the Stockholders Agreement will be obligated to vote all
shares as to which they have voting rights in a manner such that the Board of
Directors will at all times include two directors nominated by the SK Funds.
Should the number of directors comprising the Board of Directors be increased,
nominees for the remaining director positions will be designated by our Board of
Directors. Pursuant to the Stockholders Agreement, Ezra Dabah, Stanley Silver
and Stanley Silverstein were designated as director nominees by Mr. Dabah and
were elected to the Board of Directors, and John Megrue and David Oddi were
designated as director nominees by the SK Funds and were elected to the Board of
Directors.
42
The Stockholders Agreement provides that we will not, without the
affirmative vote of at least one director nominated by the SK Funds, engage in
specified types of transactions with certain of our affiliates (not including
the SK Funds), take action to amend our ByLaws or Certificate of Incorporation
or increase or decrease the size of the entire Board of Directors. The
Stockholders Agreement also provides that certain specified types of corporate
transactions and major corporate actions will require the approval of at least
two-thirds of the members of the Board of Directors.
Under the terms of the Stockholders Agreement, the rights of any party
thereunder will terminate at the time that such party's Common Stock constitutes
less than 25% of the shares of Common Stock owned by such party on the date of
the Stockholders Agreement. All the provisions of the Stockholders Agreement
will terminate when no party to the Stockholders Agreement beneficially owns
shares representing at least 25% of the outstanding Common Stock owned by such
party on the date of the Stockholders Agreement.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SKM FINANCIAL ADVISORY SERVICES
In 1996, the Company entered into a management agreement with SKM which
provides for the payment of an annual fee of $150,000, payable quarterly in
advance, in exchange for certain financial advisory services. This management
agreement remains in effect until SKM or any of its affiliates' total ownership
of the Company's Common Stock is less than 10% on a fully diluted basis.
Pursuant to the management agreement, the Company incurred fees and expenses of
approximately $93,000, $153,000 and $151,000 during fiscal 1996, fiscal 1997 and
fiscal 1998, respectively.
STOCKHOLDERS AGREEMENT
For a description of our stockholders agreement see Item 12--Security
Ownership of Certain Beneficial Owners and Management.
MERCHANDISE FOR RE-SALE
During fiscal 1998, the Company purchased approximately $290,000 in bath
products from HBA Technologies, LLC. Haim Dabah, Ezra Dabah's brother, is the
majority owner of HBA Technologies, LLC.
During fiscal 1999, the Company placed orders for approximately $60,000 in
footwear from Nina Footwear Corporation. Stanley Silverstein, a member of the
Company's Board of Directors and Ezra Dabah's father-in-law, owns Nina Footwear
Corporation with his brother.
In the opinion of the Company, the transactions with HBA Technologies, LLC
and Nina Footwear Corporation were on terms no less favorable than could have
been obtained from an unaffiliated third party.
43
PART IV
ITEM 14.--EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The following documents are filed as part of this report:
Report of Independent Public Accountants
Consolidated Balance Sheets as of January 31, 1998 and January 30, 1999
Consolidated Statements of Income for each of the three fiscal years in the
period ended
January 30, 1999
Consolidated Statements of Changes in Stockholders' Equity for the three
fiscal years in the period
ended January 30, 1999
Consolidated Statements of Cash Flows for the three fiscal years in the
period ended January 30, 1999
Notes to Consolidated Financial Statements
45
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED
FEBRUARY 1, 1997, JANUARY 31, 1998 AND JANUARY 30, 1999
THE CHILDREN'S PLACE RETAIL STORES, INC.
PAGE:
-----
Report of Independent Public Accountants...................................................................
Consolidated Balance Sheets................................................................................
Consolidated Statements of Income..........................................................................
Consolidated Statements of Changes in Stockholders' Equity.................................................
Consolidated Statements of Cash Flows......................................................................
Notes to Consolidated Financial Statements.................................................................
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
The Children's Place Retail Stores, Inc.:
We have audited the accompanying consolidated balance sheets of The
Children's Place Retail Stores, Inc. (a Delaware corporation) and subsidiaries
(the "Company") as of January 31, 1998 and January 30, 1999 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three fiscal years in the period ended January 30, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Children's Place Retail
Stores, Inc. and subsidiaries as of January 31, 1998 and January 30, 1999, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended January 30, 1999, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
New York, New York
February 22, 1999
46
THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JANUARY 31, JANUARY 30,
1998 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 887 $ 16,370
Accounts receivable................................................................... 1,904 2,742
Inventories........................................................................... 20,334 35,339
Prepaid expenses and other current assets............................................. 4,612 5,622
Deferred income taxes................................................................. 10,653 2,447
----------- -----------
Total current assets................................................................ 38,390 62,520
Property and equipment:
Leasehold improvements................................................................ 27,226 34,261
Store fixtures and equipment.......................................................... 16,219 23,825
Construction in progress.............................................................. 1,464 3,517
----------- -----------
44,909 61,603
Less accumulated depreciation and amortization........................................ (12,788) (19,299)
----------- -----------
Property and equipment, net......................................................... 32,121 42,304
Deferred income taxes................................................................... 8,244 5,144
Other assets............................................................................ 598 793
----------- -----------
Total assets........................................................................ $ 79,353 $ 110,761
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Revolving credit facility............................................................. $ 1,089 $ 0
Accounts payable...................................................................... 9,471 13,345
Accrued expenses, interest and other current liabilities.............................. 7,592 13,644
----------- -----------
Total current liabilities........................................................... 18,152 26,989
Other long-term liabilities............................................................. 2,734 3,165
----------- -----------
Total liabilities................................................................... 20,886 30,154
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value........................................................... 2,462 2,497
Additional paid-in capital.............................................................. 82,589 84,032
Accumulated deficit..................................................................... (26,584) (5,922)
----------- -----------
Total stockholders' equity.......................................................... 58,467 80,607
----------- -----------
Total liabilities and stockholders' equity.......................................... $ 79,353 $ 110,761
----------- -----------
----------- -----------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
47
THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED
-------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
----------- ----------- -----------
Net sales.................................................................. $ 143,838 $ 192,557 $ 283,853
Cost of sales.............................................................. 90,071 123,556 166,449
----------- ----------- -----------
Gross profit............................................................... 53,767 69,001 117,404
Selling, general and administrative expenses............................... 35,966 46,451 70,313
Pre-opening costs.......................................................... 982 2,127 3,030
Depreciation and amortization.............................................. 4,017 5,958 8,607
----------- ----------- -----------
Operating income........................................................... 12,802 14,465 35,454
Interest expense, net...................................................... 2,884 2,647 324
Other expense, net......................................................... 396 139 110
----------- ----------- -----------
Income before income taxes and extraordinary item.......................... 9,522 11,679 35,020
Provision (benefit) for income taxes....................................... (20,919) 4,695 14,358
----------- ----------- -----------
Income before extraordinary item........................................... 30,441 6,984 20,662
Extraordinary loss on extinguishment of debt, net.......................... 0 1,743 0
----------- ----------- -----------
Net income................................................................. $ 30,441 $ 5,241 $ 20,662
----------- ----------- -----------
Basic income per common share before extraordinary item.................... $ 0.32 $ 0.83
Extraordinary item......................................................... (0.08) 0.00
----------- -----------
Basic net income per common share.......................................... $ 0.24 $ 0.83
----------- -----------
----------- -----------
Basic weighted average common shares outstanding........................... 21,821 24,788
Diluted income per common share before extraordinary item.................. $ 0.29 $ 0.80
Extraordinary item......................................................... (0.07) 0.00
----------- -----------
Diluted net income per common share........................................ $ 0.22 $ 0.80
----------- -----------
----------- -----------
Diluted weighted average common shares outstanding......................... 24,358 25,909
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
48
THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1997, JANUARY 31, 1998 AND JANUARY 30,
1999
(IN THOUSANDS)
SERIES A SERIES B
PREFERRED STOCK COMMON STOCK COMMON STOCK COMMON STOCK
-------------------------- ------------------------ ---------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- ----------- --------- ----------- ----------- -------------
BALANCE, February 3,
1996................. 10 $ 10 137 $ 14 0 $ 0 0 $ 0
Surrendered preferred
stock................ (10) (10) 0 0 0 0 0 0
Exercise of stock
options.............. 0 0 3 0 0 0 0 0
Issuance of warrants... 0 0 0 0 0 0 0 0
Conversion of common
stock to Series A
Common Stock......... 0 0 (140) (14) 16,800 1,680 0 0
Issuance of Series B
Common Stock, net of
transaction costs.... 0 0 0 0 0 0 47 5
Redemption of Series A
Common Stock......... 0 0 0 0 (4,039) (404) 0 0
Net income............. 0 0 0 0 0 0 0 0
-- -- --
--- ----------- ----------- --------- -----------
BALANCE, February 1,
1997................. 0 0 0 0 12,761 1,276 47 5
Return of funds toward
common stock
subscription......... 0 0 0 0 0 0 0 0
Series B Common Stock
conversion........... 0 0 0 0 7,660 766 (47) (5)
Series A Common Stock
conversion........... 0 0 20,421 2,042 (20,421) (2,042) 0 0
Issuance of Common
Stock................ 0 0 4,000 400 0 0 0 0
Transaction fees....... 0 0 0 0 0 0 0 0
Redemption of
Noteholder Warrant... 0 0 0 0 0 0 0 0
Redemption of two-
thirds of Legg Mason
Warrant.............. 0 0 0 0 0 0 0 0
Exercise of one-third
of Legg Mason
Warrant.............. 0 0 201 20 0 0 0 0
Net income............. 0 0 0 0 0 0 0 0
-- -- --
--- ----------- ----------- --------- -----------
BALANCE, January 31,
1998................. 0 0 24,622 2,462 0 0 0 0
Exercise of stock
options and employee
stock purchases...... 0 0 351 35 0 0 0 0
Net income............. 0 0 0 0 0 0 0 0
-- -- --
--- ----------- ----------- --------- -----------
BALANCE, January 30,
1999................. 0 $ 0 24,973 $ 2,497 0 $ 0 0 $ 0
-- -- --
-- -- --
--- ----------- ----------- --------- -----------
--- ----------- ----------- --------- -----------
ADDITIONAL TREASURY STOCK TOTAL
PAID-IN ACCUMULATED -------------------------- STOCKHOLDERS'
CAPITAL DEFICIT SHARES AMOUNT EQUITY
----------- ------------- ------------- ----------- ----------------
BALANCE, February 3,
1996................. $ 50,557 $ (62,266) (3) $ (50) $ (11,735)
Surrendered preferred
stock................ 10 0 0 0 0
Exercise of stock
options.............. 123 0 3 50 173
Issuance of warrants... 1,501 0 0 0 1,501
Conversion of common
stock to Series A
Common Stock......... (1,666) 0 0 0 0
Issuance of Series B
Common Stock, net of
transaction costs.... 18,758 0 0 0 18,763
Redemption of Series A
Common Stock......... (11,441) 0 0 0 (11,845)
Net income............. 0 30,441 0 0 30,441
-
----------- ------------- --- --------
BALANCE, February 1,
1997................. 57,842 (31,825) 0 0 27,298
Return of funds toward
common stock
subscription......... (488) 0 0 0 (488)
Series B Common Stock
conversion........... (761) 0 0 0 0
Series A Common Stock
conversion........... 0 0 0 0 0
Issuance of Common
Stock................ 51,680 0 0 0 52,080
Transaction fees....... (1,350) 0 0 0 (1,350)
Redemption of
Noteholder Warrant... (20,605) 0 0 0 (20,605)
Redemption of two-
thirds of Legg Mason
Warrant.............. (4,269) 0 0 0 (4,269)
Exercise of one-third
of Legg Mason
Warrant.............. 540 0 0 0 560
Net income............. 0 5,241 0 0 5,241
-
----------- ------------- --- --------
BALANCE, January 31,
1998................. 82,589 (26,584) 0 0 58,467
Exercise of stock
options and employee
stock purchases...... 1,443 0 0 0 1,478
Net income............. 0 20,662 0 0 20,662
-
----------- ------------- --- --------
BALANCE, January 30,
1999................. $ 84,032 $ (5,922) 0 $ 0 $ 80,607
-
-
----------- ------------- --- --------
----------- ------------- --- --------
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
49
THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED
-------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................................. $ 30,441 $ 5,241 $ 20,662
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 4,017 5,958 8,607
Deferred financing fee amortization................................................... 359 405 25
Loss on disposals of property and equipment........................................... 0 164 803
Extraordinary loss.................................................................... 0 1,743 0
Deferred taxes........................................................................ (21,263) 4,205 11,959
Changes in operating assets and liabilities:
Accounts receivable................................................................... (249) (1,014) (838)
Inventories........................................................................... (1,812) (5,909) (15,005)
Prepaid expenses and other current assets............................................. (814) (1,449) (1,010)
Other assets.......................................................................... (128) (445) (519)
Accounts payable...................................................................... (4,536) 1,149 3,874
Accrued expenses, interest and other.................................................. 2,045 1,299 6,401
Payment of restructuring charges...................................................... (214) 0 0
----------- ----------- -----------
Total adjustments................................................................... (22,595) 6,106 14,297
----------- ----------- -----------
Net cash provided by operating activities............................................... 7,846 11,347 34,959
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases........................................................ (8,492) (17,183) (19,841)
----------- ----------- -----------
Net cash used in investing activities................................................... (8,492) (17,183) (19,841)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the sale of Common Stock.............................................. 0 50,730 0
Repurchase of Noteholder and Legg Mason Warrants........................................ 0 (25,757) 0
Borrowings under revolving credit facility.............................................. 141,907 193,210 143,155
Repayments under revolving credit facility.............................................. (150,596) (192,121) (144,244)
Proceeds from issuance of long-term debt................................................ 20,000 0 0
Repayment of long-term debt............................................................. (12,821) (21,360) 0
Payment of obligations under capital leases............................................. (690) (838) (24)
Return of funds toward common stock subscription........................................ 0 (488) 0
Redemption of Series A Common Stock..................................................... (11,845) 0 0
Net proceeds from sale of Series B Common Stock......................................... 18,763 0 0
Exercise of stock options and employee stock purchases.................................. 173 0 1,478
Deferred financing costs................................................................ (1,392) (75) 0
----------- ----------- -----------
Net cash provided by financing activities........................................... 3,499 3,301 365
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents................................ 2,853 (2,535) 15,483
Cash and cash equivalents, beginning of period...................................... 569 3,422 887
----------- ----------- -----------
Cash and cash equivalents, end of period................................................ $ 3,422 $ 887 $ 16,370
----------- ----------- -----------
----------- ----------- -----------
OTHER CASH FLOW INFORMATION:
Cash paid during the year for interest.................................................. $ 2,369 $ 2,551 $ 439
Cash paid during the year for income taxes.............................................. 70 607 2,085
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
50
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Company is a specialty retailer of apparel and accessories for children
from newborn to twelve years of age. The Company designs, sources and markets
its products under "The Children's Place" brand name for sale exclusively in its
stores. As of January 30, 1999, the Company operated 209 stores in 26 states,
located primarily in regional shopping malls in the eastern half of the United
States.
FISCAL YEAR
The Company's fiscal year is a 52-week or 53-week period ending on the
Saturday nearest to January 31. The results for fiscal 1996, 1997 and 1998
represent the 52-week periods ended February 1, 1997, January 31, 1998 and
January 30, 1999, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and amounts of revenues and expenses reported during the period.
Actual results could differ from the estimates made by and assumptions used by
management.
CONSOLIDATION
The consolidated financial statements include the accounts of The Children's
Place Retail Stores, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to current
year presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories, which consist primarily of finished goods, are stated at the
lower of average cost or market.
COST OF SALES
In addition to the cost of inventory sold, the Company includes its buying,
distribution and occupancy expenses in its cost of sales.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, except for store fixtures and
equipment under capital leases which are recorded at the present value of the
future lease payments as of lease inception. Property and equipment is
depreciated on a straight-line basis based upon their estimated useful lives,
51
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
which range from three to ten years. Amortization of property and equipment
under capital leases and leasehold improvements is computed on a straight-line
basis over the term of the lease or the estimated useful life, whichever is
shorter.
DEFERRED FINANCING COSTS
The Company capitalizes costs directly associated with acquiring third-party
financing. Deferred financing costs are included in other assets and are
amortized over the term of the indebtedness. As of January 30, 1999, unamortized
deferred financing costs represent the cost of acquiring the Company's working
capital revolving credit facility and were approximately $75,000, net of
accumulated amortization of $38,000. See Note 2--Initial Public Offering for a
discussion of the write-off of unamortized deferred financing costs in
conjunction with the Company's initial public offering.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
The Company continually evaluates the carrying value and the economic useful
lives of its long-lived assets based on the Company's operating performance and
the expected undiscounted future net cash flows and adjusts the carrying value
of assets which may not be recoverable. The Company does not believe that any
impairment exists as of January 30, 1999 in the recoverability of its long-lived
assets.
PRE-OPENING COSTS
Store pre-opening costs, which consist primarily of payroll, supply and
marketing expenses, are expensed as incurred.
ADVERTISING COSTS
The Company expenses the cost of advertising over the period when the
advertising is run or displayed. Included in selling, general and administrative
expenses for fiscal 1996, 1997 and 1998 are advertising costs of $1,706,000,
$2,004,000 and $3,526,000 respectively.
RESTRUCTURING
The payment of restructuring costs included in the statement of cash flows
for fiscal 1996 reflects the payments of restructuring charges which were
recorded by the Company prior to fiscal 1994. These payments represented the
resolution of lease and vendor payment agreements.
INCOME TAXES
The Company computes income taxes using the liability method. This standard
requires recognition of deferred tax assets and liabilities, measured by enacted
rates, attributable to temporary differences between financial statement and
income tax basis of assets and liabilities. Temporary differences result
primarily from accelerated depreciation and amortization for tax purposes and
various accruals and reserves being deductible for future tax periods.
52
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments,"
requires entities to disclose the fair value of financial instruments, both
assets and liabilities, recognized and not recognized in the balance sheets, for
which it is practicable to estimate fair value. For purposes of this disclosure,
the fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. Fair value is based on quoted market prices for
the same or similar financial instruments.
As cash and cash equivalents, accounts receivable and payable, and certain
other short-term financial instruments are all short-term in nature, their
carrying amount approximates fair value.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company accounts for its 1996 Stock Option Plan (the "1996 Plan"), its
1997 Stock Option Plan (the "1997 Plan") and its Employee Stock Purchase Plan
(the "ESPP") under the provisions of Accounting Principles Bulletin No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Refer to Note 10--Stock
Option and Purchase Plans for pro forma disclosures required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
NET INCOME PER COMMON SHARE
The Company reports its earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS 128"),
which requires the presentation of both basic and diluted earnings per share on
the statements of income. The Company adopted SFAS 128 during fiscal 1997.
During fiscal 1996, the Company was not publicly traded and due to the
significant change in capital structure resulting from the Private Placement (as
discussed in Note 3--1996 Private Placement), earnings per share for that year
is not presented due to a lack of comparability.
Basic income per common share for fiscal 1997 was calculated by dividing net
income by the basic weighted average common shares outstanding as if the Stock
Split, the Series B Conversion and the Reclassification (as discussed in Note
2--Initial Public Offering), occurred on the first day of fiscal 1997.
Diluted income per common share for fiscal 1997 was calculated by dividing
net income by the diluted weighted average common shares and common share
equivalents outstanding as if the Stock Split, the Series B Conversion and the
Reclassification occurred on the first day of fiscal 1997. For fiscal 1997,
common share equivalents included the Noteholder Warrant and Legg Mason Warrant
(each as discussed in Note 2--Initial Public Offering) prior to their exercise
and management options to purchase common stock under the 1996 Plan and the 1997
Plan calculated using the treasury stock method at an assumed public offering
price of $14.00 prior to the initial public offering and, after the initial
public offering, at the average market price in accordance with SFAS 128.
53
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In accordance with SFAS 128, the following table reconciles income and share
amounts utilized to calculate basic and diluted net income per common share:
FOR THE FISCAL YEAR ENDED
--------------------------
JANUARY 31, JANUARY 30,
1998 1999
------------ ------------
Net income (in thousands)......................................... $ 5,241 $ 20,662
------------ ------------
------------ ------------
Basic weighted average common shares.............................. 21,821,160 24,787,698
Dilutive effect of stock options.................................. 2,536,495 1,120,901
------------ ------------
Diluted weighted average common shares............................ 24,357,655 25,908,599
------------ ------------
Antidilutive options.............................................. 183,753 223,807
Antidilutive options consist of the weighted average of stock options for
the respective periods ended January 31, 1998 and January 30, 1999 that had an
exercise price greater than the average market price during the period. Such
options are therefore excluded from the computation of diluted shares.
DERIVATIVE INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at its fair value.
SFAS 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
133 is effective for fiscal years beginning after June 15, 1999 with early
adoption permitted. The Company does not expect that the adoption of SFAS 133
will have a material impact on its financial statements.
2. INITIAL PUBLIC OFFERING
On September 18, 1997, the Company sold 4,000,000 shares of Common Stock at
$14.00 per share in an initial public offering (the "Offering") pursuant to a
registration statement filed on Form S-1 (No. 333-31535) with the Securities and
Exchange Commission and in its prospectus dated September 18, 1997 (the
"Prospectus"). The Company used the net proceeds of $50.7 million, after
deducting the underwriters' discount of $3.9 million and transaction expenses of
$1.4 million, from this Offering to (i) pay the principal amount of, and accrued
interest on, the Senior Subordinated Notes held by Nomura Holding America Inc.,
(the "Noteholder") of $20.6 million, (ii) repurchase a warrant held by the
Noteholder (the "Noteholder Warrant"), for $20.6 million, (iii) repurchase
two-thirds of a warrant held by Legg Mason Wood Walker, Incorporated (the "Legg
Mason Warrant") for $5.2 million, and (iv) reduce borrowings outstanding under
the Company's working capital revolving credit facility (the "Foothill Credit
Facility") with the remainder of the net proceeds. The Senior Subordinated
Notes, the Noteholder Warrant and the Legg Mason Warrant were issued in
conjunction with a 1996 recapitalization of the Company (as discussed in Note
3--1996 Private Placement).
54
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INITIAL PUBLIC OFFERING (CONTINUED)
The Senior Subordinated Notes were prepaid without a prepayment premium
since concurrent with the prepayment the Noteholder was afforded the opportunity
to sell its Noteholder Warrant. The Company has had no long-term debt other than
obligations under capital leases as a result of the Offering.
As a result of the repayment of the Senior Subordinated Notes, the Company
incurred a non-cash, extraordinary charge to earnings during the third quarter
of Fiscal 1997 of $1.7 million, resulting from the write-off of unamortized
deferred financing costs of $1.4 million and unamortized debt discount of $1.5
million, net of a $1.2 million tax benefit.
The repurchase price of the Noteholder Warrant and two-thirds of the Legg
Mason Warrant was equal to the initial public offering price of $14.00 per
share, less the per share underwriting discount and exercise price of $2.677 per
warrant, multiplied by the number of shares covered by the warrant (or portion
thereof) being repurchased. The repurchase in cash of the Noteholder Warrant and
two-thirds of the Legg Mason Warrant was accounted for as a reduction of
additional paid-in capital. The repurchase in cash of two-thirds of the Legg
Mason Warrant was recorded net of deferred tax benefits of $0.9 million.
Concurrent with the Offering, the Company effected a 120-for-one stock split
of the Series A Common Stock (the "Stock Split"), and converted all outstanding
shares of the Series B Common Stock into 7,659,889 shares of Series A Common
Stock (the "Series B Conversion") and redesignated the Series A Common Stock as
Common Stock ("the Reclassification"). The Company also issued 201,414 shares of
Common Stock upon the cashless exercise of one-third of the Legg Mason Warrant.
The cashless exercise of one-third of the Legg Mason Warrant was recorded net of
deferred tax benefits of $0.6 million.
At the time of the Offering, the Company also amended and restated its
certificate of incorporation and bylaws in order to, among other things, (i)
effect the Stock Split, the Series B Conversion and the Reclassification, (ii)
authorize 100,000,000 shares of Common Stock, $0.10 par value per share, (iii)
authorize 1,000,000 shares of Preferred Stock, $1.00 par value per share, and
(iv) provide for certain anti-takeover provisions. The Company also entered into
an amended and restated stockholders agreement with all of its existing
stockholders. In addition, the Company adopted the 1997 Plan and the ESPP.
3. 1996 PRIVATE PLACEMENT
During fiscal 1996, the Company employed the services of Legg Mason Wood
Walker, Incorporated ("Legg Mason") to assist, as its placement agent, in the
recapitalization of the Company. As a result, pursuant to a note and warrant
purchase agreement dated June 28, 1996 (the "Note and Warrant Purchase
Agreement") between the Company and Nomura Holding America Inc., the Company
sold, for a purchase price of $20 million, the Company's 12% Senior Subordinated
Notes due 2002 (the "Senior Subordinated Notes") in the principal amount of $20
million, together with a Noteholder Warrant representing the right to purchase
1,992,252 shares of Common Stock at an exercise price of $2.677 per share. This
warrant was valued for financial reporting purposes by an independent appraisal
firm at approximately $1.9 million. This amount was accounted for as a credit to
additional paid-in capital, net of income tax effect of $0.8 million, and a
discount to the Senior Subordinated
55
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. 1996 PRIVATE PLACEMENT (CONTINUED)
Notes, and was being amortized over the six year term of the Senior Subordinated
Notes. The Company also paid the Noteholder funding and structuring fees in the
aggregate amount of $0.3 million.
Concurrent with the sale of the Senior Subordinated Notes, Legg Mason
assisted the Company in its sale of its newly issued Series B Common Stock to
two funds managed by Saunders Karp & Megrue L.P. ("SKM"). The aggregate proceeds
from the sale of the Series B Common Stock were approximately $20.5 million,
before deducting transaction costs of approximately $1.7 million.
Net proceeds from the sale of the Senior Subordinated Notes and the issuance
of the Series B Common Stock (collectively, the "1996 Private Placement"), were
used to (i) redeem certain outstanding shares of Common Stock ($11.8 million),
(ii) repay certain indebtedness and related interest ($13.5 million), (iii) pay
transaction costs ($3.1 million), (iv) reduce borrowings under the Company's
revolving credit facility and (v) for other general corporate purposes.
In conjunction with the 1996 Private Placement, Legg Mason received $1.6
million in cash fees and a warrant to purchase 747,096 shares of Common Stock at
an exercise price of $2.677 per share (the "Legg Mason Warrant"). This warrant
was valued for financial reporting purposes by an independent appraisal firm at
approximately $0.7 million. An amount equal to 49.4% of the value of the
warrant, determined on the basis of gross proceeds from the 1996 Private
Placement, was attributable to the placement of the Senior Subordinated Notes.
This amount was credited to additional paid-in capital and capitalized as
deferred financing costs in other assets, and was amortized over the term of the
Senior Subordinated Notes.
As discussed in Note 2--Initial Public Offering, the Company paid the
principal and accrued interest on its Senior Subordinated Notes and repurchased
in cash the Noteholder Warrant and two-thirds of the Legg Mason Warrant with a
portion of the net proceeds of the Offering. In addition, the Company issued
201,414 shares of Common Stock upon the cashless exercise of the remaining
one-third of the Legg Mason Warrant and also effected the Series B Conversion of
the stock issued to SKM.
4. SHORT-TERM BORROWINGS
THE FOOTHILL CREDIT FACILITY
The Company has a working capital revolving credit facility (the "Foothill
Credit Facility") with Foothill Capital Corporation ("Foothill Capital"). The
Foothill Credit Facility provides for up to $30 million in borrowings which
includes a sublimit of up to $20 million in letters of credit. The Foothill
Credit Facility expires in July 2000 and provides for one year automatic renewal
options. The Company had $1.1 million outstanding under the Foothill Credit
Facility as of January 31, 1998 and had no outstanding borrowings as of January
30, 1999. Letters of credit outstanding as of January 31, 1998 and January 30,
1999 were $5.7 million and $10.6 million, respectively. Availability as of
January 31, 1998 and January 30, 1999 was $15.8 million and $19.3 million,
respectively.
The availability of borrowings under the Foothill Credit Facility are
determined as an amount equal to the sum of (i) 90% of eligible accounts
receivable, (ii) 30% of the selling price of eligible inventory (not to exceed
65% of the cost of eligible inventory) and (iii) 30% of the retail selling price
of inventory to be acquired pursuant to the outstanding letters of credit not to
exceed the lower of (a) the face value of the outstanding letters of credit or
(b) 65% of the cost of inventory to be acquired
56
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SHORT-TERM BORROWINGS (CONTINUED)
pursuant to the outstanding letters of credit. The Company's obligations under
the Foothill Credit Facility are secured by a first priority security interest
on the Company's present and future assets.
The Foothill Credit Facility also contains certain financial covenants,
including, among others, the maintenance of minimum levels of tangible net
worth, working capital and current ratios and imposes certain limitations on the
Company's annual capital expenditures, as defined in the Foothill Credit
Facility, as well as a prohibition on the payment of dividends. As of January
30, 1999, the Company was in compliance with all of its covenants under the
Foothill Credit Facility. Noncompliance with these covenants could result in
additional fees or could affect the availability of the facility. To provide
greater financial flexibility, the Company has requested an increase in its
credit line under the Foothill Credit Facility and amendments to the financial
covenants contained in the Foothill Credit Facility.
Amounts outstanding under the Foothill Credit Facility bear interest at a
floating rate equal to the prime rate or, at the Company's option, the 30-day
LIBOR Rate plus a pre-determined spread. As of January 31, 1998 and January 30,
1999, the interest rate charged under the Foothill Credit Facility was 8.50% and
7.75%, respectively. In addition, the Company was also required to pay an
anniversary fee of $100,000 and $75,000 during fiscal 1997 and fiscal 1998,
respectively.
Borrowing activity under the Foothill Credit Facility was as follows
(dollars in thousands):
FOR THE FISCAL YEAR
ENDED
------------------------
JANUARY 31, JANUARY 30,
1998 1999
----------- -----------
Weighted average balances outstanding............................... $ 5,266 $ 4,744
Weighted average interest rate...................................... 9.40% 7.50%
Maximum balance outstanding......................................... $ 16,440 $ 15,994
5. ACCRUED EXPENSES, INTEREST AND OTHER CURRENT LIABILITIES
Accrued expenses, interest and other current liabilities is comprised of the
following (dollars in thousands):
JANUARY 31, JANUARY 30,
1998 1999
----------- -----------
Accrued salaries and benefits....................................... $ 2,034 $ 3,999
Accrued real estate expenses........................................ 1,317 1,845
Accrued professional fees........................................... 787 1,293
Customer liabilities................................................ 836 1,497
Income taxes payable................................................ 186 941
Accrued taxes other than income..................................... 358 793
Accrued capital expenditures........................................ 855 309
Other accrued expenses.............................................. 1,219 2,967
----------- -----------
Accrued expenses, interest and other current liabilities.......... $ 7,592 $ 13,644
----------- -----------
----------- -----------
57
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Company leases all of its stores and distribution facilities, and
certain office equipment, store fixtures and automobiles, under leases expiring
at various dates through 2011. Certain leases include options to renew. The
leases require fixed minimum annual rental payments plus, under the terms of
certain leases, additional payments for taxes, other expenses and additional
rent based upon sales.
Rent expense is as follows (dollars in thousands):
FISCAL YEAR ENDED
-------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
----------- ----------- -----------
Store and distribution facility rent:
Minimum rentals...................................... $ 11,221 $ 16,037 $ 23,022
Additional rent based upon sales..................... 195 242 351
----------- ----------- -----------
Total rent expense................................. $ 11,416 $ 16,279 $ 23,373
----------- ----------- -----------
----------- ----------- -----------
Future minimum annual lease payments under the Company's operating leases
with initial or remaining terms of one year or more, at January 30, 1999, are as
follows (dollars in thousands):
OPERATING
LEASES
----------
Fiscal year--
1999.............................................................................. $ 31,457
2000.............................................................................. 32,612
2001.............................................................................. 30,150
2002.............................................................................. 29,717
2003.............................................................................. 28,051
Thereafter........................................................................ 115,352
----------
Total minimum lease payments...................................................... $ 267,339
----------
----------
7. LITIGATION
STOCKHOLDER LITIGATION
On October 16, 1997, Stephen Brosious and Rudy Pallastrone, who allegedly
purchased shares of the Company's common stock in an initial public offering in
September 1997 (the "IPO"), filed a lawsuit against the Company, several of the
Company's directors and officers, and the underwriters of the IPO (the
"Defendants") in the United States District Court of the District of New Jersey
(the "Court"). The named plaintiffs purport to maintain a class action on behalf
of all persons, other than the Defendants, who purchased the Company's common
stock issued in connection with the IPO on or about September 19, 1997 through
October 13, 1997. The complaint alleges that the Defendants violated federal
securities laws by making materially false or misleading statements and/or
omissions in connection with the IPO. The plaintiffs seek monetary damages of an
unspecified amount, rescission or rescissory damages and fees and costs. Since
October 16, 1997, 15 additional putative class actions making substantially
similar allegations and seeking substantially similar relief have been filed
against some or all of the Defendants. On or about January 13, 1998, the 16
putative class actions were consolidated in the Court and on February 26, 1998,
the plaintiffs served and filed their amended
58
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LITIGATION (CONTINUED)
consolidated complaint. On April 16, 1998, the Defendants moved to dismiss the
complaint. On September 4, 1998, the Court entered an order granting the motion
to dismiss in part and denying in part. The Court also dismissed the case
against the underwriters without prejudice. On October 5, 1998, the plaintiffs
filed an amended complaint against the Defendants including the underwriters.
The Company filed its answer to the amended complaint on October 26, 1998. The
parties have commenced discovery.
On October 27, 1997, Bulldog Capital Management, L.P., a limited partnership
that serves as a general partner for a series of investment funds which
allegedly purchased shares of the Company's common stock issued in connection
with the IPO, also filed a lawsuit against the Company and several of the
Company's directors and officers in the Superior Court of New Jersey, Essex
County Division. The complaint also alleges that by making materially false or
misleading statements and/or omissions in connection with the IPO, the Company
and several of the Company's directors and officers violated provisions of
federal and state law. The plaintiff seeks monetary damages of an unspecified
amount, rescission or rescissory damages and fees and costs. This action and the
federal action described above have been coordinated for purposes of discovery.
The Company believes that the allegations made in the complaints described
above are untrue and totally without merit and intends to defend them
vigorously. The Company does not believe that any ultimate liability arising out
of the actions described above will have a material adverse effect on its
business; however the Company can give no assurance as to the ultimate
resolution of the proceedings or the amount to be paid, if any, in the
disposition of the actions.
OTHER LITIGATION
The Company is also involved in various legal proceedings arising in the
normal course of its business. In the opinion of management, any ultimate
liability arising out of such proceedings, will not have a material adverse
effect on the Company's financial position or results of operations.
8. INCOME TAXES
Components of the Company's provision (benefit) for income taxes consisted
of the following (dollars in thousands):
FISCAL YEAR ENDED
-------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
----------- ----------- -----------
Current--
Federal.............................................. $ 244 $ 158 $ 799
State................................................ 100 332 1,600
Deferred--
Federal.............................................. 859 3,679 10,209
State................................................ 249 526 1,750
Valuation allowance.................................. (22,371) 0 0
----------- ----------- -----------
Provision (benefit) for income taxes................. $ (20,919) $ 4,695 $ 14,358
----------- ----------- -----------
----------- ----------- -----------
59
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The deferred portion of the tax provision for the fiscal year ended January
31, 1998 excludes (i) a tax benefit of $1.2 million recorded against the
extraordinary charge to earnings resulting from the write-off of deferred
financing costs and unamortized debt discount (see Note 2-Initial Public
Offering), and (ii) a tax benefit of $1.4 million resulting from the repurchase
and exercise of the Legg Mason Warrant recorded as paid-in capital.
A reconciliation between the calculated tax provision (benefit) on income
based on the statutory rates in effect and the effective tax rate follows
(dollars in thousands):
FISCAL YEAR ENDED
-------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
----------- ----------- -----------
Calculated income tax provision........................ $ 3,333 $ 4,088 $ 12,257
Reversal of valuation allowance........................ (21,042) 0 0
Utilization of operating loss carryforwards............ (3,540) 0 0
State income taxes, net of federal benefit............. 259 583 2,101
Nondeductible expenses................................. 24 30 (160)
Other.................................................. 47 (6) 160
----------- ----------- -----------
Tax provision (benefit) as shown on the statements of
income............................................... $ (20,919) $ 4,695 $ 14,358
----------- ----------- -----------
----------- ----------- -----------
Deferred income taxes reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting purposes as measured
by tax laws.
Temporary differences and net operating loss carryforwards which give rise
to deferred tax assets and liabilities are as follows (dollars in thousands):
JANUARY 31,
1998 JANUARY 30, 1999
--------------- -----------------
Current--
Uniform inventory capitalization......................... $ 247 $ 832
Inventory................................................ 166 941
Expenses not currently deductible........................ 360 638
Net operating loss carryforwards......................... 9,880 36
------- ------
Total current.......................................... $ 10,653 2,447
------- ------
Noncurrent--
Depreciation............................................. 1,496 2,424
Deferred rent............................................ 1,093 1,458
Net operating loss carryforwards......................... 5,230 0
Alternative minimum tax credit........................... 425 1,262
------- ------
Total noncurrent....................................... 8,244 $ 5,144
------- ------
Total deferred tax asset............................... $ 18,897 $ 7,591
------- ------
------- ------
As a result of the Company's improved operating results during the second
half of fiscal 1996, the Company reversed its valuation allowance of $21.0
million, as it was deemed to be more likely than not
60
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
that the deferred tax assets would be utilized. Accordingly, the Company's net
income for fiscal 1997 and fiscal 1998 required the calculation of a tax
provision based on statutory rates in effect.
Until the NOLs are fully utilized or expire, the majority of the 1998 tax
provision will not be paid in cash, but will reduce the deferred tax asset on
the balance sheet. However, the Company expects to make cash tax payments of
approximately $2.3 million for its fiscal 1998 taxes related to payments of
federal Alternative Minimum Tax ("AMT"), state minimum taxes and state taxes
where the Company is not in an NOL status. The Company expects to utilize its
remaining NOL carryforwards during fiscal 1999. The amount and availability of
these NOLs are subject to review by the Internal Revenue Service.
9. STOCKHOLDERS' EQUITY
The Company's stockholders' equity is comprised of the following (dollars in
thousands):
JANUARY 31, JANUARY 30,
1998 1999
------------- -------------
Common stock:
Authorized number of shares, $0.10 per value................. 100,000,000 100,000,000
Issued and outstanding number of shares...................... 24,622,103 24,972,901
Preferred stock:
Authorized number of shares.................................. 1,000,000 1,000,000
Issued and outstanding number of shares...................... 0 0
10. STOCK OPTION AND PURCHASE PLANS
STOCK OPTION PLANS
Effective February 1, 1997, the Company adopted the provisions of SFAS 123
in accounting for its stock option plans, which are described below.
Accordingly, no compensation expense has been recognized for stock-based
compensation, since the options granted were at prices that equaled or exceeded
their estimated fair market value at the date of grant. If compensation expense
for the Company's stock options issued in fiscal 1996, 1997 and 1998 had been
determined based on the fair value method of accounting, the Company's net
income would have been reduced to the pro forma amounts indicated below for the
three fiscal years in the period ended January 30, 1999:
FISCAL YEAR ENDED
------------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
------------- ------------ -------------
Net income--
As reported.................................... $ 30,441,000 $ 5,241,000 $ 20,662,000
Pro forma...................................... $ 30,210,000 $ 4,385,000 $ 19,042,000
Pro forma diluted net income per share--
As reported.................................... $ 0.22 $ 0.80
Pro forma...................................... $ 0.18 $ 0.73
61
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
The fair value of issued stock options were estimated on the date of grant
using the Black-Scholes option pricing model, incorporating the following
assumptions:
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
----------------- ----------------- -----------------
Dividend yield..................... 0% 0% 0%
Volatility factor.................. 0% 36.56% 45.00%
Weighted average risk-free interest
rate............................. 6.46% 6.02% 5.17%
Expected life of options........... 5 years 5 years 5 years
Weighted average fair value on
grant date....................... $ 0.74 per share $ 5.82 per share $ 3.52 per share
On June 28, 1996, the Company approved the adoption of the 1996 Plan, which
authorized the granting of incentive stock options and nonqualified stock
options to key employees of the Company. The 1996 Plan provided for the granting
of options with respect to 1,743,240 shares of Common Stock. On September 17,
1997, the Company approved adoption of the 1997 Plan, which also authorizes the
granting of incentive stock options and nonqualified stock options to key
employees of the Company with respect to an additional 1,000,000 shares of
Common Stock. As of January 30, 1999, there were no shares available for grant
under the 1996 Plan and 215,240 shares available for grant under the 1997 Plan.
Both the 1996 Plan and the 1997 Plan are administered by the Board of
Directors. Options granted under the 1996 Plan and the 1997 Plan have exercise
prices established by the Board of Directors provided that the exercise price of
incentive stock options may not be less than the fair market value of the
underlying shares at the date of grant. The 1996 Plan and the 1997 Plan also
contain certain provisions that require the exercise price of incentive stock
options granted to stockholders owning greater than 10% of the Company be at
least 110% of the fair market value of the underlying shares.
The Company issued options to key employees in fiscal 1996 in conjunction
with the 1996 Private Placement and in fiscal 1997 in conjunction with the
Offering. During fiscal 1998, the 931,500 options granted were comprised of (i)
363,700 options that were canceled and re-granted on March 26, 1998, (ii)
290,000 options that were granted to officers hired during fiscal 1998, (iii)
135,000 options that were granted to existing officers and (iv) 142,800 options
that were granted to newly hired or existing key employees. The Board of
Directors authorized the cancellation and re-granting of certain options, which
were originally granted in conjunction with the Offering under the 1996 Plan and
the 1997 Plan, from an exercise price of $14.00 to the average market price on
March 27, 1998 of $8.70 per share. The cancellation and re-granting
re-established these options as an incentive to improve the overall performance
of the Company. Options granted to officers were not repriced.
The options granted in conjunction with the 1996 Private Placement vest at
20% six months from the date of grant and 20% on each of the first, second,
third and fourth anniversaries of the date of the grant. The options granted in
conjunction with the Offering vest 20% on December 31, 1997 and 20% on each of
the first, second, third and fourth anniversaries of the date of the grant. The
options canceled and re-granted during fiscal 1998 will vest in accordance with
their original vesting schedule. Unless otherwise specified by the Board of
Directors, options granted during fiscal 1998 vest at 20% on
62
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
the anniversaries of the Offering and 20% on the first, second, third and fourth
anniversaries of the Offering.
Changes in common shares under option for the three fiscal years in the
period ended January 31, 1999 are summarized below:
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
------------------------------ ---------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ------------------- --------- ----------------- --------- -------------------
Beginning of year.................. 0 -- 1,444,080 $ 2.68 1,981,120 $ 5.82
Granted............................ 1,444,080 $ 2.68 551,260 14.25 931,500(1) 9.66
Exercised.......................... 0 -- 0 -- (339,294) 3.41
Canceled........................... 0 -- (14,220) 14.00 (387,620 (1) 13.73
--------- ----- --------- ------ --------- -----
End of year........................ 1,444,080 $ 2.68 1,981,120 $ 5.82 2,185,706 $ 6.43
--------- ----- --------- ------ --------- -----
--------- ----- --------- ------ --------- -----
Exercisable at end of year......... 288,816 $ 2.68 684,576 $ 4.49 793,378 $ 4.85
- ------------------------------
(1) Includes 363,700 options that were canceled and re-granted on March 26,
1998.
The following table summarizes information regarding options outstanding at
January 30, 1999:
OPTIONS OUTSTANDING
- -------------------------------------------------------------------------------- OPTIONS EXERCISABLE
OUTSTANDING AT ------------------------------------
EXERCISE JANUARY 30, WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
PRICES(1) 1999 CONTRACTUAL LIFE EXERCISE PRICE JANUARY 30, 1999 EXERCISE PRICE
- ----------- --------------- ------------------------------- ----------------- ----------------- -----------------
$ 2.68 1,145,916 7.4 $ 2.68 568,284 $ 2.68
$7.31-10.69 806,530 9.3 8.71 157,230 8.44
$14.00-19.06 183,660 8.7 15.12 67,864 14.82
$23.06-27.13 50,900 9.9 24.31 0 --
--
--------------- ------ ------- ------
$2.68-27.13 2,187,006 8.3 $ 6.45 793,378 $ 4.85
- ------------------------------
(1) Exercise prices reflect the actual range of exercise prices at 150%
increments.
STOCK PURCHASE PLANS
On September 17, 1997, the Company approved the adoption of the ESPP, which
authorized up to 360,000 shares of Common Stock for employee purchase through
payroll deductions at 85% of fair market value. All employees of the Company,
who have completed at least 90 days of employment and attained 21 years of age,
are eligible to participate, except for employees who own Common Stock or
options on such common stock which represents 5% or more of the Company. During
fiscal 1997 and fiscal 1998, there were 0 shares and 11,504 shares issued under
the ESPP.
11. SAVINGS AND INVESTMENT PLAN
The Company has adopted The Children's Place 401(k) Savings and Investment
Plan (the "401(k) Plan"), which is intended to qualify under Section 401(k) of
the Internal Revenue Code of 1986, as amended. The 401(k) Plan is a defined
contribution plan established to provide retirement benefits for all employees
who have completed one year of service with the Company and attained 21 years of
age.
63
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SAVINGS AND INVESTMENT PLAN (CONTINUED)
The 401(k) Plan is employee funded up to an elective annual deferral and
also provides an option for the Company to contribute to the 401(k) Plan at the
discretion of the 401(k) Plan's trustees. The Company did not exercise its
discretionary contribution option during calendar 1996. In January 1997, the
401(k) Plan was amended whereby the Company will match the lesser of 50% of the
participant's contribution or 2.5% of the participant's compensation. During
fiscal 1997 and fiscal 1998, the Company's matching contributions to the 401(k)
Plan were approximately $247,000 and $300,000, respectively.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for the periods
indicated (dollars in thousands, except for per share amounts):
FISCAL YEAR ENDED JANUARY 31, 1998
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
Net sales............................................................. $ 39,203 $ 33,534 $ 54,489 $ 65,331
Gross profit.......................................................... 13,944 9,785 21,408 23,864
Net income (loss)..................................................... 1,011 (1,744) 1,754(1) 4,220
Basic net income (loss) per common share.............................. $ 0.05 $ (0.09) $ 0.08 $ 0.17
Diluted net income (loss) per common share............................ $ 0.04 $ (0.07) $ 0.07 $ 0.17
FISCAL YEAR ENDED JANUARY 30, 1999
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
Net sales............................................................. $ 55,999 $ 48,014 $ 82,496 $ 97,344
Gross profit.......................................................... 21,915 15,489 36,126 43,874
Net income (loss)..................................................... 2,742 (511) 8,485 9,946
Basic net income (loss) per common share.............................. $ 0.11 $ (0.02) $ 0.34 $ 0.40
Diluted net income (loss) per common share............................ $ 0.11 $ (0.02) $ 0.33 $ 0.38
- ------------------------
(1) Includes an extraordinary loss on the extinguishment of debt of $1,743. (see
Note 2--Initial Public Offering).
13. RELATED PARTY TRANSACTIONS
SKM FINANCIAL ADVISORY SERVICES
In 1996, the Company entered into a management agreement with SKM which
provides for the payment of an annual fee of $150,000, payable quarterly in
advance, in exchange for certain financial advisory services. This management
agreement remains in effect until SKM or any of its affiliates' total ownership
of the Company's Common Stock is less than 10% on a fully diluted basis.
Pursuant to the management agreement, the Company incurred fees and expenses of
approximately $93,000, $153,000 and $151,000 during fiscal 1996, fiscal 1997 and
fiscal 1998, respectively.
64
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RELATED PARTY TRANSACTIONS (CONTINUED)
STOCKHOLDERS AGREEMENT
The Company and certain of its stockholders, who as of February 15, 1999 own
in the aggregate a majority of the Common Stock, are parties to a Stockholders
Agreement (the "Stockholders Agreement"). The Stockholders Agreement places
certain limitations upon the transfer, in privately negotiated transactions, of
shares of Common Stock beneficially owned by Ezra Dabah, Stanley Silver and the
SK Funds. In addition, the Stockholders Agreement provides that (1) so long as
Ezra Dabah, together with members of his family, beneficially owns shares
representing at least 25% of the shares of Common Stock owned by such parties on
the date of the Stockholders Agreement, the stockholders party to the
Stockholders Agreement will be obligated to vote all shares as to which they
have voting rights in a manner such that the Board of Directors will at all
times include three directors nominated by Ezra Dabah and (2) so long as the SK
Funds beneficially own shares representing at least 25% of the shares of Common
Stock owned by such parties on the date of the Stockholders Agreement, the
stockholders party to the Stockholders Agreement will be obligated to vote all
shares as to which they have voting rights in a manner such that the Board of
Directors will at all times include two directors nominated by the SK Funds.
Should the number of directors comprising the Board of Directors be increased,
nominees for the remaining director positions will be designated by the Board of
Directors.
The Stockholders Agreement provides that so long as the SK Funds
beneficially own shares representing at least 25% of the outstanding Common
Stock, will not, without the affirmative vote of at least one director nominated
by the SK Funds, engage in specified types of transactions with certain of our
affiliates (not including the SK Funds), take action to amend the ByLaws or
Certificate of Incorporation or increase or decrease the size of the entire
Board of Directors. The Stockholders Agreement also provides that certain
specified types of corporate transactions and major corporate actions will
require the approval of at least two-thirds of the members of the Board of
Directors.
Under the terms of the Stockholders Agreement, the rights of any party
thereunder will terminate at the time that such party's Common Stock constitutes
less than 25% of the shares of Common Stock owned by such party on the date of
the Stockholders Agreement. All the provisions of the Stockholders Agreement
will terminate when no party to the Stockholders Agreement beneficially owns
shares representing at least 25% of the outstanding Common Stock owned by such
party on the date of the Stockholders Agreement.
MERCHANDISE FOR RE-SALE
During fiscal 1998, the Company purchased approximately $290,000 in bath
products from HBA Technologies, LLC. Haim Dabah, Ezra Dabah's brother, is the
majority owner of HBA Technologies, LLC.
During fiscal 1999, the Company placed orders for approximately $60,000 in
footwear from Nina Footwear Corporation. Stanley Silverstein, a member of the
Company's Board of Directors and Ezra Dabah's father-in-law, owns Nina Footwear
Corporation with his brother.
In the opinion of the Company, the transactions with HBA Technologies, LLC
and Nina Footwear Corporation were on terms no less favorable than could have
been obtained from an unaffiliated third party.
65
(A)(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted because they are not
required or are not applicable.
(A)(3) EXHIBITS
3.1* Amended and Restated Certificate of Incorporation of the Company.
3.2* Amended and Restated ByLaws of the Company.
4.1* Form of Certificate for Common Stock of the Company.
9.1* Amended and Restated Stockholders Agreement, dated as of September18, 1997.
10.1* 1996 Stock Option Plan of The Children's Place Retail Stores, Inc.
10.2* 1997 Stock Option Plan of The Children's Place Retail Stores, Inc.
10.3* The Children's Place Retail Stores, Inc. 401 (k) Plan.
10.4* Form of The Children's Place Retail Stores, Inc. Employee Stock Purchase Plan.
10.5* The Children's Place Retail Stores, Inc. Management Incentive Plan.
10.6* Amended and Restated Loan and Security Agreement dated as of July 31, 1997,
between the Company and Foothill Capital Corporation.
10.7* Merchant Services Agreement dated December 12, 1994 between the Company and
Hurley State Bank.
10.8* Employment Agreement dated as of June 27, 1996 between the Company and Ezra
Dabah.
10.9* Employment Agreement dated as of June 27, 1996 between the Company and Stanley
B. Silver.
10.10* Form of Indemnification Agreement between the Company and the members of its
Board of Directors.
10.11* Lease Agreement dated August 11, 1993 between the Company and Suburban Mall V
Associates, as amended by First Amendment to Lease, dated October 21, 1994
between the Company and Suburban Mall V Associates.
10.12* Form of Amended and Restated Registration Rights Agreement, dated as of
September 18, 1997.
10.13* Letter Agreement as to employment, dated January 18, 1991, between the Company
and Diane M. Timbanard.
10.14* Letter Agreement as to severance pay, dated January 22, 1991, between the
Company and Diane M. Timbanard.
10.17* Buying Agency Agreement dated September 17, 1996 between the Company and KS Best
International.
66
10.18* Advisory Agreement dated June 28, 1996 between the Company and Saunders Karp &
Megrue, L.P.
10.19** Amendment as of October 27, 1997 to Merchant Services Agreement dated December
12, 1994 between the Company and Hurley State Bank.
10.20*** Employment Agreement dated as of January 30, 1998 between the Company and Clark
Hinkley.
10.21**** Service Agreement, between the Company and AST StockPlan, Inc., dated June 8,
1998.
10.22***** Lease for a distribution center and corporate headquarters facility between the
Company and Hartz Mountain Associates, dated June 30, 1998.
10.23***** Software Purchase and license agreement between the Company and Trimax Inc.,
dated August 14, 1998.
10.24***** Sales agreement between the Company and Mannesmann Dematic Rapistan Corporation,
dated August 21, 1998.
10.25****** Amendment to a lease for a distribution center and corporate headquarters
facility between the Company and Hartz Mountain Associates, dated November 20,
1998.
10.26 Second Amendment effective as of September 1, 1998 to the Merchant Services
Agreement dated December 12, 1994 between the Company and Hurley State Bank, as
amended as of October 27, 1997.
10.27 Letter dated as of December 22, 1998 regarding extension of Lease Agreement
between the Company and Suburban Mall V Associates.
10.28 Security Agreement--Stock Pledge dated January 31, 1999 between the Company and
Foothill Capital Corporation.
10.29 Amendment Number One dated as of February 22, 1999 to Amended and Restated Loan
and Security Agreement between the Company and Foothill Capital Corporation.
27.1 Financial Data Schedule.
* Incorporated by reference to the registrant's Registration Statement on
Form S-1 (No. 333-31535). Exhibit numbers arc identical to the exhibit
numbers incorporated by reference to such registration statement.
** Incorporated by reference to the registrant's quarterly report on Form
10-Q for the period ended November 1, 1997. Exhibit 10.19 was filed
previously as Exhibit 10.1 in such quarterly report.
*** Incorporated by reference to the registrant's annual report on Form 10-K
for the fiscal year ended January 31, 1998. Exhibit 10.20 was filed
previously as Exhibit 10.21 in such annual report.
**** Incorporated by reference to the registrant's quarterly report on Form
10-Q for the period ended May 2, 1998. Exhibit 10.21 was filed previously
as Exhibit 10.1 in such quarterly report.
***** Incorporated by reference to the registrant's quarterly report on Form
10-Q for the period ended August 1, 1998. Exhibit 10.22 was filed
previously as Exhibit 10.2, Exhibit 10.23 was filed previously as August
1, 1998. Exhibit 10.24 was filed previously as 10.4 in such quarterly
report.
****** Incorporated by reference to registrant's quarterly report on Form 10-Q
for the period ended October 31, 1998. Exhibit 10.25 was filed previously
as Exhibit 10.5 in such quarterly report.
(B) REPORTS ON FORM 8-K
No reports were filed.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
THE CHILDREN'S PLACE RETAIL STORES, INC.
By: /s/ EZRA DABAH
-----------------------------------------
Ezra Dabah
Chairman of the Board and
Chief Executive Officer
February 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ EZRA DABAH
- ------------------------------ February 24, 1999
Ezra Dabah Chairman of the Board of
Directors and Chief
Executive Officer
(Principal Executive
Officer)
/s/ STANLEY B. SILVER
- ------------------------------ President, Chief Operating February 24, 1999
Stanley B. Silver Officer and Director
/s/ SETH L. UDASIN
- ------------------------------ February 24, 1999
Seth L. Udasin Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
Director
- ------------------------------ February , 1999
Stanley Silverstein
/s/ JOHN MEGRUE Director
- ------------------------------ February 24, 1999
John Megrue
/s/ DAVID J. ODDI Director
- ------------------------------ February 24, 1999
David J. Oddi
68