<PAGE>
FILED PURSUANT TO RULE 424(B)(4)
REGISTRATION NO. 333-31535
4,000,000 SHARES
[LOGO]
COMMON STOCK
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY.
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK
OF THE COMPANY. SEE "UNDERWRITING" FOR A DISCUSSION OF FACTORS CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE. APPROXIMATELY $5.2 MILLION OF THE
NET PROCEEDS OF THIS OFFERING WILL BE USED TO REDEEM TWO-THIRDS OF A WARRANT
HELD BY LEGG MASON WOOD WALKER, INCORPORATED, ONE OF THE REPRESENTATIVES OF THE
UNDERWRITERS OF THIS OFFERING. SEE "RISK FACTORS--MATERIAL BENEFITS TO AN
UNDERWRITER" AND "UNDERWRITING."
THE COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "PLCE." AT THE REQUEST OF THE COMPANY, UP TO 280,000 SHARES OF
COMMON STOCK HAVE BEEN RESERVED FOR SALE TO CERTAIN EMPLOYEES OF THE COMPANY AND
CERTAIN OTHER PERSONS. SEE "UNDERWRITING."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
PER SHARE............. $14.00 $0.98 $13.02
TOTAL (3)............. $56,000,000 $3,920,000 $52,080,000
</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING OFFERING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT
$1,350,000.
(3) CERTAIN STOCKHOLDERS OF THE COMPANY HAVE GRANTED TO THE UNDERWRITERS A
30-DAY OPTION TO PURCHASE UP TO 600,000 ADDITIONAL SHARES OF COMMON STOCK
SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE THIS
OPTION IN FULL, THE TOTAL PROCEEDS TO THE COMPANY WILL REMAIN UNCHANGED, AND
THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNT AND PROCEEDS TO THE SELLING
STOCKHOLDERS WILL BE $64,400,000, $4,508,000 AND $7,812,000, RESPECTIVELY.
SEE "UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN, WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS AND
SUBJECT TO THEIR RIGHT TO REJECT ANY ORDERS IN WHOLE OR IN PART. IT IS EXPECTED
THAT DELIVERY OF THE CERTIFICATES REPRESENTING SUCH SHARES WILL BE MADE AGAINST
PAYMENT THEREFOR AT THE OFFICE OF MONTGOMERY SECURITIES ON OR ABOUT SEPTEMBER
24, 1997.
-------------------
MONTGOMERY SECURITIES
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SMITH BARNEY INC.
LEGG MASON WOOD WALKER
INCORPORATED
SEPTEMBER 18, 1997
<PAGE>
[The Inside Front Cover Page of the Prospectus consists of a gatefold that
shows three photographs of a Company store, along with a large version of the
Company's logo. On the inside of the gatefold are numerous photographs of
children wearing the Company's apparel and accessories, interspersed with small
versions of the Company's logo.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING TRANSACTIONS AND THE PURCHASE OF
COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, CONTAINED
ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN
THIS PROSPECTUS GIVES EFFECT TO A 120-FOR-ONE STOCK SPLIT OF THE COMMON STOCK
(THE "STOCK SPLIT") AND THE CONVERSION OF ALL OUTSTANDING SHARES OF THE
COMPANY'S SERIES B COMMON STOCK INTO A TOTAL OF 7,659,889 SHARES OF COMMON STOCK
(THE "SERIES B CONVERSION"), BOTH OF WHICH WILL BE EFFECTED PRIOR TO
CONSUMMATION OF THE OFFERING MADE BY THIS PROSPECTUS. ALL REFERENCES TO THE
COMPANY'S FISCAL YEARS REFER TO THE FISCAL YEARS ENDED ON THE SATURDAY NEAREST
TO JANUARY 31 OF THE FOLLOWING YEAR. FOR EXAMPLE, REFERENCES TO FISCAL 1996
SHALL MEAN THE FISCAL YEAR ENDED FEBRUARY 1, 1997.
THE COMPANY
The Children's Place Retail Stores, Inc. (the "Company") is a leading
specialty retailer of high quality, value-priced apparel and accessories for
newborn to twelve year old children. The Company designs, contracts to
manufacture and sells its products under "The Children's Place" brand name. As
of September 1, 1997, the Company operated 140 stores, primarily located in
regional shopping malls in the eastern half of the United States. The Company's
net sales have increased from $96.6 million in fiscal 1993 to $143.8 million in
fiscal 1996 and operating income has increased from $1.4 million in fiscal 1993
to $12.8 million in fiscal 1996. In the first six months of fiscal 1997, net
sales totaled $72.7 million as compared to $56.4 million in the first six months
of fiscal 1996. The Company has achieved comparable store sales increases over
prior years of 13.2%, 10.0% and 8.6% during fiscal 1994, 1995 and 1996,
respectively, and 2.5% in the first six months of fiscal 1997. The Company
defines its comparable store sales as net sales from stores that have been open
for more than 14 full months and have not been substantially remodeled during
that time. The Company's net sales per gross square foot have increased from
$226 in fiscal 1993 to $335 in fiscal 1996. These increases are primarily the
result of a merchandising and operational repositioning of the Company over the
last five fiscal years under the direction of the Company's current management
team. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."
In fiscal 1996, new stores for which fiscal 1996 was the first full year of
operations had average net sales of $1,250,000. 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
$371,000. New stores have generally achieved profitability within the first full
quarter of operations, with average fiscal 1996 store level operating cash flow
of $288,000 (23.0% of net sales) for stores for which fiscal 1996 was the first
full year of operations. In fiscal 1996, these stores yielded a cash return on
investment of 77.6%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
In July 1996, following a private financing in which the Company raised
$37.4 million of net proceeds through the issuance of senior subordinated notes,
Series B Common Stock and warrants, the Company began to implement an aggressive
growth strategy designed to capitalize on its business strengths and its strong
store economics. From July 1, 1996 through the end of fiscal 1996, the Company
opened a total of 16 new stores, growing to 108 stores. During fiscal 1997
through September 1, 1997, the Company has opened 32 stores. The Company intends
to continue its expansion program and currently plans to open approximately 15
additional stores during the remainder of fiscal 1997 and at least 60 stores in
fiscal 1998. See "Business--Store Expansion Program" and "Certain Relationships
and Related Transactions--1996 Private Placement."
3
<PAGE>
BUSINESS STRENGTHS AND STRATEGY
The Company believes that its value-based, proprietary brand business
strategy has been and will continue to be the key to its success as a specialty
retailer. The following strengths have contributed to the success of the
Company's merchandising and operating strategies:
UNIQUE PRICE-VALUE POSITIONING. By offering quality clothing and
accessories under "The Children's Place" brand name at prices 20% to 30% below
most of its direct mall-based competitors, the Company believes that it has
built a loyal base of customers who regularly purchase from the Company as their
children grow. The Company believes that the value created by the price and
quality of its merchandise has enabled it to establish a unique market position.
See "Business--Merchandising" and "--Sourcing and Procurement."
MERCHANDISING STRATEGY. The Company's merchandising strategy is built on
the offering of key basic items at prices which the Company believes represent
exceptional values, complemented by fashion items and accessories to create a
fully coordinated look. The Company designs its merchandise to present a fresh
and youthful image that management believes is unique to "The Children's Place"
brand. See "Business-- Merchandising" and "--Sourcing and Procurement."
STRONG BRAND IMAGE. The Company believes that it has built a strong brand
image for "The Children's Place" by (i) selling its products exclusively in its
own stores, (ii) creating a uniform appearance in merchandise presentation,
(iii) providing a consistent selection of coordinated separates and accessories
for children, and (iv) offering high quality products at value prices. The
Company believes that these factors foster consumer loyalty to "The Children's
Place" brand name. See "Business--Merchandising" and "--Company Stores."
BROAD CONSUMER APPEAL. The Company believes that its high-quality
merchandise assortment, offered at "everyday value prices" so that customers
need not wait for special sales, enable it to appeal to a broad range of
consumers across all socioeconomic groups and to compete successfully in a wide
range of regional shopping malls, outlet centers and other locations. See
"Business--Merchandising--Everyday Value Pricing" and "--Company Stores."
VERTICALLY INTEGRATED OPERATIONS. The Company controls the design, sourcing
and sale of its private label children's apparel and accessories. The Company
believes that the vertical integration of its operations, from in-house design
to in-store presentation, enables the Company to identify and respond to market
trends, uphold rigorous product quality standards and control the cost of its
merchandise. See "Business-- Merchandising" and "--Company Stores."
EXPERT SOURCING. The Company combines management's extensive sourcing
experience with a cost-based buying strategy. Management has established close,
long-standing and mutually beneficial relationships with numerous manufacturers.
Through these relationships and its extensive knowledge of component costs of
apparel, the Company believes that it has been able to purchase high quality
products at low costs. See "Business--Merchandising" and "--Sourcing and
Procurement."
PROVEN MANAGEMENT TEAM. The Company has a seasoned, highly experienced
management team, with its 12 most senior members having an average of 17 years
in the retail and/or apparel business and an average of eight years with the
Company. The Company believes that management's substantial experience favorably
positions the Company for future expansion. See "Management."
The Company's principal executive offices are located at One Dodge Drive,
West Caldwell, New Jersey 07006. Its telephone number is (973) 227-8900.
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company:.................... 4,000,000 shares
Common Stock to be outstanding after
the offering:......................................... 24,622,103 shares(1)
Use of proceeds:........................................ To repay the Company's 12% Senior Subordinated Notes, to
repurchase a portion of the Company's outstanding
warrants and to reduce outstanding borrowings under the
Company's revolving credit facility.
Nasdaq National Market symbol:.......................... PLCE
</TABLE>
- ------------------------
(1) Excludes 1,995,540 shares of Common Stock issuable under outstanding
options, of which 577,632 are currently exercisable.
RISK FACTORS
Investors should carefully consider the risk factors relating to the Company
and this offering described on pages 8 through 14 of this Prospectus. Such
factors include the Company's aggressive growth strategy; changes in comparable
store sales results from period to period; the Company's ability to anticipate
and respond to changing merchandise trends; potential disruptions in receiving
and distribution of merchandise; the Company's reliance on information systems;
the Company's dependence on unaffiliated manufacturers and independent agents;
the risks of using foreign manufacturers; the possible adverse impact of
unaffiliated manufacturers' failure to comply with acceptable labor practices;
risks of foreign currency fluctuations; the Company's dependence on key
personnel; competition; possible adverse effects of future changes in the
Company's proprietary credit card program; fluctuations in quarterly results and
seasonality; risks associated with changing economic, regional and other
business conditions; the adverse tax consequences of any inability of the
Company to use certain net operating loss carryforwards; the control of the
Company by certain existing stockholders; the possible adverse impact of future
sales of Common Stock in the public market by existing stockholders and of
certain registration rights; uncertainty as to the future existence of an active
trading market for the Common Stock; possible volatility of the Company's stock
price; the material benefits of the offering to an Underwriter; dilution; and
the potential anti-takeover effect of certain provisions of the Company's
Certificate of Incorporation and Bylaws.
5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND AVERAGE NET SALES PER GROSS
SQUARE FOOT)
The following information is qualified in its entirety by the financial
statements appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1) SIX MONTHS ENDED
-------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
JANUARY 29, JANUARY 28, FEBRUARY 3, FEBRUARY 1, AUGUST 3, AUGUST 2,
1994 1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Net sales........................................... $ 96,649 $ 107,953 $ 122,060 $ 143,838 $ 56,412 $ 72,737
Gross profit........................................ 28,874 33,724 38,626 54,052 18,112 23,820
Operating income.................................... 1,364 2,329 4,062 12,802 120 696
Interest expense, net............................... 1,150 1,303 1,925 2,884 1,182 1,815
Income (loss) before income taxes, extraordinary
items and the cumulative effect of accounting
change............................................ 214 1,026 1,690 9,522 (1,441) (1,225)
----------- ----------- ----------- ----------- ----------- -----------
Provision (benefit) for income taxes(2)............. 53 54 36 (20,919) 21 (492)
Extraordinary gains(3).............................. 15,169 490 0 0 0 0
Net income (loss)(4)................................ $ 14,780 $ 1,462 $ 1,654 $ 30,441 $ (1,462) $ (733)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Pro forma net income (loss) per common share(5)..... $ 1.28 $ (0.03)
Pro forma weighted average common shares
outstanding(5).................................... 23,804,185 23,804,185
Pro forma supplemental net income per common
share(6).......................................... $ 1.24 $ 0.01
SELECTED OPERATING DATA:
Number of stores open at end of period.............. 87 87 91 108 95 134
Comparable store sales increase (decrease)(7)(8).... (2.2%) 13.2% 10.0% 8.6% 8.1% 2.5%
Average net sales per store(8)(9)................... $ 1,124 $ 1,264 $ 1,362 $ 1,479 $ 611 $ 618
Average square footage per store(10)................ 4,954 4,786 4,528 4,284 4,392 4,147
Average net sales per gross square
foot(8)(11)....................................... $ 226 $ 259 $ 292 $ 335 $ 138 $ 146
</TABLE>
<TABLE>
<CAPTION>
AT AT AUGUST 2, 1997
-------------------------------------------------- -------------------------
JANUARY 29, JANUARY 28, FEBRUARY 3, FEBRUARY 1, AS
1994 1995 1996 1997 ACTUAL ADJUSTED(12)
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................ $ (11,621) $ (10,398) $ (17,630) $ 11,951 $ 2,079 $ 7,052
Total assets..................................... 26,600 26,556 32,073 64,479 79,748 79,514
Long-term debt (including current portion)....... 23,719 21,626 15,735 20,504 18,928 489
Stockholders' equity (deficit)................... (15,338) (13,388) (11,735) 27,298 26,077 49,255
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
6
<PAGE>
- ------------------------------
(1) All references to the Company's 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 1996 mean the fiscal year ended February 1,
1997. 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. See Note 9 of the Notes to Financial Statements.
(3) Extraordinary gains during fiscal 1993 and fiscal 1994 represented
forgiveness of debt in connection with a debt restructuring undertaken with
the consent of the Company's creditors.
(4) Net income for fiscal 1993 included a $550,000 charge relating to the
cumulative effect of a change in accounting for inventory capitalization.
(5) Pro forma net income (loss) per common share is calculated by dividing net
income (loss) by the pro forma weighted average common shares outstanding.
The pro forma weighted average common shares outstanding used in computing
pro forma net income (loss) per common share for fiscal 1996 and the first
six months of fiscal 1997 are based on the number of common shares and
common share equivalents outstanding after giving effect to (i) the 1996
Private Placement described elsewhere in this Prospectus, (ii) the
cancellation of the preferred stock discussed in Note 10 of the Notes to
Financial Statements, (iii) the granting of management options in
conjunction with the 1996 Private Placement as discussed in Note 11 of the
Notes to Financial Statements and (iv) the Stock Split and the Series B
Conversion described elsewhere in this Prospectus, as if all such events
had occurred on the first day of fiscal 1996.
(6) The pro forma supplemental net income per common share gives effect to the
elimination of interest expense on long-term debt to be repaid from the net
proceeds of this offering, as if such repayment had occurred on the first
day of the period indicated. The pro forma weighted average common shares
outstanding of 25,408,102 used in computing pro forma supplemental net
income per common share is based upon the number of common shares and
common share equivalents outstanding after giving effect to the repurchase
of certain warrants, the issuance in this offering of those shares the net
proceeds of which are to be used to repay long-term debt and to repurchase
such warrants, and the events described in clauses (i) through (iv) of
footnote (5).
(7) The Company defines comparable store sales as net sales from stores that
have been open for more than 14 full months and have not been substantially
remodeled during that time.
(8) For purposes of determining comparable store sales increase (decrease),
average net sales per store and average net sales per gross square foot,
fiscal 1995 results were recalculated based on a 52-week year.
(9) Represents net sales from stores open throughout the full period divided by
the number of such stores.
(10) 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.
(11) Represents net sales from stores open throughout the full period divided by
the gross square footage of such stores.
(12) Adjusted to give effect to the sale of 4,000,000 shares of Common Stock
offered by the Company in this offering and the application of the estimated
net proceeds therefrom, as described in "Use of Proceeds."
7
<PAGE>
RISK FACTORS
BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY, A PROSPECTIVE
INVESTOR SHOULD CONSIDER THE SPECIFIC FACTORS SET FORTH BELOW AS WELL AS THE
OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS. SEE "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS" FOR A DESCRIPTION OF OTHER FACTORS AFFECTING THE BUSINESS OF THE
COMPANY GENERALLY.
AGGRESSIVE GROWTH STRATEGY
The Company intends to pursue an aggressive growth strategy over the next
several years. From July 1, 1996 through the end of fiscal 1996, the Company
opened 16 new stores, growing to 108 stores. The Company has opened 32 stores
during fiscal 1997 through September 1, 1997 and expects to open approximately
15 additional stores during the remainder of fiscal 1997. In a typical new
store, capital expenditures (net of landlord contribution) approximate $200,000.
In addition, a new store typically requires a $100,000 investment in inventory
(net of merchandise payables) and other pre-opening expenses. The Company
anticipates that it will spend a total of approximately $14.0 million in fiscal
1997 for capital expenditures and inventory relating to new store openings. The
Company currently plans to spend at least $19.0 million to open at least 60 new
stores in fiscal 1998. The Company reviews its expansion plans on a regular
basis, in light of opportunities that may arise, and may determine to open a
larger number of stores in fiscal 1998 than currently planned.
The Company's future operating results will depend largely upon its ability
to open and operate new stores successfully and to manage a growing business
profitably. This will depend upon a number of factors, including (i) the
availability of suitable store locations, (ii) the ability to negotiate
acceptable lease terms, (iii) the ability to timely complete necessary
construction or remodeling, (iv) the ability to obtain an adequate supply of
finished products, (v) the ability to hire and train qualified managers and
other employees, (vi) the ability to continue to upgrade its management
information and distribution systems, (vii) the ability to manage increased
distribution, including the ability to relocate the Company's distribution
center to a larger facility, (viii) the ability to successfully integrate new
stores into the Company's existing operations, and (ix) the ability to recognize
and respond to regional differences in customer preferences (such as
climate-related preferences). All of the Company's current stores are located in
the eastern half of the United States, primarily in regional malls in and around
major metropolitan areas. The Company intends to focus its expansion by
establishing clusters of stores in states in which it already has stores or in
contiguous states.
There can be no assurance that the Company will be able to achieve its
planned expansion on a timely and profitable basis or that it will be able to
achieve results similar to those achieved in existing locations in prior
periods. Operating margins may also be adversely affected during periods in
which expenses have been incurred in anticipation of new store openings. Any
failure to successfully and profitably execute its expansion plans could have a
material adverse effect on the Company.
The Company believes that cash generated from operations and funds available
under the Company's revolving line of credit will be sufficient to fund its
capital requirements at least through fiscal 1998. However, there can be no
assurance that the Company will not be required to seek additional funds for its
capital needs. The inability to secure such funds or to obtain such funds on
acceptable terms could have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Store Expansion
Program."
CHANGES IN COMPARABLE STORE SALES RESULTS FROM PERIOD TO PERIOD
Numerous factors affect comparable store sales results, including among
others, weather conditions, fashion trends, the retail sales environment,
economic conditions and the Company's success in executing its business
strategy. The Company's quarterly comparable store sales results have fluctuated
significantly in the past. The Company does not expect its comparable store
sales to continue to increase at rates similar
8
<PAGE>
to those achieved in recent periods. Moreover, there can be no assurance that
comparable store sales for any particular period will not decrease in the
future. Fluctuations in the Company's comparable store sales results could cause
the price of the Common Stock to fluctuate significantly and could have a
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
MERCHANDISE TRENDS
The Company's continued success will depend in part on its ability to
anticipate and respond to fashion trends and consumer preferences. The Company's
design, manufacturing and distribution process generally requires up to nine
months, during which time fashion trends and consumer preferences may change.
Any failure by the Company to anticipate, identify or respond to future fashion
trends may adversely affect customer acceptance of its products or require
substantial markdowns, which could have a material adverse effect on the
Company. See "Business--Merchandising."
DISRUPTIONS IN RECEIVING AND DISTRIBUTION
All of the Company's merchandise is currently shipped directly from
manufacturers through freight consolidators to the Company's distribution center
in West Caldwell, New Jersey. The Company's operating results depend in large
part on the orderly operation of this receiving and distribution process, which
depends on manufacturers' adherence to shipping schedules and the Company's
effective management of the distribution center. In addition, there can be no
assurance that the Company has anticipated, or will be able to anticipate, all
of the changing demands which its expanding operations will impose on its
receiving and distribution system, nor can there be any assurance that events
beyond the control of the Company, such as a strike or other disruption
affecting the parcel service that delivers substantially all of the Company's
merchandise to its stores, will not result in delays in delivery of merchandise
to stores.
The Company intends to relocate its distribution facility during fiscal 1998
to accommodate future growth and is in the process of selecting a suitable site.
The Company is also seeking additional interim warehouse space to accommodate
its growth prior to moving into the new facility. There can be no assurance that
delays, cost overruns or other complications in the relocation to a new
distribution facility will not result in a significant interruption in the
receipt and distribution of merchandise. Any such event could have a material
adverse effect on the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity" and
"Business--Distribution."
RELIANCE ON INFORMATION SYSTEMS
The Company relies on various information systems to manage its operations
and regularly makes investments to upgrade, enhance or replace such systems.
During fiscal 1998, the Company intends to install a warehouse management system
to facilitate more efficient receiving and distribution of inventory and intends
to replace its current point-of-sale ("POS") software with an upgraded system.
Any delays or difficulties in executing transitions to these or other new
systems, or any other disruptions affecting the Company's information systems,
could have a material adverse effect on the Company. See "Business-- Management
Information Systems."
DEPENDENCE ON UNAFFILIATED MANUFACTURERS AND INDEPENDENT AGENTS
The Company does not own or operate any manufacturing facilities and is
therefore dependent upon independent third parties for the manufacture of all of
its products. The Company's products are currently manufactured to its
specifications pursuant to purchase orders by more than 50 independent
manufacturers located primarily in Asia, principally in Taiwan, Hong Kong,
Turkey, China, Thailand, the Philippines and Sri Lanka. In fiscal 1996,
approximately 38% of the Company's merchandise was manufactured in Taiwan, 25%
in Hong Kong, 8% in Turkey and 7% in China. All the merchandise that the Company
purchases from Taiwan is purchased through a single independent agent located in
Taiwan which has an exclusive arrangement with the Company. In addition,
substantially all merchandise that the Company
9
<PAGE>
purchases from Hong Kong, China and the Philippines, representing approximately
35% of the Company's total purchases in fiscal 1996, is purchased through a
single Hong Kong-based trading company which has an exclusive arrangement with
the Company. Excluding the approximately 20 manufacturers represented by this
trading company, the Company's ten largest manufacturers accounted for 44% of
the Company's total purchases during fiscal 1996, with the top four such
manufacturers each accounting for between 5% and 8%. The Company has no
exclusive or long-term contracts with its manufacturers and competes with other
companies for manufacturing facilities. In addition, the Company has no formal
written agreement with the Hong Kong-based trading company. Although management
believes that it has established close relationships with the Company's
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 the Company. See "Business--Sourcing and
Procurement."
RISKS OF USING FOREIGN MANUFACTURERS; POSSIBLE ADVERSE IMPACT OF UNAFFILIATED
MANUFACTURERS' FAILURE TO COMPLY WITH ACCEPTABLE LABOR PRACTICES
The Company's business is subject to the risks generally associated with
purchasing products from foreign countries, such as foreign governmental
regulations, political instability (including uncertainty concerning the future
of Hong Kong following the transfer of Hong Kong to China on July 1, 1997),
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
the Company's manufacturing sources are located. The Company cannot predict the
effect that such factors will have on its business arrangements with foreign
manufacturing sources. If any such factors were to render the conduct of
business in a particular country undesirable or impractical, or if the Company's
current foreign manufacturing sources were to cease doing business with the
Company for any reason, the Company's business and operating results could be
adversely affected. The Company's business is also subject to the risks
associated with changes in United States legislation and regulations relating to
imported apparel products, including quotas, duties, taxes and other charges or
restrictions on imported apparel. The Company cannot predict whether such
changes or other charges or restrictions will be imposed upon the importation of
its products in the future, or, generally, the effect any such event would have
on the Company. However, if China were to lose its Most Favored Nation trading
status with the United States, such event could have a material adverse effect
on the Company. See "Business--Sourcing and Procurement."
The Company requires its independent manufacturers to operate in compliance
with applicable laws and regulations. While the Company's purchasing guidelines
promote ethical business practices, the Company does not control such
manufacturers or their labor practices. The violation of labor or other laws by
an independent manufacturer of the Company, 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 the Company. See
"Business--Sourcing and Procurement."
FOREIGN CURRENCY FLUCTUATIONS
The Company conducts its business in United States dollars. However, because
the Company purchases substantially all of its products overseas, the cost of
these products may be affected by changes in the values of the relevant
currencies. To date, the Company has not considered it necessary to hedge
against foreign currency fluctuations. Although foreign currency fluctuations
have had no material adverse effect on the Company in the past, there can be no
assurance that such fluctuations will not have such an effect on the Company in
the future.
DEPENDENCE ON KEY PERSONNEL
The leadership of Ezra Dabah, the Company's Chief Executive Officer and
Chairman of the Board, and of Stanley B. Silver, the Company's President and
Chief Operating Officer, has been instrumental in the Company's success. The
loss of the services of either Mr. Dabah or Mr. Silver could have a material
10
<PAGE>
adverse effect on the Company. The Company has entered into employment
agreements with Messrs. Dabah and Silver, but there can be no assurance that the
Company will be able to retain their services. In addition, other members of
management have substantial experience and expertise in the Company's 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 the Company grows, could
have a material adverse effect on the Company. The Company is not protected by
any key-man or similar life insurance for any of its executive officers. See
"Management."
COMPETITION
The children's apparel retail business is highly competitive. The Company
competes in substantially all of its 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.
and Kids "R" Us (a division of Toys "R" Us, Inc.). The Company also competes
with a wide variety of local and regional specialty stores and with other
national retail chains and catalog companies. One or more of its competitors are
present in substantially all of the malls in which the Company has stores. Many
of the Company's competitors are larger than the Company and have access to
significantly greater financial, marketing and other resources than the Company.
There can be no assurance that the Company will be able to compete successfully
against existing or future competition. See "Business--Competition."
PROPRIETARY CREDIT CARD
Sales under "The Children's Place" credit card program represented
approximately 15% of the Company's net sales in fiscal 1996. The Company's
private label credit card program is operated by an unaffiliated third party,
Hurley State Bank, through its agent, SPS Payment Services, Inc. ("SPS"), on
terms that currently do not provide for recourse against the Company. In
connection with its efforts to increase the number of cardholders and encourage
use of its proprietary credit card, the Company, from time to time, may consider
changing these arrangements to provide for either full or partial recourse. Any
such changes may subject the Company to losses from unpaid charges and could
have a material adverse effect on the Company. See "Business--Marketing."
FLUCTUATIONS IN QUARTERLY RESULTS AND SEASONALITY
As is the case with many apparel retailers, the Company experiences seasonal
fluctuations in its net sales and net income, with the greater amount of the
Company's net sales and net income typically realized during the third and
fourth quarters of the fiscal year, which include the back-to-school and holiday
seasons. Net sales and net income are generally weakest during the first two
fiscal quarters and are often lower during the second fiscal quarter than during
the first fiscal quarter. The Company has experienced first and second quarter
losses in prior years and expects to experience second quarter losses, and may
experience first quarter losses, in the future.
The Company's 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 expenses, net sales contributed by new stores, increases or decreases
in comparable store sales, adverse weather conditions, shifts in timing of
certain holidays, changes in the Company's merchandise mix and overall economic
conditions. Any failure by the Company to meet its business plans for the third
and fourth quarter of any fiscal year would have a material adverse effect on
the Company's earnings, which in all likelihood would not be offset by
satisfactory results achieved in other quarters of the same fiscal year. In
addition, because the Company's expense levels are based in part on expectations
of future sales levels, a shortfall in expected sales could result in a
disproportionate decrease in the Company's net income. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results and Seasonality."
11
<PAGE>
IMPACT OF ECONOMIC, REGIONAL AND OTHER BUSINESS CONDITIONS
The Company's 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. All of the Company's stores
are located in the eastern half of the United States and the Company anticipates
that substantially all stores to be opened in fiscal 1997 and fiscal 1998 will
be in states where the Company presently has operations or in contiguous states.
Therefore, the Company is, and will continue to be, susceptible to changes in
regional economic conditions, weather conditions, demographic and population
characteristics, consumer preferences and other regional factors. The Company is
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 the Company's 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 the Company. See
"Business--Company Stores."
NET OPERATING LOSS CARRYFORWARDS
The Company reported net operating loss carryforwards ("NOLs") of $57.3
million on its fiscal 1995 income tax return. The Company expects that $11.4
million of these NOLs will be utilized to offset taxable income earned by the
Company in its 1996 taxable year, leaving $45.9 million to be utilized in
subsequent taxable years. The Company does not believe that this offering will
affect the Company's ability to utilize these NOLs. However, because the amount
and availability of these NOLs are subject to review by the Internal Revenue
Service, there can be no assurance that the NOLs would not be reduced or their
use limited as the result of an audit of the Company's tax returns. In addition,
future events, including certain transactions involving outstanding shares of
the Company's Common Stock, could affect the Company's ability to utilize its
NOLs. If the amount of these NOLs were reduced or their availability limited,
the Company could be liable for additional taxes with respect to its 1996
taxable year, and its tax liability could be increased for its current and
subsequent taxable years. See Note 9 of the Notes to Financial Statements.
CONTROL BY CERTAIN STOCKHOLDERS
After the sale of the shares of Common Stock offered hereby, Ezra Dabah and
certain members of his family will own beneficially 11,920,440 shares of the
Company's Common Stock, constituting approximately 48.3% 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"),
together with a former consultant to SKM (collectively with the SK Funds, the
"SKM Investors"), will own approximately 7,659,889 shares or 31.1% of the
outstanding Common Stock (assuming that the underwriters' over-allotment option
is not exercised). See "Security Ownership of Certain Beneficial Owners and
Management." Pursuant to a stockholders agreement, the SKM Investors and all the
Company's other current stockholders, who will own in the aggregate 82.9% of the
outstanding Common Stock after this offering, have agreed to vote for the
election of two nominees of the SKM Investors and three nominees of Ezra Dabah
to the Company's Board of Directors. As a result, the SKM Investors and Ezra
Dabah will be able to control the election of five of the Company's seven
directors. In addition, if the SKM Investors and Mr. Dabah were to vote
together, they would be able to determine the outcome of any matter submitted to
a vote of the Company's stockholders for approval, including the election of the
remaining two directors. See "Security Ownership of Certain Beneficial Owners
and Management--Stockholders Agreement" and "Description of Capital
Stock--Certain Certificate of Incorporation Provisions."
POTENTIAL IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of Common Stock in the public market following
this offering could have an adverse effect on the market price of the Common
Stock. The 4,000,000 shares offered hereby will be freely tradeable in the
public market, except to the extent purchased by affiliates of the Company. All
of the remaining 20,622,103 shares to be outstanding upon consummation of this
offering will become eligible for sale in the public market, subject to
compliance with the volume and manner of sale requirements of Rule 144
promulgated under the Securities Act, upon the expiration of "lock-up"
agreements with the
12
<PAGE>
Underwriters not to sell such shares until 180 days after the date of this
Prospectus. Holders of such shares have contractual rights to have those shares
registered with the Securities and Exchange Commission for resale to the public.
In addition, following this offering, the Company intends to file a registration
statement with the Securities and Exchange Commission covering shares of Common
Stock issued or reserved for issuance under the 1996 Stock Option Plan, the
Company's 1997 Stock Option Plan and the Company's 1997 Employee Stock Purchase
Plan and, upon effectiveness of such registration statement, any shares
subsequently issued under such plans will be eligible for sale in the public
market, except to the extent restricted by lock-up agreements and subject to
compliance with Rule 144 in the case of affiliates of the Company. See "Shares
Eligible for Future Sale."
UNCERTAINTY AS TO FUTURE EXISTENCE OF ACTIVE TRADING MARKET; POSSIBLE VOLATILITY
OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. Although the Common Stock has been approved for listing on the Nasdaq
National Market, there can be no assurance that an active trading market in the
Common Stock will develop subsequent to this offering or, if developed, that it
will be sustained or that the market price of the Common Stock will not decline
below the initial public offering price. The initial public offering price was
determined by negotiations between the Company and the Representatives. For a
description of the factors considered in determining the initial public offering
price, see "Underwriting." 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 the operating performance of the Company. Furthermore, there can be no
assurance that the Company will continue to satisfy the requirements to have its
Common Stock listed on the Nasdaq National Market. In addition, the Company
believes that factors such as quarterly fluctuations in its financial results,
its comparable store sales results, trading prices for common stock of other
retailers, the overall economy and the condition of the financial markets could
cause the price of the Common Stock to fluctuate substantially.
MATERIAL BENEFITS TO AN UNDERWRITER
Approximately $5.2 million of the net proceeds of this offering will be used
to redeem two-thirds of a warrant (the "Legg Mason Warrant") held by Legg Mason
Wood Walker, Incorporated ("Legg Mason"), one of the Representatives of the
Underwriters of this offering. To the extent that the initial public offering
price had been greater or less than $14.00 per share, the redemption price to be
paid to Legg Mason would have been increased or decreased. As a result, Legg
Mason may be deemed to have a conflict of interest with respect to the
determination of the initial public offering price of this offering.
Accordingly, the initial public offering price was established at a price no
greater than that recommended by Montgomery Securities in its capacity as a
"qualified independent underwriter" (as defined in the Conduct Rules of the
National Association of Securities Dealers, Inc.). See "Underwriting."
DILUTION
Purchasers of Common Stock in this offering will incur immediate dilution of
$12.00 per share in net tangible book value per share of Common Stock. See
"Dilution."
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") and Amended and Restated
Bylaws (the "Bylaws") may be deemed to 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, (i)
classify the Company's Board of Directors into three classes, each of which will
serve for different three year periods, (ii) provide that only the chairman of
the Board of Directors may call special meetings of the stockholders, (iii)
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, (iv)
provide that all vacancies on the Company's 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, (v) establish certain advance notice
13
<PAGE>
procedures for nominations of candidates for election as directors and for
stockholder proposals to be considered at stockholders' meetings, and (vi)
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, the Company is subject to the provisions of Section 203
of the Delaware General Corporation Law (the "DGCL") which would require a
two-thirds vote of stockholders for any business combination (such as a merger
or sale of all or substantially all of the Company's assets) between the Company
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 the Common Stock.
See "Description of Capital Stock--Certain Certificate of Incorporation and
Bylaw Provisions" and "--Delaware Law and Certain Charter Provisions."
14
<PAGE>
COMPANY HISTORY
The Company was founded in 1969 as a children's retailer. In 1989, the
Company was purchased by D.G. Acquisition Corp. ("DG Acquisition"), a company
owned by Ezra Dabah and certain members of his family, from Federated Department
Stores. During fiscal 1990 and 1991, the Company experienced substantial losses
due to, among other things, the legacy of its outmoded merchandising strategy of
selling brands at discount prices and a poor real estate portfolio, including
many stores in need of remodeling. Consequently, in 1991, Mr. Dabah, who was
serving as Chairman of the Board of Directors, assumed the position of Chief
Executive Officer and became involved in the Company's day-to-day operations.
Mr. Dabah also recruited Stanley B. Silver, a seasoned retail executive, as
Chief Operating Officer.
Under the leadership of Messrs. Dabah and Silver, the Company's management
team recognized that a strategy of selling branded merchandise at discount
prices was not sustainable given the high occupancy costs associated with the
Company's large, mall-based locations. Accordingly, the Company repositioned its
merchandise strategy to one in which it would design, contract to manufacture
and sell its own line of private label apparel and accessories under "The
Children's Place" brand name at everyday value prices. At the same time, the new
management team took steps to stabilize the Company's operations by closing
approximately half of the Company's 170 stores and focusing the Company's
operations in the eastern half of the United States. The Company also developed
a new store prototype that reflected a reduction in average store size from
5,500 square feet to 3,500 square feet. In addition, in July 1992, management
commenced negotiations with the Company's creditors, which resulted in a
consensual restructuring of the Company's indebtedness by the end of 1993.
By 1993, the Company had fully implemented its merchandising strategy and
was exclusively selling its internally designed apparel and accessories under
"The Children's Place" brand name at everyday value prices. As a result of the
Company's successful implementation of its new merchandising strategy and its
restructured real estate portfolio, the Company generated net income in fiscal
1993 and improved its operational performance in each succeeding year as it
continued to refine its merchandising and operating strategies. However, debt
repayment obligations prevented the Company from investing capital into the
expansion of its store base. Accordingly, in late fiscal 1995, the Company began
to look for new financing.
In July 1996, the Company consummated private placement transactions with
the SKM Investors and Nomura Holding America Inc. (the "Noteholder") (such
transactions, collectively, the "1996 Private Placement"), which resulted in net
proceeds to the Company of $37.4 million. These proceeds enabled the Company to
repay a substantial portion of its outstanding indebtedness, redeem certain
outstanding shares of Common Stock and begin to implement an aggressive program
of opening new stores. From July 1, 1996 to September 1, 1997, the Company has
increased the number of its stores from 93 to 140. For a full description of the
1996 Private Placement, see "Certain Relationships and Related Transactions."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the shares
of Common Stock offered hereby, after deducting the underwriting discount and
estimated expenses of the offering, are estimated to be $50.7 million. Of such
net proceeds, the Company will use $20.5 million to pay the principal amount of,
and accrued interest on, the Company's 12% Senior Subordinated Notes due 2002
(the "Senior Subordinated Notes") held by the Noteholder. In addition, the
Company will use $25.8 million of the net proceeds from the offering to
repurchase a warrant (the "Noteholder Warrant") held by the Noteholder and
two-thirds of the Legg Mason Warrant. The balance of the net proceeds, estimated
to be $4.4 million, will be used to reduce borrowings outstanding (and thus
increase borrowing availability) under the Company's senior revolving credit
facility (the "Foothill Credit Facility") with Foothill Capital Corporation
("Foothill Capital"). Outstanding borrowings under the Foothill Credit Facility
totalled $14.4 million at September 18, 1997. Pending such uses, the Company
intends to invest the net proceeds of this offering in investment-grade,
interest-bearing securities. See "Certain Relationships and Related
Transactions," "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Liquidity and Capital Resources" and "Underwriting."
In the event that the underwriters' over-allotment option is exercised, the
Company will not receive any proceeds from the sale of shares pursuant to such
option.
DIVIDEND POLICY
The Company has never paid dividends on its Common Stock and does not
anticipate paying dividends on its Common Stock in the foreseeable future. It is
the present intention of the Company's Board of Directors to retain any future
earnings of the Company to finance its operations and the expansion of its
business. The Foothill Credit Facility prohibits any payment of dividends. Any
determination in the future to pay dividends will depend upon the Company's
earnings, financial condition, cash requirements, future prospects, covenants in
the Company's credit facility and any future debt instruments and such other
factors as the Board of Directors deems appropriate at the time.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
August 2, 1997 (i) on an actual basis (giving effect to the Stock Split), (ii)
as adjusted to give pro forma effect to the Series B Conversion and (iii) as
further adjusted to give effect to the sale of the 4,000,000 shares of Common
Stock offered by the Company hereby and the application of the estimated net
proceeds therefrom as described under "Use of Proceeds" and to the issuance of
201,414 shares upon the exercise of one-third of the Legg Mason Warrant. The
table should be read in conjunction with the historical financial statements of
the Company and the notes thereto and the other financial information appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF AUGUST 2, 1997
------------------------------------
<S> <C> <C> <C>
ACTUAL PRO FORMA AS ADJUSTED
--------- ---------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Senior Subordinated Notes....................................................... $ 20,000 $20,000 $0
Less: Unamortized discount.................................................... (1,561)(1) (1,561)(1) 0
Other long-term debt and capital lease obligations (less current portion of
$477)......................................................................... 12 12 12
Total long-term debt and capital lease obligations (less current portion
of $477)................................................................ 18,451 18,451 12
Stockholders' equity:
Preferred Stock, $1.00 par value:
Shares authorized -- 1,000,000(2)
Shares outstanding -- none
Series A Common Stock, $.10 par value......................................... 1,276 -- --
Shares authorized -- 27,600,000
Shares outstanding -- actual 12,760,800(3); pro forma 0; as adjusted 0
Series B Common Stock, $.10 par value......................................... 5 -- --
Shares authorized -- 70,000
Shares outstanding -- actual 47,238; pro forma 0; as adjusted 0
Common Stock, $.10 par value:
Shares authorized -- 100,000,000(2)
Shares outstanding -- actual 0; pro forma 20,420,689(3); as adjusted
24,622,103(4)............................................................. -- 2,042 2,462
Additional paid-in capital.................................................... 57,354 56,593 81,146
Accumulated deficit(5)........................................................ (32,558) (32,558) (34,353)
--------- ---------- -----------
Total stockholders' equity................................................ 26,077 26,077 49,255
--------- ---------- -----------
Total capitalization.................................................. $ 44,528 $44,528 $49,267
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
- ------------------------
(1) The unamortized discount on the Senior Subordinated Notes is attributable to
the issuance of the Noteholder Warrant.
(2) Subsequent to August 2, 1997, the Company's Certificate of Incorporation was
amended to increase the number of authorized shares of Common Stock to
100,000,000 and the number of authorized shares of Preferred Stock to
1,000,000.
(3) Does not include 2,739,348 shares issuable upon exercise of the Noteholder
Warrant and the Legg Mason Warrant or shares issuable upon exercise of stock
options outstanding on August 2, 1997.
(4) Does not include shares issuable upon exercise of stock options outstanding
on August 2, 1997.
(5) The as adjusted accumulated deficit reflects the effect of an extraordinary
item representing the write-off of unamortized debt issuance costs and
unamortized debt discount, net of taxes, as a result of the repayment of the
Senior Subordinated Notes in connection with this offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
17
<PAGE>
DILUTION
As of August 2, 1997, the Company's net tangible book value (defined as
total assets, excluding deferred financing costs, less total liabilities) was
$24.6 million, or $1.21 per share of Common Stock (adjusted to give pro forma
effect to the Stock Split and to the Series B Conversion). Dilution represents
the difference between the amount per share of Common Stock paid by investors in
this offering, and the net tangible book value per share of Common Stock after
this offering. After giving effect to the sale by the Company of 4,000,000
shares of Common Stock in this offering and the use of proceeds therefrom as
described in "Use of Proceeds" and to the issuance of 201,414 shares upon the
exercise of one-third of the Legg Mason Warrant, the pro forma net tangible book
value of the Company at August 2, 1997 would have been $49.3 million, or $2.00
per share of Common Stock. This represents an immediate increase in net tangible
book value of $0.79 per share of Common Stock to the Company's existing
stockholders, and an immediate dilution of $12.00 per share of Common Stock to
investors purchasing in this offering. This per share dilution is illustrated in
the following table:
<TABLE>
<S> <C> <C>
Initial public offering price............................................... $ 14.00
---------
Pro forma net tangible book value before this offering.................... $1.21
Increase in pro forma net tangible book value attributable to this
offering(1)............................................................. $0.79
---------
Pro forma net tangible book value after this offering....................... $ 2.00
---------
Dilution to investors purchasing in this offering........................... $ 12.00
---------
</TABLE>
- ------------------------
(1) Reflects the receipt of the net proceeds from the sale of 4,000,000 shares
of Common Stock in this offering and the use of $25.8 million of such net
proceeds to repurchase the Noteholder Warrant and two-thirds of the Legg
Mason Warrant.
The following table summarizes, as of August 2, 1997, the differences
between the existing stockholders (including Legg Mason) and the investors
purchasing in this offering (adjusted to give pro forma effect to the Stock
Split and to the Series B Conversion), with respect to the number of shares of
Common Stock purchased, the total consideration paid and the average price per
share of Common Stock paid. The determination of the total consideration and
average price per share paid by existing stockholders has been based upon the
consideration paid by stockholders to acquire the Company and subsequent
contributions to the capital of the Company, net of amounts paid to redeem
shares.
<TABLE>
<CAPTION>
AVERAGE
PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders................................ 20,622,103 83.8% $ 58,754,000 51.2% $ 2.85
New investors........................................ 4,000,000 16.2% $ 56,000,000 48.8% $ 14.00
------------ ----- -------------- -----
Total.............................................. 24,622,103 100.0% $ 114,754,000 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>
The foregoing tables assume no exercise of outstanding stock options after
August 2, 1997. At August 2, 1997, 1,444,080 shares of Common Stock were subject
to outstanding options, at a weighted average exercise price of $2.677 per
share, of which options for 577,632 shares were exercisable. To the extent any
such stock options are exercised, there will be further dilution to new
investors. See "Management--Stock Option and Other Plans for Employees--Stock
Option Plans."
18
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table sets forth certain historical and pro forma financial
and operating data for the Company. The selected historical financial data for
the Company is qualified by reference to, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," the financial statements and notes thereto and other financial
information appearing elsewhere in this Prospectus. The statement of operations
data set forth below for fiscal 1994, 1995 and 1996, and the balance sheet data
as of February 3, 1996 and February 1, 1997, have been derived from the
Company's historical financial statements, which statements have been audited by
Arthur Andersen LLP, independent public accountants ("Arthur Andersen"), as
indicated in their report included elsewhere herein. The statement of operations
data set forth below for fiscal 1993, and the balance sheet data as of January
29, 1994 and January 28, 1995, have been derived from the Company's historical
financial statements audited and reported on by Arthur Andersen, which are not
included in this Prospectus. The historical financial data for fiscal 1992 have
been derived from the Company's historical financial statements audited by
another independent public accounting firm, which are not included in this
Prospectus. The historical information for the six months ended August 3, 1996
and August 2, 1997, and as of August 2, 1997, has been derived from the
unaudited financial statements of the Company and reflects, in the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial position as of, and the results for,
such interim periods. The results of operations for the six months ended August
2, 1997 are not necessarily indicative of results to be expected for the full
fiscal year.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED(1) ENDED
--------------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
JANUARY 30, JANUARY 29, JANUARY 28, FEBRUARY 3, FEBRUARY 1, AUGUST 3, AUGUST 2,
1993 1994 1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $ 114,126 $ 96,649 $ 107,953 $ 122,060 $143,838 $ 56,412 $72,737
Gross profit....................... 28,764 28,874 33,724 38,626 54,052 18,112 23,820
Selling, general and administrative
expenses......................... 28,051 24,156 27,873 30,757 36,251 15,926 19,287
Pre-opening costs.................. 41 79 178 311 982 212 1,222
Depreciation and amortization...... 3,664 3,275 3,344 3,496 4,017 1,854 2,615
----------- ----------- ----------- ----------- ----------- ----------- ----------
Operating income (loss)(2)......... (15,670 ) 1,364 2,329 4,062 12,802 120 696
Interest expense, net.............. 2,562 1,150 1,303 1,925 2,884 1,182 1,815
Other expense, net................. 0 0 0 447 396 379 106
----------- ----------- ----------- ----------- ----------- ----------- ----------
Income (loss) before income taxes,
extraordinary items and
cumulative effect of accounting
change........................... (18,232 ) 214 1,026 1,690 9,522 (1,441 ) (1,225)
Provision (benefit) for income
taxes(3)......................... 0 53 54 36 (20,919 ) 21 (492)
----------- ----------- ----------- ----------- ----------- ----------- ----------
Income (loss) before extraordinary
items............................ (18,232 ) 161 972 1,654 30,441 (1,462 ) (733)
Extraordinary gains(4)............. 0 15,169 490 0 0 0 0
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net income (loss)(5)............... $ (18,232 ) $ 14,780 $ 1,462 $ 1,654 $ 30,441 $ (1,462 ) $ (733)
----------- ----------- ----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------- ----------- ----------
Pro forma net income (loss) per
common share(6).................. $ 1.28 $ (0.03)
----------- ----------
----------- ----------
Pro forma weighted average common
shares outstanding(6)............ 23,804,185 23,804,185
Pro forma supplemental net income
per common share(7).............. $ 1.24 $ 0.01
SELECTED OPERATING DATA:
Number of stores open at end of
period........................... 87 87 87 91 108 95 134
Comparable store sales increase
(decrease)(8)(9)................. 8.5% (2.2% ) 13.2% 10.0% 8.6% 8.1% 2.5%
Average net sales per store (in
thousands)(9)(10)................ $ 1,123 $ 1,124 $ 1,264 $ 1,362 $ 1,479 $ 611 $ 618
Average square footage per
store(11)........................ 5,049 4,954 4,786 4,528 4,284 4,392 4,147
Average net sales per gross square
foot(9)(12)...................... $ 220 $ 226 $ 259 $ 292 $ 335 $ 138 $ 146
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AT
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JANUARY 30, JANUARY 29, JANUARY 28, FEBRUARY 3, FEBRUARY 1, AUGUST 2,
1993 1994 1995 1996 1997 1997
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)..................... $ (52,540) $ (11,621) $ (10,398) $ (17,630) $ 11,951 $ 2,079
Total assets.................................. 31,107 26,600 26,556 32,073 64,479 79,748
Long-term debt................................ 66,311 23,719 21,626 15,735 20,504 18,928
Stockholders' equity (deficit)................ (52,061) (15,338) (13,388) (11,735) 27,298 26,077
</TABLE>
- ------------------------
(1) All references to the Company's 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 1996 mean the fiscal year ended February 1,
1997. Fiscal 1995 was a 53-week year.
(2) The operating income (loss) for fiscal 1992 included a reorganization and
restructuring charge of $12.7 million related to a strategic operational
restructuring plan to close 93 stores, reduce other stores' square footage
and reduce other administrative overhead costs.
(3) 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. See Note 9 of the Notes to Financial Statements.
(4) Extraordinary gains during fiscal 1993 and fiscal 1994 represented
forgiveness of debt in connection with a debt restructuring undertaken with
the consent of the Company's creditors.
(5) Net income for fiscal 1993 included a $550,000 charge related to the
cumulative effect of a change in accounting for inventory capitalization.
(6) Pro forma net income (loss) per common share is calculated by dividing net
income (loss) by the pro forma weighted average common shares outstanding.
The pro forma weighted average common shares outstanding used in computing
pro forma net income (loss) per share for fiscal 1996 and the first six
months of fiscal 1997 are based on the number of common shares and common
share equivalents outstanding after giving effect to (i) the 1996 Private
Placement described elsewhere in this Prospectus, (ii) the cancellation of
the preferred stock discussed in Note 10 of the Notes to Financial
Statements, (iii) the granting of management options in conjunction with the
1996 Private Placement as discussed in Note 11 of the Notes to Financial
Statements and (iv) the Stock Split and the Series B Conversion described
elsewhere in this Prospectus, as if all such events had occurred on the
first day of fiscal 1996.
(7) The pro forma supplemental net income per common share gives effect to the
elimination of interest expense on long-term debt to be repaid from the net
proceeds of this offering, as if such repayment had occurred on the first
day of the period indicated. The pro forma weighted average common shares
outstanding of 25,408,102 used in computing pro forma supplemental net
income per common share is based upon the number of common shares and common
share equivalents outstanding after giving effect to the repurchase of
certain warrants, the issuance in this offering of those shares the net
proceeds of which are to be used to repay long-term debt and to repurchase
such warrants, and the events described in clauses (i) through (iv) of
footnote (6).
(8) The Company defines comparable store sales as net sales from stores that
have been open for more than 14 full months and have not been substantially
remodeled during that time.
(9) For purposes of determining comparable store sales increase (decrease),
average net sales per store and average net sales per gross square foot,
fiscal 1995 results were recalculated based on a 52-week year.
(10) Represents net sales from stores open throughout the full period divided by
the number of such stores.
(11) 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.
(12) Represents net sales from stores open throughout the full period divided by
the gross square footage of such stores.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN THIS SECTION, AS WELL AS THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN
THIS PROSPECTUS. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR
REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE. THE FOLLOWING DISCUSSION OF THE COMPANY'S HISTORICAL
FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH
THE HISTORICAL FINANCIAL STATEMENTS AND THE NOTES THERETO AND THE OTHER
FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY'S FISCAL YEAR ENDS ON THE SATURDAY CLOSEST TO JANUARY 31 OF THE
FOLLOWING YEAR. THE RESULTS FOR FISCAL 1994, 1995, AND 1996 REPRESENT THE
52-WEEK PERIOD ENDED JANUARY 28, 1995, THE 53-WEEK PERIOD ENDED FEBRUARY 3, 1996
AND THE 52-WEEK PERIOD ENDED FEBRUARY 1, 1997, RESPECTIVELY.
GENERAL
The Company is a leading specialty retailer of children's apparel and
accessories. As of September 1, 1997, the Company operated 140 stores primarily
in regional shopping malls in the eastern half of the United States. In July
1996, following the 1996 Private Placement, the Company began to implement an
aggressive growth strategy designed to capitalize on its business strengths and
its strong store economics. From July 1, 1996 through the end of fiscal 1996,
the Company opened a total of 16 stores, growing to 108 stores. During fiscal
1997 through September 1, 1997, the Company has opened 32 stores. The Company
intends to continue its expansion program and currently plans to open
approximately 15 additional stores during the remainder of fiscal 1997 and at
least 60 stores in fiscal 1998.
As a result of increases in comparable store sales and the opening of new
stores, the Company's net sales increased from $108.0 million in fiscal 1994 to
$143.8 million in fiscal 1996 and operating income increased from $2.3 million
to $12.8 million over the same period. During the past 12 months, the Company
has concentrated on building the infrastructure necessary to manage its growth
strategy, including the opening and remodeling of stores. During fiscal 1996 and
the first six months of fiscal 1997, the Company hired additional management
personnel in the areas of store operations, real estate, store construction,
merchandising and finance. In fiscal 1998, the Company intends to relocate its
distribution center to a larger facility and to install a warehouse management
system to accommodate the Company's continued growth.
The Company has achieved comparable store sales increases on an annual basis
in each year following fiscal 1993. The Company defines its 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. The Company
reported comparable store sales growth over prior years of 13.2%, 10.0% and 8.6%
during fiscal 1994, fiscal 1995 and fiscal 1996, respectively, and 2.5% in the
first six months of fiscal 1997. The Company believes that these increases were
primarily the result of a successful merchandising and operational repositioning
of the Company, including the restructuring of its real estate portfolio. The
Company does not expect comparable store sales to continue to increase at rates
similar to those that it has experienced in recent years.
The Company incurs significant store pre-opening costs, consisting primarily
of payroll, supply and advertising expenses. The Company's policy is to expense
these pre-opening costs as incurred.
The Company anticipates repaying the $20.0 million principal amount of the
Senior Subordinated Notes, together with accrued interest, out of the net
proceeds of its initial public offering. Consequently, the Company expects to
incur a non-cash, extraordinary charge to earnings during the third quarter of
fiscal 1997 of approximately $1.7 million, resulting from the write-off of
unamortized debt issuance costs
21
<PAGE>
and unamortized debt discount, net of taxes. This charge will negatively impact
the Company's third quarter fiscal 1997 results of operations.
During fiscal 1996 and the preceding fiscal years, the Company paid federal
income taxes based on the Alternative Minimum Tax ("AMT") at an effective tax
rate of 2% and minimum taxes in most states due to its utilization of its NOL
carryforwards. At the end of fiscal 1996, management determined, based on the
Company's results of operations and projected future results, that it was likely
that the NOL carryforwards could be utilized in subsequent years to offset tax
liabilities. As a result of this determination, the Company reversed a valuation
allowance on the Company's deferred tax asset on its balance sheet. Accordingly,
the Company's net income for fiscal 1997 and future years will require
calculation of a tax provision based on statutory rates in effect. Until the NOL
is fully utilized or expires, this tax provision will not be paid in cash (other
than to the extent of the federal AMT and state minimum taxes) but will reduce
the deferred tax asset on the balance sheet.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
JANUARY 28, FEBRUARY 3, FEBRUARY 1, AUGUST 3, AUGUST 2,
1995 1996 1997 1996 1997
------------- ------------- ------------- ----------- -----------
Net sales............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................................ 68.8 68.4 62.4 67.9 67.3
----- ----- ----- ----- -----
Gross profit......................................... 31.2 31.6 37.6 32.1 32.7
Selling, general and administrative expenses......... 25.8 25.2 25.2 28.2 26.5
Pre-opening costs.................................... 0.2 0.3 0.7 0.4 1.7
Depreciation and amortization........................ 3.1 2.8 2.8 3.3 3.5
----- ----- ----- ----- -----
Operating income..................................... 2.1 3.3 8.9 0.2 1.0
Interest expense, net................................ 1.2 1.6 2.0 2.1 2.5
Other expense, net................................... -- 0.3 0.3 0.7 0.2
----- ----- ----- ----- -----
Income (loss) before income taxes and extraordinary
item............................................... 0.9 1.4 6.6 (2.6) (1.7)
Income tax provision (benefit)....................... -- -- (14.5) -- (0.7)
Extraordinary gain................................... 0.5 -- -- -- --
----- ----- ----- ----- -----
Net income (loss).................................... 1.4% 1.4% 21.1% (2.6)% (1.0 )%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
SIX MONTHS ENDED AUGUST 2, 1997 COMPARED TO SIX MONTHS ENDED AUGUST 3, 1996
Net sales increased by $16.3 million, or 28.9%, to $72.7 million during the
first six months of fiscal 1997 from $56.4 million during the first six months
of fiscal 1996. Net sales for the 26 new stores opened and the six stores
remodeled during the first six months of fiscal 1997 and for those stores opened
or remodeled during fiscal 1996 not yet qualifying as comparable stores
contributed $15.2 million of the increase in net sales. During the first six
months of fiscal 1997, comparable store sales increased 2.5% and contributed
$1.3 million of the increase in net sales. The first six months of fiscal 1997
were compared to a strong first six months of fiscal 1996, in which comparable
store sales increased 8.1%. The fiscal 1997 increase in comparable store sales
was attributable in part to strength in the Company's big girls', legwear and
newborn departments, partially offset by weaker sales in the boys' departments.
Net sales were also impacted by the closing of a store during 1996 which
contributed $0.2 million to net sales during the first six months of fiscal
1996.
22
<PAGE>
Gross profit increased by $5.7 million to $23.8 million during the first six
months of fiscal 1997 from $18.1 million during the first six months of fiscal
1996. As a percentage of net sales, gross profit increased to 32.7% in the first
six months of fiscal 1997 from 32.1% in the first six months of fiscal 1996. The
increase in gross profit as a percentage of net sales was principally due to the
leveraging of distribution expenses over a larger store base and increased sales
volume. Gross profit was also favorably impacted by a higher initial markup,
partially offset by higher markdowns in the boys' departments.
Selling, general and administrative expenses increased by $3.4 million to
$19.3 million during the first six months of fiscal 1997 from $15.9 million
during the first six months of fiscal 1996, but decreased as a percentage of net
sales to 26.5% in the first six months of fiscal 1997 from 28.2% in the first
six months of fiscal 1996. The decrease as a percentage of net sales was
primarily due to a reduction in store payroll expense as a percentage of net
sales and higher average store sales levels which provided greater leverage of
store expenses. The increased sales base also offset the increased investment in
the Company's corporate infrastructure to support its planned new store
expansion program.
During the first six months of fiscal 1997, pre-opening costs were $1.2
million as compared to $0.2 million during the first six months of fiscal 1996,
reflecting the opening of 26 new stores in the first six months of fiscal 1997
as compared to four new stores during the first six months of fiscal 1996.
Depreciation and amortization amounted to $2.6 million in the first six
months of fiscal 1997 as compared to $1.9 million in the comparable prior year
period. The increase in depreciation and amortization primarily relates to the
increase in the number of stores.
Interest expense, net, for the first six months of fiscal 1997 was $1.8
million, or 2.5% of net sales, as compared to $1.2 million, or 2.1% of net
sales, in the comparable prior year period. The increase in interest expense was
primarily due to interest on the Senior Subordinated Notes, which were
outstanding for approximately one month of the prior year period.
Other expense, net, for the first six months of fiscal 1997 amounted to $0.1
million, or 0.2% of net sales, as compared to $0.4 million, or 0.7% of net
sales, in the comparable prior year period. During the first six months of
fiscal 1997, other expenses primarily consisted of an anniversary fee on the
Foothill Credit Facility. During the first six months of fiscal 1996, other
expenses primarily comprised anniversary and credit agreement amendment fees
relating to the Foothill Credit Facility.
The Company recorded a net loss before income taxes of $1.2 million during
the six months ended August 2, 1997 as compared with a net loss of $1.4 million
in the comparable prior year period. As a percentage of net sales, the Company's
loss before income taxes decreased to 1.7% during the first six months of fiscal
1997 from 2.6% during the first six months of fiscal 1996 due to the factors
discussed above.
During the first six months of fiscal 1997, the Company recorded a tax
benefit for federal, state and local taxes of $0.5 million, or 0.7% of net
sales, which reflected an effective tax rate of approximately 40%. During the
first six months of fiscal 1996, the Company recorded a tax provision for state
minimum taxes. No federal tax provision was recorded in the first six months of
fiscal 1996 due to the Company's NOL.
The Company had net losses of $0.7 million and $1.5 million for the first
six months of fiscal 1997 and the first six months of fiscal 1996, respectively.
YEAR ENDED FEBRUARY 1, 1997 COMPARED TO YEAR ENDED FEBRUARY 3, 1996
Net sales increased by $21.8 million, or 17.8%, to $143.8 million during
fiscal 1996 from $122.1 million in fiscal 1995. Net sales for the 18 new stores
opened and the five stores remodeled during fiscal 1996, and for those stores
opened or remodeled during fiscal 1995 not yet qualifying as comparable stores,
contributed $17.9 million of the increase in net sales. Comparable store sales,
restated to reflect a comparable 52-week period, increased by 8.6% and
contributed approximately $8.6 million of the increase
23
<PAGE>
in net sales. Comparable store sales increased by 10.0% in fiscal 1995. The
increase in comparable store sales reflected the strength of the Company's
newborn, underwear and accessory departments. The above increases were offset by
the closure of five stores during fiscal 1995 and one store during fiscal 1996,
which in the aggregate generated a net sales decrease of $3.5 million in fiscal
1996 as compared to fiscal 1995. In addition, fiscal 1995 was a 53-week year,
with the extra week contributing $1.2 million to fiscal 1995 net sales.
Gross profit increased by $15.4 million to $54.1 million during fiscal 1996
from $38.6 million during fiscal 1995. As a percentage of net sales, gross
profit increased to 37.6% during fiscal 1996 from 31.6% during fiscal 1995.
Merchandise margins improved 4.9% from the previous year primarily due to higher
initial markups and a reduction in the markdown rate. In addition, the Company's
buying, distribution and occupancy expenses decreased as a percentage of net
sales due to the increased store base and sales volume.
Selling, general and administrative expenses increased by $5.5 million to
$36.3 million during fiscal 1996 from $30.8 million during fiscal 1995, but
remained constant at 25.2% of net sales in both fiscal years. The $5.5 million
increase was primarily due to the operation of an increased number of stores. In
addition, there were increased management incentive bonuses, advertising costs
and expenses related to the expansion of the real estate and store construction
functions to support the Company's growth strategy. However, as a result of the
increased store base and sales volume, these additional expenses did not
increase selling, general and administrative expenses as a percentage of net
sales.
During fiscal 1996, pre-opening costs were $1.0 million, or 0.7% of net
sales, as compared to $0.3 million, or 0.3% of net sales, during fiscal 1995.
The increase in pre-opening costs reflects the opening of 18 stores in fiscal
1996 as compared to nine stores in fiscal 1995.
Depreciation and amortization amounted to $4.0 million in fiscal 1996, or
2.8% of net sales, as compared to $3.5 million, or 2.8% of net sales, in fiscal
1995. The increase in depreciation and amortization was primarily due to new
stores.
Interest expense, net, for fiscal 1996 totaled $2.9 million, or 2.0% of net
sales, as compared to $1.9 million, or 1.6% of net sales, in the prior year. The
increase in interest expense in fiscal 1996 was due primarily to interest on the
Senior Subordinated Notes issued during fiscal 1996, partially offset by reduced
borrowings under the Foothill Credit Facility and the elimination of interest
expense on various loans repaid by the Company with proceeds from the 1996
Private Placement.
Other expense, net, for fiscal 1996 amounted to $0.4 million, or 0.3% of net
sales, as compared to $0.4 million, or 0.3% of net sales, in fiscal 1995. During
fiscal 1996, other expenses consisted primarily of anniversary and credit
agreement amendment fees related to the Foothill Credit Facility. During fiscal
1995, other expenses consisted primarily of $0.4 million in fees and related
legal and professional costs associated with the Foothill Credit Facility.
Income before income taxes and extraordinary items increased by $7.8 million
to $9.5 million during fiscal 1996 from $1.7 million during fiscal 1995 and
increased to 6.6% of net sales in fiscal 1996 from 1.4% of net sales in fiscal
1995 due to the factors discussed above.
During fiscal 1996, the Company recorded an income tax benefit of $20.9
million. This income tax benefit primarily resulted from the reversal of a
valuation allowance of $21.0 million on a net deferred tax asset, based on the
Company's results of operations in fiscal 1996 and projected future results. For
fiscal 1995, the Company recorded a tax provision for state minimum taxes and
the federal AMT. No other federal tax provision was recorded by the Company in
fiscal 1995 due to its NOL.
The Company had net income of $30.4 million and $1.7 million for fiscal 1996
and fiscal 1995, respectively.
24
<PAGE>
YEAR ENDED FEBRUARY 3, 1996 COMPARED TO YEAR ENDED JANUARY 28, 1995
Net sales increased by $14.1 million, or 13.1%, to $122.1 million during
fiscal 1995 from $108.0 million in fiscal 1994. Net sales for the nine new
stores opened and the 12 stores remodeled during fiscal 1995, and for those
stores opened or remodeled during fiscal 1994 not yet qualifying as comparable
stores, contributed $9.0 million of the increase in net sales. Comparable store
sales during fiscal 1995 increased by 10.0% and contributed $8.3 million of the
increase in net sales. Comparable store sales had increased by 13.2% in fiscal
1994. The fiscal 1995 increase in comparable store sales reflected the strength
of the Company's newborn and baby boy and big girl departments along with the
expansion of the underwear/ legwear departments. The above increases were offset
by the closing of five stores during fiscal 1995 and six stores during fiscal
1994, which in the aggregate generated a net sales decrease of $4.8 million in
fiscal 1995 as compared to fiscal 1994. In addition, fiscal 1995 was a 53-week
year, with the extra week contributing $1.6 million to fiscal 1995 net sales.
Gross profit increased by $4.9 million to $38.6 million during fiscal 1995
from $33.7 million during fiscal 1994. As a percentage of net sales, gross
profit increased to 31.6% during fiscal 1995 from 31.2% in fiscal 1994. The
increase as a percentage of net sales during fiscal 1995 was attributable to
increased leverage of store occupancy costs resulting from the higher sales
volume and a higher initial markup, partially offset by a higher markdown rate
and increased merchandise design expenses.
Selling, general and administrative expenses increased by $2.9 million to
$30.8 million during fiscal 1995 from $27.9 million during fiscal 1994, but
decreased as a percentage of net sales to 25.2% in fiscal 1995 from 25.8% in
fiscal 1994. The increase in selling, general and administrative expenses was
primarily due to the increased number of stores in operation and the
introduction of the Company's proprietary credit card program. The decrease in
selling, general and administrative expenses as a percentage of net sales was
primarily the result of improved store payroll productivity and a reduction in
corporate overhead expenses as a percentage of net sales due to the Company's
larger store base and increased sales volume.
During fiscal 1995, pre-opening costs were $0.3 million, or 0.3% of net
sales, as compared to $0.2 million, or 0.2% of net sales, in fiscal 1994,
reflecting the opening of nine stores in fiscal 1995 as compared to six stores
in fiscal 1994.
Depreciation and amortization amounted to $3.5 million in fiscal 1995, or
2.8% of net sales, as compared to $3.3 million, or 3.1% of net sales, in fiscal
1994. The increase in depreciation and amortization was primarily due to new and
remodeled stores.
Interest expense, net, for fiscal 1995 was $1.9 million, or 1.6% of net
sales, as compared to $1.3 million, or 1.2% of net sales, in fiscal 1994. The
increase in fiscal 1995 interest expense was due primarily to interest on
borrowings under the Foothill Credit Facility.
Other expense, net, for fiscal 1995 amounted to $0.4 million, or 0.3% of net
sales. During fiscal 1995, other expenses were comprised primarily of fees and
related legal and professional costs associated with the Foothill Credit
Facility.
Income before income taxes and extraordinary items increased by $0.7 million
to $1.7 million during fiscal 1995 from $1.0 million during fiscal 1994 and
increased to 1.4% of net sales in fiscal 1995 from 0.9% of net sales in fiscal
1994 due to the factors discussed above.
The Company's recorded income tax provision for fiscal 1995 and fiscal 1994
represented a provision for state minimum taxes and the federal AMT. No other
federal tax provision was recorded due to the use of the Company's NOL.
In fiscal 1994, the Company recorded an extraordinary gain of $0.5 million
relating to the forgiveness of debt.
The Company had net income of $1.7 million and $1.5 million for fiscal 1995
and fiscal 1994, respectively.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During its three most recent fiscal years and the first six months of fiscal
1997, the Company's primary uses of cash have been to finance new store
openings, purchase inventory, provide for working capital and make required
principal and interest payments on its debt. Until the 1996 Private Placement,
the Company met its cash requirements through cash flow from operations, the
sale of equity securities and borrowings under its lines of credit. Since the
1996 Private Placement, the Company has been able to meet its cash needs,
including those associated with the opening of new stores, principally by using
cash flow from operations and borrowings under the Foothill Credit Facility.
Cash flows provided by operating activities were $1.3 million, $7.7 million
and $7.8 million in fiscal 1994, 1995 and 1996, respectively. During the first
six months of fiscal 1996 and 1997, cash flows used in operating activities were
$4.5 million and $2.9 million, respectively. The increase in cash flows from
operating activities in fiscal 1995 was primarily the result of an increase in
accounts payable. In fiscal 1996, cash flows from operating activities increased
primarily as a result of an increase in net income, partially offset by a
decrease in payables. The decrease in net cash used in operating activities
during the first six months of fiscal 1997 was due primarily to an increase in
accounts payable partially offset by an increase in inventory resulting from the
Company's store expansion program.
Cash flows used in investing activities were $2.7 million, $6.9 million and
$8.5 million in fiscal 1994, 1995 and 1996, respectively, and $2.8 million and
$10.2 million in the first six months of fiscal 1996 and 1997, respectively.
Cash flows used in investing activities relate primarily to store openings and
remodelings and computer equipment for the Company's executive offices. In
fiscal 1994, 1995 and 1996, the Company opened 6, 9 and 18 stores while
remodeling 3, 12 and 5 stores, respectively. In the first six months of fiscal
1996 and 1997, the Company opened 4 and 26 stores while remodeling 5 and 6
stores, respectively.
Cash flows provided by (used in) financing activities were $1.2 million,
($0.5) million and $3.5 million in fiscal 1994, 1995 and 1996, respectively, and
$7.2 million and $10.2 million in the first six months of fiscal 1996 and 1997,
respectively. The decrease in cash flows from financing activities in fiscal
1995 was primarily the result of the net repayments on long-term debt, partially
offset by higher borrowings under the Foothill Credit Facility and lower
payments on obligations under capital leases. In fiscal 1996, cash flows from
financing activities increased as a result of the 1996 Private Placement with
the SKM Investors and the Noteholder. 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 the Foothill
Credit Facility. The increase in cash flows from financing activities during the
first six months of fiscal 1997 related primarily to the utilization of the
Foothill Credit Facility to fund seasonal working capital needs and the
Company's store expansion program partially offset in the prior year by the net
proceeds resulting from the 1996 Private Placement.
The Company has a working capital revolving credit facility with Foothill
Capital. As of February 1, 1997, there were no amounts borrowed under the
Foothill Credit Facility and, as of August 2, 1997, a total of $12.5 million had
been borrowed under the Foothill Credit Facility. In addition, as of February 1,
1997 and August 2, 1997, the Company had outstanding $4.7 million and $7.0
million, respectively, in letters of credit under the Foothill Credit Facility.
Availability under the Foothill Credit Facility as of February 1, 1997 and
August 2, 1997 was $11.9 million and $5.8 million, respectively. As of February
1, 1997 and August 2, 1997 the interest rates charged under the Foothill Credit
Facility were 10.75% and 8.5% per annum, respectively.
The Company amended its credit facility with Foothill Capital on July 31,
1997 to increase the Foothill Credit Facility from $20.0 million to $30.0
million (including an increase in the sublimit for letters of credit from $10.0
million to $20.0 million). The amount that may be borrowed by the Company under
the amended Foothill Credit Facility depends upon the levels of inventory and
accounts receivable. Amounts outstanding under the amended facility bear
interest at a floating rate equal to the reference rate of
26
<PAGE>
Norwest Bank Minnesota N.A. or, at the Company's option, the 30-day LIBOR Rate
plus a pre-determined spread. The LIBOR spread is 1 1/2% or 2%, depending upon
the Company's financial performance from time to time. Borrowings under the
amended facility mature in July 2000 and provide for one year automatic renewal
options. The amended Foothill 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 the Company's annual capital expenditures, as defined in the amended Foothill
Credit Facility. Management believes that the Company will be able to comply
with the financial covenants contained in the amended facility and does not
believe that compliance with these covenants will interfere with its business or
the implementation of its growth strategy. Credit extended under the amended
Foothill Credit Facility continues to be secured by a first priority security
interest in the Company's present and future assets, intellectual property and
other general intangibles.
In July 1996, the Company consummated the 1996 Private Placement with the
SKM Investors and the Noteholder, which resulted in net proceeds to the Company
of $37.4 million. These net proceeds were used to repay certain outstanding
indebtedness and to redeem certain outstanding shares of Common Stock. The
successful completion of the 1996 Private Placement enabled the Company to
implement a growth strategy built on opening new stores through the reinvestment
of operating cash flow which had previously been dedicated to debt repayment
obligations. See "Certain Relationships and Related Transactions--1996 Private
Placement."
The Company obtained a waiver from Foothill Capital and an amendment from
the Noteholder with respect to the capital expenditure limitations for fiscal
1996 under the Foothill Credit Facility and the Senior Subordinated Notes. The
waiver and amendment enabled the Company to open additional stores in connection
with its expansion.
During fiscal 1995, fiscal 1996 and the first six months of fiscal 1997, the
Company incurred capital expenditures of $6.9 million, $8.5 million and $10.2
million, respectively. In a typical new store, capital expenditures (net of
landlord contribution) approximate $0.2 million. In addition, a new store
typically requires a $0.1 million investment in inventory (net of merchandise
payables) and other pre-opening expenses. Management anticipates that total
capital expenditures in fiscal 1997, relating primarily to new and remodeled
stores and ongoing store maintenance programs, will be approximately $15.2
million. Management plans to fund these capital expenditures from cash flow from
operations.
The Company currently has no material commitments for capital other than the
Foothill Credit Facility. The Company expects, however, to enter into a
commitment with respect to a new distribution center and corporate headquarters.
The Company's lease for its current distribution center and headquarters
facility is scheduled to expire in March 1999. In addition, as a result of its
continuing growth, the Company believes that it will require additional space by
the third or fourth quarter of fiscal 1998. Consequently, the Company is seeking
a suitable site to relocate its distribution center and headquarters. The
Company has not selected a site or determined whether it would purchase or lease
such a facility. However, the Company has received and is considering a proposal
for the Company to purchase a facility comprising 147,000 square feet with
expansion capability for an additional 60,000 to 80,000 square feet. If the
Company were to proceed with such purchase, it would anticipate consummating the
purchase during the first quarter of fiscal 1998. Based on its preliminary
discussions with respect to this proposal, the Company estimates that the cost
of purchasing the facility, together with the costs of outfitting the facility,
would be approximately $8.0 million to $9.0 million. The Company would likely
also incur costs of approximately $200,000 for additional interim warehouse
space, which it is currently seeking, to accommodate its growth prior to moving
into the new facility. If the Company were unable to reach agreement with
respect to the purchase of this potential facility or another new facility, the
Company may consider renewing its current lease and leasing additional space for
a distribution center or leasing an entirely new facility.
27
<PAGE>
If the Company purchases a new facility for its distribution center and
corporate headquarters, the Company would expect to finance most of the purchase
price through a mortgage. The Company believes that its current financing
arrangements under the Foothill Credit Facility and its anticipated level of
internally generated funds will be adequate to fund its other capital
requirements for at least the next 18 to 24 months. The Company's capital needs
consist of working capital expenditures, including inventory and capital
expenditures relating to new and remodeled stores, expenditures for computer
hardware and software required in connection with the Company's growth, and
interest payments on indebtedness. The Company's ability to meet these capital
requirements, and its continued need for external financing, will depend on its
ability to generate cash from operations and successfully implement its store
expansion plans.
QUARTERLY RESULTS AND SEASONALITY
The Company's 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 expenses, net sales contributed by new stores, increases or decreases in
comparable store sales, adverse weather conditions, shifts in timing of certain
holidays, changes in the Company's merchandise mix and overall economic
conditions.
The Company's business is also subject to seasonal influences, with heavier
concentrations of sales during the holiday and back-to-school seasons. As is the
case with many retailers of apparel and related merchandise, the Company
typically experiences lower net sales during the first two fiscal quarters and
are often lower during the second fiscal quarter than during the first fiscal
quarter. The Company has experienced first and second quarter losses in the past
and may experience such 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. See "Risk Factors--Fluctuations in Quarterly Results
and Seasonality."
The following table sets forth certain statement of operations data and
operating data for each of the Company's last ten fiscal quarters and the
percentage of net sales represented by the line items presented. The quarterly
statement of operations data and selected operating data set forth below were
derived from unaudited financial statements of the Company and reflect, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the results of operations for these
fiscal quarters.
<TABLE>
<CAPTION>
FISCAL FISCAL
1995 1996
-------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $ 25,433 $ 23,181 $ 33,713 $ 39,733 $ 30,438 $ 25,974 $ 40,353
Gross profit..................... 7,224 5,530 11,640 14,232 10,238 7,873 16,976
Operating income (loss).......... (440) (2,423) 3,065 3,860 1,557 (1,438) 6,347
AS A PERCENTAGE OF NET SALES:
Gross profit..................... 28.4% 23.9% 34.5% 35.8% 33.6% 30.3% 42.1%
Operating income (loss).......... (1.7) (10.5) 9.1 9.7 5.1 (5.5) 15.7
SELECTED OPERATING DATA:
Comparable store sales increase
(decrease)..................... 25.6% 19.0% 0.8% 3.5% 9.8% 6.2% 8.1%
Stores open at end of period..... 90 90 94 91 93 95 104
<CAPTION>
FISCAL
1997
------------------------
<S> <C> <C> <C>
FOURTH FIRST SECOND
QUARTER QUARTER QUARTER
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $ 47,073 $ 39,203 $ 33,534
Gross profit..................... 18,965 14,018 9,802
Operating income (loss).......... 6,336 2,618 (1,922)
AS A PERCENTAGE OF NET SALES:
Gross profit..................... 40.3% 35.8% 29.2%
Operating income (loss).......... 13.5 6.7 (5.7)
SELECTED OPERATING DATA:
Comparable store sales increase
(decrease)..................... 9.7% 5.0% (0.5%)
Stores open at end of period..... 108 119 134
</TABLE>
28
<PAGE>
BUSINESS
OVERVIEW
The Company is a leading specialty retailer of high quality, value-priced
apparel and accessories for newborn to twelve year old children. The Company
designs, contracts to manufacture and sells its products under "The Children's
Place" brand name. As of September 1, 1997, the Company operated 140 stores,
primarily located in regional shopping malls in the eastern half of the United
States. The Company's net sales have increased from $96.6 million in fiscal 1993
to $143.8 million in fiscal 1996 and operating income has increased from $1.4
million in fiscal 1993 to $12.8 million in fiscal 1996. In the first six months
of fiscal 1997, net sales totaled $72.7 million as compared to $56.4 million in
the first six months of fiscal 1996. The Company has achieved comparable store
sales increases over prior years of 13.2%, 10.0% and 8.6% during each of fiscal
1994, 1995 and 1996, respectively, and 2.5% in the first six months of fiscal
1997. Net sales per gross square foot have increased from $226 in fiscal 1993 to
$335 in fiscal 1996. These increases are primarily the result of a merchandising
and operational repositioning of the Company over the last five fiscal years
under the direction of the Company's current management team.
In fiscal 1996, new stores for which fiscal 1996 was the first full year of
operations had average net sales of $1,250,000. 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
$371,000. New stores have generally achieved profitability within the first full
quarter of operations, with average fiscal 1996 store level operating cash flow
of approximately $288,000 (23.0% of net sales) for stores for which fiscal 1996
was the first full year of operations. In fiscal 1996, these stores yielded a
cash return on investment of 77.6%.
In July 1996, following a private financing in which the Company raised
$37.4 million of net proceeds, the Company began to implement an aggressive
growth strategy designed to capitalize on its business strengths and its strong
store economics. From July 1, 1996 through the end of fiscal 1996, the Company
opened a total of 16 new stores, growing to 108 stores. During fiscal 1997
through September 1, 1997, the Company has opened 32 stores. The Company intends
to continue its expansion program and currently plans to open approximately 15
additional stores during the remainder of fiscal 1997 and at least 60 stores in
fiscal 1998.
The Company and other children's retailers capitalize on the fact that
children typically require new clothes every season, and often more than once
within a season. The Company believes that the children's apparel market
generated approximately $26.9 billion in retail purchases in calendar 1996.
Management estimates that total sales of children's apparel grew at a compound
annual rate of approximately 4.6% between calendar 1991 and calendar 1996. In
addition, there are approximately four million births in the United States each
year. The Company believes that the size and growth of its market, coupled with
its business strengths and expansion strategies, should provide significant
opportunities for growth in the future.
The Company believes that its value-based, proprietary brand business
strategy has been and will continue to be the key to its success as a specialty
retailer. The Company also believes that the combination of its unique
price-value positioning, merchandising strategy, strong brand image, broad
consumer appeal, vertically integrated operations, expert sourcing and proven
management team have contributed to the success of the Company's merchandising
and operating strategies.
MERCHANDISING
MERCHANDISE OFFERING. The Company's merchandise is divided into four
divisions--girlswear, boyswear, newborn and accessories. The Company's
merchandise offers a balanced assortment of styles in fashionable colors and
patterns, with the aim of consistently creating a fresh, youthful look that the
Company believes is unique to "The Children's Place" brand. Each year the
Company presents four major
29
<PAGE>
seasonal lines (spring, summer, back-to-school, holiday) and two transitional
lines. Within each season, the Company offers a fresh assortment of coordinated
basic and fashion apparel with complementary accessories designed to encourage
multiple item purchases.
EVERYDAY VALUE PRICING. The Company's pricing strategy is to set prices
that the Company believes provide value to its customers and are below those of
comparable quality products sold by most of its direct mall-based competitors.
The Company employs this everyday value pricing strategy to attract and retain
customers by allowing customers to make purchases without having to wait for
special sales. The Company's mark-down policy is to systematically reduce prices
on slow-moving merchandise.
MERCHANDISE EXPANSION STRATEGY. The Company periodically evaluates
opportunities for selective product extensions. In fiscal 1997, the Company
introduced a new layette line and expanded its big boy and big girl departments
to include size 16. The Company expects to continue to seek opportunities to
expand its customer base and enhance the productivity of its stores through
further development of existing merchandise categories and the continued
introduction of new merchandise classifications.
DESIGN AND PRODUCT DEVELOPMENT. Each of the Company's seasonal lines begins
with the compilation of market intelligence regarding fashion trends
approximately nine months before the season, through 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. Potential items are designed using
computer aided design ("CAD") technology, giving the Company the opportunity to
consider a wide range of style and fashion options.
PLANNING AND ALLOCATION. The merchandise planning team creates a detailed
purchasing plan for each season covering each department, each category and each
key basic item, based on historical and current selling trends. The Company
typically orders 90% of the purchasing plan five months before the season,
saving 10% to respond quickly to new fashion trends and reorders of key basic
items. The production process takes approximately four to five months from order
confirmation to receipt of merchandise at the Company's distribution facility.
The merchandise planning team also monitors current and future inventory levels
on a weekly basis and analyzes sales patterns to predict future demand for
various categories. The Company regularly monitors sales of each style and color
and maintains some flexibility to adjust merchandise on order for future seasons
or to accelerate delivery of merchandise. The merchandise planning team is also
responsible for planning and allocating merchandise to each store based on sales
volume levels for each department, category and key basic item and other
factors. See "Risk Factors-- Merchandise Trends."
SOURCING AND PROCUREMENT
After a product line is conceptualized and purchase levels are determined,
the Company's sourcing team makes on-site visits to the Company's independent
agents and various manufacturers to negotiate product costs and arrange delivery
of merchandise manufactured to the Company's specifications.
COST-BASED BUYING. The Company combines 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, enabling the Company to determine the most
cost-effective country and manufacturer from which to source each particular
item. Relying on its supplier relationships and management's knowledge of
component costs, the Company believes it has been able to arrange for the
manufacture of high quality products at low cost. One important aspect of the
Company's sourcing strategy is that its Chief Executive Officer, Ezra Dabah, who
has over 25 years of merchandising, apparel and buying experience, frequently
travels to meet with the Company's agents and manufacturers.
MANUFACTURERS. The Company's apparel is produced to its specifications by
more than 50 independent manufacturers located primarily in the Far East and
elsewhere in Asia. In fiscal 1996, the majority of
30
<PAGE>
the Company's merchandise was produced in Taiwan and Hong Kong. The remainder of
the Company's merchandise was produced in Turkey, China, the United States and
certain other countries. To broaden its sourcing base, the Company also has
begun to source from manufacturers located in lower cost markets, such as the
Philippines, Thailand and Sri Lanka. These three markets accounted for
approximately 12% of the Company's total purchases in fiscal 1996, as compared
to approximately 6% in fiscal 1995.
The Company has no exclusive or long-term contracts with its manufacturers
and typically transacts business on an item-by-item basis under purchase orders
at freight on board ("FOB") cost in United States dollars. The Company purchases
merchandise through a Hong Kong-based trading company, with which the Company
has no formal written agreement, for most of its procurements from manufacturers
located in China, Hong Kong and the Philippines. In addition, the Company has
entered into agreements with commissioned independent agents elsewhere in the
Far East and in Turkey to assist in sourcing and pre-production approval,
production, inspection and ensuring timely delivery of merchandise. The Company
has developed long-term, continuous relationships with key individual
manufacturers and raw material suppliers which management believes have yielded
numerous benefits, including quality control and favorable costs, and have
afforded it flexible working arrangements and a steady flow of merchandise
supply. In addition, although they are not contractually obligated to do so, the
Hong Kong-based trading company and a commissioned independent agent in Taiwan
each have exclusive arrangements with the Company. See "Risk Factors--Dependence
on Unaffiliated Manufacturers and Independent Agents."
SYSTEMS. The Company employs a work-in-process tracking system that enables
it to anticipate potential delivery delays and take action to mitigate the
impact of such delays. By using this system together with the Company's purchase
order and advanced shipping notification systems, the Company and its
independent agents actively monitor the status of each purchase order from order
confirmation to merchandise receipt. The Company has experienced occasional
shipment delays, but no such delay has had a material adverse effect on the
Company. The Company is pursuing software technologies to further enhance
communication of the production and pre-approval status of its work-in-process
directly from its overseas agents.
QUALITY ASSURANCE. To ensure quality and promote consumer confidence in
"The Children's Place" products, the Company utilizes its own, in-house quality
assurance laboratory to test and evaluate all fabric and trimming materials
against a comprehensive range of physical performance standards before bulk
production can begin. The Company's director of quality control and/or the
quality control personnel of the Company's independent agents visit the various
manufacturing facilities to monitor and improve the quality control and
production process. With this focus on pre-production quality approval, the
Company is generally able to detect and correct quality related problems before
bulk production begins. The Company does not accept its finished apparel
products until each purchase order receives formal certification of compliance
from its agents' inspectors.
31
<PAGE>
COMPANY STORES
EXISTING STORES. As of September 1, 1997, the Company operated 140 stores,
all of which are located in the eastern half of the United States. Most of the
Company's stores are clustered in and around major metropolitan areas. The
Company's stores are concentrated in major regional malls, with the exception of
seven outlet stores and two urban street stores. The map and store list below
set forth by state and city the number and location of stores operated by the
Company:
[The Prospectus contains a graphic of a Map of the United States which sets
forth the number of stores operated by the Company in each state in which it has
stores.]
<TABLE>
<S> <C> <C> <C> <C> <C>
CONNECTICUT-6 INDIANA-6 MASSACHUSETTS-13 NEW HAMPSHIRE-3 NEW YORK-26 OHIO-6
Danbury Merrillville N. Attleboro Salem Rochester (3) Columbus (2)
Manchester Lafayette Kingston Manchester Buffalo Dayton
Meriden Ft. Wayne East Taunton Nashua Syracuse (2) Cincinnati (3)
Waterford Greenwood Braintree Albany
Trumbull Indianapolis Natick NEW JERSEY-19 Niagara Falls PENNSYLVANIA-12
West Hartford Evansville Saugus E. Brunswick Garden City Springfield
Worcester Deptford White Plains Willow Grove
DELAWARE-2 KENTUCKY-1 Marlborough Princeton Huntington Station Philadelphia (4)
Newark Florence Burlington Freehold Valley Stream Exton
Wilmington Watertown Lawrenceville Massapequa North Wales
MAINE-2 Peabody Eatontown Lake Grove Langhorne
FLORIDA-1 Kittery Cambridge Cherry Hill Bay Shore King of Prussia
Coral Springs S. Portland Holyoke Mays Landing Riverhead York
Wayne New York (7) Pittsburgh
ILLINOIS-13 MARYLAND-9 MICHIGAN-7 Paramus (2) Yorktown Heights
Vernon Hills Gaithersburg Grand Rapids Woodbridge Middletown SOUTH CAROLINA-1
Bloomingdale Baltimore Novi Rockaway Nanuet Myrtle Beach
Norridge Columbia Dearborn Livingston
N. Riverside Parkville Troy Secaucus NORTH CAROLINA-3 TENNESSEE-1
Lincolnwood Annapolis Sterling Heights Jersey City Winston-Salem Nashville
St. Charles Owings Mills Harper Woods Bridgewater Raleigh
Schaumburg Waldorf Portage Voorhees Greensboro VIRGINIA-5
Orland Park Glen Burnie Toms River Fairfax
Gurnee Towson MINNESOTA-4 Virginia Beach
Chicago Bloomington Richmond
Calumet City Maplewood Winchester
Aurora Minnetonka Woodbridge
West Dundee Burnsville
</TABLE>
32
<PAGE>
STORE ENVIRONMENT. The Company's prototype store measures approximately
3,500 square feet and features a design that incorporates light maple wood
floors, fixtures and trim set against a white color scheme, accented by the
hunter green used in the Company's logo. The Company believes that the
environment created by its "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 the Company's 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. Suspended signs direct customers to departments within
the store where each merchandise line is displayed as a separate collection of
coordinated basic and fashion items, with matching accessories. The Company
believes that its merchandise presentation effectively displays "The Children's
Place" 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
coordinating items, store management is provided with detailed written and
visual store plans that specify merchandise placement. Standardization of store
design and merchandise presentation 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, the Company believes that it is able to maintain and enhance "The
Children's Place" brand image.
As of September 1, 1997, approximately 75% of the Company's stores
(excluding outlet stores) are based on the new "apple-maple" prototype. The
Company generally remodels its stores to the new prototype specifications as
their leases are renewed. In many cases, conversion to the new prototype
involves relocation within a mall as well as a significant reduction in space.
STORE OPERATIONS. The Company's store operations are directed by the
Company's Vice President of Store Operations, three regional managers and 15
district managers. Individual stores are managed by a store manager and up to
three co-managers depending on sales volume. A typical store employs a number of
full time and part time sales associates, and hires 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 supervising customer service,
store presentation, staff scheduling, shrinkage control and seeing that the
store achieves its planned sales goals. Customer service is a major focus for
store management and sales associates, and continuing efforts are made to
maximize selling productivity.
The Company engages in an ongoing process of training management and sales
associates in the areas of customer service, selling skills, merchandising,
procedures and controls, utilizing visual aids, training manuals and training
workshops.
Management maintains a high level of communication between the central
office and stores. Frequent downloads through the 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,
quarterly home office and district manager meetings engender a strong team
culture. The Company is continuing to improve the communication between the
central office and its stores with the use of new technology.
STORE EXPANSION PROGRAM
In mid-1996, the Company began implementing an aggressive growth strategy
designed to capitalize on its business strengths and its strong store economics.
From July 1, 1996 to the end of fiscal 1996, the Company opened 16 stores.
During fiscal 1997 through September 1, 1997, the Company has opened 32 stores.
The Company intends to continue its store expansion program and currently plans
to open
33
<PAGE>
approximately 15 additional stores during the remainder of fiscal 1997 and at
least 60 stores in fiscal 1998. The Company believes that its value pricing and
its merchandise assortment appeal to customers in all socioeconomic groups,
affording it substantial expansion opportunities. There are hundreds of regional
malls, street locations and outlet centers in the United States that the Company
believes would be suitable sites for the Company's stores.
The Company's expansion strategy focuses primarily on mall-based locations.
The regional malls which the Company targets are typically high volume centers,
generally measuring one million square feet or more, 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). The Company conducts extensive 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. The
most important consideration for the Company in evaluating a store location
within a mall is placement of the store relative to mall traffic patterns. In
addition, the Company continuously evaluates opportunities to add stores in
other types of locations, such as outlet centers and urban street locations. The
Company intends to focus its expansion by establishing clusters of stores in
states in which it already has stores or in contiguous states in order to
strengthen "The Children's Place" brand name recognition. See "Risk
Factors--Aggressive Growth Strategy."
MARKETING
ADVERTISING AND PROMOTION. The Company strives to enhance its reputation
and image in the marketplace and build recognition and equity in "The Children's
Place" brand name by advertising its image, product and message through in-store
photographs and product displays, direct mail and, to a lesser extent, regional
and national print media. The Company's point of purchase marketing strategy
uses high image visuals to highlight the individual departments and seasonal
fashion looks, promoting key basic items at price points representing
exceptional value, and focusing on store-front and window displays to attract
customers into the stores. The Company primarily relies on mall-based traffic
and its reputation, loyal customer base and brand image to generate sales.
Moreover, instead of relying on special holiday or one-day promotions to
stimulate sales, the Company relies on its everyday value pricing strategy to
attract customers. To encourage larger purchases, the Company periodically
distributes coupons providing a discount on purchases above a specified minimum.
PROPRIETARY CREDIT CARD. The Company views the use of a proprietary credit
card as an important marketing and communication tool and introduced "The
Children's Place" credit card in January 1995. Pursuant to a merchant services
agreement with the Company, Hurley State Bank issues to the Company's customers
private label credit cards for use exclusively at the Company's stores and
extends credit to such customers. Hurley State Bank's agent, SPS, administers
the approval, issuance and administration of the credit card program. For these
services, the Company pays to Hurley State Bank a merchant fee which is
calculated as a percentage of sales under the credit card. In fiscal 1996, the
Company paid $0.9 million to Hurley State Bank in merchant fees. The number of
holders of the Company's proprietary credit card has grown to over 250,000, and
these customers accounted for approximately 15% of the Company's fiscal 1996 net
sales. The Company believes that its proprietary 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. The
Company markets its proprietary credit card by offering customers who apply for
a card a 15% discount on their initial purchase using the card. The Company's
average dollar sale to customers using "The Children's Place" card has been
substantially higher than the Company's overall average dollar sale. The
Company's credit card operations are conducted through a third party credit card
service. See "Risk Factors--Proprietary Credit Card."
34
<PAGE>
MANAGEMENT INFORMATION SYSTEMS
The Company's management information and electronic data processing systems
consist of a full range of retail, financial and merchandising systems,
including purchase order management, importing, inventory planning and control,
inventory distribution, sales reporting and accounts payable. These systems
operate on a Hitachi EX/27 platform mainframe computer and utilize a combination
of third party and proprietary software packages. Management views technology as
an important tool in efficiently supporting its 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 other store initiated 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 stock keeping
unit ("SKU") requirements of each store. The Company evaluates information
obtained through daily reporting to identify sales trends and to implement
merchandising decisions regarding markdowns and allocation of merchandise.
The Company is committed to utilizing technology to further enhance its
competitive position. In this regard, the Company is scheduled to install a
warehouse management system during fiscal 1998 in connection with the planned
relocation of its distribution center. The Company also intends to replace its
POS software during fiscal 1998 to enhance customer service and communication
between the Company's central office and its stores. See "Risk Factors--Reliance
on Information Systems."
DISTRIBUTION
All merchandise is currently received, inspected, processed and distributed
through the Company's 65,000 square foot leased distribution facility at its
headquarters in West Caldwell, New Jersey. In light of its stringent quality
assurance procedures implemented during the manufacturing process, the Company
has been able to substantially reduce the physical inspection of garments
received at the distribution facility. Accordingly, most merchandise "flows
through" within one business day of its receipt at the distribution facility and
is shipped directly to stores each weekday by commercial carrier, reducing costs
and expediting delivery to the Company's stores. The Company has experienced
occasional shipment delays, but no such delay has had a material adverse effect
on the Company. The Company intends to move its distribution center to a larger
facility during fiscal 1998 to accommodate the Company's continued growth and is
evaluating suitable sites for, and whether to purchase or lease, such new
facility. See "Risk Factors--Disruptions in Receiving and Distribution."
COMPETITION
The children's apparel retail business is highly competitive. The Company
competes in substantially all of its 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.
and Kids "R" Us (a division of Toys "R" Us, Inc.). The Company also competes
with a wide variety of local and regional specialty stores and with other
national retail chains and catalog companies. One or more of its competitors are
present in substantially all of the malls in which the Company has stores. Many
of the Company's competitors are larger than the Company or have access to
significantly greater financial, marketing and other resources than the Company.
The Company believes that the principal factors of competition in the
Company's marketplace are perceived value, price, quality, merchandise
assortment, brand name recognition, customer service, and a friendly store
environment. Management believes that the Company has been able to effectively
compete
35
<PAGE>
against other retailers of children's apparel because of its reputation in the
marketplace and consistent merchandise offering of high quality, everyday
value-priced childrenswear, sold in a friendly environment. See "Risk
Factors--Competition."
TRADEMARKS AND SERVICE MARKS
Each of "The Children's Place," "Baby Place," "The Place," "TCP" and
"Authentic Tiny Tee" has been registered as a trademark and/or a service mark
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. The
Company intends to continue to use and protect its trademarks and service marks
and maintain their registrations. The Company also intends to take action to
protect its trademarks in certain foreign countries. The Company believes its
trademarks and service marks have received broad recognition and are of
significant value to the Company's business.
PROPERTIES
The Company's executive offices and distribution center are located in West
Caldwell, New Jersey, and are occupied under the terms of a lease covering
approximately 91,000 square feet. The Company expects to relocate its offices
and distribution center during fiscal 1998 but may continue to be obligated on
its current lease until its expiration in March 1999. Many of the Company's
store leases contain provisions requiring landlord consent to a change in
control of the Company. Such provisions may be triggered by this offering or
future offerings of securities by the Company. However, the Company believes
that because of its good relations with its landlords and because most of its
leases are at market rents, these provisions should not have a material adverse
effect on the Company.
All of the Company's existing store locations are leased by the Company,
with lease terms expiring between 1998 and 2008 and with an average unexpired
lease term of 7.5 years. The leases for most of the existing stores are for
terms of ten years and provide for contingent rent based upon a percent of sales
in excess of specified minimums. Leases for future stores will likely include
similar contingent rent provisions. For a map and list of the geographic
locations of the Company's existing stores, see "--Company Stores-- Existing
Stores."
EMPLOYEES
As of August 2, 1997, the Company had approximately 680 full-time employees,
of whom approximately 180 are based at the Company's headquarters and
distribution center, and approximately 1,370 part-time employees. None of the
Company's employees is covered by a collective bargaining agreement. The Company
believes its relations with its employees are good.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings from time to time
incidental to the conduct 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 financial condition or results of operations of the
Company.
36
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ ----------- ---------------------------------------------------------------
<S> <C> <C>
Ezra Dabah................................ 44 Chairman of the Board of Directors and Chief
Executive Officer
Stanley B. Silver......................... 59 President, Chief Operating Officer and Director
Seth L. Udasin............................ 41 Vice President, Chief Financial Officer and Treasurer
Steven Balasiano.......................... 34 Vice President, General Counsel and Secretary
Mario A. Ciampi........................... 37 Vice President -- Real Estate & Construction
Ed DeMartino.............................. 46 Vice President -- Management Information Systems
Robert Finkelstein........................ 45 Vice President -- Merchandising Planning and
Allocation
Nina L. Miner............................. 48 Vice President -- Design and Product Development
Salvatore W. Pepitone..................... 50 Vice President -- Distribution Center
Mark L. Rose.............................. 32 Vice President -- Sourcing and Production
Susan F. Schiller......................... 36 Vice President -- Store Operations
Diane M. Timbanard........................ 52 Vice President -- Merchandising Manager
Stanley Silverstein....................... 72 Director
John F. Megrue............................ 39 Director
David J. Oddi............................. 27 Director
</TABLE>
EZRA DABAH has been Chief Executive Officer of the Company since 1991 and
Chairman of the Board and a Director since purchasing the Company 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. Mr.
Dabah is Stanley Silverstein's son-in-law and Nina Miner's brother-in-law. See
"Certain Relationships and Related Transactions--Dabah Family and Gitano Legal
Proceedings" for information concerning certain legal proceedings involving Mr.
Dabah.
STANLEY B. SILVER has been President and Chief Operating Officer of the
Company since June 1996 and prior to that served as the Company's Executive Vice
President and Chief Operating Officer since joining the Company in 1991. Mr.
Silver has been a Director of the Company since July 1, 1996. Before joining the
Company 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.
SETH L. UDASIN has been Vice President, Chief Financial Officer and
Treasurer since 1996. Since joining the Company in 1983, Mr. Udasin has held
various other positions, including Controller from 1988 to 1994 and Vice
President -- Finance from 1994 to 1996.
STEVEN BALASIANO has been Vice President and General Counsel since joining
the Company in December 1995 and Secretary since January 1996. Prior to joining
the Company, 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.
37
<PAGE>
MARIO A. CIAMPI has been Vice President -- Real Estate and Construction
since joining the Company in June 1996. Prior to joining the Company, 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.
ED DEMARTINO has been Vice President -- Management Information Systems since
1991. Mr. DeMartino began his career with the Company in 1981 as a System
Development Project Manager and was subsequently promoted to Director -- MIS in
1989.
ROBERT FINKELSTEIN joined the Company in 1989 as Vice President --
Merchandise Planning and Allocation. Immediately prior to joining the Company,
Mr. Finkelstein was a Director of Distribution for Payless Shoe Stores.
NINA L. MINER has been Vice President -- Design and Product Development
since joining the Company in 1991. Before joining the Company, Ms. Miner held
various management positions at E.J. Gitano. Ms. Miner is Stanley Silverstein's
daughter and Ezra Dabah's sister-in-law.
SALVATORE W. PEPITONE has been Vice President -- Distribution Center since
joining the Company in 1991. Prior to joining the Company, 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 Company in 1990 and was promoted to Senior Product Buyer
that year. Prior to joining the Company, 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 Company 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 -- Merchandising Manager since
joining the Company in 1990. Prior to joining the Company, Ms. Timbanard held
various merchandising and management positions, including Vice President of
Merchandising for Macy's.
STANLEY SILVERSTEIN has been a Director of the Company since July 1, 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 Nina
Miner's father and Ezra Dabah's father-in-law.
JOHN F. MEGRUE has been a Director of the Company since July 1996. Mr.
Megrue has been a partner of SKM Partners, L.P., which serves as the general
partner of SKM and the SK Funds, since 1992. 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 Company since April 1997. Mr. Oddi
joined SKM as an Associate in 1994 and is currently a Principal of SKM. Prior to
joining SKM, Mr. Oddi was a financial analyst in the Leveraged Finance Group at
Salomon Brothers Inc.
38
<PAGE>
The Company has a Board of Directors comprised of three classes, each of
which serves for three years, with one class being elected each year. See
"Description of Capital Stock--Certain Certificate of Incorporation and Bylaw
Provisions." The terms of Mr. Oddi and Mr. Silverstein will expire at the 1998
Annual Meeting of Stockholders. 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. Following this offering, the
Company expects that two additional directors, who will be independent
directors, will be elected to the Board of Directors. For a description of
certain voting agreements relating to the selection of directors, see "Security
Ownership of Certain Beneficial Owners and Management-- Stockholders Agreement.
EXECUTIVE COMPENSATION
The following table summarizes the compensation for fiscal 1996 for the
Company's Chief Executive Officer and each of its four other most highly
compensated executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION(2)
ANNUAL COMPENSATION(1) ---------------- ALL OTHER
SECURITIES COMPENSATION
---------------------- UNDERLYING -------------
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) ($)
- ----------------------------------------------------- ---------- ---------- ---------------- -------------
<S> <C> <C> <C> <C>
Ezra Dabah........................................... $ 490,403 $ 383,604 0 $ 708(3)
Chairman of the Board and Chief Executive Officer
Stanley B. Silver.................................... $ 325,778 $ 203,934 249,000 $ 133,980(4)
President and Chief Operating Officer
Diane M. Timbanard................................... $ 228,846 $ 89,396 99,600 $ 590(3)
Vice President -- Merchandising Manager
Nina L. Miner........................................ $ 191,461 $ 77,957 149,400 $ 456(3)
Vice President -- Design and Product Development
Mark L. Rose......................................... $ 173,634 $ 68,544 149,400 $ 647(3)
Vice President -- Sourcing and Production
</TABLE>
- ------------------------
(1) Includes bonuses earned in fiscal 1996, portions of which were 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) 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 each of the
first, second, third and fourth anniversaries of the date of grant. See
"--Stock Option and Other Plans for Employees--Stock Option Plans."
(3) Amounts shown consist of the Company's matching contributions under The
Children's Place 401(k) Savings and Investment Plan.
(4) 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.
39
<PAGE>
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth certain information concerning options
granted during fiscal 1996 to each executive officer named in the Summary
Compensation Table. To date, no options have been exercised.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
NUMBER OF PRICE APPRECIATION FOR
SECURITIES % OF TOTAL OPTION TERM(3)
UNDERLYING OPTIONS GRANTED IN EXERCISE EXPIRATION ------------------------
NAME GRANTED(1) FISCAL 1996 PRICE(2) DATE 5% 10%
- ------------------------------ ------------------- ------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ezra Dabah.................... 0 0% $ 0 N/A $ 0 $ 0
Stanley B. Silver............. 249,000 17.2% 2.677 6/28/06 420,400 1,064,262
Diane M. Timbanard............ 99,600 6.9% 2.677 6/28/06 168,160 425,705
Nina L. Miner................. 149,400 10.4% 2.677 6/28/06 252,240 638,557
Mark L. Rose.................. 149,400 10.4% 2.677 6/28/06 252,240 638,557
</TABLE>
- ------------------------
(1) 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 each of the
first, second, third and fourth anniversaries of the date of grant. See
"--Stock Option and Other Plans for Employees--Stock Option Plans."
(2) The exercise price was fixed at the date of the grant and represented the
fair market value per share of Common Stock on such date.
(3) In accordance with the rules of the 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.
COMPENSATION OF DIRECTORS
Beginning with the consummation of the offering made hereby, each member of
the Company's Board of Directors who is not an officer of the Company or an
affiliate of the SKM Investors (any such director, an "Eligible Director") will
receive an annual fee of $15,000 for serving on the Board. Such independent
directors also will receive $1,000 for each Board or committee meeting attended
plus reimbursement of expenses for each such meeting. All directors will be
entitled to receive options under the Company's stock option plans. See "--Stock
Option and Other Plans for Employees--Stock Option Plans." Directors of the
Company received no compensation, as directors, during the Company's last fiscal
year.
COMMITTEES OF THE BOARD OF DIRECTORS
To date, the Company has not had a formal Compensation Committee of the
Board of Directors and all compensation-related decisions have been made by the
entire Board based upon the recommendations of Messrs. Dabah and Silver.
Subsequent to this offering, the Company intends to create a Compensation
Committee and an Audit Committee of the Board of Directors. The Company expects
that, following the completion of this offering, two independent directors will
be elected to the Company's Board of Directors. At least a majority of the
members of each of the Audit Committee and the Compensation Committee will be
independent directors.
40
<PAGE>
EMPLOYMENT AGREEMENTS
The Company is a party to employment agreements with certain executive
officers.
EZRA DABAH
Mr. Dabah's employment agreement (the "Dabah Agreement") provides that he
will serve as Chairman and Chief Executive Officer of the Company from June 27,
1996 through June 27, 1999, at an initial salary of $480,000 per year, subject
to annual review. Mr. Dabah's service after June 27, 1999 shall continue for
successive three year periods, subject to termination in accordance with the
termination provisions of the Dabah Agreement. 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 the Company's performance during such six-month
period. The Dabah Agreement also provides for certain insurance and other
benefits to be maintained and paid by the Company.
The Dabah Agreement provides that if Mr. Dabah's employment is terminated by
the Company 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), the Company 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 the Company's stock
option plans will immediately vest. If Mr. Dabah's employment is terminated for
any of the above reasons, the Company 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.
STANLEY B. SILVER
Mr. Silver's employment agreement (the "Silver Agreement") provides that he
will serve as President and Chief Operating Officer of the Company from June 27,
1996, and that such service shall continue unless terminated in accordance with
the termination provisions of the Silver Agreement, at an initial salary of
$320,000 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) the 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 the Company's performance during such six-month
period. The Silver Agreement also provides for certain insurance and other
benefits to be maintained and paid by the Company.
The Silver Agreement provides that if Mr. Silver's employment is terminated
without cause by the Company (as such term is defined in the Silver Agreement),
the Company 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 the
Company 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 the Company's
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.
41
<PAGE>
OTHER EMPLOYMENT AGREEMENTS
The Company has also entered into employment agreements with certain of its
other executive officers which provide for the payment of severance equal to the
officer's salary for a period of six to nine months following any termination
without cause.
STOCK OPTION AND OTHER PLANS FOR EMPLOYEES
STOCK OPTION PLANS
The 1996 Stock Option Plan of The Children's Place Retail Stores, Inc. (the
"1996 Plan") was adopted by the Company and approved by the Company's
stockholders as of June 28, 1996. All key employees of the Company, as
determined by a committee consisting of Messrs. Dabah and Silver, were eligible
to receive options under the 1996 Plan. A total of 1,743,240 shares were
authorized for issuance under the 1996 Plan. Options with respect to all of
these shares were granted under the 1996 Plan prior to this offering. Effective
with this offering, the Board of Directors of the Company will discontinue any
future grants of options under the 1996 Plan.
The 1997 Stock Option Plan of The Children's Place Retail Stores, Inc. (the
"1997 Plan") was adopted by the Company and approved by the Company's
stockholders prior to this offering. The 1996 Plan and the 1997 Plan
(collectively, the "Plans") will be administered by a Stock Option Plan
Committee of the Company's Board of Directors which solely consists of two or
more directors, except that prior to the offering the Plans were administered by
a committee consisting of Messrs. Dabah and Silver. All employees and directors
of the Company, as may be determined from time to time by the Stock Option Plan
Committee, will be eligible to receive options under the 1997 Plan. In addition,
Eligible Directors of the Company will automatically receive a limited number of
options, as described below.
A total of 1,000,000 shares will be authorized for issuance under the 1997
Plan. Not more than 250,000 shares of Common Stock may be the subject of options
granted to any individual during any calendar year. Subject to consummation of
this offering, the Company has granted options with respect to 252,300 shares at
exercise prices equal to the initial public offering price to certain eligible
employees under the 1997 Plan, none of which were granted to executive officers.
The exercise price of an incentive stock option and a non-qualified stock
option is fixed by the Stock Option Plan Committee at the date of grant;
however, the exercise price under an incentive stock option must be at least
equal to the fair market value of the Common Stock at the date of grant, and
110% of the fair market value of the Common Stock at the date of grant for any
incentive stock option granted to any individual who owns more than 10% of the
voting power or value of all classes of stock of the Company (a "10% Owner").
Stock options are exercisable for a duration determined by the Stock Option
Plan Committee, but in no event more than ten years after the date of grant (or
five years after the date of grant in the case of an incentive stock option
granted to a 10% Owner). Unless otherwise determined by the Stock Option Plan
Committee at the time of grant, options granted under the 1996 Plan are
exercisable cumulatively 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 and options granted under the 1997 Plan will
be exercisable cumulatively at the rate of 20% on or after December 31st of the
year of grant and 20% on or after each of the first, second, third and fourth
anniversaries of the date of grant. The aggregate fair market value (determined
at the time the option is granted) of the Common Stock with respect to which
incentive stock options are exercisable for the first time by a participant
during any calendar year (under all stock option plans of the Company) shall not
exceed $100,000; to the extent this limitation is exceeded, such excess options
shall be treated as non-qualified stock options for purposes of the Plans and
the Internal Revenue Code of 1986, as amended (the "Code").
42
<PAGE>
At the time a stock option is granted, the Stock Option Plan Committee may,
in its sole discretion, designate whether the stock option is to be considered
an incentive stock option or a non-qualified stock option, except that incentive
stock options can be granted only to employees. Stock options granted to
employees with no such designation shall be deemed incentive stock options.
The 1997 Plan will also provide for automatic grants of non-qualified stock
options to Eligible Directors. Upon the consummation of the offering, each
Eligible Director will be granted an option to purchase 5,000 shares of Common
Stock for a purchase price equal to the initial public offering price. Each
Eligible Director who is initially elected to the Board of Directors of the
Company following the consummation of the offering will be granted an option to
purchase 5,000 shares of Common Stock upon such director's initial election to
the Board, for a purchase price equal to the fair market value of the Common
Stock on the date of grant. On the last day of each fiscal year of the Company
(beginning with the fiscal year commencing on a date following the offering),
each Eligible Director will be granted an additional option for 5,000 shares of
Common Stock, for a purchase price equal to the fair market value of the Common
Stock on the date of grant; provided that any Eligible Director initially
elected to the Board during a fiscal year will be granted an option for a
prorated portion of 5,000 shares on the last day of the fiscal year during which
such person was elected. Each of the foregoing options granted to Eligible
Directors will have a duration of ten years and will become exercisable
cumulatively at the rate of one-third on or after each of the first, second and
third anniversaries of the date of grant.
Payment of the purchase price for shares acquired upon the exercise of
options may be made by any one or more of the following methods: in cash, by
check, by delivery to the Company of shares of Common Stock already owned by the
option holder, or by such other method as the Stock Option Plan Committee may
permit from time to time, including by furnishing a promissory note to the
Company or by a "cashless" exercise method. However, a holder may not use
previously owned shares of Common Stock to pay the purchase price under an
option, unless the holder has beneficially owned such shares for at least six
months.
Stock options become immediately exercisable in full upon (i) the holder's
retirement at or after age 65, (ii) the holder's disability or death, (iii) a
"Change in Control" (as defined in the Plans) or (iv) the occurrence of such
special circumstances as in the opinion of the Stock Option Plan Committee merit
special consideration.
Stock options terminate at the end of three months following the holder's
termination of employment or service. This period is extended to one year in the
case of the disability or death of the holder and, in the case of death, the
stock option is exercisable by the holder's estate. However, stock options
terminate immediately upon a holder's termination of employment or service for
cause.
The options granted under the Plans contain anti-dilution provisions which
will automatically adjust the number of shares subject to the option in the
event of a stock dividend, split-up, conversion, exchange, reclassification or
substitution. In the event of any other change in the corporate structure or
outstanding shares of Common Stock, the number of shares and the class of shares
available for grants under the 1997 Plan or upon the exercise of any outstanding
options granted under either of the Plans shall be adjusted so as to prevent
dilution or enlargement of rights.
The Company shall obtain such consideration for granting options under the
1997 Plan as the Stock Option Plan Committee in its discretion may request. Each
option may be subject to provisions to assure that any exercise or disposition
of Common Stock will not violate federal and state securities laws. No option
may be granted under the 1997 Plan after the day preceding the tenth anniversary
of the adoption of the 1997 Plan.
The Board of Directors or the Stock Option Plan Committee may at any time
withdraw or amend the Plans and may, with the consent of the affected holder of
an outstanding option at any time withdraw or amend the terms and conditions of
outstanding options. Any amendment which would increase the
43
<PAGE>
maximum number of shares issuable pursuant to the Plans, or to any individual
under the 1997 Plan, or change the class of individuals to whom options may be
granted, shall be subject to the approval of the stockholders of the Company.
401(K) SAVINGS PLAN
The Company has adopted The Children's Place 401(k) Savings and Investment
Plan (the "401(k) Plan"), which is intended to be a qualified plan under
Sections 401(a) and 401(k) of the Code. Employees of the Company generally are
eligible to participate in the 401(k) Plan following the date any such employee
attains the age of twenty-one and completes one year of service with the
Company. Each participant may elect to defer the receipt of between 1% and 15%
of such participant's compensation (a "Deferral Election") and have the Company
contribute such compensation to the 401(k) Plan, on such participant's behalf,
up to an annual statutory limitation. For 1997, a participant cannot elect to
defer more than $9,500. This amount is adjusted by the Secretary of the Treasury
to reflect increases in the cost of living.
In addition to the contribution made pursuant to each participant's Deferral
Election, the Company makes a matching contribution (a "Matching Contribution")
in an amount equal to the lesser of 50% of the participant's deferral election
or 2.5% of the participant's salary.
The Company's Matching Contributions and earnings thereon generally become
nonforfeitable upon the participant's completion of five years of service.
However, such contributions will become fully vested regardless of years of
service if the participant's employment terminates by reason of retirement at or
after age 55, disability or death. A participant is always 100% vested in such
participant's other benefits under the 401(k) Plan.
All of the contributions under the 401(k) Plan are held in trust (the
"Trust") and allocated to one or more accounts maintained on behalf of each
participant. The Trust is divided into various investment vehicles, one of which
will be the Common Stock of the Company.
When a participant leaves the employ of the Company for any reason, the
participant will be entitled to receive an amount equal to the vested value of
such participant's accounts. A participant's benefit will be paid to such
participant, or, in the case of his or her death, to such participant's
beneficiary, in a lump sum payable in either cash or Common Stock, to the extent
that any funds have been invested in Common Stock Fund under the 401(k) Plan.
Also, all or a part of certain amounts contributed to the 401(k) Plan may be
withdrawn, in the case of financial hardship, or for any reason after age
59 1/2. Finally, a participant may borrow the vested amounts allocated to such
participant's account, up to certain specified limits. Interest is payable to
the 401(k) Plan on any amounts borrowed.
The expenses of administering the 401(k) Plan are paid by the Company.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Board of Directors expects to adopt, and anticipates that the
Company's stockholders will approve, The Children's Place Retail Stores, Inc.
Employee Stock Purchase Plan (the "Employee Stock Purchase Plan"). Under the
Employee Stock Purchase Plan, a maximum of 360,000 shares of Common Stock may be
purchased from the Company by employees through payroll withholding pursuant to
monthly offerings under the Employee Stock Purchase Plan, following the
consummation of this offering. The purchase price of the Common Stock will be
85% of the fair market value of the Common Stock on the date of the termination
of such offerings. The Employee Stock Purchase Plan will be established pursuant
to the provisions of Section 423 of the Code. All employees of the Company (or
of any future subsidiaries of the Company designated by the Compensation
Committee), who have completed at least 90 days of employment, except for
employees who own Common Stock of the Company or options on such stock which
represent 5% or more of the Common Stock of the Company, will be eligible to
44
<PAGE>
participate. The Employee Stock Purchase Plan will be administered by the
Compensation Committee. The Compensation Committee shall have discretion to
administer, interpret and construe any and all provisions of the Employee Stock
Purchase Plan. The Compensation Committee's determinations will be conclusive.
In the event of certain corporate transactions or events affecting the Common
Stock or structure of the Company, the Compensation Committee shall make certain
adjustments as described in the Employee Stock Purchase Plan. The Board may
amend, alter or terminate the Plan at any time; provided, however, that
stockholder approval will be required for any amendment that would increase the
maximum number of shares issuable pursuant to the Employee Stock Purchase Plan.
The shares of Common Stock which may be purchased pursuant to the Employee Stock
Purchase Plan will be made available from authorized but unissued shares of
Common Stock or from treasury shares. No employee will be granted any right to
purchase Common Stock with a value in excess of $25,000 per year.
MANAGEMENT INCENTIVE PLAN
The Company has a Management Incentive Plan under which key executives of
the Company with significant operating and financial responsibility are eligible
to earn seasonal cash incentive compensation payments that are paid twice each
year.
Prior to the beginning of each six month period, operating income objectives
are established by the Compensation Committee. Any objectives set anticipate a
"stretch" performance level, and are based on an analysis of historical
performance and growth expectations for the business. These objectives and
determination of results are based entirely on financial measures.
Annual incentive compensation targets established for eligible executives
range from 10% to 50% of base salary, as established by the Compensation
Committee. Executives earn their target incentive compensation if the Company
achieves the established operating income. The amount of incentive compensation
paid to executives can range from zero to double their targets, based upon the
extent to which operating income objectives are achieved. The minimum level at
which an executive would earn any incentive payment, and the level at which an
executive would earn the maximum incentive payment of double the target, are
established by the Compensation Committee prior to the commencement of each
bonus period, and actual payouts are based on a straight-line interpolation
based on these minimum and maximum levels and the target operating income
objectives. Payouts under the Management Incentive Plan based on fiscal 1996
performance amounted to $1.2 million.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During its most recent fiscal year, the Company did not have a formal
Compensation Committee. However, Messrs. Dabah and Silver participated in
deliberations of the Company's Board of Directors concerning executive officer
compensation. See "--Committees of the Board of Directors."
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the DGCL, the Company has adopted provisions in its
Certificate of Incorporation and ByLaws which eliminate, subject to certain
exceptions, the personal liability of directors to the Company and its
stockholders for monetary damages for breach of the directors' fiduciary duties.
The Certificate of Incorporation and ByLaws also provide for the indemnification
of directors and officers of the Company and require the Company to advance
expenses to its officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. The Company also has
entered into agreements to indemnify its directors which are intended to provide
the maximum indemnification permitted by the DGCL. These agreements, among other
things, indemnify each of the Company's directors for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
such director in any action or proceeding, including any action by or in the
right of the Company, on account of such director's service as a director of the
Company. The Company believes that these indemnification provisions are
necessary to attract and retain qualified persons as directors. The Company
intends to obtain insurance for the benefit of the directors and officers of the
Company insuring such persons against certain liabilities, including liabilities
under federal and state securities laws.
45
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table provides information at September 1, 1997, with respect
to ownership of Common Stock by (i) each beneficial owner of five percent or
more of the Company's Common Stock, (ii) each director of the Company, (iii)
each of the Company's five most highly compensated executive officers in fiscal
1996 and (iv) 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 September 1, 1997 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 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.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED PERCENT OF CLASS
- ------------------------------------------------------------------------ ------------ --------------------------
<S> <C> <C> <C>
BEFORE AFTER
OFFERING OFFERING(1)
----------- -------------
The SK Equity Fund, L.P. (2)(3)......................................... 7,659,889 37.5% 31.1%
SK Investment Fund, L.P. (2)(3)......................................... 7,659,889 37.5% 31.1%
John F. Megrue (2)(3)................................................... 7,659,889 37.5% 31.1%
Allan W. Karp (2)(3).................................................... 7,659,889 37.5% 31.1%
Thomas A. Saunders III (2)(3)........................................... 7,659,889 37.5% 31.1%
Christopher K. Reilly (2)(3)............................................ 7,659,889 37.5% 31.1%
David Oddi (2)(4)....................................................... 0 0% 0%
Ezra Dabah (5)(6)....................................................... 9,893,400 48.4% 40.2%
Stanley B. Silver (5)(7)................................................ 603,600 2.9% 2.4%
Stanley Silverstein (5)(8).............................................. 6,249,360 30.6% 25.4%
Diane M. Timbanard (9).................................................. 39,840 * *
Nina L. Miner (9)....................................................... 59,760 * *
Mark L. Rose (9)........................................................ 59,760 * *
Nomura Holding America Inc. (10)........................................ 1,992,252 8.9% 0%
2 World Financial Center
New York, New York 10281
All Directors and Executive Officers as a Group 19,733,401 94.0% 78.3%
(15 persons)(11)......................................................
</TABLE>
- ------------------------
* Less than 1%.
(1) Does not give effect to the exercise of the Underwriters' over-allotment
option. The SKM Investors have granted an option to the Underwriters,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to an aggregate of 600,000 shares of Common Stock, solely to
cover over-allotments, if any. If such option is exercised in full, the SKM
Investors will own 7,059,889 shares, or 28.7% of the Common Stock. Of the
600,000 shares to be sold if the over-allotment option is exercised in full,
584,221 shares are to be sold by The SK Equity Fund, L.P., 8,468 shares are
to be sold by SK Investment Fund, L.P. and 7,311 shares are to be sold by a
former consultant to SKM.
(2) The address of this person is Two Greenwich Plaza, Suite 100, Greenwich, CT
06830.
(3) Includes (i) 7,458,445 shares owned by The SK Equity Fund, L.P., (ii)
108,108 shares owned by SK Investment Fund, L.P. and (iii) 93,336 shares
owned by a former consultant to SKM, as to which The SK Equity Fund, L.P.
has certain rights. SKM Partners, L.P. is the general partner of each of The
SK
46
<PAGE>
Equity Fund, L.P. and SK Investment Fund, L.P. Messrs. Karp, Megrue, Reilly
and Saunders are general partners 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, Reilly 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.
(4) Does not include shares owned by The SK Equity Fund, L.P. or SK Investment
Fund, L.P. Mr. Oddi is a principal of SKM and has a limited partnership
interest in SK Investment Fund, L.P.
(5) The address of this person is c/o The Children's Place Retail Stores, Inc.,
One Dodge Drive, West Caldwell, New Jersey 07006.
(6) Includes (i) 6,549,000 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, and (ii) 39,600 shares held by Mr.
Dabah's wife. Does not include (i) 1,098,480 shares beneficially owned by
Stanley Silverstein, Mr. Dabah's father-in-law, (ii) a total of 868,800
shares beneficially owned by other members of Mr. Dabah's family and (iii)
59,760 shares subject to options exercisable within 60 days after September
1, 1997, which are beneficially owned by Nina Miner, Mr. Dabah's
sister-in-law.
(7) Includes 99,600 shares issuable upon exercise of outstanding stock options
exercisable within 60 days of September 1, 1997.
(8) 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) 4,742,520 shares beneficially owned by Ezra Dabah, Mr.
Silverstein's son-in-law, or Mr. Dabah's wife and (ii) 59,760 shares subject
to options exercisable within 60 days after September 1, 1997, which are
beneficially owned by Nina Miner, Mr. Silverstein's daughter.
(9) Reflects shares issuable upon exercise of outstanding stock options
exercisable within 60 days of September 1, 1997.
(10) Reflects shares issuable upon exercise of a warrant, which will be
repurchased by the Company upon consummation of the offering.
(11) Includes shares issuable upon exercise of outstanding stock options
exercisable within 60 days of September 1, 1997.
After the sale of the shares of Common Stock offered hereby, (i) Ezra Dabah
and certain members of his family will own beneficially 11,920,440 shares of the
Company's Common Stock, constituting approximately 48.3% of the outstanding
Common Stock and (ii) the SKM Investors will own 7,659,889 shares or
approximately 31.1% of the outstanding Common Stock (assuming that the
underwriters' over-allotment option is not exercised). Pursuant to the Amended
Stockholders Agreement described below, the SKM Investors and certain other
stockholders, who will own in the aggregate 82.9% of the outstanding Common
Stock, have agreed to vote for the election of two nominees of the SKM Investors
and three nominees of Ezra Dabah to the Company's Board of Directors. As a
result, the SKM Investors and Ezra Dabah will be able to control the election of
five of the Company's directors. In addition, if the SKM Investors and Mr. Dabah
were to vote together, they would be able to determine the outcome of any matter
submitted to a vote of the Company's stockholders for approval, including the
election of the remaining directors. See "--Stockholders Agreement" and
"Description of Capital Stock--Certain Certificate of Incorporation Provisions."
47
<PAGE>
STOCKHOLDERS AGREEMENT
Prior to consummation of this offering, the Company and all of its existing
stockholders, who will own in the aggregate 82.9% of the Common Stock
immediately after this offering, will enter into an Amended and Restated
Stockholders Agreement (the "Amended Stockholders Agreement"). The Amended
Stockholders Agreement will place certain limitations upon the transfer in
privately negotiated transactions of shares of Common Stock beneficially owned
by Ezra Dabah, Stanley Silver and the SKM Investors. In addition, the Amended
Stockholders Agreement will provide that (i) 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 Amended
Stockholders Agreement, the Company's existing stockholders will be obligated to
vote all shares as to which they have voting rights in a manner such that the
Board will at all times include three directors nominated by Ezra Dabah and (ii)
so long as the SKM Investors beneficially own shares representing at least 25%
of the shares of Common Stock owned by such parties on the date of the Amended
Stockholders Agreement, the Company's existing stockholders will be obligated to
vote all shares as to which they have voting rights in a manner such that the
Board will at all times include two directors nominated by the SKM Investors.
Nominees for the remaining director positions will be designated by the
Company's Board of Directors, subject to the approval of the SKM Investors,
which approval may not be unreasonably withheld. Pursuant to the Amended
Stockholders Agreement, Ezra Dabah, Stanley Silver and Stanley Silverstein were
designated as director nominees by Mr. Dabah and were elected to the Board, and
John Megrue and David Oddi were designated as director nominees by the SKM
Investors and were elected to the Board.
The Amended Stockholders Agreement will provide that so long as the SKM
Investors beneficially own shares representing at least 25% of the outstanding
Common Stock, the Company will not, without the affirmative vote of at least one
director nominated by the SKM Investors, engage in specified types of
transactions with certain of its affiliates (not including the SKM Investors),
take action to amend the Company's Bylaws or Certificate of Incorporation or
increase the size of the entire Board of Directors beyond seven directors. The
Amended Stockholders Agreement will also provide 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 Amended 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 the Amended Stockholders Agreement. All the provisions of the Amended
Stockholders Agreement will terminate when no party to the Amended Stockholders
Agreement beneficially owns shares representing at least 25% of the outstanding
Common Stock owned by such party on the date of the Amended Stockholders
Agreement.
The Amended Stockholders Agreement is a revised version of a Stockholders
Agreement that was originally entered into by all of the Company's stockholders
in June 1996 as a condition to the 1996 Private Placement.
48
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN INDEBTEDNESS
On December 28, 1993, the Company agreed to be a co-maker of two installment
notes issued as of that date by Ezra Dabah and certain of his family members in
connection with their bankruptcy proceedings. Although the Company was a
co-maker of the installment notes, the notes expressly provided that they were
non-recourse to the Company. The Company agreed to be a co-maker of these
installment notes in consideration for the waiver of certain claims in the
amount of $20.0 million for repayment of funds previously loaned to the Company
by its stockholders. One such installment note, in the principal amount of
$2,650,000 ("Note A"), was non-interest bearing and provided for three annual
principal payments. Note A was secured by a pledge of shares of the Company's
Common Stock held by Ezra Dabah and certain of his family members. Note A was
repaid by the Company on July 1, 1996 with a portion of the net proceeds from
the 1996 Private Placement. The other installment note, in the principal amount
of $2,110,000 ("Note B" and, collectively with Note A, the "Installment Notes"),
provided for monthly principal payments of $50,000, commencing November 30, 1995
and continuing through October 31, 1998, with the remaining balance of $310,000
due on November 30, 1998. Interest on Note B accrued at the rate of 5% per annum
for the first two years only, of which 3% per annum was payable monthly and the
remaining 2% was added to the principal balance, to be paid at final maturity.
Note B was secured by a lien on certain personal assets of Ezra Dabah and
certain of his family members. The Company repaid Note B on May 28, 1997.
Management believes that the transactions described in the preceding
paragraph were upon terms and conditions at least as favorable to the Company as
could have been obtained from unaffiliated third parties.
1996 PRIVATE PLACEMENT
In July 1996, the SKM Investors purchased shares of the Company's newly
issued Series B Common Stock for an aggregate purchase price of $20.5 million.
Under the terms of the Series B Common Stock, such shares were entitled to a
liquidation preference over the outstanding Series A Common Stock held by the
Company's other stockholders and carried certain special voting and other
rights. The shares of Series B Common Stock purchased by the SKM Investors are
convertible into 7,659,889 of Common Stock. Such conversion will be effected
immediately prior to consummation of the offering made by this Prospectus.
Concurrently with the issuance of the Series B Common Stock to the SKM
Investors, the Company sold the Senior Subordinated Notes and the Noteholder
Warrant to the Noteholder for a purchase price of $20.0 million. The Company
also paid the Noteholder funding and structuring fees in the aggregate amount of
$300,000. The Noteholder Warrant expires in 2006 and represents the right to
purchase 1,992,252 shares of Common Stock at an exercise price of $2.677 per
share, which is equal to the per share purchase price paid by the SKM Investors.
The Senior Subordinated Notes are governed by the terms of a note and warrant
purchase agreement which provides for certain operating restrictions and
financial covenants. Upon consummation of this offering, the Senior Subordinated
Notes will be repaid in full at 100% of their principal amount and the Company
will repurchase the Noteholder Warrant for an aggregate purchase price
determined by multiplying (a) the initial public offering price per share minus
the underwriting discount per share minus the $2.677 exercise price per share of
such warrant by (b) the 1,992,252 shares of Common Stock subject to such
warrant. See "Use of Proceeds."
As compensation for Legg Mason's services as placement agent in connection
with the 1996 Private Placement, the Company granted Legg Mason the Legg Mason
Warrant and paid Legg Mason a cash fee of $1,645,000. The Legg Mason Warrant
expires in 2006 and represents the right to purchase 747,096 shares of Common
Stock at an exercise price of $2.677 per share, which is equal to the per share
purchase price paid by the SKM Investors. Upon consummation of this offering,
the Company will repurchase two-
49
<PAGE>
thirds of the Legg Mason Warrant for a purchase price determined by multiplying
(a) the initial public offering price per share minus the underwriting discount
minus the $2.677 exercise price per share of such warrant by (b) the 498,064
shares of Common Stock subject to the portion of such warrant being repurchased.
See "Use of Proceeds." Legg Mason has informed the Company that, concurrently
with such redemption, Legg Mason will exercise the remaining one-third of the
Legg Mason Warrant and will receive 201,414 shares of Common Stock pursuant to
such exercise.
At the time of the 1996 Private Placement, the Company entered into a
Registration Rights Agreement with its existing stockholders, the SKM Investors,
the Noteholder and Legg Mason, providing for demand and piggyback registration
rights under certain circumstances. In addition, the Company and its existing
stockholders entered into (i) a Stockholders Agreement with the SKM Investors
providing for, among other things, certain restrictions on the issuance and
transfer of shares of the Company's capital stock held by its existing
stockholders, certain voting rights relating to the election of directors, and
veto rights of the directors nominated by the SKM Investors with respect to
certain specified matters, and certain other rights granted to the SKM
Investors, and (ii) a Warrantholder Agreement with the Noteholder and Legg Mason
pursuant to which the Company and its existing stockholders agreed to grant
certain rights to the Noteholder. The execution of the Registration Rights
Agreements, the Stockholders Agreement and the Warrantholder Agreement was a
condition to the 1996 Private Placement. The Registration Rights Agreement and
the Stockholders Agreement are being amended and restated in their entirety in
connection with the offering made hereby and the Warrantholder Agreement will
terminate upon the Company's repurchase of the Noteholder Warrant and the Legg
Mason Warrant. For descriptions of the Amended and Restated Stockholders
Agreement and the Amended and Restated Registration Rights Agreement, see
"Security Ownership by Certain Beneficial Owners and Management--Stockholders
Agreement" and "Description of Capital Stock--Registration Rights." At the time
of the 1996 Private Placement, there were no existing relationships between the
Company and the SKM Investors or the Noteholder.
The net proceeds of the 1996 Private Placement, after payment of transaction
expenses, were $37.4 million. The Company used $11.8 million of such net
proceeds from the 1996 Private Placement to redeem certain outstanding shares of
Common Stock held by certain members of the family of Ezra Dabah and used $2.9
million of such net proceeds to repay certain indebtedness of the Company owed
to Mr. Dabah and certain members of his family as described below. At the time
of the 1996 Private Placement, all outstanding shares of preferred stock, all of
which were held by Mr. Dabah and certain of his family members, were surrendered
for no consideration.
Concurrently with the 1996 Private Placement, the Company paid a transaction
fee of $250,000 to SKM and reimbursed SKM for $50,000 of out-of-pocket expenses.
The Company also entered into an advisory agreement with SKM on June 28, 1996,
pursuant to which SKM agreed to provide certain financial advisory services to
the Company in connection with the Company's ongoing business and financial
matters, including operating and cash flow requirements, corporate liquidity and
other corporate finance concerns. In consideration for these services, SKM is
entitled to receive an annual fee of $150,000, payable quarterly in advance.
Pursuant to the advisory agreement, the Company incurred fees to SKM of
approximately $93,000 in fiscal 1996 and approximately $75,000 during the first
six months of fiscal 1997. The Company also agreed to indemnify SKM for certain
losses arising out of the provision of its advisory services and to reimburse
certain of SKM's out-of-pocket expenses. The advisory agreement will continue in
effect in accordance with its terms following the offering.
The securities sold by the Company in the 1996 Private Placement were
privately placed by the Company pursuant to the exemption from registration
under the Securities Act set forth in Section 4(2) of the Securities Act.
50
<PAGE>
RELATED PARTY LOANS
In July 1994, Ezra Dabah, Stanley Silverstein and Mr. Dabah's mother made
loans to the Company for working capital purposes in the aggregate amount of
$2.5 million. The loans bore interest at rates ranging from 4% to 8% per annum
and were subordinated to the Company's working capital facility with its senior
lender. In addition, Stanley Silverstein loaned the Company $300,000 in March
1996 at 8% interest per annum. All such loans were repaid with a portion of the
net proceeds of the 1996 Private Placement.
During fiscal 1994, Ezra Dabah forwarded funds in the amount of $488,000 to
the Company for the subscription for shares to be issued to Mr. Dabah, subject
to approval of the Company's Board of Directors, at a future date. The Company's
Board of Directors determined to not issue such shares and refunded the $488,000
to Mr. Dabah on July 31, 1997.
Management believes that each of the transactions described in the preceding
two paragraphs was upon terms and conditions at least as favorable to the
Company as could have been obtained from unaffiliated third parties.
DABAH FAMILY AND GITANO LEGAL PROCEEDINGS
Ezra Dabah, certain members of his family and DG Acquisition filed petitions
for reorganization under chapter 11 of the United States Bankruptcy Code in
November 1992. In October 1993, a plan of reorganization was confirmed and all
of the debtors' pre-bankruptcy obligations were discharged. With the express
approval of the creditors' committee, the plan permitted Mr. Dabah and his
family members to retain their ownership of the Company. Pursuant to the terms
of such plan of reorganization, certain proceedings, not related to the Company,
were initiated by the liquidating trustee appointed as part of the Dabah family
bankruptcy case and are currently continuing.
In March 1994, Gitano filed a petition under the United States Bankruptcy
Code and its assets were subsequently sold to an unaffiliated third party. On
several occasions Gitano stockholders initiated litigation against Gitano and
certain of its officers, including Mr. Dabah, asserting claims under the federal
securities laws, which litigation was ultimately settled. The claims against Mr.
Dabah and the other defendants primarily related to alleged misleading and
inaccurate statements in public documents in violation of Rule 10b-5 promulgated
under the Securities Exchange Act of 1934. These claims were settled with the
establishment of a settlement fund for the benefit of the plaintiff class.
Pursuant to the terms of the settlement, the plaintiffs withdrew any claims they
had asserted against Mr. Dabah.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company is subject to
the Delaware General Corporation Law, as amended (the "DGCL"), and to provisions
contained in the Company's Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation") and Amended and Restated Bylaws (the
"Bylaws"), copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part. Reference is made to such
exhibits for a detailed description of the provisions thereof summarized below.
Upon consummation of the offering made hereby, the authorized capital stock
of the Company will consist of one million shares of preferred stock, par value
$1.00 per share, without designation (the "Preferred Stock"), none of which will
be issued and outstanding, and 100,000,000 shares of Common Stock, $.10 par
value per share, of which 24,622,103 shares will be issued and outstanding
(excluding shares issuable pursuant to stock options). Prior to this offering,
the Company's common stock has been designated in two series, the Series A
Common Stock and the Series B Common Stock. Prior to the consummation of this
offering, the Series B Stock will be converted into Series A Common Stock and
the Series A Common Stock will be redesignated as Common Stock.
COMMON STOCK
DIVIDENDS. After any requirements with respect to dividends on any
Preferred Stock have been met, the holders of Common Stock will be entitled to
receive such dividends, if any, as may be declared from time to time by the
Board of Directors on the Common Stock, which dividends will be paid out of
assets legally available therefor and will be distributed pro rata in accordance
with the number of shares of Common Stock held by each such holder. See
"Dividend Policy."
VOTING RIGHTS. Each holder of Common Stock is entitled to one vote per
share on each matter to be voted on by stockholders. Because there is no
cumulative voting of shares, the holders of a majority of the voting power of
the shares voting for the election of directors can elect all of the directors
if they choose to do so. See "Risk Factors--Control by Insiders and Certain
Other Stockholders."
LIQUIDATION RIGHTS. In the event of any liquidation, distribution or sale
of assets, dissolution or winding-up of the Company, holders of Common Stock
will be entitled to share equally and ratably in all assets available for
distribution to stockholders after payment of creditors and distribution in full
to the holders of any series of Preferred Stock outstanding at the time of any
preferential amount to which they may be entitled.
OTHER TERMS. The Common Stock carries no preemptive rights and is not
convertible, redeemable or assessable, or entitled to the benefit of any sinking
fund.
TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar for the
Company's Common Stock is American Stock Transfer & Trust Company.
PREFERRED STOCK
The Board of Directors is empowered to issue Preferred Stock from time to
time in one or more series, without stockholder approval, and with respect to
each series to determine, subject to limitations prescribed by law, (i) the
number of shares constituting such series, (ii) the dividend rate on the shares
of each series, whether such dividends shall be cumulative and the relation of
such dividends to the dividends payable on any other class of stock, (iii)
whether the shares of each series shall be redeemable and the terms thereof,
(iv) whether the shares shall be convertible into Common Stock and the terms
thereof, (v) the amount per share payable on each series or other rights of
holders of such shares on liquidation or dissolution of the Company, (vi) the
voting rights, if any, of shares of each series, and (vii) generally any other
rights and privileges not in conflict with the Certificate of Incorporation or
the DGCL for each series
52
<PAGE>
and any qualifications, limitations or restrictions thereof. To date, no series
of Preferred Stock has been authorized and no shares of Preferred Stock have
been issued.
The issuance of Preferred Stock by action of the Board of Directors could
adversely affect the voting power, dividend rights and other rights of holders
of the Common Stock. Issuance of a series of Preferred Stock also could,
depending on the terms of such series, either impede or facilitate the
completion of a merger, tender offer or other takeover attempt. Although the
Board of Directors is required to make a determination as to the best interests
of the stockholders of the Company when issuing Preferred Stock, the Board of
Directors could act in a manner that would discourage an acquisition attempt or
other transaction that some, or a majority, of the stockholders might believe to
be in the best interests of the Company or in which stockholders might receive a
premium for their stock over the then prevailing market price. Although there
are currently no plans to issue shares of Preferred Stock or rights to purchase
such shares, management believes that the availability of the Preferred Stock
will provide the Company with increased flexibility in structuring possible
future financings and acquisitions and in meeting other corporate needs that
might arise. The authorized shares of Preferred Stock are available for issuance
without further action by the Company's stockholders, unless such action is
required by applicable law or the rules of any stock exchange on which the
Common Stock may then be listed.
CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Certain provisions of the Certificate of Incorporation and Bylaws may be
deemed to 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, (i) classify the Company's Board of Directors
into three classes, each of which will serve for different three year periods,
(ii) provide that only the chairman of the Board of Directors may call special
meetings of the stockholders, (iii) 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, (iv) provide that all vacancies on the Company's
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, (v) establish certain advance notice
procedures for nominations of candidates for election as directors and for
stockholder proposals to be considered at stockholders' meetings, and (vi)
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.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the DGCL. In
general, this statute prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the person becomes an interested stockholder, unless
(i) prior to such time the transaction which resulted in the stockholder
becoming an interested stockholder was approved by the Company's Board of
Directors, or (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the Company outstanding at the commencement
of the transaction, subject to certain exceptions, or (iii) at or subsequent to
such time, the business combination is approved by the Company's Board of
Directors and authorized at an annual or special meeting of stockholders by the
affirmative vote of at least two-thirds of the holders of the Company's
outstanding voting stock not owned by the interested stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within the prior three years did own) 15% or more of the Company's voting stock.
Such provisions could render the Company more difficult to be acquired pursuant
53
<PAGE>
to an unfriendly acquisition by a third party by making it more difficult for
such person to obtain control of the Company without the approval of the Board
of Directors.
The Company has included in its Certificate of Incorporation provisions to
eliminate the personal liability of its directors for monetary damages resulting
from breaches of their fiduciary duty to the extent permitted by the DGCL and to
indemnify its directors and officers to the fullest extent permitted by Section
145 of the DGCL. See "Management--Limitation of Liability and Indemnification."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have a total of 24,622,103
shares of Common Stock outstanding (excluding shares issuable pursuant to stock
options). Of these shares, the 4,000,000 shares of Common Stock offered hereby
will be freely tradable without restriction or registration under the Securities
Act by persons other than "affiliates" of the Company, as defined in the
Securities Act, who would be required to sell under Rule 144 under the
Securities Act. The remaining 20,622,103 shares of Common Stock outstanding will
be "restricted securities" as such term is defined by Rule 144 (the "Restricted
Shares"). The Restricted Shares were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the Securities
Act.
Of the Restricted Shares, 396,120 shares will be eligible for sale in the
public market in reliance on Rule 144(k) immediately following the commencement
of this offering. The remaining 20,225,983 Restricted Shares will be eligible
for sale in the public market pursuant to Rule 144 and Rule 701 under the
Securities Act beginning 90 days after the date of this Prospectus as described
below. All of the Restricted Shares are subject to lock-up agreements with the
Underwriters. See "Underwriting."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least one year (including the holding period of any prior owner except an
affiliate), including persons who may be deemed "affiliates" of the Company,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of 1% of the number of shares of Common Stock then
outstanding (approximately 246,221 shares upon completion of the offering) or
the average weekly trading volume of the Common Stock during the four calendar
weeks preceding the filing of a Form 144 with respect to such sale. Sales under
Rule 144 are also subject to certain manner of sale provisions and notice
requirements, and to the availability of current public information about the
Company. In addition, a person who is not deemed to have been an affiliate of
the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), would be
entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. Rule 144 also provides that affiliates who are
selling shares that are not Restricted Shares must nonetheless comply with the
same restrictions applicable to Restricted Shares with the exception of the
holding period requirement.
Rule 701 promulgated under the Securities Act provides that shares of Common
Stock acquired on the exercise of outstanding options may be resold by persons
other than affiliates, beginning 90 days after the date of this Prospectus,
subject only to the manner of sale provisions of Rule 144, and by affiliates,
beginning 90 days after the date of this Prospectus, subject to all provisions
of Rule 144 except its one-year minimum holding period.
The Company is party to an Amended and Restated Registration Rights
Agreement pursuant to which the SKM Investors and the Company's other existing
stockholders may demand registration under the Securities Act of shares of the
Common Stock held by them at any time after nine months from the date of this
Prospectus. The Company may postpone such a demand under certain circumstances.
In addition, the Company's existing stockholders may request the Company to
include shares of the Common Stock held by them in any registration proposed by
the Company of such Common Stock under the Securities Act.
54
<PAGE>
As of September 1, 1997, options to purchase a total of 1,444,080 shares of
Common Stock pursuant to the 1996 Plan were outstanding with a weighted average
exercise price of $2.677 per share. Options to purchase an additional 299,160
shares were granted prior to this offering at exercise prices equal to the
initial public offering price. In addition, a total of 1,000,000 shares of
Common Stock are available for future issuance under the 1997 Plan. Subject to
consummation of this offering, the Company has granted options with respect to
252,300 shares at exercise prices equal to the initial public offering price to
certain eligible employees under the 1997 Plan, none of which were granted to
executive officers. Following this offering, the Company intends to file one or
more registration statements on Form S-8 under the Securities Act to register
shares of Common Stock issuable under the 1996 Plan, the 1997 Plan and the
Employee Stock Purchase Plan.
Prior to the offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of Common Stock will have on the market price of
the Common Stock. Nevertheless, sales of substantial amounts of such shares in
the public market, or the perception that such sales could occur, could
materially and adversely affect the market price of the Common Stock and could
impair the Company's future ability to raise capital through an offering of its
equity securities. See "Risk Factors--Potential Impact of Shares Eligible for
Future Sale; Registration Rights."
55
<PAGE>
UNDERWRITING
The Underwriters named below, represented by Montgomery Securities, Donaldson,
Lufkin & Jenrette Securities Corporation, Smith Barney Inc. and Legg Mason (the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company the number
of shares of Common Stock indicated below opposite their respective names, at
the initial public offering price less the underwriting discount set forth on
the cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent and
that the Underwriters are committed to purchase all of the shares of Common
Stock if they purchase any.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Montgomery Securities............................................................ 717,000
Donaldson, Lufkin & Jenrette Securities Corporation.............................. 717,000
Smith Barney Inc................................................................. 717,000
Legg Mason Wood Walker, Incorporated............................................. 239,000
Bear, Stearns & Co. Inc.......................................................... 110,000
William Blair & Company, L.L.C................................................... 110,000
BT Alex. Brown Incorporated...................................................... 110,000
Deutsche Morgan Grenfell Inc..................................................... 110,000
SBC Warburg Dillon Read Inc...................................................... 110,000
A.G. Edwards & Sons, Inc......................................................... 110,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated............................... 110,000
Morgan Stanley & Co. Incorporated................................................ 110,000
Oppenheimer & Co., Inc........................................................... 110,000
PaineWebber Incorporated......................................................... 110,000
Dain Bosworth Incorporated....................................................... 70,000
Needham & Company, Inc........................................................... 70,000
Stephens Inc..................................................................... 70,000
Cruttenden Roth Incorporated..................................................... 50,000
Fahnestock & Co. Inc............................................................. 50,000
Gerard Klauer Mattison & Co., LLC................................................ 50,000
Hampshire Securities Corporation................................................. 50,000
Ladenburg, Thalmann & Co., Inc................................................... 50,000
H.C. Wainwright & Co., Inc....................................................... 50,000
----------
Total.......................................................................... 4,000,000
----------
----------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $0.55 per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $0.10 per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part. The Representatives have advised the Company
that they intend to make a market in the Common Stock after the effective date
of this offering.
The SKM Investors have granted an option to the Underwriters, exercisable
during the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 600,000 additional shares of Common Stock from such SKM Investors to
cover over-allotments, if any, at the same price per share as the initial shares
to be purchased by the Underwriters. To the extent that the Underwriters
exercise this option, the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this offering.
56
<PAGE>
The Underwriting Agreement provides that the Company and the SKM Investors
will indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act, or will contribute to payments that the
Underwriters may be required to make in respect thereof.
The Representatives have informed the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts over
which they exercise discretionary authority in excess of 5% of the shares of
Common Stock offered hereby.
At the request of the Company, the Underwriters have reserved for sale to
certain employees of the Company and certain other persons, at the public
offering price, up to 280,000 of the shares of Common Stock offered hereby. The
number of shares available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares not so
purchased will be offered by the Underwriters to the general public on the same
basis as the other shares offered hereby.
The Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock. If the Underwriters create a short position in the Common Stock in
connection with the offering, I.E., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives may
reduce that short position by purchasing Common Stock in the open market. The
Representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
In general, purchases of Common Stock for the purpose of stabilization or to
reduce a short position could cause the price of the Common Stock to be higher
than it might be in the absence of such purchases. Neither the Company nor any
of the Underwriters makes any representation or predictions as to the direction
or magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Representatives will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
Pursuant to a redemption agreement entered into between the Company and Legg
Mason, one of the Representatives, the Company will use approximately $5.2
million of the net proceeds of this offering to redeem, upon consummation of
this offering, two-thirds of the Legg Mason Warrant. The redemption price to be
paid by the Company to Legg Mason will be determined by multiplying (a) the
initial public offering price per share minus the underwriting discount minus
the $2.677 exercise price per share of such warrant by (b) the 498,064 shares of
Common Stock subject to the portion of such warrant being repurchased.
Concurrently with such redemption, Legg Mason will exercise the remaining
one-third of the Legg Mason Warrant and will receive 201,414 shares of Common
Stock pursuant to a cashless exercise of such portion of the Legg Mason Warrant.
The Legg Mason Warrant was issued as partial compensation for its services in
connection with the 1996 Private Placement; the Company also paid Legg Mason a
total cash fee of $1.6 million for services in connection with the 1996 Private
Placement. As a result of this warrant redemption, the Conduct Rules of the
National Association of Securities Dealers, Inc. require that the initial public
offering price be established at a price no higher than that recommended by a
"qualified independent underwriter" (as defined in such Conduct Rules) that (i)
does not beneficially own 5% or more of the outstanding voting securities of the
Company, (ii) participates in the preparation of this Prospectus and the
Registration Statement of which this Prospectus is a part and (iii) exercises
the usual standards of "due diligence" in respect thereto. Montgomery Securities
has acted as such qualified independent underwriter with respect to this
offering. As a result of the warrant redemption and its participation as an
underwriter in this offering, Legg Mason is expected to receive approximately
9.7% of the gross proceeds of this offering.
The Company's stockholders and Legg Mason have agreed that, subject to
certain limited exceptions, for a period of 180 days from the date of this
Prospectus, they will not, without the prior written consent of Montgomery
Securities, directly or indirectly, sell, offer, contract or grant any option to
sell or otherwise dispose of any shares of the Company's capital stock, options
or warrants to acquire shares of the Company's capital stock, or securities
exchangeable or exercisable for or convertible into shares of the
57
<PAGE>
Company's capital stock. Montgomery Securities may, in its sole discretion and
at any time without notice, release all or any portion of the securities subject
to these lock-up agreements. The Company has agreed that, for a period of 180
days from the date of this Prospectus, it will not, directly or indirectly,
sell, offer, contract or grant any option to sell or otherwise dispose of any
shares of Common Stock, options or warrants to acquire shares of Common Stock,
or securities exchangeable or exercisable for or convertible into shares of
Common Stock, except that the Company may issue shares of Common Stock or
options to purchase Common Stock pursuant to any stock option, stock bonus or
other stock plan or arrangement described in this Prospectus, but only if the
holders of such shares or options agree in writing not to sell, offer, dispose
of or otherwise transfer any such shares or options during such 180-day period.
The shares of Common Stock offered hereby have been approved for listing on
the Nasdaq National Market under the symbol PLCE.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price of the Common Stock was
determined by negotiations among the Representatives and the Company. Among the
factors considered in such negotiations were the history of, and the prospects
for, the Company and the industry in which it competes, an assessment of the
Company's management, its past and present earnings and the trend of such
earnings, the general condition of securities markets at the time of this
offering and the market price of publicly traded stock of comparable companies
in recent periods.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Stroock & Stroock & Lavan LLP, New York, New York. Certain legal
matters will be passed upon for the Underwriters by Hale and Dorr LLP, Boston,
Massachusetts.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as stated in their reports with respect thereto,
and are included herein, in reliance upon the authority of said firm as experts
in accounting and auditing in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W., Washington, D.C. 20549, a Registration
Statement on Form S-1 (the "Registration Statement") under the Securities Act,
for the registration of the Common Stock offered by this Prospectus. Certain of
the information contained in the Registration Statement is omitted from this
Prospectus, and reference is hereby made to the Registration Statement and
exhibits relating thereto for further information concerning the Company and the
Common Stock. Statements contained herein concerning the provisions of any
document are not necessarily complete and in each instance reference is made to
the copy of the document filed as an exhibit to the Registration Statement. Each
such statement is qualified in its entirety by this reference.
The Registration Statement and the exhibits thereto are available for
inspection in the principal office of the Commission in Washington, D.C. and
photostatic copies of such material may be obtained from the Commission upon
payment of the fees prescribed by the Commission. In addition, such material may
be electronically examined at the Commission's Web site on the Internet located
at http://www.sec.gov.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent certified public
accountants and quarterly reports containing unaudited financial information for
the first three quarters of each fiscal year.
58
<PAGE>
INDEX TO
FINANCIAL STATEMENTS
THE CHILDREN'S PLACE RETAIL STORES, INC.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheets at February 3, 1996, February 1, 1997 and August 2, 1997 (unaudited)........................ F-3
Statements of Income for the fiscal years ended January 28, 1995, February 3, 1996
and February 1, 1997 and for the six months ended August 3, 1996 (unaudited) and
August 2, 1997 (unaudited)............................................................................... F-4
Statements of Changes in Stockholders' Equity (Deficit) for the fiscal years
ended January 28, 1995, February 3, 1996 and February 1, 1997 and for the six
months ended August 2, 1997 (unaudited).................................................................. F-5
Statements of Cash Flows for the fiscal years ended January 28, 1995, February 3, 1996
and February 1, 1997 and for the six months ended August 3, 1996 (unaudited)
and August 2, 1997 (unaudited)........................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
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 balance sheets of The Children's Place
Retail Stores, Inc. (a Delaware corporation) as of February 1, 1997 and February
3, 1996, and the related statements of income, changes in stockholders' equity
(deficit) and cash flows for each of the three fiscal years in the period ended
February 1, 1997. 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. as of February 1, 1997 and February 3, 1996, and the results of its
operations and its cash flows for each of three fiscal years in the period ended
February 1, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 13, 1997 (except with respect to the
matters discussed in Note 15, as to which
the date is September 18, 1997)
F-2
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
AUGUST 2, AUGUST 2,
FEBRUARY 3, FEBRUARY 1, 1997 1997(1)
1996 1997 (UNAUDITED) (UNAUDITED)
----------- ----------- ------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............................. $ 569 $ 3,422 $ 631 $ 631
Accounts receivable................................... 641 890 1,637 1,637
Inventories........................................... 12,613 14,425 22,445 22,445
Prepaid expenses and other current assets............. 2,349 3,163 4,281 4,281
Deferred income taxes, net of valuation allowance..... 0 5,788 5,788 5,788
----------- ----------- ------------- -------
Total current assets................................ 16,172 27,688 34,782 34,782
Property and equipment, net........................... 15,792 20,299 27,853 27,853
Deferred income taxes, net of valuation allowance..... 0 14,711 15,283 15,283
Other assets.......................................... 109 1,781 1,830 1,830
----------- ----------- ------------- -------
Total assets........................................ $ 32,073 $ 64,479 $ 79,748 $ 79,748
----------- ----------- ------------- -------
----------- ----------- ------------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
Revolving credit facility............................. $ 8,689 $ 0 $ 12,464 $ 12,464
Current portion of long-term debt..................... 6,808 600 0 0
Current maturities of obligations under capital
leases.............................................. 692 772 477 477
Accounts payable...................................... 12,856 8,322 12,564 12,564
Accrued expenses, interest and other current
liabilities......................................... 4,757 6,043 7,198 32,955
----------- ----------- ------------- -------
Total current liabilities........................... 33,802 15,737 32,703 58,460
Long-term debt........................................ 7,373 19,040 18,439 18,439
Obligations under capital leases...................... 862 92 12 12
Other long-term liabilities........................... 1,771 2,312 2,517 2,517
----------- ----------- ------------- -------
Total liabilities................................... 43,808 37,181 53,671 79,428
----------- ----------- ------------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $1 par value......................... 10 0 0 0
Common stock, Series A, $.10 par value................ 0 1,276 1,276 1,276
Common stock, Series B, $.10 par value................ 0 5 5 5
Common stock, $.10 par value.......................... 14 0 0 0
Additional paid-in capital............................ 50,557 57,842 57,354 31,597
Accumulated deficit................................... (62,266) (31,825) (32,558) (32,558)
Less: Treasury stock, 2,800 shares of common stock, at
cost................................................ (50) 0 0 0
----------- ----------- ------------- -------
Total stockholders' equity (deficit)................ (11,735) 27,298 26,077 320
----------- ----------- ------------- -------
Total liabilities and stockholders' equity
(deficit)........................................... $ 32,073 $ 64,479 $ 79,748 $ 79,748
----------- ----------- ------------- -------
----------- ----------- ------------- -------
</TABLE>
- ------------------------
(1) Refer to Note 16--Unaudited Pro Forma Balance Sheet.
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
-------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
AUGUST 3, AUGUST 2,
JANUARY 28, FEBRUARY 3, FEBRUARY 1, 1996 1997
1995 1996 1997 (UNAUDITED) (UNAUDITED)
----------- ----------- ------------ ------------- -------------
Net sales................................. $ 107,953 $ 122,060 $143,838 $ 56,412 $72,737
Cost of sales............................. 74,229 83,434 89,786 38,300 48,917
----------- ----------- ------------ ------------- -------------
Gross profit.............................. 33,724 38,626 54,052 18,112 23,820
Selling, general and administrative
expenses................................ 27,873 30,757 36,251 15,926 19,287
Pre-opening costs......................... 178 311 982 212 1,222
Depreciation and amortization............. 3,344 3,496 4,017 1,854 2,615
----------- ----------- ------------ ------------- -------------
Operating income.......................... 2,329 4,062 12,802 120 696
Interest expense, net..................... 1,303 1,925 2,884 1,182 1,815
Other expense, net........................ 0 447 396 379 106
----------- ----------- ------------ ------------- -------------
Income (loss) before income taxes and
extraordinary item...................... 1,026 1,690 9,522 (1,441 ) (1,225 )
Provision (benefit) for income taxes...... 54 36 (20,919) 21 (492 )
----------- ----------- ------------ ------------- -------------
Income (loss) before extraordinary item... 972 1,654 30,441 (1,462 ) (733 )
Extraordinary item--gain on forgiveness of
debt.................................... 490 0 0 0 0
----------- ----------- ------------ ------------- -------------
Net income (loss)......................... $ 1,462 $ 1,654 $ 30,441 $ (1,462 ) $ (733 )
----------- ----------- ------------ ------------- -------------
----------- ----------- ------------ ------------- -------------
Pro forma net income (loss) per common
share (unaudited)....................... $ 1.28 $ (0.03 )
Pro forma weighted average common shares
outstanding (unaudited)................. 23,804,185 23,804,185
------------ -------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE FISCAL YEARS ENDED JANUARY 28, 1995, FEBRUARY 3, 1996
AND FEBRUARY 1, 1997 AND FOR THE SIX MONTHS ENDED AUGUST 2, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK COMMON STOCK COMMON STOCK COMMON STOCK
---------------------- ----------------------- ------------------------ ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- ---------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 29, 1994...... 10,000 $ 10 0 $0 0 $0 137,200 $ 14
Receipt of funds toward common
stock subscription............ 0 0 0 0 0 0 0 0
Net income..................... 0 0 0 0 0 0 0 0
--------- --- ---------- ----------- ----------- ----- --------- ---
BALANCE, January 28, 1995...... 10,000 10 0 0 0 0 137,200 14
Net income..................... 0 0 0 0 0 0 0 0
--------- --- ---------- ----------- ----------- ----- --------- ---
BALANCE, February 3, 1996...... 10,000 10 0 0 0 0 137,200 14
Surrendered preferred stock.... (10,000) (10) 0 0 0 0 0 0
Exercise of stock options...... 0 0 0 0 0 0 2,800 0
Issuance of warrants........... 0 0 0 0 0 0 0 0
Conversion of common stock to
Series A Common Stock........ 0 0 16,800,000 1,680 0 0 (140,000) (14)
Issuance of Series B Common
Stock, net of transaction
costs........................ 0 0 0 0 47,238 5 0 0
Redemption of Series A Common
Stock......................... 0 0 (4,039,200) (404) 0 0 0 0
Net income..................... 0 0 0 0 0 0 0 0
--------- --- ---------- ----------- ----------- ----- --------- ---
BALANCE, February 1, 1997...... 0 0 12,760,800 1,276 47,238 5 0 0
Return of funds toward common
stock subscription............ 0 0 0 0 0 0 0 0
Net loss (unaudited)........... 0 0 0 0 0 0 0 0
--------- --- ---------- ----------- ----------- ----- --------- ---
BALANCE, August 2, 1997
(unaudited)................... 0 $ 0 12,760,800 $ 1,276 47,238 $5 0 $ 0
--------- --- ---------- ----------- ----------- ----- --------- ---
--------- --- ---------- ----------- ----------- ----- --------- ---
<CAPTION>
TOTAL
ADDITIONAL TREASURY STOCK STOCKHOLDERS'
PAID-IN ACCUMULATED ------------------------ EQUITY
CAPITAL DEFICIT SHARES AMOUNT (DEFICIT)
----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 29, 1994...... $ 50,069 $ (65,382) (2,800) $ (50) $ (15,339)
Receipt of funds toward common
stock subscription............ 488 0 0 0 488
Net income..................... 0 1,462 0 0 1,462
----------- ------------ ----------- ----- ------------
BALANCE, January 28, 1995...... 50,557 (63,920) (2,800) (50) (13,389)
Net income..................... 0 1,654 0 0 1,654
----------- ------------ ----------- ----- ------------
BALANCE, February 3, 1996...... 50,557 (62,266) (2,800) (50) (11,735)
Surrendered preferred stock.... 10 0 0 0 0
Exercise of stock options...... 123 0 2,800 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)
Net loss (unaudited)........... 0 (733) 0 0 (733)
----------- ------------ ----------- ----- ------------
BALANCE, August 2, 1997
(unaudited)................... $ 57,354 $ (32,558) 0 $ 0 $ 26,077
----------- ------------ ----------- ----- ------------
----------- ------------ ----------- ----- ------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements
F-5
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
--------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
JANUARY 28, FEBRUARY 3, FEBRUARY 1, AUGUST 3, AUGUST 2,
1995 1996 1997 1996 1997
------------- ----------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 1,462 $ 1,654 $ 30,441 $ (1,462) $ (733)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization................................ 3,344 3,496 4,017 1,854 2,615
Deferred financing fee amortization.......................... 0 0 359 54 304
Loss on disposals of property and equipment.................. 0 156 0 2 25
Extraordinary gain........................................... (490) 0 0 0 0
Deferred taxes............................................... 0 0 (21,263) 0 (572)
Changes in operating assets and liabilities:
Accounts receivable.......................................... 38 (146) (249) (148) (747)
Inventories.................................................. (1,819) (1,601) (1,812) 463 (8,020)
Prepaid expenses and other current assets.................... 454 (243) (814) (647) (1,118)
Other assets................................................. 251 (29) (128) (6) (229)
Accounts payable............................................. (531) 5,691 (4,536) (5,676) 4,242
Accrued expenses, interest and other current liabilities..... 864 530 2,045 1,027 1,360
Payment of restructuring charges............................. (2,265) (1,854) (214) 0 0
------ ----------- ----------- ----------- -----------
Total adjustments.......................................... (154) 6,000 (22,595) (3,077) (2,140)
------ ----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities.............. 1,308 7,654 7,846 (4,539) (2,873)
------ ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases................................. (2,723) (6,935) (8,492) (2,759) (10,159)
------ ----------- ----------- ----------- -----------
Net cash used in investing activities............................ (2,723) (6,935) (8,492) (2,759) (10,159)
------ ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility....................... 8,500 76,919 141,907 53,413 88,557
Repayments under revolving credit facility....................... (8,000) (73,596) (150,596) (59,147) (76,093)
Proceeds from issuance of long-term debt......................... 699 0 20,000 20,000 0
Repayment of long-term debt...................................... (2,067) (3,436) (12,821) (12,521) (1,360)
Proceeds from related party loan................................. 2,500 0 0 0 0
Receipt of funds toward common stock subscription................ 488 0 0 0 0
Payment of obligations under capital leases...................... (1,220) (387) (690) (335) (375)
Return of funds toward common stock subscription................. 0 0 0 0 (488)
Increase in bank overdrafts...................................... 288 0 0 0 0
Redemption of Series A Common Stock.............................. 0 0 (11,845) (11,845) 0
Net proceeds from Series B Common Stock.......................... 0 0 18,763 18,763 0
Exercise of stock options........................................ 0 0 173 173 0
Deferred financing costs......................................... 0 0 (1,392) (1,334) 0
------ ----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities.......... 1,188 (500) 3,499 7,167 10,241
------ ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents......... (227) 219 2,853 (131) (2,791)
Cash and cash equivalents, beginning of period............... 577 350 569 569 3,422
------ ----------- ----------- ----------- -----------
Cash and cash equivalents, end of period......................... $ 350 $ 569 $ 3,422 $ 438 $ 631
------ ----------- ----------- ----------- -----------
------ ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
1. BUSINESS AND ORGANIZATION OF THE COMPANY
The Children's Place Retail Stores, Inc., a Delaware corporation (the
"Company"), is a specialty retailer of high quality, value-priced apparel and
accessories for newborn to twelve year old children. The Company designs,
contracts to manufacture and sells its products under "The Children's Place"
brand name. As of February 1, 1997, the Company operated 108 stores, primarily
located in regional shopping malls in the eastern half of the United States.
During the fiscal year ended February 1, 1997 ("Fiscal 1996"), the Company
embarked on an aggressive expansion program. During Fiscal 1996, the Company
opened 18 new stores and substantially remodeled or relocated 5 stores. During
the six months ended August 2, 1997, 26 new stores were opened. During the
fiscal year ended February 3, 1996 ("Fiscal 1995"), the Company opened 9 new
stores. The Company's future operating results will depend largely upon its
ability to open and operate new stores successfully and to manage a growing
business profitably.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
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 1994, 1995 and 1996
represent the 52-week period ended January 28, 1995 ("Fiscal 1994"), the 53-week
period ended February 3, 1996 and the 52-week period ended February 1, 1997,
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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from the estimates made by and
assumptions used by management.
CASH AND CASH EQUIVALENTS
In accordance with the Statement of Financial Accounting Standards ("SFAS")
No. 95, "Statement of Cash Flows," 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 as determined by the retail inventory method.
COST OF SALES
The Company includes its buying, distribution and occupancy expenses in its
cost of sales.
F-7
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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,
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 long-term
third-party financing, including the value of the Legg Mason warrants
attributable to the debt financing portion of the 1996 Private Placement
discussed further in Note 3--1996 Private Placement and Note 10--Stockholders'
Equity (Deficit). Deferred financing costs are included in other assets and are
amortized over the term of the indebtedness. As of February 1, 1997 unamortized
deferred financing costs were approximately $1.6 million, net of accumulated
amortization of $0.4 million. The Company expects to write-off its unamortized
deferred financing costs and debt discount in conjunction with its contemplated
repayment of debt following its initial public offering (see Note 15--Subsequent
Events).
ACCOUNTING FOR IMPAIRMENTS IN LONG-LIVED ASSETS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
Being Disposed Of," which the Company adopted in the First Fiscal Quarter 1996.
This statement requires that long-lived assets and identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that carrying amounts of the assets may not be recoverable. The Company
continually evaluates the carrying value and the economic useful life of its
long-lived assets based on the Company's operating performance and the expected
future net cash flows and will adjust the carrying amount of assets which may
not be recoverable. The Company does not believe that any impairment exists in
the recoverability of its long-lived assets.
PRE-OPENING COSTS
Store pre-opening costs, which consist primarily of payroll, supply and
advertising expenses, are expensed as incurred.
ADVERTISING COSTS
The Company expenses the cost of advertising when the advertising is first
run or displayed. Included in selling, general and administrative expenses for
Fiscal 1994, Fiscal 1995 and Fiscal 1996 is $1,388,000, 1,253,000 and
$1,706,000, respectively, in advertising costs.
RESTRUCTURING
Included in selling, general and administrative expenses for Fiscal 1994,
1995 and 1996 is $481,000, $350,000 and $483,000, respectively, of restructuring
costs, primarily consisting of legal, consulting and severance costs regarding
the closing of numerous store locations. In addition, included in the statement
of
F-8
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
cash flows for Fiscal 1994 and Fiscal 1995 is the payment of restructuring
charges which were recorded prior to Fiscal 1994.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). 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 tax periods in future
periods. See Note 9--Income Taxes for a discussion of income taxes and the
Company's net operating loss carryforwards.
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. The fair values of the Company's
long-term debt are discussed further in Note 4--Short and Long-term Borrowings.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company accounts for its 1996 Stock Option Plan (the "1996 Plan") under
the provisions of Accounting Principles Bulletin ("APB") No. 25, "Accounting for
Stock Issued to Employees," under which no compensation cost has been
recognized. Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), establishes a fair value based method of
accounting for stock-based compensation plans and requires adoption or pro forma
disclosure for all transactions entered into after December 15, 1994. See Note
11--Stock Option Plan for a discussion of the Company's pro forma disclosure of
its 1996 Plan.
ACCOUNTING FOR COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." Under SFAS No. 130, the Company will be
required to present comprehensive income in its primary financial statements.
Other comprehensive income represents revenues, expenses, gains and losses that
bypass the income statement. The Company will be required to display the
cumulative effect of other comprehensive income items as a separate component of
stockholders' equity, and present the components of other comprehensive income
in its income statement or statement of stockholders' equity. This statement is
effective for fiscal years beginning after December 15, 1997 and
reclassification of comparative information for prior years' financial
statements will be required. Management does not
F-9
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
believe that the accompanying financial statements will be affected by the
adoption of SFAS No. 130, and will adopt SFAS No. 130 during the first quarter
of Fiscal 1998.
RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to current
year presentation.
UNAUDITED INTERIM FINANCIAL INFORMATION
All information with respect to the balance sheet as of August 2, 1997 and
the statements of income, changes in stockholders' equity (deficit) and cash
flows for the six months ended August 3, 1996 and the six months ended August 2,
1997 is unaudited and has been prepared in accordance with generally accepted
accounting principles for interim financial presentation. In the opinion of
management, the unaudited financial statements contain all adjustments necessary
for a fair presentation of the results of such periods. The unaudited financial
statements have been prepared on a basis consistent with that of the audited
financial statements as of February 1, 1997. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The results of operations for the six months ended August 2, 1997 are not
necessarily indicative of the results of operations that may be expected for the
full year.
PRO FORMA NET INCOME PER COMMON SHARE
Pro forma net income per common share is calculated by dividing net income
by the pro forma weighted average common shares and common share equivalents
outstanding as if (i) the proposed stock split and Series B conversion as
discussed in Note 15--Subsequent Events, (ii) the 1996 Private Placement of
Common Stock as discussed in Note 3--Private Placements, (iii) the cancellation
of the preferred shares as discussed in Note 10--Stockholders' Equity (Deficit)
and (iv) the granting of management options in conjunction with the 1996 Private
Placement as discussed in Note 11--Stock Option Plan, occurred on February 4,
1996. Common share equivalents include the Noteholder Warrant, the Legg Mason
Warrant, as discussed in Note 3--1996 Private Placement, and management options
to purchase common stock, calculated using the treasury stock method in
accordance with APB Opinion No. 15, "Earnings per Share," ("APB No. 15") at an
assumed initial public offering price of $14.00 per share. Pro forma fully
diluted net income per common share is equal to the amount presented.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." Under SFAS No. 128, the presentation of both basic
and diluted earnings per share is required on the statements of income for
periods ending after December 15, 1997, at which time restatement will be
necessary. Had the provisions of SFAS No. 128 been in effect for Fiscal 1996 and
the six months ended August 2, 1997, the Company would have reported pro forma
basic net income (loss) per share of $1.49 (unaudited) and $(0.04) (unaudited)
for Fiscal 1996 and for the six months ended August 2, 1997, respectively. Under
SFAS No. 128, pro forma diluted earnings per share is equal to the pro forma net
income per share currently disclosed by the Company.
F-10
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
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
"Noteholder"), the Company sold to the Noteholder, 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
warrant (the "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 has been accounted for herein as a
credit to additional paid-in capital, net of income tax effect of $0.8 million,
and a discount to the Senior Subordinated Notes, and is 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 $300,000.
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 SK Equity Fund,
L.P. and SK Investment Fund, L.P., together with a former consultant to SKM
(collectively, the "SKM Investors"). 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. See Note 10--Stockholders'
Equity (Deficit) for a discussion of the Series B Common Stock. Concurrently
with the 1996 Private Placement, the Company paid a transaction fee of $250,000
to SKM and reimbursed SKM for $50,000 of out-of-pocket expenses.
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 Foothill
Credit Facility (see Note 4--Short- and Long-term Borrowings) 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 $700,000. 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, has been
credited to additional paid-in capital and capitalized as deferred financing
costs in other assets, and is being amortized over the six year term of the
Senior Subordinated Notes. See Note 10--Stockholders' Equity (Deficit) for a
further discussion of the Legg Mason Warrant.
4. SHORT AND LONG-TERM BORROWINGS
SHORT-TERM BORROWINGS
THE FOOTHILL CREDIT FACILITY
On April 12, 1995, the Company entered into a revolving credit facility
("the Foothill Credit Facility") with Foothill Capital Corporation ("Foothill
Capital"). The Foothill Credit Facility provided for borrowings of up to $15
million and up to $5 million of letters of credit. In May 1996, the Foothill
Credit Facility
F-11
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
4. SHORT AND LONG-TERM BORROWINGS (CONTINUED)
was amended to provide for up to $20 million in borrowings and up to $10 million
of letters of credit. On July 31, 1997, the Foothill Credit Facility was further
amended to provide for up to $30 million in borrowings and up to $20 million in
letters of credit. The amended Foothill Credit Facility expires in July, 2000
and provides for one year automatic renewal options. As of February 3, 1996,
February 1, 1997 and August 2, 1997 (unaudited) the Company had $8.7 million,
$0.0 million and $12.5 million, respectively, outstanding under the Foothill
Credit Facility. Letters of credit outstanding as of February 3, 1996, February
1, 1997 and August 2, 1997 (unaudited) were $2.0 million, $4.7 million and $7.0
million, respectively. Availability as of February 3, 1996, February 1, 1997 and
August 2, 1997 was $0.6 million, $11.9 million and $5.8 million, respectively.
The availability of borrowings under the amended Foothill Credit Facility is
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 pursuant to the outstanding
letters of credit. The Company's obligations under the amended Foothill Credit
Facility are secured by a first priority security interest on the Company's
present and future assets, intellectual property and other general intangibles.
The amended 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 maximum capital
expenditures, as defined in the amended Foothill Credit Facility, as well as a
prohibition on the payment of dividends. The Company obtained a waiver from
Foothill Capital with respect to the capital expenditure limitations for fiscal
1996, which enabled the Company to open additional stores in connection with its
expansion program. The Company anticipates that the availability for capital
expenditures under this covenant will be adequate to support the Company's
capital requirements. As of February 1, 1997, the Company was in compliance with
all of its other covenants under the Foothill Credit Facility. Noncompliance
with these covenants could result in additional fees or could affect the
availability of the facility.
Amounts outstanding under the amended credit facility bear interest at a
floating rate equal to the reference rate of Norwest Bank Minnesota N.A. or, at
the Company's option, the 30-day LIBOR Rate plus a pre-determined spread. The
LIBOR spread is 1 1/2% or 2%, depending upon the Company's financial performance
from time to time. As of each of February 3, 1996 and February 1, 1997, the
interest rate charged under the Foothill Credit Facility was 10.75%. In
addition, the Company was also required to pay an anniversary fee of $150,000
during Fiscal 1996 and $100,000 during the six months ended August 2, 1997.
F-12
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
4. SHORT AND LONG-TERM BORROWINGS (CONTINUED)
Borrowing activity under the Foothill Credit Facility was as follows
(dollars in thousands):
<TABLE>
<CAPTION>
FOR THE FISCAL
YEARS ENDED
------------------------
FEBRUARY 3, FEBRUARY 1,
1996 1997
----------- -----------
<S> <C> <C>
Weighted average balances outstanding............................... $ 9,556 $ 5,403
Weighted average interest rate...................................... 11.21% 10.75%
Maximum balance outstanding......................................... $ 15,747 $ 12,687
</TABLE>
LONG-TERM BORROWINGS
The fair value of the Company's long-term debt is estimated based on the
borrowing rates currently available to the Company for bank loans with similar
terms and maturities. Management believes that the carrying amount of the
Company's long-term debt approximates fair value. The components of the
Company's long-term debt are as follows (dollars in thousands) :
<TABLE>
<CAPTION>
FEBRUARY 3, FEBRUARY 1, AUGUST 2,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Senior Subordinated Notes.................................................. $ 0 $ 20,000 $ 20,000
Installment Notes.......................................................... 4,610 1,360 0
Finchside Notes............................................................ 3,713 0 0
Skiva Note................................................................. 3,358 0 0
Related party loan......................................................... 2,500 0 0
----------- ----------- -----------
14,181 21,360 20,000
Less: Current portion...................................................... (6,808) (600) 0
Less: Unamortized discount of Senior Subordinated Notes.................... 0 (1,720) (1,561)
----------- ----------- -----------
Total long-term debt....................................................... $ 7,373 $ 19,040 $ 18,439
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
THE SENIOR SUBORDINATED NOTES
The Senior Subordinated Notes, which mature in 2002, are in the principal
amount of $20.0 million and bear interest at a rate of 12% per annum, payable
quarterly in arrears on January 1, April 1, July 1 and October 1 of each year,
commencing on July 1, 1996. These notes have been discounted by $1.9 million
relative to the valuation of the Noteholder Warrant for financial reporting
purposes (see Note 10-- Stockholders' Equity (Deficit)). This discount is being
accreted into interest expense over the six year term of the Senior Subordinated
Notes.
The Senior Subordinated Notes are governed by the terms of a Note and
Warrant Purchase Agreement which provides for certain operating restrictions and
financial covenants. The Senior Subordinated Notes by their terms are
subordinated to borrowings under the Foothill Credit Facility. The Senior
Subordinated Notes rank senior to or pari passu with all other unsecured
indebtedness of the Company. The Senior Subordinated Notes may not be prepaid
prior to December 31, 1997, except upon consummation of an initial public
offering of the Company's Common Stock. On or after December 31, 1997 or, if
F-13
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
4. SHORT AND LONG-TERM BORROWINGS (CONTINUED)
earlier, upon consummation of an initial public offering, the Senior
Subordinated Notes may be prepaid in whole or in part, upon payment of a
prepayment premium of 6% through December 31, 1998, decreasing to 4% during 1999
and 2% during 2000, with no prepayment premium thereafter. Notwithstanding the
foregoing, the Senior Subordinated Notes may be prepaid at any time without a
prepayment premium if concurrently with prepayment the Noteholder is afforded
the opportunity to sell at least 75% of the stock underlying its warrants in a
public offering of the Company. The Company obtained an amendment from the
Noteholder with respect to the capital expenditure limitations for fiscal 1996,
which enabled the Company to open additional stores in connection with its
expansion.
THE INSTALLMENT NOTES
On December 28, 1993, the Company agreed to be a co-maker of two installment
notes issued as of that date by the Chairman of the Board and certain of his
family members in connection with their bankruptcy proceedings. Although the
Company was a co-maker of the installment notes, the notes expressly provided
that they were non-recourse to the Company. The Company agreed to be a co-maker
of these installment notes in consideration for the waiver of certain claims in
the amount of $20.0 million for repayment of funds previously loaned to the
Company by its stockholders. One such installment note, in the principal amount
of $2,650,000 ("Note A"), was non-interest bearing and provided for three annual
principal payments. Note A was secured by a pledge of shares of the Company's
Common Stock held by the Chairman of the Board and certain of his family
members. Note A was repaid by the Company on July 1, 1996 with a portion of the
net proceeds from the 1996 Private Placement. The other installment note, in the
principal amount of $2,110,000 ("Note B" and collectively with Note A, the
"Installment Notes"), provided for monthly principal payments of $50,000,
commencing November 30, 1995 and continuing through October 31, 1998, with the
remaining balance of $310,000 due on November 30, 1998. Interest on Note B
accrued at the rate of 5% per annum for the first two years only, of which 3%
per annum was payable monthly and the remaining 2% was added to the principal
balance, to be paid at final maturity. Note B was secured by a lien on certain
personal assets of the Chairman of the Board and certain of his family members.
The Company repaid Note B on May 28, 1997 (unaudited).
THE FINCHSIDE NOTES
On June 28, 1991, the Company entered into a $10 million financing agreement
with Finchside International, Ltd. ("Finchside"), an unaffiliated lender, which
provided for irrevocable letters of credit, draft acceptances and advances (up
to 120 days) to finance inventory purchases. The Company subsequently entered
into a non-interest bearing agreement (the "Finchside Notes") with Finchside on
January 28, 1993 providing for the repayment of $7.6 million in past due amounts
under the original financing agreement. The Finchside Notes required installment
payments of principal through June 1997. As a result of the Company's financial
difficulties leading to its revised agreement with Finchside, the issuance of
the Finchside Notes was accounted for as a troubled debt restructuring and
therefore no interest was imputed on the Finchside Notes. On July 22, 1994, the
Company amended and extended the remaining principal amount of the Finchside
Notes of $5,712,000 over seven non-interest bearing payments commencing December
1995 with full repayment required by December 1998. On December 8, 1995, the
Company further amended the repayment schedule of the Finchside Notes to provide
for a final maturity in August 1998. The Finchside Notes were repaid on June 28,
1996 with a portion of the net proceeds from the 1996 Private Placement.
F-14
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
4. SHORT AND LONG-TERM BORROWINGS (CONTINUED)
THE SKIVA NOTE
During the fiscal year ended January 30, 1993 ("Fiscal 1992"), Skiva
International, Inc. ("Skiva") agreed to extend credit to the Company for working
capital purposes, under an informal financing arrangement personally guaranteed
by certain stockholders of the Company. As a result of a default by the Company
during fiscal 1992, Skiva accepted a note from the Company (the "Skiva Note") in
the aggregate principal amount of $4,473,000 with no interest. As a result of
the Company's financial difficulties leading to its revised arrangement with
Skiva, the issuance of the Skiva Note was accounted for as a troubled debt
restructuring and therefore no interest was imputed on the Skiva Note. In Fiscal
1994, as the Company continued to restructure its business, the terms of the
Skiva Note were amended to extend the repayment of the outstanding principal
balance of $3,358,000, with no interest, over nine quarterly installment
payments commencing in December 1995. On January 1, 1996, the Company further
amended the Skiva Note to provide for a revised repayment schedule, an annual
interest rate of 10% on the remaining balance and a $154,000 payment for accrued
interest for the six month period ended June 30, 1996. The Skiva Note was repaid
on June 28, 1996 with a portion of the net proceeds from the 1996 Private
Placement.
RELATED PARTY LOANS
During Fiscal 1994, the Chairman of the Board, his father-in-law and his
mother made loans to the Company for working capital purposes in the aggregate
amount of $2.5 million. The loans bore interest at rates ranging from 4% to 8%
per annum and were subordinated to the Company's working capital facility with
its senior lender. In addition, the Chairman of the Board's father-in-law loaned
the Company $300,000 in March 1996 at 8% per annum interest. All such loans were
repaid with a portion of the net proceeds of the 1996 Private Placement.
Interest expense attributable to such loans amounted to $49,000, $184,000 and
$84,000 for Fiscal 1994, Fiscal 1995 and Fiscal 1996, respectively.
MATURITIES OF LONG-TERM DEBT
As of February 1, 1997, the aggregate maturities of long-term debt were as
follows (dollars in thousands):
<TABLE>
<S> <C>
1997............................................................... $ 600
1998............................................................... 760
1999............................................................... 0
2000............................................................... 0
2001............................................................... 0
Thereafter......................................................... 20,000
---------
21,360
Less: Current portion.............................................. (600)
Less: Unamortized discount......................................... (1,720)
---------
Total long-term debt........................................... $ 19,040
---------
---------
</TABLE>
F-15
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
FOR THE FISCAL YEARS ENDED --------------------------
------------------------------------- AUGUST 3, AUGUST 2
JANUARY 28, FEBRUARY 3, FEBRUARY 1, 1996 1997
1995 1996 1997 (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Interest......................................... $ 1,255 $ 1,916 $ 2,369 $ 987 $ 1,498
Income taxes..................................... $ 0 $ 58 $ 70 $ 35 $ 507
----------- ----------- ----------- ----- -----------
----------- ----------- ----------- ----- -----------
</TABLE>
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net is comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
AUGUST 2,
FEBRUARY 3, FEBRUARY 1, 1997
1996 1997 (UNAUDITED)
----------- ----------- -----------
<S> <C> <C> <C>
Leasehold improvements...................................................... $ 15,012 $ 19,226 $ 24,470
Store fixtures and equipment................................................ 6,610 8,604 13,501
Store fixtures and equipment under capital leases........................... 3,642 3,642 3,642
Construction in progress.................................................... 197 910 860
----------- ----------- -----------
Property and equipment, gross............................................... 25,461 32,382 42,473
Less: Accumulated depreciation and amortization............................. (9,669) (12,083) (14,620)
----------- ----------- -----------
Property and equipment, net................................................. $ 15,792 $ 20,299 $ 27,853
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
7. ACCRUED EXPENSES, INTEREST AND OTHER CURRENT LIABILITIES
Accrued expenses, interest and other current liabilities is comprised of the
following (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 3, FEBRUARY 1, AUGUST 2,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Accrued salaries and benefits.............................................. $ 1,236 $ 1,878 $ 2,014
Accrued interest........................................................... 196 298 229
Accrued real estate expenses............................................... 825 1,000 1,293
Customer liabilities....................................................... 566 716 695
Accrued taxes other than income............................................ 367 342 413
Other accrued expenses..................................................... 1,567 1,809 2,554
----------- ----------- -----------
Accrued expenses, interest and other current liabilities................... $ 4,757 $ 6,043 $ 7,198
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Company leases all of its stores, a distribution facility, and certain
office equipment and store fixtures under leases expiring at various dates
through 2008. Certain of the leases include options to renew.
F-16
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The leases require fixed minimum annual rentals plus, under the terms of certain
leases, additional payments for taxes, other expenses and rentals based upon
sales.
Rent expense is as follows (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
-------------------------------------
<S> <C> <C> <C>
JANUARY 28, FEBRUARY 3, FEBRUARY 1,
1995 1996 1997
----------- ----------- -----------
Store and distribution facility rent
Minimum rentals.......................................................... $ 8,915 $ 9,946 $ 11,221
Additional rent based upon sales......................................... 175 175 195
----------- ----------- -----------
Total store rent..................................................... 9,090 10,121 11,416
Store fixtures and equipment rent.......................................... 711 712 727
----------- ----------- -----------
Total rent expense................................................... $ 9,801 $ 10,833 $ 12,143
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Future minimum annual lease payments under the Company's operating and
capital leases with initial or remaining terms of one year or more, at February
1, 1997, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- -----------
<S> <C> <C>
Fiscal year--
1997..................................................................... $ 14,122 $ 828
1998..................................................................... 14,245 92
1999..................................................................... 13,891 0
2000..................................................................... 13,277 0
2001..................................................................... 10,608 0
Thereafter............................................................... 36,869 0
---------- -----
Total minimum lease payments............................................. $ 103,012 920
----------
----------
Less: Interest and executory costs....................................... (56)
-----
Present value of net minimum lease payments.............................. 864
Less: Current portion of obligations under capital lease................. (772)
-----
Long-term obligations under capital lease................................ $ 92
-----
-----
</TABLE>
Many of the Company's store leases contain provisions requiring landlord
consent to a change in control of the Company. Management believes that the
majority of its leases are at market rents and that these provisions will not
have a material adverse effect on the Company's financial position or results of
operations.
LITIGATION
The Company, from time to time, is involved in litigation arising in the
normal course of its business. Management believes that the resolution of all
pending litigation, after considering reserves provided for
F-17
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
in the accompanying financial statements, will not have a material adverse
effect on the Company's financial position or results of operations.
9. INCOME TAXES
Components of the Company's provision (benefit) for income taxes consisted
of the following (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
---------------------------------------------
<S> <C> <C> <C>
JANUARY 28, FEBRUARY 3, FEBRUARY 1,
1995 1996 1997
--------------- --------------- -----------
Current--
Federal.................................................................. $ 0 $ 36 $ 244
State.................................................................... 54 0 100
Deferred--
Federal.................................................................. 0 0 859
State.................................................................... 0 0 249
Valuation allowance...................................................... 0 0 (22,371)
--- --- -----------
Provision (benefit) for income taxes....................................... $ 54 $ 36 $ (20,919)
--- --- -----------
--- --- -----------
</TABLE>
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):
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
-----------------------------------------
<S> <C> <C> <C>
JANUARY 28, FEBRUARY 3, FEBRUARY 1,
1995 1996 1997
------------- ------------- -----------
Calculated income tax provision............................................ $ 371 $ 575 $ 3,333
Reversal of valuation allowance............................................ 0 0 (21,042)
Utilization of operating loss carryforwards................................ (167) (537) (3,540)
State income taxes......................................................... 36 27 259
Nondeductible expenses..................................................... 12 21 24
Other...................................................................... (198) (50) 47
----- ----- -----------
Tax provision (benefit) as shown on the statements of income............... $ 54 $ 36 $ (20,919)
----- ----- -----------
----- ----- -----------
</TABLE>
Deferred income taxes reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting purposes as measured
by tax laws. These temporary differences are determined in accordance with SFAS
No. 109.
F-18
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
9. INCOME TAXES (CONTINUED)
Temporary differences and net operating loss carryforwards which give rise
to deferred tax assets and liabilities are as follows (dollars in thousands) :
<TABLE>
<CAPTION>
FEBRUARY 3, 1996 FEBRUARY 1, 1997
--------------------------- -----------------------------
<S> <C> <C> <C> <C>
DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------------ ------------- ------------ ---------------
Current--
Restructuring.......................................... $ 89 $ 0 $ 0 $ 0
Uniform inventory capitalization....................... 181 0 258 0
Inventory.............................................. 121 0 16 0
Expenses not currently deductible...................... 114 0 514 0
Net operating loss carryforwards....................... 0 0 5,000 0
------------ ------ ------------ -----
Total current...................................... $ 505 $ 0 $ 5,788 $ 0
------------ ------ ------------ -----
------------ ------ ------------ -----
Noncurrent--
Amortization of debt issue costs....................... $ 0 $ 0 $ 66 $ 0
Depreciation........................................... 1,021 0 921 0
Deferred rent.......................................... 609 0 925 0
Imputed interest on loans.............................. 0 (668) 139 0
Discount on Senior Subordinated Notes.................. 0 0 0 688
Net operating loss carryforwards....................... 20,904 0 13,348 0
------------ ------ ------------ -----
Total noncurrent................................... 22,534 $ (668) 15,399 $ 688
------------ ------ ------------ -----
------------ ------ ------------ -----
Net noncurrent..................................... 21,866 14,711
------------ ------------
Total.............................................. 22,371 20,499
------------ ------------
Valuation allowance...................................... (22,371) 0
------------ ------------
Total deferred taxes..................................... $ 0 $ 20,499
------------ ------------
------------ ------------
</TABLE>
At February 1, 1997, the Company had net operating loss carryforwards
("NOLs") totaling approximately $45.9 million which expire for federal income
tax purposes during the fiscal years 2003 through 2006. The provisions of SFAS
109 require that the tax benefit of such NOLs be recorded as an asset and, to
the extent that management cannot assess that the utilization of all or a
portion of such deferred tax assets is more likely than not to be realized, a
valuation allowance should be recorded. At February 3, 1996, the Company had net
deferred tax assets amounting to approximately $22.4 million and management
believed it to be more likely than not that the deferred tax assets would not be
utilized based upon the historical performance of the Company. Accordingly, a
valuation allowance was recorded against the net deferred tax assets at February
3, 1996. During Fiscal 1996, the Company consummated the 1996 Private Placement,
a private placement of debt and equity (see Note 3--1996 Private Placement). The
1996 Private Placement enabled the Company to access capital to expand its
business and achieve greater profitability. As a result of the Company's
improved operating results during the second half of Fiscal 1996, as well as its
projected results for Fiscal 1997 and thereafter, the Company reversed its
valuation allowance in the fourth quarter of Fiscal 1996, as it is deemed to be
more likely than not that the deferred tax assets will be utilized. Accordingly,
the Company's net income for fiscal 1997 and future years will require
calculation of a tax
F-19
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
9. INCOME TAXES (CONTINUED)
provision based on statutory rates in effect. Until the NOLs are fully utilized
or expire, this tax provision will not be paid in cash (other than to the extent
of the federal alternative minimum tax and state minimum taxes) but will reduce
the deferred tax asset on the balance sheet. The amount and availability of
these NOLs are subject to review by the Internal Revenue Service.
Under the provisions of the Internal Revenue Code, the occurrence of certain
events may affect the Company's ability to utilize its NOLs. The Company does
not believe any such events occurred during fiscal 1996.
10. STOCKHOLDERS' EQUITY (DEFICIT)
The Company's preferred stock, Series A Common Stock, Series B Common Stock
and the common stock are comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
AUGUST 2,
FEBRUARY 3, FEBRUARY 1, 1997
1996 1997 (UNAUDITED)
----------- ------------ ------------
<S> <C> <C> <C>
Preferred stock:
Authorized number of shares............................................ 10,000 10,000 10,000
Issued and outstanding number of shares................................ 10,000 0 0
Liquidation preference................................................. $35,953 $0 $0
Series A Common Stock:
Authorized number of shares............................................ n/a 27,600,000 27,600,000
Issued and outstanding number of shares................................ n/a 12,760,800 12,760,800
Series B Common Stock:
Authorized number of shares............................................ n/a 70,000 70,000
Issued and outstanding number of shares................................ n/a 47,238 47,238
Liquidation preference................................................. n/a $22,001 $23,283
Common stock:
Authorized number of shares............................................ 140,000 n/a n/a
Issued and outstanding number of shares................................ 137,200 n/a n/a
Treasury stock:
Number of shares....................................................... 2,800 0 0
Warrants:
Number of shares of Series A Common Stock.............................. n/a 2,739,348 2,739,348
</TABLE>
In conjunction with the Company's initial public offering, the Company
intends to effectuate a 120-for-one stock split of its Series A Common Stock and
anticipates a conversion of all outstanding Series B Common Stock into 7,659,889
shares of Common Stock (see Note 15--Subsequent Events). The Company's financial
statements retroactively reflect such stock split. In addition, the Series A
Common Stock will be redesignated as Common Stock. The Foothill Credit Facility
prohibits the payment of dividends.
F-20
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
PREFERRED STOCK
The preferred stock was nonvoting and provided for cumulative dividends.
Dividends in arrears amounted to approximately $12.5 million, or $1,245 per
share at February 3, 1996. The Company did not declare or pay any dividends
during fiscal 1996. The shares of preferred stock were redeemable by the Company
at their issuance price plus accrued dividends, whether or not such dividends
were earned or declared. Accrued dividends were deducted from net income to
calculate net income applicable to common stockholders for historical earnings
per share purposes (See Note 2--Basis of Presentation and Significant Accounting
Policies). On June 28, 1996, the outstanding shares of preferred stock were
surrendered for no consideration. Accordingly, at February 1, 1997, 10,000
shares are available for future issuance by the Company.
SERIES A COMMON STOCK
During Fiscal 1996, the Company converted all outstanding shares of its
common stock to 16,800,000 shares of Series A Common Stock. Pursuant to a
Redemption Agreement dated June 28, 1996, the Company redeemed a total of
4,039,200 shares of its Series A Common Stock from certain stockholders of the
Company for the aggregate amount of $11.8 million.
SERIES B COMMON STOCK
In conjunction with the 1996 Private Placement, the Company issued 47,238
shares of Series B Common Stock to the SKM Investors (see Note 3--1996 Private
Placement). Under the terms of the Series B Common Stock, the approval of
holders of a majority of the Series B Common Stock, voting as a seperate class,
is required to amend certain provisions of the Certificate of Incorporation and
Bylaws, to authorize the issuance of equity securities of the Company ranking
senior to or pari passu with the Series B Common Stock, to adopt or amend any
certificate of designation with respect to the Company's preferred stock, to
modify the rights of the Series B Common Stock in an adverse manner, to
authorize the merger of the Company or the sale or disposition of all or
substantially all its assets or any other business combination or acquisition
transaction as to which stockholder approval is required, to authorize the
adoption of any employee stock option or similar plan, to amend the Company's
management stock option plan, or to authorize the payment of dividends or other
distributions. The holders of Series A Common Stock and Series B Common Stock
vote together as a single class on all other matters presented to stockholders.
The Series B Common Stock is currently convertible into 7,659,889 shares of
Series A Common Stock, which would represent 30.8% of the outstanding shares of
the Series A Common Stock on a fully diluted basis. The conversion ratio is
subject to adjustment under certain circumstances. In the event of a public
offering, the liquidation preference and special voting rights of the Series B
Common Stock terminate thirty days after any such event, provided certain
conditions are met. The Series B Common Stock carries a liquidation preference
initially equal to its purchase price, increasing by 12.5% per annum. After five
years, if the Company has not effected an initial public offering, the holders
of the Series B Common Stock have the right subject to certain conditions, to
require the Company to repurchase the Series B Common Stock at a price equal to
the greater of its liquidation preference or fair market value. The Company can
avoid this repurchase by allowing the holders of the Series B Common Stock to
sell the entire company. The
F-21
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
10. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Series B Common Stock also has certain registration rights. For additional
information on the Series B Common Stock, see Note 15--Subsequent Events.
COMMON STOCK
During Fiscal 1994, an executive officer of the Company forwarded funds in
the amount of $488,000 to the Company towards a subscription for shares to be
issued to such executive officer, subject to approval of the Company's Board of
Directors, at a future date. Such shares were not issued as of February 1, 1997.
The Board of Directors determined to not issue such shares and refunded the
$488,000 (unaudited) to such executive on July 31, 1997.
During Fiscal 1996, the Company converted all outstanding shares of its
common stock to 16,800,000 shares of Series A Common Stock.
TREASURY STOCK
During Fiscal 1993, the Company purchased 2,800 shares of common stock
(subsequently converted into 336,000 shares of Series A Common Stock) for
treasury for an aggregate price of $50,000. An option was granted to an
executive officer of the Company to purchase such shares for $50,000. On June 5,
1996, the executive officer exercised his option to purchase such shares of
treasury stock.
WARRANTS
In conjunction with the 1996 Private Placement on June 28, 1996 (see Note
3--1996 Private Placement), the Company sold to the Noteholder a warrant to
purchase 1,992,252 shares of the Series A Common Stock of the Company at an
exercise price of $2.677 per share. The Noteholder Warrant is exercisable for a
ten year period beginning after the earlier of January 10, 1997 or the date the
Series A Common Stock is first registered under the Securities Exchange Act of
1934. The Noteholder also has registration rights with respect to shares
underlying the Noteholder Warrant. This Noteholder Warrant was valued for
financial reporting purposes by an independent appraisal firm at approximately
$1.9 million. This amount has been accounted for herein as a credit to
additional paid-in capital, net of income taxes, and a discount to the Senior
Subordinated Notes, and is being amortized over the six year term of the Senior
Subordinated Notes.
On June 28, 1996, the Company also issued a warrant to purchase 747,096
shares of the Series A Common Stock of the Company at an exercise price of
$2.677 per share to Legg Mason. The Legg Mason Warrant was valued for financial
reporting purposes by an independent appraisal firm at approximately $700,000.
An amount equal to 49.4% of the value of the Legg Mason Warrant, determined on
the basis of gross proceeds from the 1996 Private Placement, was attributable to
the placement of the Senior Subordinated Notes, has been credited to paid-in
capital and capitalized as deferred financing costs in other assets, and is
being amortized over the six year term of the Senior Subordinated Notes.
See Note 15--Subsequent Events for additional information about the
warrants.
F-22
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
11. STOCK OPTION PLAN
On June 28, 1996, the Company approved the adoption of the 1996 Stock Option
Plan (the "1996 Plan"). The 1996 Plan authorizes the granting of incentive stock
options and nonqualified stock options to key employees of the Company. The Plan
provides for the granting of options with respect to 1,743,240 shares of Series
A Common Stock. The 1996 Plan is administered by a committee of the Board of
Directors (the "Committee"). Options granted under the 1996 Plan will have an
exercise price established by the Committee 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 also contains certain
provisions that require the exercise price of incentive stock options granted to
shareholders owning greater than 10% of the Company be at least 110% of the fair
market value of the underlying shares. At February 1, 1997, no stock options
were issued to any stockholders owning greater than 10% of the Company's stock.
Unless otherwise specified by the Committee, options will vest at the rate of
20% six months from the date of grant and 20% on each of the first, second,
third and fourth anniversaries of the date of grant. On June 28, 1996, options
to purchase 1,444,080 shares were granted at the exercise price of $2.677 per
share. No additional options were granted in Fiscal 1996. As of February 1,
1997, no options had been exercised under the 1996 Stock Option Plan and options
to purchase 288,816 shares were exercisable. For additional information on
additional options being granted under the 1996 Plan, see Note 15--Subsequent
Events.
Effective February 1, 1997, the Company adopted the provisions of SFAS 123.
As permitted by SFAS 123, the Company has elected to continue to account for
stock-based compensation using the intrinsic value method under Accounting
Principles Board Opinion No. 25. 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 1996
had been determined based on the fair value method of accounting, for Fiscal
1996 the Company's net income would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<S> <C>
Net income--
As reported.................................................. $30,441,000
Pro forma.................................................... $30,210,000
Pro forma net income per share--
As reported.................................................. $1.28
Pro forma.................................................... $1.27
</TABLE>
The fair value of issued stock options was estimated on the date of grant
using the Black-Scholes option pricing model incorporating the following
assumptions for options granted in Fiscal 1996: no dividend yield or volatility
factor; risk free interest rate of 6.46%; and an expected life of the options of
five years. The weighted average grant date fair value for options granted
during Fiscal 1996 was $0.74 per share.
12. 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.
F-23
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
12. 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 Fiscal 1994, Fiscal 1995 and Fiscal
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.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 3, 1996
------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
Net sales.......................................................... $ 25,433 $ 23,181 $ 33,713 $ 39,733
Gross profit....................................................... 7,224 5,530 11,640 14,232
Net income (loss).................................................. (1,116) (2,959) 2,382 3,347
<CAPTION>
YEAR ENDED FEBRUARY 1, 1997
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales.......................................................... $ 30,438 $ 25,974 $ 40,353 $ 47,073
Gross profit....................................................... 10,238 7,873 16,976 18,965
Net income (loss).................................................. 637 (2,099) 5,312 26,591(1)
<CAPTION>
YEAR ENDING JANUARY 31, 1998
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales.......................................................... $ 39,203 $ 33,534 -- --
Gross profit....................................................... 14,018 9,802 -- --
Net income (loss).................................................. 1,011 (1,744) -- --
</TABLE>
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(1) Includes a reversal of a valuation allowance on a net deferred tax asset
(see Note 9--Income Taxes).
14. RELATED PARTY TRANSACTIONS
Concurrently with the 1996 Private Placement, 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. Pursuant to the advisory agreement, the Company incurred fees
to SKM of approximately $93,000 in Fiscal 1996 and approximately $75,000 during
the six months ended August 2, 1997.
For additional information about related party transactions, see Note
3--1996 Private Placement, Note 4--Short and Long Term Borrowings, and Note
10--Stockholders' Equity (Deficit).
F-24
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION RELATING TO THE SIX MONTHS ENDED AUGUST 3, 1996 AND AUGUST 2,
1997 IS UNAUDITED.)
15. SUBSEQUENT EVENTS
In July 1997, the Company filed a registration statement on Form S-1 with
the Securities and Exchange Commission which, as amended, provides for an
initial public offering of 4,000,000 shares of Common Stock. The Company intends
to use the net proceeds of the proposed offering to (i) pay the principal amount
of, and accrued interest on, the Senior Subordinated Notes, (ii) repurchase the
Noteholder Warrant and (iii) repurchase two-thirds of the Legg Mason Warrant. As
a result of the repayment of the Senior Subordinated Notes, the Company expects
to incur a non-cash, extraordinary charge to earnings during the third quarter
of Fiscal 1997 of approximately $1.7 million, resulting from the write-off of
unamortized debt issuance costs and unamortized debt discount, net of taxes. The
repurchase of the Noteholder Warrant and two-thirds of the Legg Mason Warrant
will be accounted for as a reduction of additional paid-in capital. The
repurchase price of the warrants will be equal to the initial public offering
price per share, less the per share underwriting discount, less the per share
exercise price of the warrants, multiplied by the number of shares covered by
the warrant (or portion thereof) being purchased. The increase in the value of
such warrants from the date of their issuance reflects the growth of the
Company's business during the second half of Fiscal 1996 and during the first
six months of Fiscal 1997.
In conjunction with its proposed initial public offering, the Company
intends to effect a 120-for-one stock split of the Series A Common Stock (the
"Stock Split"), to convert all outstanding shares of the Series B Common Stock
into 7,659,889 shares of Series A Common Stock (the "Series B Conversion") and
to redesignate the Series A Common Stock as Common Stock (the
"Reclassification"). Concurrently with the offering, the Company expects to
issue 201,414 shares upon the exercise of one-third of the Legg Mason Warrant.
In addition, the Company expects that, prior to the consummation of the initial
public offering, the Company will amend and restate its certificate of
incorporation and bylaws in order to, among other things, (i) effect the Series
B Conversion, the Stock Split and the Reclassification, (ii) authorize
100,000,000 shares of Common Stock, $.10 par value per share, (iii) authorize
one million shares of Preferred Stock, par value $1.00 per share, without
designation, and (iv) provide for certain anti-takeover provisions.
The Company also expects to enter into an amended and restated stockholders
agreement with all of its existing stockholders. In addition, the Company
intends to adopt a 1997 Stock Option Plan and is considering adopting an
Employee Stock Purchase Plan. Moreover, it is expected that, prior to the public
offering, options to purchase 299,160 shares of Common Stock at the initial
public offering price, will be granted to one or more key employees under the
1996 Plan and that, thereafter, no further options will be granted under the
1996 Plan. As the options will be issued at the market price, the Company does
not anticipate recognizing any additional compensation expense.
16. UNAUDITED PRO FORMA BALANCE SHEET
The unaudited pro forma balance sheet as of August 2, 1997 gives effect to
the repurchase of the Noteholder Warrant and two-thirds of the Legg Mason
Warrant for $25.8 million (based upon an assumed initial public offering price
of $14.00 per share). This balance sheet assumes that the Company obtained $25.8
million of short term financing to consummate such warrant repurchases as of
August 2, 1997.
The Company intends to repurchase the Noteholder Warrant and two-thirds of
the Legg Mason Warrant utilizing proceeds from the initial public offering as
described in Note 15 and does not intend to finance this repurchase through
short term financing.
F-25
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
[THE INSIDE BACK COVER PAGE OF THE PROSPECTUS CONSISTS OF A GATEFOLD THAT SHOWS
A LARGE PHOTOGRAPH OF SIX CHILDREN WEARING THE COMPANY'S APPAREL, ALONG WITH A
LARGE VERSION OF THE COMPANY'S LOGO. ON THE INSIDE OF THE GATEFOLD ARE NUMEROUS
PHOTOGRAPHS OF CHILDREN WEARING THE COMPANY'S APPAREL AND ACCESSORIES,
INTERSPERSED WITH SMALL VERSIONS OF THE COMPANY'S LOGO.]
<PAGE>
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH SOLICITATION.
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY................................... 3
RISK FACTORS......................................... 8
COMPANY HISTORY...................................... 15
USE OF PROCEEDS...................................... 16
DIVIDEND POLICY...................................... 16
CAPITALIZATION....................................... 17
DILUTION............................................. 18
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND
OPERATING DATA..................................... 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................ 21
BUSINESS............................................. 29
MANAGEMENT........................................... 37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................... 46
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....... 49
DESCRIPTION OF CAPITAL STOCK......................... 52
SHARES ELIGIBLE FOR FUTURE SALE...................... 54
UNDERWRITING......................................... 56
LEGAL MATTERS........................................ 58
EXPERTS.............................................. 58
ADDITIONAL INFORMATION............................... 58
INDEX TO FINANCIAL STATEMENTS........................ F-1
</TABLE>
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UNTIL OCTOBER 13, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
4,000,000 SHARES
[LOGO]
COMMON STOCK
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PROSPECTUS
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MONTGOMERY SECURITIES
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SMITH BARNEY INC.
LEGG MASON WOOD WALKER
INCORPORATED
SEPTEMBER 18, 1997
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