<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 1999
REGISTRATION STATEMENT NO. 333-72897
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
THE CHILDREN'S PLACE RETAIL STORES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 31-1241495
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
------------------------
ONE DODGE DRIVE
WEST CALDWELL, NEW JERSEY 07006
(973) 227-8900
(Address, including zip code, and telephone number, including area code
of registrant's principal executive offices)
------------------------------
STEVEN BALASIANO, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
THE CHILDREN'S PLACE RETAIL STORES, INC.
ONE DODGE DRIVE
WEST CALDWELL, NEW JERSEY 07006
(973) 227-8900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
STROOCK & STROOCK & LAVAN LLP FULBRIGHT & JAWORSKI L.L.P.
180 MAIDEN LANE 666 FIFTH AVENUE
NEW YORK, NY 10038 NEW YORK, NY 10103
ATTN.: JEFFREY S. LOWENTHAL, ESQ. ATTN.: GREGG J. BERMAN, ESQ.
(212) 806-5400 (212) 318-3000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES AMOUNT AGGREGATE PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED TO BE REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.10 per share..... 4,600,000 Shares $30.78 $141,588,000 $39,361.46(2)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933.
(2) Previously paid
WE WILL AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE
NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL WE FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL
THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
<PAGE>
SUBJECT TO COMPLETION
MARCH 29, 1999
4,000,000 SHARES
[LOGO]
COMMON STOCK
This is a public offering of 4,000,000 shares of common stock of The Children's
Place Retail Stores, Inc. by the selling stockholders identified in this
prospectus. The Children's Place is a specialty retailer of apparel and
accessories for children from newborn to twelve years of age.
Our common stock is quoted on the Nasdaq National Market under the symbol
"PLCE." On March 26, 1999, the last reported sale price of our common stock was
$26.31 per share.
AN INVESTMENT IN THE COMMON STOCK OF THE CHILDREN'S PLACE INVOLVES A HIGH DEGREE
OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ----------
<S> <C> <C>
Public offering price.................................................
Underwriting discount and commissions.................................
Proceeds to the selling stockholders..................................
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The selling stockholders have granted the underwriters the right to purchase up
to 600,000 additional shares to cover any over-allotments.
------------------------
The shares should be delivered through the facilities of the Depository Trust
Company on or about , 1999.
BT ALEX. BROWN MERRILL LYNCH & CO.
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY SECURITIES LLC
THOMAS WEISEL PARTNERS LLC
, 1999
<PAGE>
[The inside front cover page of the Prospectus consists of a gatefold
that shows photographs of a Company store and photographs of children
wearing The Children's Place apparel and accessories, interspersed with
the Company's logo.]
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS WE INDICATE OTHERWISE IN THIS PROSPECTUS, REFERENCES TO
THE "COMPANY," "THE CHILDREN'S PLACE," "WE," "US" OR "OUR" MEAN THE CHILDREN'S
PLACE RETAIL STORES, INC. AND OUR SUBSIDIARIES. "THE CHILDREN'S PLACE," "BABY
PLACE," "PLACE," "TCP," "THE PLACE" AND OUR "P" LOGO ARE AMONG OUR REGISTERED
TRADEMARKS. ALL REFERENCES TO OUR FISCAL YEARS REFER TO OUR FISCAL YEARS ENDED
ON THE SATURDAY NEAREST TO JANUARY 31 OF THE FOLLOWING YEAR. FOR EXAMPLE,
REFERENCES TO FISCAL 1998 REFER TO OUR FISCAL YEAR ENDED JANUARY 30, 1999.
THE COMPANY
The Children's Place Retail Stores, Inc. is a growing specialty retailer of
apparel and accessories for children from newborn to twelve years of age. We
design, source and market our products under our proprietary "The Children's
Place" brand name for sale exclusively in our stores. We endeavor to distinguish
ourselves by providing our customers a high-quality, focused merchandise
selection at prices that represent a substantial value relative to our
competitors. Our merchandising strategy is built on offering a collection of
interchangeable outfits and accessories to create a coordinated look distinctive
to The Children's Place. Our stores are positioned in areas of high pedestrian
traffic and are designed to be very accessible, inviting and easy-to-shop. As of
February 15, 1999, we operated 211 stores in 26 states, located primarily in
regional shopping malls serving a broad range of socioeconomic communities in
the eastern half of the United States.
In fiscal 1996, we began to implement an aggressive store opening campaign
that resulted in the opening of 47 new stores in fiscal 1997 and 54 new stores
in fiscal 1998. In fiscal 1998, our new stores that were operating for their
first full fiscal year generated average net sales of approximately $1.3 million
and a cash-on-cash return on investment of approximately 86.1%. As a result of
these factors and our five consecutive fiscal years of comparable store sales
increases, we have generated a compound annual growth rate in net sales and net
sales per gross square foot of approximately 27.3% and 10.2%, respectively, and
have increased our operating margin from 2.2% to 12.5% from fiscal 1994 to
fiscal 1998.
The children's apparel industry capitalizes on the fact that children
typically require new clothes every season. This industry had total sales in
1998 of $30.1 billion and compound annual growth since 1995 of approximately
5.8%. More importantly, the specialty retail sector of the children's apparel
industry has grown at a compound annual rate of approximately 14.1% since 1995
and has increased its market share. We currently represent less than one percent
of the children's apparel market and believe that we have the opportunity to
significantly increase our market share.
Our operating strategy draws upon the following core strengths that we
believe have contributed to our success and provide us with a competitive
advantage:
MERCHANDISE STRATEGY. We seek to provide our customers:
- distinctive, high-quality clothing and accessories;
- easy-to-coordinate outfits;
- up-to-date styling and colors;
- fresh merchandise through monthly product introductions; and
- an inviting and easy-to-shop store format.
VALUE STRATEGY. We consistently offer our high-quality merchandise at value
prices that are generally 20% to 30% below comparable merchandise sold by most
of our competitors.
1
<PAGE>
STRONG BRAND IMAGE. The consistent quality, presentation, styling and
coordination of our distinctive merchandise, as well as the use of aspirational
images in our advertising and the exclusivity of The Children's Place product to
our stores, further strengthen our brand image.
LOW-COST SOURCING. Our extensive sourcing relationships in the Far East and
our knowledge of the material and manufacturing costs of apparel enable us to
achieve significant cost savings in the manufacture of our merchandise.
EXPERIENCED MANAGEMENT. Our 15-person management team has on average 20
years of apparel or retail industry experience and eight years of experience
with The Children's Place. This team is led by Ezra Dabah, Stanley Silver and
Clark Hinkley, each of whom has over 25 years of experience in the apparel or
retail industry.
Our broad merchandise appeal and consistent value pricing result in a highly
portable store concept which we believe can be operated profitably in malls,
strip centers and street locations in a wide variety of geographic and
demographic regions. As a result, we believe that we have the opportunity to
substantially increase our store base.
To continue to grow our brand and seek to increase our sales and earnings
per share, we plan to:
- open at least 70 new stores in fiscal 1999 and at least 90 new stores in
fiscal 2000;
- reformat our merchandise presentation to consolidate our five currently
overlapping merchandise departments into three distinct departments to
both reduce stock keeping units and improve our merchandise presentation;
- upgrade the fixtures in our stores to enhance the perceived value of our
merchandise and the easy-to-shop format of our stores; and
- launch a broadcast and print advertising campaign and increase the
emphasis on and effectiveness of our direct-mail marketing program.
To support this growth, we intend to move into a new automated distribution
center and corporate headquarters in the second quarter of fiscal 1999.
------------------------
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the selling stockholders... 4,000,000 shares
Common Stock outstanding........................... 24,975,101 shares(1)
Nasdaq National Market symbol:..................... PLCE
</TABLE>
- ------------------------------
(1) Excludes 2,197,006 shares of Common Stock issuable under outstanding
options, of which 831,698 are currently exercisable.
2
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED (1)
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30,
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA (IN THOUSANDS,
EXCEPT PER SHARE DATA):
Net sales...................................................... $ 107,953 $ 122,060 $ 143,838 $ 192,557 $ 283,853
Gross profit................................................... 33,724 38,626 53,767 69,001 117,404
----------- ----------- ----------- ----------- -----------
Operating income............................................... 2,329 4,062 12,802 14,465 35,454
----------- ----------- ----------- ----------- -----------
Income before income taxes and extraordinary item.............. 1,026 1,690 9,522 11,679 35,020
Provision (benefit) for income taxes (2)....................... 54 36 (20,919) 4,695 14,358
----------- ----------- ----------- ----------- -----------
Income before extraordinary item............................... 972 1,654 30,441 6,984 20,662
Extraordinary gain (loss) (3).................................. 490 0 0 (1,743) 0
----------- ----------- ----------- ----------- -----------
Net income..................................................... $ 1,462 $ 1,654 $ 30,441 $ 5,241 $ 20,662
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted income per common share before extraordinary item...... $ 0.29 $ 0.80
----------- -----------
Extraordinary item............................................. (0.07) 0.00
----------- -----------
Diluted net income per common share............................ $ 0.22 $ 0.80
----------- -----------
----------- -----------
Diluted weighted average common shares outstanding (4)......... 24,358 25,909
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of stores open at end of period..... 87 91 108 155 209
Comparable store sales increase (5) (6).... 13% 10% 9% 2% 14%
Average net sales per store (in thousands)
(6) (7).................................. $ 1,264 $ 1,362 $ 1,479 $ 1,487 $ 1,569
Average square footage per store (8)....... 4,786 4,528 4,284 4,123 4,055
Average net sales per gross square foot (6)
(9)...................................... $ 259 $ 292 $ 335 $ 350 $ 382
</TABLE>
<TABLE>
<CAPTION>
JANUARY 30,
1999
-----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Working capital................................................ $ 35,531
Total assets................................................... 110,761
Long-term debt................................................. 2
Stockholders' equity........................................... 80,607
</TABLE>
- ------------------------------
(1) All references to our fiscal years refer to the 52- or 53-week year ended on
the Saturday nearest to January 31 of the following year. For example,
references to fiscal 1998 mean the fiscal year ended January 30, 1999.
Fiscal 1995 was a 53-week year.
(2) The provision (benefit) for income taxes for fiscal 1996 reflected the
reversal of a valuation allowance of $21.0 million on a net deferred tax
asset.
(3) The extraordinary gain during fiscal 1994 represented the forgiveness of
debt in connection with a debt restructuring undertaken with the consent of
our creditors. The extraordinary loss in fiscal 1997 represented the
write-off of unamortized deferred financing costs and unamortized debt
discount as a result of the repayment of long-term debt in conjunction with
our initial public offering in September 1997.
(4) The weighted average common shares outstanding used in computing diluted
income per common share before extraordinary item and diluted net income per
common share for fiscal 1997 are based on the number of common shares and
common share equivalents outstanding as if our recapitalization at the time
of our initial public offering had occurred on the first day of fiscal 1997.
During and prior to the fiscal year ended February 1, 1997, our Common Stock
was not publicly traded and in light of the significant changes in our
capital structure resulting from a private placement of our Common Stock in
July 1996 (as discussed in Note 3--1996 Private Placement in the Notes to
the
(FOOTNOTES CONTINUE ON FOLLOWING PAGE)
3
<PAGE>
Consolidated Financial Statements), earnings per share for that year and
earlier periods is not presented due to a lack of comparability.
(5) We define comparable store sales as net sales from stores that have been
open for more than 14 full months and that have not been substantially
remodeled during that time.
(6) For purposes of determining the comparable store sales increase, average net
sales per store and average net sales per gross square foot, fiscal 1995
results were recalculated based on a 52-week year.
(7) Represents net sales from stores open throughout the full period divided by
the number of such stores.
(8) Average square footage per store represents the square footage of stores
open on the last day of the period divided by the number of such stores.
(9) Represents net sales from stores open throughout the full period divided by
the gross square footage of such stores.
------------------------------
Our principal executive offices are located at One Dodge Drive, West
Caldwell, New Jersey 07006. Our telephone number is (973) 227-8900. During the
second quarter of fiscal 1999, we will be relocating to new executive offices
located at 915 Secaucus Road, Secaucus, New Jersey 07094.
4
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK (THE "COMMON STOCK") OFFERED HEREBY
INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING
FACTORS AND CAUTIONARY STATEMENTS, AS WELL AS THE OTHER INFORMATION SET FORTH IN
OR INCORPORATED BY REFERENCE INTO THIS PROSPECTUS, BEFORE MAKING AN INVESTMENT
IN THE COMMON STOCK OFFERED IN THIS PROSPECTUS.
CERTAIN MATTERS DISCUSSED UNDER THE CAPTIONS "RISK FACTORS," "BUSINESS" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND ELSEWHERE IN THIS PROSPECTUS OR IN THE INFORMATION INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). SOME OF THE FORWARD-LOOKING STATEMENTS CAN BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS SUCH AS "BELIEVES," "EXPECTS,"
"MAY," "COULD," "WILL," "SHOULD," "SEEKS," "APPROXIMATELY," "INTENDS," "PLANS,"
"ESTIMATES" OR "ANTICIPATES," OR THE NEGATIVE OF THOSE WORDS OR OTHER COMPARABLE
TERMINOLOGY. THE DISCUSSION OF FINANCIAL TRENDS, STRATEGY, PLANS OR INTENTIONS
MAY ALSO INCLUDE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES AND OTHER FACTORS THAT COULD CAUSE ACTUAL RESULTS TO BE
VERY DIFFERENT FROM THOSE PROJECTED.
RISK OF INABILITY TO SUSTAIN AGGRESSIVE GROWTH STRATEGY
Our net sales have grown significantly during the past several years,
primarily as a result of the opening of new stores and, to a lesser extent, due
to increases in our comparable store sales. We intend to continue to pursue an
aggressive growth strategy for the foreseeable future, and our future operating
results will depend largely upon our ability to open and operate new stores
successfully and to manage a larger business profitably. We anticipate opening
at least 70 new stores during fiscal 1999 and at least 90 new stores during
fiscal 2000.
We are subject to a variety of business risks generally associated with
rapidly growing companies. Our ability to open and operate new stores
successfully depends on many factors, including, among others, the availability
of suitable store locations, the ability to negotiate acceptable lease terms,
the ability to timely complete necessary construction, the ability to
successfully integrate new stores into our existing operations, the ability to
hire and train store personnel and the ability to recognize and respond to
regional differences in customer preferences (such as climate-related
preferences).
We cannot assure you that we will be able to continue to achieve our planned
expansion on a timely and profitable basis or that we will be able to achieve
results similar to those achieved in existing locations in prior periods. In
addition, as our business grows, we anticipate that we will not be able to
sustain the current annual growth rate of our store base of approximately 30%.
Operating margins may also be adversely affected during periods in which we have
incurred expenses in anticipation of new store openings. Furthermore, we need to
continually evaluate the adequacy of our store management and our management
information and distribution systems to manage our planned expansion. Any
failure to successfully and profitably execute our expansion plans could have a
material adverse effect on our business.
We expect to spend approximately $45.0 million in fiscal 1999 on capital
expenditures. We believe that cash generated from operations and funds available
under our working capital revolving credit facility will be sufficient to fund
our capital and other cash flow requirements for at least the next 12 months. We
expect to amend our existing working capital revolving credit facility in fiscal
1999 to provide greater financial flexibility. However, we may not be able to
amend the credit facility. Furthermore, it is possible that as we continue to
grow we may be required to seek additional funds for our capital and other cash
flow needs, and we cannot assure you that we will be able to obtain such funds.
5
<PAGE>
POTENTIAL DISRUPTIONS IN RECEIVING AND DISTRIBUTION INCLUDING RELOCATION OF
DISTRIBUTION FACILITY
We plan to move into a larger distribution center and corporate headquarters
facility in Secaucus, New Jersey during the second quarter of fiscal 1999. In
connection with this move, we are implementing a new automated warehouse
management system. It is possible that delays, cost overruns or other
complications in the relocation to the new distribution center or in the
implementation of the new warehouse management system could result in a
significant interruption in the receipt and distribution of our merchandise. Any
such disruption could have a material adverse effect on our business.
Our merchandise is shipped directly from manufacturers through freight
consolidators to our distribution center in West Caldwell, New Jersey. Our
operating results depend in large part on the orderly operation of our receiving
and distribution process, which depends on manufacturers' adherence to shipping
schedules and our effective management of our distribution facility. In
addition, we cannot assure you that we have anticipated, or will be able to
anticipate, all of the changing demands which our expanding operations will
impose on our receiving and distribution system. Furthermore, it is possible
that events beyond our control, such as a strike or other disruption affecting
the parcel service that delivers substantially all of our merchandise to our
stores, could result in delays in delivery of merchandise to our stores. Any
such event could have a material adverse effect on our business.
NEED TO ANTICIPATE AND RESPOND TO MERCHANDISE TRENDS
Our continued success will depend in part on our ability to anticipate and
respond to fashion trends and consumer preferences. Our design, manufacturing
and distribution process generally takes up to nine months, during which time
fashion trends and consumer preferences may change. If we fail in any way to
anticipate, identify or respond to future fashion trends, such a failure may
adversely affect customer acceptance of our products or require substantial
markdowns, which could have a material adverse effect on our business. In
addition, certain public school districts in various markets in which we have
stores are increasingly requiring that their grade school students wear
uniforms, which may have a material adverse effect on our business.
RELIANCE ON INFORMATION SYSTEMS
We rely on various information systems to manage our operations and
regularly make investments to upgrade, enhance or replace such systems. In
connection with the planned relocation of our distribution center, we intend to
install an automated warehouse management system to facilitate more efficient
receipt and distribution of inventory. We also intend to replace our current
point-of-sale ("POS") software and hardware with an upgraded system during
fiscal 1999. Any delays or difficulties in transitioning to these or other new
systems, or in integrating these systems with our current systems, or any other
disruptions affecting our information systems, could have a material adverse
effect on our business.
UNCERTAINTY OF SUCCESS OF NEW MERCHANDISE PRESENTATION
In fiscal 1999, we intend to implement a new merchandise presentation
strategy, through which we will consolidate separate departments for older and
younger boys and girls into one boys and one girls department, while expanding
our newborn department. We are also upgrading the display fixtures in
approximately two-thirds of our existing stores and installing these fixtures in
our new stores. We believe these initiatives should simplify, facilitate and
enhance the shopping experience of our customers by eliminating duplicative
displays and creating more space within our stores. However, we have not tested
these changes and therefore cannot predict the impact they will have on
customers
6
<PAGE>
familiar with our current layout and departmental structure. The failure of our
new merchandise presentation initiatives could have a material adverse effect on
our business.
DEPENDENCE ON UNAFFILIATED MANUFACTURERS AND INDEPENDENT AGENTS
We do not own or operate any manufacturing facilities and therefore are
dependent upon independent third parties for the manufacture of all of our
products. Our products are currently manufactured to our specifications,
pursuant to purchase orders, by more than 60 independent manufacturers located
primarily in Asia. We have no exclusive or long-term contracts with our
manufacturers and compete with other companies for manufacturing facilities. In
addition, we have no formal written agreement with the Hong Kong-based trading
company through which we purchase approximately 35% of our products. We also
purchase approximately 30% of our products from a single agent in Taiwan, which
has an exclusive arrangement with us. Although we believe that we have
established close relationships with our principal manufacturers and independent
agents, the inability to maintain such relationships or to find additional
sources to cover future growth could have a material adverse effect on our
business.
RISKS OF USING FOREIGN MANUFACTURERS; POSSIBLE ADVERSE IMPACT OF UNAFFILIATED
MANUFACTURERS' FAILURE TO COMPLY WITH ACCEPTABLE LABOR PRACTICES
Our business is subject to the risks generally associated with purchasing
from foreign countries. Some of these risks are foreign governmental
regulations, political instability, currency and exchange risks, quotas on the
amounts and types of merchandise which may be imported into the United States
from other countries, disruptions or delays in shipments and changes in economic
conditions in countries in which our manufacturing sources are located. We
cannot predict the effect that such factors will have on our business
arrangements with foreign manufacturing sources. If any of these factors
rendered the conduct of business in a particular country undesirable or
impractical, or if our current foreign manufacturing sources ceased doing
business with us for any reason, our business could be materially adversely
affected. Our business is also subject to the risks associated with changes in
U.S. legislation and regulations relating to imported apparel products,
including quotas, duties, taxes and other charges or restrictions on imported
apparel. We cannot predict whether such changes or other charges or restrictions
will be imposed upon the importation of our products in the future, or the
effect any such event would have on our business. However, if China were to lose
its Most Favored Nation trading status with the United States, that event could
have a material adverse effect on our business.
We require our independent manufacturers to operate in compliance with
applicable laws and regulations and our internal requirements. While our
purchasing guidelines promote ethical business practices, we do not control
these manufacturers or their labor practices. The violation of labor or other
laws by one of the independent manufacturers we use or the divergence of an
independent manufacturer's labor practices from those generally accepted as
ethical in the United States could have a material adverse effect on our
business.
EFFECT OF FLUCTUATIONS IN QUARTERLY RESULTS AND SEASONALITY ON INCOME
As is the case with many apparel retailers, we experience seasonal
fluctuations in our net sales and net income. Our net sales and net income are
generally weakest during the first two fiscal quarters, and are lower during the
second fiscal quarter than during the first fiscal quarter. For example, in
fiscal 1998, 21.8%, 17.7%, 28.6% and 31.9% of our net sales for stores open for
the full fiscal year occurred in the first, second, third and fourth quarters,
respectively. We generally experience second quarter losses and, in the past,
have experienced first quarter losses. We expect to continue to experience
second quarter losses in the future and may experience losses in other quarters.
Our first quarter results are heavily dependent upon sales during the period
leading up to the Easter holiday and weak
7
<PAGE>
sales during this period could have a material adverse effect on our operating
results. Our third quarter results are heavily dependent upon back-to-school
sales and our fourth quarter results are heavily dependent upon sales during the
holiday season. Weak sales during either of these periods could have a material
adverse effect on our operating results.
Our quarterly results of operations may also fluctuate significantly from
quarter to quarter as a result of a variety of other factors, including the
timing of new store openings and related pre-opening and other start-up costs,
net sales contributed by new stores, increases or decreases in comparable store
sales, weather conditions, shifts in timing of certain holidays, changes in our
merchandise mix and overall economic conditions. Any failure by us to meet our
business plans for, in particular, the third and fourth quarter of any fiscal
year would have a material adverse effect on our earnings, which in all
likelihood would not be offset by satisfactory results achieved in other
quarters of the same fiscal year. In addition, because our expense levels are
based in part on expectations of future sales levels, a shortfall in expected
sales could result in a disproportionate decrease in our net income.
CHANGES IN COMPARABLE STORE SALES RESULTS FROM PERIOD TO PERIOD
Numerous factors affect our comparable store sales results including, among
others, weather conditions, fashion trends, merchandise assortment, the retail
sales environment, economic conditions and our success in executing our business
strategy. Our quarterly comparable store sales results have fluctuated
significantly in the past and we anticipate that our quarterly comparable store
sales will continue to fluctuate in the future. In addition, we do not expect
our comparable store sales to continue to increase at rates similar to those
experienced in fiscal 1998. Moreover, comparable store sales for any particular
period may decrease in the future. Comparable store sales results are often
followed closely by the investment community and significant fluctuations in
such results may affect the price of our Common Stock. Any such variations in
our comparable store sales results could have a material adverse effect on our
business and on the market price of our Common Stock.
FOREIGN CURRENCY FLUCTUATIONS
We conduct our business in U.S. dollars. However, because we purchase
substantially all of our products overseas, the cost of these products may be
affected by changes in the values of the relevant currencies. To date, we have
not considered it necessary to hedge against foreign currency fluctuations.
Although foreign currency fluctuations have had no material adverse effect on
our business in the past, we cannot predict whether such fluctuations will have
such an effect in the future.
DEPENDENCE ON KEY PERSONNEL
The leadership of Ezra Dabah, our Chief Executive Officer and Chairman of
the Board, Stanley Silver, our President and Chief Operating Officer, and Clark
Hinkley, our Executive Vice President, Merchandising, has been instrumental in
our success. The loss of the services of Mr. Dabah, Mr. Silver or Mr. Hinkley
could have a material adverse effect on our business. We have entered into
employment agreements with Messrs. Dabah, Silver and Hinkley, but we cannot
assure you that we will be able to retain their services. In addition, other
members of management have substantial experience and expertise in our business
and have made significant contributions to its growth and success. The loss of
services of one or more of these individuals, or the inability to attract
additional qualified managers or other personnel as we grow, could have a
material adverse effect on our business. We are not protected by any key-man or
similar life insurance for any of our executive officers.
COMPETITION
The children's apparel retail business is highly competitive. We compete in
substantially all of our markets with GapKids, BabyGap and Old Navy (each of
which is a division of The Gap, Inc.), The
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<PAGE>
Gymboree Corporation, Limited Too (a division of The Limited, Inc.), J.C. Penney
Company, Inc., Sears, Roebuck and Co. and other department stores that sell
children's apparel and accessories, as well as certain discount stores such as
Wal-Mart Stores, Inc., Kmart Corporation, Target (a division of Dayton Hudson
Corporation) and Kids "R" Us (a division of Toys "R" Us, Inc.). We also compete
with a wide variety of specialty stores, other national and regional retail
chains, catalog companies and Internet retailers. One or more of our competitors
are present in substantially all of the malls in which we have stores. Many of
our competitors are larger than The Children's Place and have access to
significantly greater financial, marketing and other resources than we have. We
cannot assure you that we will be able to compete successfully against existing
or future competition.
UNCERTAINTY OF NET OPERATING LOSS CARRYFORWARDS
We utilized $11.6 million, $8.1 million and $39.9 million of our net
operating loss carryforwards ("NOLs") to offset taxable income that we earned in
our 1996, 1997 and 1998 taxable years, respectively, leaving NOLs of
approximately $0.1 million which we expect to utilize in our 1999 taxable year.
As the amount and availability of these NOLs are subject to review by the
Internal Revenue Service, we cannot assure you that the NOLs will not be reduced
or their use not limited as the result of an audit of our tax returns. If the
amount of these NOLs were reduced or their availability limited, we could be
liable for additional taxes with respect to our 1996 through 1998 taxable years.
Any such reduction or restriction could have a material adverse effect on our
business.
CONTROL BY CERTAIN STOCKHOLDERS
As of February 15, 1999, Ezra Dabah and certain members of his family
beneficially own 11,370,164 shares of our Common Stock, constituting
approximately 45.3% of the outstanding Common Stock. Two funds managed by
Saunders Karp & Megrue, L.P. ("SKM"), The SK Equity Fund, L.P. and SK Investment
Fund, L.P. (collectively, the "SK Funds"), own 7,566,553 shares or approximately
30.3% of the outstanding Common Stock. After giving effect to this offering,
Ezra Dabah and certain members of his family will beneficially own 10,170,164
shares of our Common Stock, constituting approximately 40.5% of the outstanding
Common Stock (9,990,164 shares or approximately 39.8% of the outstanding Common
Stock if the over-allotment option is fully exercised), and the SK Funds will
beneficially own 4,866,553 shares or approximately 19.5% of the outstanding
Common Stock (4,461,553 shares or approximately 17.9% of the outstanding Common
Stock if the over-allotment option is fully exercised). Under a stockholders
agreement, the SK Funds and certain other stockholders, who following this
offering will own in the aggregate a majority of the outstanding Common Stock,
have agreed to vote for the election of two nominees of the SK Funds and three
nominees of Ezra Dabah to our Board of Directors in any election of directors.
As a result, the SK Funds and Ezra Dabah are, and will continue to be, able to
control the election of our directors. In addition, if the SK Funds and Mr.
Dabah were to vote together, they would be able to determine the outcome of any
matter submitted to a vote of our stockholders for approval.
SENSITIVITY TO ECONOMIC, REGIONAL AND OTHER BUSINESS CONDITIONS
Our business is sensitive to customers' spending patterns which, in turn,
are subject to prevailing regional and national economic conditions such as
interest rates, taxation and consumer confidence. We are, and will continue to
be, susceptible to changes in regional economic conditions, weather conditions,
demographic and population characteristics, consumer preferences and other
regional factors. We are also dependent upon the continued popularity of malls
as shopping destinations and the ability of mall anchor tenants and other
attractions to generate customer traffic in the malls where our stores are
located. Any economic or other conditions decreasing the retail demand for
apparel or the level of mall traffic could have a material adverse effect on our
business.
9
<PAGE>
RISK OF GEOGRAPHIC EXPANSION
Most of our stores are located in the northeastern and mid-Atlantic United
States. In the past, we have typically expanded our operations in states where
we presently have operations or in contiguous states. In fiscal 1999 and fiscal
2000, in addition to continuing this expansion strategy, we expect to open
stores in new markets and in markets that we have recently penetrated. As a
result, we are, and will continue to be, susceptible to differences in
demographic and population characteristics, regional economic conditions,
climate and other weather-related conditions, consumer preferences and other
geographical factors. We cannot assure you that, as we expand into new regions,
we will be able to achieve results comparable to those we have achieved in prior
periods in regions where we already conduct business.
POSSIBILITY OF CHANGE OF TERMS IN PRIVATE LABEL CREDIT CARD
Sales under "The Children's Place" credit card program represented
approximately 12% of our net sales in fiscal 1998. Our private label credit card
program is operated by an unaffiliated third party, Hurley State Bank, through
its agent, SPS Payment Services, Inc., on terms that currently do not provide
for recourse against The Children's Place. In connection with our efforts to
increase the number of cardholders and encourage use of our private label credit
card, we may, from time to time, consider changing these arrangements to provide
for either full or partial recourse. Any such changes may subject us to losses
from unpaid charges and could have a material adverse effect on our business.
FAILURE OF OUR SYSTEMS TO RECOGNIZE YEAR 2000
The Year 2000 issue exists because many computer applications currently use
two-digit date fields to designate a year. As the century date occurs, date
sensitive systems may not properly recognize and process the Year 2000 which
could cause a system failure or other computer errors leading to disruptions in
normal business processing. Although we are taking prudent business precautions
and developing contingency plans to minimize any business disruption caused by
the Year 2000, we cannot predict whether we will be adversely impacted by a
failure caused by the Year 2000. These risks include, but are not limited to,
power and communications disruptions, failures of our information technology
systems, the ability of any of our significant domestic or foreign suppliers,
service providers, agents or trading companies to become Year 2000 compliant and
disruptions in the distribution channels including both domestic and foreign
ports, customs and transportation vendors.
STOCK PRICE VOLATILITY
Our Common Stock, which is quoted on the Nasdaq National Market, has
experienced and is likely to experience in the future significant price and
volume fluctuations which could adversely affect the market price of the Common
Stock without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in our financial results, our comparable
store sales results, announcements by other apparel retailers, the overall
economy and the condition of the financial markets could cause the price of our
Common Stock to fluctuate substantially.
ANTI-TAKEOVER PROVISIONS OF APPLICABLE DELAWARE LAW AND OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
Certain provisions of our Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation") and Amended and Restated ByLaws (the
"ByLaws") may have anti-takeover effects and may discourage, delay or prevent a
takeover attempt that a stockholder might consider in its best interest. These
provisions, among other things, (1) classify our Board of Directors into three
classes, each of which will serve for different three year periods, (2) provide
that only the Chairman of the Board of Directors may call special meetings of
the stockholders, (3) provide that a director may be
10
<PAGE>
removed by stockholders only for cause by a vote of the holders of more than
two-thirds of the shares entitled to vote, (4) provide that all vacancies on our
Board of Directors, including any vacancies resulting from an increase in the
number of directors, may be filled by a majority of the remaining directors,
even if the number is less than a quorum, (5) establish certain advance notice
procedures for nominations of candidates for election as directors and for
stockholder proposals to be considered at stockholders' meetings, and (6)
require a vote of the holders of more than two-thirds of the shares entitled to
vote in order to amend the foregoing provisions and certain other provisions of
the Certificate of Incorporation and ByLaws. In addition, the Board of
Directors, without further action of the stockholders, is permitted to issue and
fix the terms of preferred stock which may have rights senior to those of the
Common Stock. Moreover, we are subject to the provisions of Section 203 of the
Delaware General Corporation Law, as amended (the "DGCL"), which would require a
two-thirds vote of stockholders for any business combination (such as a merger
or sales of all or substantially all of our assets) between The Children's Place
and an "interested stockholder," unless such transaction is approved by a
majority of the disinterested directors or meets certain other requirements. In
certain circumstances, the existence of these provisions which inhibit or
discourage takeover attempts could reduce the market value of our Common Stock.
POTENTIAL IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE ON STOCK PRICE
Sales of substantial amounts of our Common Stock in the public market
following this offering could adversely affect the market price of our Common
Stock. Immediately following this offering, an aggregate of 10,088,000 shares of
our currently outstanding Common Stock (10,688,000 shares if the underwriters'
over-allotment option is fully exercised) will be freely tradable without
restriction or registration under the Securities Act, except to the extent held
by our affiliates. An additional 14,887,101 restricted shares (14,287,101 shares
if the underwriters' over-allotment option is fully exercised) will be eligible
for sale subject to compliance with volume and other limitations under Rule 144
of the Securities Act. As of February 15, 1998, an additional 831,698 shares are
subject to issue upon the exercise of vested stock options previously granted by
us, all of which would be freely tradable if issued subject to compliance with
Rule 144 in the case of our affiliates.
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<PAGE>
USE OF PROCEEDS
All net proceeds from the sale of the shares of our Common Stock will go to
the selling stockholders. Accordingly, we will not receive any of the proceeds
from the sale of the shares of our Common Stock offered by this prospectus.
PRICE RANGE OF COMMON STOCK
Our Common Stock is listed on the Nasdaq National Market under the symbol
"PLCE." The following table sets forth the range of high and low closing sales
prices on the Nasdaq National Market of our Common Stock for the calendar
periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1997
Third Quarter (from September 19, 1997).................................... $ 15.75 $ 14.13
Fourth Quarter............................................................. 14.25 4.44
1998
First Quarter.............................................................. 9.06 5.06
Second Quarter............................................................. 11.38 8.13
Third Quarter.............................................................. 11.00 8.06
Fourth Quarter............................................................. 25.13 9.13
1999
First Quarter (through March 26, 1999)..................................... 33.25 23.56
</TABLE>
On March 26, 1999, the last reported sale price of our Common Stock was
$26.31 per share. As of March 26, 1999, there were approximately 1,600 holders
of record of our Common Stock.
DIVIDEND POLICY
We have never paid dividends on our Common Stock and do not anticipate
paying dividends on our Common Stock in the foreseeable future. Our Board of
Directors presently intends to retain any future earnings of The Children's
Place to finance our operations and the expansion of our business. Our working
capital revolving credit facility with Foothill Capital Corporation prohibits
any payment of dividends. Any determination in the future to pay dividends will
depend upon our earnings, financial condition, cash requirements, future
prospects, covenants in our working capital revolving credit facility and any
future debt instruments and such other factors as the Board of Directors deems
appropriate at the time.
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<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth certain historical financial and operating
data for The Children's Place. The selected historical financial data is
qualified by reference to, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the financial statements and notes thereto included elsewhere in this
prospectus. Certain prior fiscal year balances set forth below have been
reclassified to conform to fiscal 1998 presentation.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED (1)
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30,
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA (IN THOUSANDS,
EXCEPT PER SHARE DATA):
Net sales...................................................... $ 107,953 $ 122,060 $ 143,838 $ 192,557 $ 283,853
Cost of sales.................................................. 74,229 83,434 90,071 123,556 166,449
----------- ----------- ----------- ----------- -----------
Gross profit................................................... 33,724 38,626 53,767 69,001 117,404
Selling, general and administrative expenses................... 27,873 30,757 35,966 46,451 70,313
Pre-opening costs.............................................. 178 311 982 2,127 3,030
Depreciation and amortization.................................. 3,344 3,496 4,017 5,958 8,607
----------- ----------- ----------- ----------- -----------
Operating income............................................... 2,329 4,062 12,802 14,465 35,454
Interest expense, net.......................................... 1,303 1,925 2,884 2,647 324
Other expense, net............................................. 0 447 396 139 110
----------- ----------- ----------- ----------- -----------
Income before income taxes and extraordinary item.............. 1,026 1,690 9,522 11,679 35,020
Provision (benefit) for income taxes (2)....................... 54 36 (20,919) 4,695 14,358
----------- ----------- ----------- ----------- -----------
Income before extraordinary item............................... 972 1,654 30,441 6,984 20,662
Extraordinary gain (loss) (3).................................. 490 0 0 (1,743) 0
----------- ----------- ----------- ----------- -----------
Net income..................................................... $ 1,462 $ 1,654 $ 30,441 $ 5,241 $ 20,662
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted income per common share before extraordinary item...... $ 0.29 $ 0.80
----------- -----------
Extraordinary item............................................. (0.07) 0.00
----------- -----------
Diluted net income per common share............................ $ 0.22 $ 0.80
----------- -----------
----------- -----------
Diluted weighted average common shares outstanding (4)......... 24,358 25,909
SELECTED OPERATING DATA:
Number of stores open at end of period......................... 87 91 108 155 209
Comparable store sales increase (5) (6)........................ 13% 10% 9% 2% 14%
Average net sales per store (in thousands) (6) (7)............. $ 1,264 $ 1,362 $ 1,479 $ 1,487 $ 1,569
Average square footage per store (8)........................... 4,786 4,528 4,284 4,123 4,055
Average net sales per gross square foot (6) (9)................ $ 259 $ 292 $ 335 $ 350 $ 382
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30,
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA (IN THOUSANDS):
Working capital (deficit)...................................... $ (10,398) $ (17,630) $ 11,951 $ 20,238 $ 35,531
Total assets................................................... 26,556 32,073 64,479 79,353 110,761
Long-term debt................................................. 21,626 15,735 20,504 26 2
Stockholders' equity (deficit)................................. (13,388) (11,735) 27,298 58,467 80,607
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
13
<PAGE>
- ------------------------
(1) All references to our fiscal years refer to the 52- or 53-week year ended
on the Saturday nearest to January 31 of the following year. For example,
references to fiscal 1998 mean the fiscal year ended January 30, 1999.
Fiscal 1995 was a 53-week year.
(2) The provision (benefit) for income taxes for fiscal 1996 reflected the
reversal of a valuation allowance of $21.0 million on a net deferred tax
asset.
(3) The extraordinary gain during fiscal 1994 represented the forgiveness of
debt in connection with a debt restructuring undertaken with the consent of
our creditors. The extraordinary loss in fiscal 1997 represented the
write-off of unamortized deferred financing costs and unamortized debt
discount as a result of the repayment of long-term debt in conjunction with
our initial public offering in September 1997.
(4) The weighted average common shares outstanding used in computing diluted
income per common share before extraordinary item and diluted net income per
common share for fiscal 1997 are based on the number of common shares and
common share equivalents outstanding as if our recapitalization at the time
of our initial public offering had occurred on the first day of fiscal 1997.
During and prior to the fiscal year ended February 1, 1997, our Common Stock
was not publicly traded and in light of the significant changes in our
capital structure resulting from a private placement of our Common Stock in
July 1996 (as discussed in Note 3--1996 Private Placement in the Notes to
the Consolidated Financial Statements) (the "1996 Private Placement"),
earnings per share for that year and earlier periods is not presented due to
a lack of comparability.
(5) We define comparable store sales as net sales from stores that have been
open for more than 14 full months and that have not been substantially
remodeled during that time.
(6) For purposes of determining the comparable store sales increase, average net
sales per store and average net sales per gross square foot, fiscal 1995
results were recalculated based on a 52-week year.
(7) Represents net sales from stores open throughout the full period divided by
the number of such stores.
(8) Average square footage per store represents the square footage of stores
open on the last day of the period divided by the number of such stores.
(9) Represents net sales from stores open throughout the full period divided by
the gross square footage of such stores.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR AUDITED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT REFLECT OUR
PLANS, ESTIMATES AND BELIEFS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW AND ELSEWHERE IN THIS PROSPECTUS, PARTICULARLY IN "RISK FACTORS."
OVERVIEW
The Children's Place Retail Stores, Inc. is a specialty retailer of apparel
and accessories for children from newborn to twelve years of age. As of February
15, 1999, we operated 211 stores in 26 states, located primarily in regional
shopping malls in the eastern half of the United States. In fiscal 1996, we
began to implement an aggressive growth strategy designed to capitalize on our
business strengths and strong store economics. From July 1, 1996 through the end
of fiscal 1996, we opened 16 stores and closed one store, growing to 108 stores.
During fiscal 1997 and fiscal 1998, we opened 47 and 54 new stores,
respectively. The majority of these stores were opened in existing and
contiguous markets. In fiscal 1998, we also entered into several new markets,
including Atlanta, St. Louis and Kansas City.
We intend to continue our expansion program and currently plan to open at
least 70 stores in fiscal 1999 and at least 90 stores in fiscal 2000. Our store
expansion program will continue to focus on expanding our presence in existing
and contiguous markets. We also plan to open stores in several new
markets--Colorado, Utah and northern Florida in fiscal 1999, and northern
California, Washington, Oregon, southern Florida, Louisiana and Texas in fiscal
2000.
Our net sales have grown significantly during the past several years,
primarily as a result of new store openings and, to a lesser extent, increases
in comparable store sales. We define our comparable store sales as net sales
from stores that have been open for more than 14 full months and that have not
been substantially remodeled during that time. We reported comparable store
sales growth over prior years of 13%, 10%, 9%, 2% and 14% during fiscal 1994,
1995, 1996, 1997 and 1998, respectively. We believe that these increases were
primarily the result of successful merchandising and operational programs,
together with well-positioned store real estate. We do not expect our comparable
store sales to continue to increase at rates similar to those experienced in
fiscal 1998.
In order to support our aggressive growth strategy, we continue to assess
and build our administrative infrastructure and our management information and
distribution systems. During fiscal 1998, we added resources in virtually all of
our administrative functions to support our present and planned store growth.
During fiscal 1999, we plan to implement an automated warehouse management
system and to replace our point-of-sale software and hardware. During the second
quarter of fiscal 1999, we also plan to move to a larger distribution center and
corporate headquarters in Secaucus, New Jersey. This relocation will support our
need for additional space for our distribution center and administrative staff.
Since our current facilities and equipment have a low net book value, we expect
only a small write-off in conjunction with this move.
In fiscal 1999, we also plan to implement a new merchandise presentation
strategy, and to upgrade the display fixtures and other elements of our store
design in approximately two-thirds of our existing stores, in order to simplify,
facilitate and enhance the shopping experience of our customers. During fiscal
1998, we accelerated depreciation expense by approximately $0.8 million for
store fixtures that will be eliminated in connection with the refixturing. We
expect to accelerate depreciation expense by approximately $1.2 million during
fiscal 1999 to complete this program. Also in fiscal 1999, we plan, through a
wholly-owned Hong Kong subsidiary, to open an office in Hong Kong, which will
initially employ eight to ten people, and for which we initially expect to incur
an annual cost of $1.0 million.
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<PAGE>
We have selected an advertising agency to assist us in developing a new
advertising campaign that will include television, print, radio and outdoor
advertising. In fiscal 1999, we expect to spend approximately $6.0 million to
$8.0 million on this campaign. We also view the use of our private label credit
card as an important marketing and communication tool. Our private label card
sales accounted for approximately 12% of our fiscal 1998 net sales.
Giving effect to the expenditures to be made in the second quarter of fiscal
1999 specified above, we may report a higher net loss for the second quarter of
fiscal 1999 than we reported for the second quarter of fiscal 1998.
Consequently, during the second quarter of fiscal 1999, we may report a higher
loss per share than we did for the second quarter of fiscal 1998. In addition,
the occupancy expense of a larger distribution center and corporate
headquarters, the overlap in rent expense between our old and new facility and
the cost of relocating to the new facility will adversely affect our results of
operations for the second quarter of fiscal 1999.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected income
statement data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------
<S> <C> <C> <C>
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
------------- ------------- -------------
Net sales.................................................................. 100.0% 100.0% 100.0%
Cost of sales.............................................................. 62.6 64.2 58.6
----- ----- -----
Gross profit............................................................... 37.4 35.8 41.4
Selling, general and administrative expenses............................... 25.0 24.1 24.8
Pre-opening costs.......................................................... 0.7 1.1 1.1
Depreciation and amortization.............................................. 2.8 3.1 3.0
----- ----- -----
Operating income........................................................... 8.9 7.5 12.5
Interest expense, net...................................................... 2.0 1.4 0.1
Other expense, net......................................................... 0.3 0.1 0.1
----- ----- -----
Income before income taxes and extraordinary item.......................... 6.6 6.0 12.3
Provision (benefit) for income taxes....................................... (14.5) 2.4 5.0
Extraordinary loss......................................................... -- 0.9 --
----- ----- -----
Net income................................................................. 21.1% 2.7% 7.3%
----- ----- -----
----- ----- -----
Number of stores, end of period............................................ 108 155 209
</TABLE>
YEAR ENDED JANUARY 30, 1999 COMPARED TO YEAR ENDED JANUARY 31, 1998
Net sales increased by $91.3 million, or 47%, to $283.9 million during
fiscal 1998 from $192.6 million during fiscal 1997. Net sales for the 54 new
stores opened, as well as other stores that did not qualify as comparable
stores, contributed $67.1 million of the sales increase. As of January 30, 1999,
The Children's Place operated 209 stores in 26 states primarily located in
regional shopping malls in the eastern half of the United States. During fiscal
1998, we entered several new markets, including Atlanta, St. Louis and Kansas
City. Our comparable store sales increased 14% and contributed $24.2 million to
the net sales increase during fiscal 1998. Comparable store sales increased 2%
during fiscal 1997. Our fiscal 1998 comparable store sales increase was
experienced across all major merchandise departments.
Gross profit increased by $48.4 million to $117.4 million during fiscal 1998
from $69.0 million during fiscal 1997. As a percentage of net sales, gross
profit increased to 41.4% during fiscal 1998 from
16
<PAGE>
35.8% during fiscal 1997. The increase in gross profit as a percentage of net
sales was principally due to higher initial markups achieved through more
effective product sourcing and a stronger dollar, as well as to lower markdowns.
As a percentage of net sales, gross profit was also favorably impacted by a
leveraging of store occupancy, buying and distribution expenses over a higher
sales base.
Selling, general and administrative expenses increased $23.8 million to
$70.3 million during fiscal 1998 from $46.5 million during fiscal 1997. As a
percentage of net sales, selling, general and administrative expenses increased
to 24.8% of net sales during fiscal 1998 from 24.1% of net sales during fiscal
1997. The increase was primarily due to increases in our administrative
infrastructure to support our growth and higher marketing expenses to promote
consumer recognition of "The Children's Place" brand. In addition, our incentive
payouts in fiscal 1998 were higher, and higher as a percentage of net sales, as
our increased operating performance for that year resulted in the payment of
higher incentive bonuses than were paid in fiscal 1997. The increase in selling,
general and administrative expenses as a percentage of net sales was partially
offset by the leveraging of store expenses over a higher sales base.
During fiscal 1998, pre-opening costs were $3.0 million, or 1.1% of net
sales, as compared to $2.1 million, or 1.1% of net sales, during fiscal 1997.
The increase in pre-opening costs in fiscal 1998 reflected the opening of 54
stores, as compared to 47 stores during fiscal 1997. Pre-opening expenses for
fiscal 1998 also reflect certain expenses incurred for approximately 26 stores
we plan to open during the first quarter of fiscal 1999.
Depreciation and amortization amounted to $8.6 million, or 3.0% of net
sales, during fiscal 1998 as compared to $6.0 million, or 3.1% of net sales,
during fiscal 1997. The increase in depreciation and amortization primarily was
a result of the increase in stores. The decrease as a percentage of net sales
during fiscal 1998 reflects the leverage of depreciation and amortization
expense over a higher sales base.
Interest expense, net, for fiscal 1998 was $0.3 million, or 0.1% of net
sales, as compared to $2.6 million, or 1.4% of net sales, during fiscal 1997.
The decrease in interest expense, net, was primarily due to the elimination of
interest expense on our long-term debt, which was repaid with a portion of the
proceeds from our initial public offering, and lower borrowings and effective
interest rates under our working capital revolving credit facility.
Other expense, net, for fiscal 1998 and fiscal 1997 was $0.1 million and
consisted of anniversary fees related to our working capital revolving credit
facility during both periods.
During fiscal 1998, a provision for income taxes of $14.4 million was
recorded, as compared to $4.7 million during fiscal 1997. Due to the utilization
of our NOLs, the majority of our 1998 tax provision will not be paid in cash.
However, we expect to make cash payments of approximately $2.3 million for our
fiscal 1998 taxes related to the payment of taxes based on the federal
alternative minimum tax, state minimum taxes and state taxes for states in which
we did not have NOLs. We expect to utilize the remaining $0.1 million of our
NOLs during fiscal 1999.
As a result of the repayment of our long-term debt with a portion of the net
proceeds from our initial public offering, we recorded a non-cash extraordinary
item of $1.7 million, net of taxes, for fiscal 1997 that represented the
write-off of unamortized deferred financing costs and unamortized debt discount.
The Children's Place had net income of $20.7 million and $5.2 million in
fiscal 1998 and fiscal 1997, respectively.
17
<PAGE>
YEAR ENDED JANUARY 31, 1998 COMPARED TO YEAR ENDED FEBRUARY 1, 1997
Net sales increased by $48.8 million, or 34%, to $192.6 million during
fiscal 1997 from $143.8 million during fiscal 1996. Net sales for the 47 new
stores opened, as well as other stores that did not qualify as comparable
stores, contributed $46.2 million of the sales increase, partially offset by the
closing of one store during 1996 which contributed $0.4 million of net sales
during fiscal 1996. Our comparable store sales increased 2% and contributed $3.0
million of the sales increase during fiscal 1997. Comparable store sales
increased 9% during fiscal 1996. Our fiscal 1997 comparable store sales increase
was primarily attributable to strength in the newborn and big girls departments,
partially offset by weaker sales in the little boys and little girls
departments.
Gross profit increased by $15.2 million to $69.0 million during fiscal 1997
from $53.8 million during fiscal 1996. As a percentage of net sales, gross
profit decreased to 35.8% during fiscal 1997 from 37.4% during fiscal 1996. The
decrease in gross profit as a percentage of net sales was principally due to
higher markdowns which were required to clear excess inventory. As a percentage
of net sales, gross profit was also unfavorably impacted by higher store
occupancy costs partially offset by a higher initial markup. The increased store
occupancy costs resulted from new stores that had not been open long enough to
leverage their rent through an established sales base.
Selling, general and administrative expenses increased $10.5 million to
$46.5 million during fiscal 1997 from $36.0 million during fiscal 1996. As a
percentage of net sales, selling, general and administrative expenses decreased
to 24.1% of net sales during fiscal 1997 from 25.0% of net sales during fiscal
1996. The decrease as a percentage of net sales was primarily due to lower
corporate administrative expenses which benefited from the leverage of the
increased sales base, partially offset by higher store payroll and other store
expenses.
During fiscal 1997, pre-opening costs were $2.1 million, or 1.1% of net
sales, as compared to $1.0 million, or 0.7% of net sales, during fiscal 1996.
The increase in pre-opening costs in fiscal 1997 reflected the opening of 47
stores, as compared to 18 stores during fiscal 1996, partially offset by cost
saving measures implemented in fiscal 1997 to reduce store pre-opening costs.
Depreciation and amortization amounted to $6.0 million, or 3.1% of net
sales, during fiscal 1997 as compared to $4.0 million, or 2.8% of net sales,
during fiscal 1996. The increase in depreciation and amortization primarily was
a result of the increase in stores.
Interest expense, net, for fiscal 1997 was $2.6 million, or 1.4% of net
sales, as compared to $2.9 million, or 2.0% of net sales, during fiscal 1996.
The decrease in interest expense, net, was primarily due to the repayment of our
long-term debt with a portion of the proceeds from our initial public offering.
Other expense, net, for fiscal 1997 amounted to $0.1 million, or 0.1% of net
sales, as compared to $0.4 million, or 0.3% of net sales, during fiscal 1996.
During fiscal 1997 and fiscal 1996, other expenses were comprised primarily of
an anniversary fee and other miscellaneous fees related to our working capital
revolving credit facility. During fiscal 1996, other expenses also contained
credit agreement amendment fees related to our working capital revolving credit
facility.
Our provision for income taxes for fiscal 1997 was $4.7 million, as compared
with an income tax benefit of $20.9 million in the prior year. Our provision for
income taxes for fiscal 1997 reflected a provision based on effective statutory
rates. Throughout fiscal 1996, our provision for income taxes provided for the
payment of federal alternative minimum taxes and minimum taxes in most states
due to the utilization of our NOLs. During the fourth quarter of fiscal 1996, we
reversed a $21.0 million valuation allowance on our deferred tax asset on our
balance sheet. The majority of the fiscal 1997 tax provision was not paid in
cash. However, we made cash tax payments for the federal alternative minimum
tax, state minimum taxes and state taxes for states in which we did not have
NOLs.
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As a result of the repayment of our long-term debt with a portion of the net
proceeds from the initial public offering, we recorded a non-cash extraordinary
item of $1.7 million, net of taxes, for fiscal 1997 that represented the
write-off of unamortized deferred financing costs and unamortized debt discount.
The Children's Place had net income of $5.2 million and $30.4 million in
fiscal 1997 and fiscal 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
DEBT SERVICE/LIQUIDITY
During fiscal 1998, our primary uses of cash were financing new store
openings and providing for working capital, which primarily represents the
purchase of inventory. Our working capital needs follow a seasonal pattern,
peaking during the second and third quarters when inventory is purchased for the
back-to-school and holiday merchandise lines. We have been able to meet our cash
needs principally by using cash flow from operations and borrowings under our
working capital revolving credit facility. Since our initial public offering, we
have had no long-term debt obligations other than obligations under capital
leases.
We have a working capital revolving credit facility with Foothill Capital
Corporation that provides for borrowings up to $30.0 million (including a
sublimit for letters of credit of $20.0 million). The amount that may be
borrowed under our working capital revolving credit facility depends upon our
levels of inventory and accounts receivable. Amounts outstanding under the
facility bear interest at a floating rate equal to the prime rate or, at our
option, the 30-day LIBOR Rate plus a pre-determined spread. The LIBOR spread is
1.50% or 2.00%, depending upon our financial performance from time to time.
Borrowings under the facility mature in July 2000 and provide for one year
automatic renewal options.
As of January 30, 1999, there were no borrowings under our working capital
revolving credit facility and, as of January 31, 1998, $1.1 million was borrowed
under the working capital revolving credit facility. In addition, as of January
30, 1999 and January 31, 1998, we had outstanding $10.6 million and $5.7
million, respectively, in letters of credit under our working capital revolving
credit facility. Availability under the working capital revolving credit
facility as of January 30, 1999 and January 31, 1998 was $19.3 million and $15.8
million, respectively. As of January 30, 1999 and January 31, 1998 the interest
rates charged under the working capital revolving credit facility were 7.75% and
8.50% per annum, respectively.
Our working capital revolving credit facility contains certain financial
covenants including, among others, the maintenance of minimum levels of tangible
net worth, working capital and current ratios, and imposes certain limitations
on our annual capital expenditures, as defined in the working capital revolving
credit facility, as well as a prohibition on the payment of dividends. Credit
extended under the working capital revolving credit facility is secured by a
first priority security interest in our present and future assets.
We were in compliance with all of the financial covenants under our working
capital revolving credit facility as of January 30, 1999.
CASH FLOWS/CAPITAL EXPENDITURES
Cash flows provided by operating activities were $35.0 million, $11.3
million and $7.8 million in fiscal 1998, 1997 and 1996, respectively. In fiscal
1998, cash flows from operating activities increased as a result of an increase
in operating earnings, the utilization of our NOLs and increases in current
liabilities, partially offset by an increased investment in inventory to support
the store expansion
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program. In fiscal 1997, cash flows from operating activities increased as a
result of an increase in operating earnings and accounts payable, partially
offset by an increased inventory investment.
Cash flows used in investing activities were $19.8 million, $17.2 million
and $8.5 million in fiscal 1998, 1997 and 1996, respectively. Cash flows used in
investing activities relate primarily to store openings and remodelings. In
fiscal 1998, 1997 and 1996, we opened 54, 47 and 18 stores while remodeling 3,
10 and 5 stores, respectively. Cash flows used in investing activities during
fiscal 1998, 1997 and 1996 also include ongoing store capital programs and
computer equipment for our corporate headquarters office. During fiscal 1998,
capital expenditures also included capital expenditures related to the upcoming
relocation of the distribution center and corporate headquarters facility, a
warehouse management system and new point-of-sale software and hardware.
Cash flows provided by financing activities were $0.4 million, $3.3 million
and $3.5 million in fiscal 1998, 1997 and 1996, respectively. In fiscal 1998,
cash flows provided by financing activities reflected funds received from the
exercise of employee stock options and employee stock purchases partially offset
by a net repayment of our working capital revolving credit facility. In fiscal
1997, cash flows provided by financing activities resulted from our initial
public offering, offset by the repayment of our long-term debt and the
repurchase of certain warrants. In fiscal 1996, cash flows provided by financing
activities resulted from the 1996 Private Placement. The net proceeds of the
1996 Private Placement were used to redeem certain outstanding shares of Common
Stock, repay existing long-term debt and reduce outstanding borrowings under our
working capital revolving credit facility.
We have entered into an eight-year lease with a three-year option period for
a distribution center and corporate headquarters facility located in Secaucus,
New Jersey. The lease also provides us with an option to terminate the lease
after the fifth year. We plan to relocate our distribution center and corporate
headquarters during the second quarter of fiscal 1999. We believe this
distribution center will support approximately 500 stores. We expect to make a
cash outlay of approximately $8.0 million to renovate the facility, of which
$0.5 million was spent in fiscal 1998. We also plan to install a new warehouse
management system at a total cost of approximately $4.5 million, of which $2.1
million was spent in fiscal 1998. The existing distribution center and corporate
headquarters facility lease expires in March 1999. We have extended our lease
arrangement for our existing distribution and corporate headquarters to cover
the period until our operations are relocated to the new facility.
In a typical new store, capital expenditures (net of landlord contribution),
initial inventory (net of merchandise payables) and pre-opening costs
approximate $0.4 million. We anticipate that total capital expenditures will
approximate $45.0 million in fiscal 1999. These expenditures will relate
primarily to the opening of at least 70 stores, the renovation of our new
distribution center and corporate headquarters, store remodelings and
refixturings, ongoing store maintenance programs and computer and warehouse
systems and equipment. We plan to fund these capital expenditures primarily with
cash flow from operations.
We believe that cash generated from operations and funds available under our
working capital revolving credit facility will be sufficient to fund our capital
and other cash flow requirements for at least the next 12 months. In addition,
as we continue our store expansion program we will consider additional sources
of financing to fund our long-term growth. Although we are complying, and
believe that we will be able to comply, with the financial covenants under our
working capital revolving credit facility, we are seeking to provide greater
financial flexibility as we implement our growth strategy. Consequently, we have
requested an increase in our credit line under the working capital revolving
credit facility and amendments to the financial covenants contained in the
credit facility.
Our ability to meet our capital requirements will depend on our ability to
generate cash from operations and successfully implement our store expansion
plans.
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QUARTERLY RESULTS AND SEASONALITY
Our quarterly results of operations have fluctuated and are expected to
continue to fluctuate materially depending on a variety of factors, including
the timing of new store openings and related pre-opening and other startup
costs, net sales contributed by new stores, increases or decreases in comparable
store sales, weather conditions, shifts in timing of certain holidays, changes
in our merchandise mix and overall economic conditions.
Our business is also subject to seasonal influences, with heavier
concentrations of sales during the back-to-school and holiday seasons. As is the
case with many retailers of apparel and related merchandise, we typically
experience lower net sales and net income during the first two fiscal quarters,
and net sales and net income are lower during the second fiscal quarter than
during the first fiscal quarter. Our first quarter results are heavily dependent
upon sales during the period leading up to the Easter holiday. Our third quarter
results are heavily dependent upon back-to-school sales and our fourth quarter
results are heavily dependent upon sales during the holiday season. We have
experienced first and second quarter losses in the past and expect to experience
second quarter losses in the future. Because of these fluctuations in net sales
and net income (loss), the results of operations of any quarter are not
necessarily indicative of the results that may be achieved for a full fiscal
year or any future quarter.
The following table sets forth certain statement of operations data and
operating data for each of our last eight fiscal quarters. The quarterly
statement of operations data and selected operating data set forth below were
derived from our unaudited financial statements and reflect, in our opinion, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the results of operations for these fiscal quarters.
<TABLE>
<CAPTION>
FISCAL 1997
------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR STORE DATA)
Net sales........................................................ $ 39,203 $ 33,534 $ 54,489 $ 65,331
Operating income (loss).......................................... 2,618 (1,922) 6,656 7,113
Comparable store sales increase (decrease)....................... 5% (1%) 0% 5%
Stores open at end of period..................................... 119 134 151 155
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1998
------------------------------------------
<S> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR STORE DATA)
Net sales........................................................ $ 55,999 $ 48,014 $ 82,496 $ 97,344
Operating income (loss).......................................... 4,682 (664) 14,619 16,817
Comparable store sales increase.................................. 7% 8% 18% 18%
Stores open at end of period..................................... 178 189 203 209
</TABLE>
YEAR 2000 COMPLIANCE
The Year 2000 issue exists because many computer applications currently use
two-digit date fields to designate a year. As the century date occurs, date
sensitive systems may not properly recognize and process the Year 2000, which
could cause a system failure or other computer errors, leading to disruptions in
normal business processing. During fiscal 1997, we began a program to ensure
that our operations would not be adversely impacted by software and other system
and equipment failures related to the Year 2000.
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During the second quarter of fiscal 1998, we engaged the services of a
consulting firm to help ensure that we had fully assessed the risks associated
with the Year 2000 and to assist in the development of a comprehensive
implementation plan. In addition, we established a project team to coordinate
and address the Year 2000 issue. The Year 2000 project has been divided into
four phases: (1) inventory and risk assessment; (2) remediation of non-compliant
systems, equipment and suppliers;
(3) implementation and testing; and (4) contingency planning.
The inventory and risk assessment phase of the Year 2000 project is
complete. During this phase, we assessed our information systems hardware and
software, equipment containing date-sensitive embedded chips, electronic data
interchange and the Year 2000 preparedness of our key suppliers and service
providers.
Our plans call for our critical information systems to be Year 2000
compliant by the end of the second quarter of fiscal 1999. We believe that
approximately 65% of our systems are currently Year 2000 compliant. We plan to
rely primarily on our existing management information systems staff supplemented
by outside consultants to modify, replace and test systems for Year 2000
compliance. During fiscal 1998, we incurred external costs of approximately $0.3
million in connection with our Year 2000 compliance and we expect to incur an
additional $0.3 million in external costs in fiscal 1999. In addition, we
utilized approximately $0.4 million in internal management information systems
resources during fiscal 1998 and expect to utilize a similar amount of internal
management information systems resources in fiscal 1999. The cost of Year 2000
remediation is not expected to have a material adverse impact on our business in
future periods. Contingency plans are being developed to provide uninterrupted
management information systems support in the event that we are unable to
replace our warehouse management system, point-of-sale system and general ledger
systems.
We have completed our initial assessment of the Year 2000 preparedness of
our service providers and key suppliers through written communications, oral
communications and visual inspection. Despite these efforts, we cannot assure
the timely compliance of these service providers and suppliers and may be
adversely affected by a failure of a significant third party to become Year 2000
compliant. Additionally, since we procure most of our merchandise from foreign
sources, we are also at risk to the extent foreign suppliers and infrastructures
are not properly prepared to handle the Year 2000. Contingency plans are in
process to mitigate the risk of dependence on foreign suppliers and distribution
channels through an accelerated receipt of merchandise for the spring 2000
selling season. We anticipate that we will incur approximately $0.2 million in
additional inventory carrying costs associated with the earlier receipt of this
merchandise. We believe that the accelerated receipt of inventory should
mitigate the risk of a material failure to receive our merchandise for re-sale.
Although we are working to minimize any business disruption caused by the
Year 2000, we may be adversely impacted by a failure related to the Year 2000.
These risks include, but are not limited to, power and communications
disruptions, failures of our information technology systems, the inability of a
significant supplier or service provider to become Year 2000 compliant and
disruptions in the distribution channels including both foreign and domestic
ports, customs, and transportation vendors.
As noted above, we are currently developing our contingency plans which will
allow for the continuation of business operations in the event that we or any of
our significant suppliers or service providers do not properly address Year 2000
issues. We expect to have a completed plan by the end of the second quarter of
fiscal 1999. Where needed, we will modify our contingency plans based on the
test results of our information systems hardware and software, the timeliness of
replacement system implementations and the ongoing assessment of risk associated
with third party suppliers and service providers. The cost of the conversions
and the completion dates set forth above are based on management's estimates and
may be updated as additional information becomes available.
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BUSINESS
OVERVIEW
The Children's Place Retail Stores, Inc. is a growing specialty retailer of
apparel and accessories for children from newborn to twelve years of age. We
design, source and market our products under our proprietary "The Children's
Place" brand name for sale exclusively in our stores. Our merchandising
objective is to provide our customers with high-quality products at prices that
represent substantial value relative to our competitors. We seek to position our
stores in areas of high pedestrian traffic and design them to be very
accessible, inviting and easy-to-shop. As of February 15, 1999, we operated 211
stores in 26 states, located primarily in regional shopping malls in the eastern
half of the United States.
We provide high-quality products that appeal to customers from a broad range
of socioeconomic and demographic profiles. We believe that the combination of
our distinctive approach to merchandising, the inherent value we offer our
customers and the growing strength of our proprietary brand generates this broad
appeal. Our designers interpret current fashion trends and combine them with a
broad color palette to develop a selection of coordinated outfits specifically
designed for children. We create freshness in our stores by generally
introducing a new merchandise line each month. These lines are designed to
convey a unified theme across a season by incorporating consistent color
palettes into merchandise that our customers can easily combine into coordinated
and interchangeable outfits and accessories. We believe that our updated
merchandise styling, coordinated, high-quality products and consistent value
pricing have created name recognition and customer loyalty for "The Children's
Place" brand.
In fiscal 1996, we began to implement an aggressive store opening campaign
to capitalize on our business strengths and our strong store economics. During
fiscal 1997 and fiscal 1998, we opened 47 and 54 new stores, respectively. Our
comparable store sales have increased for each of the past five fiscal years.
This has contributed to our overall growth and yielded an increase in our net
sales per gross square foot from $259 in fiscal 1994 to $382 in fiscal 1998. Our
net sales have increased at a compound annual growth rate of approximately
27.3%, from $108.0 million in fiscal 1994 to $283.9 million in fiscal 1998. Over
that same period of time, our operating income margin has increased from 2.2% to
12.5%.
We intend to continue our expansion program and plan to open at least 70
stores during fiscal 1999 and at least 90 stores during fiscal 2000. Our broad
merchandise appeal and consistent value pricing result in a highly portable
store concept which we believe can operate profitably in a wide variety of
geographic and demographic regions. In fiscal 1998, our new stores that were
operating for their first full fiscal year generated a cash-on-cash return on
investment of approximately 86.1%. We believe that we have the opportunity to
significantly increase our domestic store base from the 211 stores we currently
operate.
THE CHILDREN'S APPAREL INDUSTRY
According to the U.S. Bureau of the Census, the U.S. population from newborn
to 13 years of age comprised 54.9 million children or 20.3% of the total U.S.
population in 1998. In addition, the birthrate in the United States is
approximately 4.0 million per year. According to industry sources, retail sales
of apparel for newborn to 13 year old children have grown at a compound annual
rate of approximately 5.8%, from $25.5 billion in 1995 to $30.1 billion in 1998.
In 1998, average apparel expenditures per child were approximately $550,
reflecting a compound annual growth rate of approximately 5.2% since 1995. We
believe that average apparel expenditures per child will continue to grow due to
several demographic factors, including (1) births among an increasing number of
older, working women with greater disposable income for expenditures on children
and (2) an increasing number of grandparents who represent a key consumer
segment for infant and toddler products. The growth in children's apparel sales
in specialty retail stores has outpaced the overall children's apparel industry,
growing at a
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compound annual rate of approximately 14.1%, from $3.4 billion in 1995 to $5.1
billion in 1998 and increasing as a percentage of the overall children's apparel
market from 13.5% to 16.9% during the same period of time.
Since children typically require new clothes every season as they grow, we
believe that the children's apparel market is price-sensitive. Consequently, we
believe that the value created by the price and quality of our merchandise has
enabled us to establish a desirable market position. We currently represent less
than one percent of the children's apparel market and believe that we have the
opportunity to significantly increase our market share.
COMPETITIVE ADVANTAGES
We believe that the following strengths have contributed to our success and
provide us with a competitive advantage:
MERCHANDISING STRATEGY. Our merchandising strategy is built on offering a
collection of interchangeable outfits and accessories to create a coordinated
look distinctive to The Children's Place. We offer a focused assortment of
styles in a variety of colors and patterns, with the aim of consistently
creating a fresh, youthful feel that we believe distinguishes "The Children's
Place" brand. We divide the year into four three-month merchandising
seasons--spring, summer, back-to-school and holiday. Within each season we
typically introduce a new merchandise line each month to continually generate
freshness in our stores. Each line is built around a central seasonal theme and
includes a stylish assortment of coordinated basic and fashion apparel with
complementary accessories designed to encourage multiple item purchases and
wardrobe building.
VALUE STRATEGY. We offer high-quality clothing and accessories under "The
Children's Place" brand name at prices generally 20% to 30% below most of our
direct mall-based competitors. We employ this consistent value pricing strategy
across our entire merchandise offering. We believe that the consistent value
pricing of our high-quality products has enabled us to build a broad and loyal
base of customers who regularly purchase from us as their children grow. To
generate increased customer traffic through a sense of urgency and heightened
excitement among our customers, we began a program in the second half of fiscal
1998 of running promotions on select seasonal merchandise for a limited time,
augmented by periodic targeted promotions of key individual items.
STRONG BRAND IMAGE. We believe that we have built a strong brand image for
"The Children's Place" by (1) offering high-quality products, (2) providing a
distinctive collection of coordinated and interchangeable outfits and
accessories, (3) maintaining a consistent merchandise presentation and an
easy-to-shop store layout, (4) employing aspirational images in our marketing
visuals and (5) selling our merchandise exclusively in our stores. We believe
these factors foster consumer loyalty to "The Children's Place" brand name. In
our continuing efforts to enhance the appeal and recognition of our brand name,
we have recently increased our emphasis on merchandise with logos. Our logo
merchandise bears our "Place," "Place Sport," "P," "Place Jeans" or other logos,
together with our "The Children's Place" label. Our goal is to make "The
Children's Place" the first name in the minds of consumers when they think of
children's apparel.
LOW-COST SOURCING. We control the design, sourcing and presentation of our
products, all of which are marketed under our proprietary brand name. We believe
that this control is essential in assuring the consistency and quality of our
merchandise and brand image, as well as in our ability to deliver value to our
customers. We have established close, long-standing and mutually beneficial
relationships with numerous manufacturers, buying agents and trading companies.
Through these relationships and our management team's extensive knowledge of the
material and manufacturing costs of apparel, we believe that we are able to
procure high-quality merchandise at low cost, which enables us to maintain our
gross margin levels while offering our customers high-quality products at value
prices. We further believe that our integrated merchandise approach, from
in-house design to in-store presentation, enables us to identify and respond to
market trends, uphold rigorous product quality standards, manage
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<PAGE>
the cost of our merchandise and strengthen our brand name. We plan to open a
Hong Kong office in fiscal 1999 to further enhance our ability to capitalize on
new sourcing opportunities, to increase our quality assurance standards and
compliance and to respond to changing merchandise trends and supplier base
dynamics more effectively and efficiently.
EXPERIENCED MANAGEMENT TEAM. Our 15-member management team is led by Ezra
Dabah, Stanley Silver and Clark Hinkley, each of whom has over 25 years of
experience in the apparel or retail industry. Mr. Dabah guides the management of
The Children's Place using his broad apparel merchandising and buying knowledge
refined during his lengthy tenure in the apparel market, including more than 15
years in the children's segment of the market. Mr. Dabah provides the foundation
for our low-cost product procurement and substantial sourcing relationships in
the Far East, from which he has been sourcing products since 1972. Mr. Silver
contributes his financial expertise and extensive knowledge of store operations
and real estate procurement derived from his experiences at Grand Met PLC,
Mothercare PLC and The Limited and is instrumental in the growth and development
of our business. Mr. Hinkley, through his significant management and
merchandising experience developed while he served in various management
positions with The Talbots, Inc. and Dayton Hudson Corporation, greatly
strengthens our merchandising capabilities. In addition, the other members of
our management team have an average of 17 years of retail or apparel industry
experience and an average of eight years with The Children's Place.
GROWTH STRATEGIES
NEW STORE OPENINGS. In fiscal 1996, we began an aggressive store opening
campaign to capitalize further on our competitive advantages and strong store
economics. We intend to open at least 70 new stores in fiscal 1999 and at least
90 new stores in fiscal 2000. In fiscal 1998, our new stores that were operating
for their first full fiscal year generated average net sales of approximately
$1.3 million and generated a cash contribution of approximately $309,000. Our
average investment for these stores, including capital expenditures (net of
landlord contribution), initial inventory (net of merchandise payables) and
pre-opening costs, was approximately $359,000. As a result, these stores
generated a cash-on-cash return on investment of approximately 86.1% in their
first full fiscal year of operation. We expect to develop clusters of new stores
in markets where we currently do not have a presence such as Colorado, Utah and
northern Florida in fiscal 1999, and northern California, Washington, Oregon,
Louisiana and Texas in fiscal 2000. We also expect to continue to open new
stores in our existing markets. We will continue to increase our store base as
rapidly as we deem prudent.
NEW MERCHANDISING AND MARKETING INITIATIVES. To optimize sell-through, we
continually evaluate our approach to (1) our merchandise offering, (2) visual
presentation of our merchandise and (3) our marketing initiatives. In fiscal
1999, we expect to undertake three major merchandising and marketing
initiatives.
(1) REFORMATTING OF MERCHANDISE PRESENTATION. We will reformat the merchandising
of our stores beginning with our fiscal 1999 back-to-school season.
Historically, we have segmented merchandise within our stores into five
areas: big boys sizes 5 to 16; big girls sizes 5 to 16; little boys sizes 18
months to 5; little girls sizes 18 months to 5; and newborn sizes 0 to 24
months. Beginning in the second quarter of fiscal 1999, we will begin to
transition to a store merchandise presentation format that features three
segments: boys sizes 4 to 16; girls sizes 4 to 16; and newborn sizes 0 to 36
months. This new format will enable us to reduce duplicate stock keeping
units ("SKUs") and sizes within each store, while also providing a clearer
merchandise statement to our customers. By consolidating all merchandise of
a particular style into one area of the store, we will be able to display
merchandise in a fashion that conveys our commitment to key items in a more
compelling manner.
(2) STORE REFIXTURING. We plan to upgrade the fixtures and other elements of our
store design in approximately two-thirds of our existing stores in an effort
to enhance the perceived value of our
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merchandise by presenting our products in a more upscale environment. This
upgrade also will feature "babyPlace" signage in the rear of the store to
designate the area in which newborn merchandise can be found. With this
refixturing and the reformatting of our merchandise presentation, we expect
to increase the open space within the store, particularly the aisles, to
enhance the shopping experience of our customers by making it easier for
them to view our product offerings and by facilitating stroller access.
(3) INCREASING OUR EXTERNAL MARKETING EFFORTS. To date, we have utilized
in-store and in-mall marketing materials and, to a lesser extent,
direct-mail marketing to promote "The Children's Place" image and brand
name. These marketing efforts have contributed to our increases in
comparable store sales and our net sales per gross square foot over our past
five fiscal years. To capitalize on our increased store base, we have
recently decided to expand and enhance our external marketing efforts. To do
so, we are pursuing two primary courses of action.
BROADCAST AND PRINT ADVERTISING. Beginning in March 1999, we expect
to launch a test in selected markets of our first broadcast advertising
campaign in anticipation of a more extensive broadcast and print
advertising campaign in most of our major markets for our fiscal 1999
back-to-school season. We believe that our new advertising initiatives
will be an important tool in raising consumer awareness of our
high-quality, value-priced products and in strengthening "The Children's
Place" brand name.
DIRECT-MAIL MARKETING. We have recently increased our emphasis on
our direct-mail marketing campaign. We target existing customers through
our private label credit card database and reverse appending of our
customers who pay by credit card and check. In fiscal 1998, we undertook
a 400,000 customer mailing. Recipients of the mailing were given a
preferred customer status that allowed them to purchase certain
merchandise below our ticketed price upon the presentation of the mailing
for a limited time. Data on respondents was gathered through the tracking
of bar codes on the mailers and retained in our database for future
reference. Customer response to our 1998 mailing exceeded industry
averages and our initial expectations. We have since expanded our
database to over 800,000 customers and intend to expand the reach and
strengthen the content of this campaign.
NEW DISTRIBUTION CENTER. We are moving into a new automated distribution
center in the second quarter of fiscal 1999 that we believe will support
approximately 500 stores. We expect this increased automation will enable us to
provide merchandise replenishment much more efficiently than is permitted by our
current distribution system and to better coordinate our introduction of new
merchandise lines across our stores in different geographic regions. We believe
that this heightened efficiency should yield fewer missed sales opportunities
due to out of stock positions.
MERCHANDISING
Our merchandising strategy is built on offering a collection of
interchangeable outfits and accessories to create a coordinated look distinctive
to The Children's Place. We offer a focused assortment of styles in a variety of
colors and patterns, with the aim of consistently creating a fresh, youthful
feel that we believe distinguishes the "The Children's Place" brand. In fiscal
1998, we derived approximately 40%, 30%, 17% and 13% of our net sales from girls
apparel, boys apparel, newborn apparel and accessories, respectively. We divide
the year into four three-month merchandising seasons and within each season we
typically introduce a new merchandise line each month. Approximately 80% of each
new line is delivered to the stores with the introduction of each line and the
remainder is reserved for replenishment throughout the month.
To execute our merchandising strategy, we rely on the coordinated efforts of
our merchandise management team, our design and product development team and our
merchandise planning team. These teams consist of a total of 43 full-time
employees. These teams, in conjunction with senior management, review our prior
season results to determine the specific styles and numbers of products
26
<PAGE>
that we will offer in upcoming seasons. The merchandise management team selects
specific styles for production from the assortment of designs that are created
by the design and product development team each season. Then, based upon the
production quantities determined by the merchandise managers and the merchandise
planning team, the sourcing and procurement team arranges for the manufacture of
the selected styles.
Our design and product development team consists of our Vice President of
Trend Development, our Trend Manager, our Vice President of Design and Product
Development, and designers, assistant designers, graphic designers and other
artists. This team analyzes and interprets current and emerging fashion trends,
translating them into a broad selection of children's clothing and accessories
in an array of fashionable colors and patterns that are appropriate for upcoming
seasons. Work on each of our seasonal lines begins approximately nine months
before the season, with the gathering of market intelligence on fashion trends.
This process involves extensive European and domestic market research, the
purchase of prototype samples, media, trade shows, fashion magazines, the
services of fashion and color forecast organizations and analysis of prior
season performance. After the Vice President of Trend Development and the Trend
Manager, in consultation with senior management and the Vice President of Design
and Product Development, arrive at a consensus regarding the fashion themes for
a coming season, the designers and other artists translate these themes into an
assortment of basic and fashion designs that seek to reflect the fresh and
youthful image of "The Children's Place" brand. These interpretations include
variations in fabric and other materials, product color, decoration and
age-appropriate silhouette. Potential items are designed using computer aided
design technology, giving us the opportunity to consider a wide range of style
and fashion options.
The merchandise management team creates a detailed purchasing plan with the
assistance of the merchandise planning team for the season covering each
department, category and key basic item, based on historical and current selling
trends. The merchandise planning team consists of our Vice President of
Merchandise Planning and Allocation, a director of planning, a director of
allocation, four merchandise planners and store planners and allocators.
We typically order the quantities contemplated by the purchasing plan six
months before the season, while retaining the flexibility to order additional
merchandise to respond quickly to new fashion trends and demand for key basic
items. The production process takes approximately six months from order
confirmation to receipt of merchandise at our distribution facility. The
merchandise planning team monitors current and future inventory levels on a
weekly basis and analyzes sales patterns to predict future demand for various
categories. We regularly monitor sales of each style and color and maintain some
flexibility to adjust merchandise on order for future seasons or to accelerate
delivery of merchandise. The merchandise allocation team is responsible for
planning and allocating merchandise to each store based on sales volume levels
and other factors.
In addition to our season-to-season development of merchandise, we regularly
evaluate opportunities for selective product extensions and new product
introductions. In fiscal 1998, we expanded our offerings of outerwear, underwear
and denim merchandise. We also introduced bath products into our stores. We
expect to continue to seek opportunities to expand our customer base and
increase sales in our stores through further development of existing merchandise
categories and continued introduction of new merchandise classifications.
SOURCING AND PROCUREMENT
We combine management's extensive sourcing experience with a cost-based
buying strategy in order to lower costs and increase margins. Management
believes it has a thorough understanding of the economics of apparel
manufacturing, including costs of materials and components. This knowledge
enables us to determine the most cost-effective country and manufacturer from
which to source each item and to obtain low prices. Relying on our supplier
relationships and management's knowledge of manufacturing costs, we believe we
have been able to arrange for the manufacture of high-quality products at low
cost. One important aspect of our sourcing strategy is that our Chief Executive
Officer,
27
<PAGE>
Ezra Dabah, who has over 25 years of apparel buying and merchandising
experience, frequently travels to meet with our agents and manufacturers. In
addition, we are in the process of opening, through a wholly-owned Hong Kong
subsidiary, an office in Hong Kong which will employ eight to ten people and for
which our annual expense will initially be approximately $1.0 million. We
believe the Hong Kong office will enable us to obtain more favorable material
and manufacturing costs and better identify and act on new supply opportunities.
We expect the opening of our Hong Kong office will also help us to foster
stronger relationships with suppliers, manufacturers, agents and trading
companies in the Far East.
Our sourcing team makes on-site visits to our independent agents and various
manufacturers to negotiate product costs, finalize technical specifications of
each product and confirm delivery of merchandise manufactured to our
specifications. Our apparel is produced to our specifications by more than 60
independent manufacturers located primarily in the Far East and elsewhere in
Asia. In fiscal 1998, the majority of our merchandise was produced in Taiwan,
Hong Kong, China and Turkey. The remainder of our merchandise was produced in
Thailand, the United States, South Korea, the Philippines, Cambodia and other
countries. We continue to pursue sourcing opportunities.
We have no exclusive or long-term contracts with our manufacturers and
typically transact business on an item-by-item basis under purchase orders at
freight on board cost in U.S. dollars. We are parties to agency agreements with
commissioned independent agents in the Far East and in Turkey to oversee our
production and assist in sourcing and pre-production approval, quality
inspection and ensuring timely delivery of merchandise. We also purchase
approximately 35% of our merchandise through a Hong Kong-based trading company,
with which we have no formal written agreement, for most of our procurements
from manufacturers located in Hong Kong, China, the Philippines and Cambodia.
Although they are not contractually obligated to do so, the Hong Kong-based
trading company, and a commissioned independent agent in Taiwan through which we
purchase approximately 30% of our products, each have exclusive arrangements
with The Children's Place. We have developed long-term, continuous relationships
with key individual manufacturers and material suppliers which have yielded
numerous benefits, including quality control and low costs, and have afforded us
flexible working arrangements and a steady flow of merchandise supply. The
establishment of our Hong Kong office should enable us to strengthen these
relationships, facilitate the development of new ones and improve quality
control and product costs.
We employ a tracking system that enables us to anticipate potential delivery
delays in our orders and take action to mitigate the impact of such delays. By
using this system together with our purchase order and advanced shipping
notification systems, we and our independent agents actively monitor the status
of each purchase order from order confirmation to merchandise receipt. We
experience occasional shipment delays, but no such delay has had a material
adverse effect on our business. We continue to pursue software technologies to
further enhance communication of the production and pre-approval status of our
work-in-process directly from our overseas agents.
To ensure quality and promote consumer confidence in our products, we
utilize our own, in-house quality assurance laboratory to test and evaluate
fabric, trimming materials and pre-production samples against a comprehensive
range of physical performance standards before production begins. The quality
control personnel of our independent agents visit the various manufacturing
facilities to monitor and improve the quality control and production process,
which is augmented by our director of quality control. With this focus on
pre-production quality approval, we are generally able to detect and correct
quality-related problems before bulk production begins. We do not accept our
finished apparel products until each purchase order receives formal
certification of compliance from our agents' inspectors. We anticipate that the
opening of our Hong Kong office will enhance our quality control by enabling us
to monitor component and manufacturing quality at close range and address
related problems at an early stage.
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<PAGE>
COMPANY STORES
EXISTING STORES. As of February 15, 1999, we operated 211 stores in 26
states, primarily located in the eastern half of the United States. Most of our
stores are clustered in and around major metropolitan areas. Our stores are
concentrated in major regional malls, with the exception of 15 outlet stores and
ten urban street and strip center stores. The following map and table set forth
the number of stores in each state as of February 15, 1999:
[The Prospectus contains a graphic of a map of the United States which sets
forth the number of The Children's Place stores in each state in which the
Company has stores.]
<TABLE>
<CAPTION>
# OF # OF
STATE STORES STATE STORES
- --------------------------------------------- ------------- --------------------------------------------- -------------
<S> <C> <C> <C>
Connecticut.................................. 8 Minnesota.................................... 4
Delaware..................................... 3 Missouri..................................... 2
Georgia...................................... 5 Nebraska..................................... 1
Florida...................................... 1 New Hampshire................................ 4
Illinois..................................... 16 New Jersey................................... 21
Indiana...................................... 7 New York..................................... 36
Iowa......................................... 1 North Carolina............................... 6
Kansas....................................... 1 Ohio......................................... 13
Kentucky..................................... 3 Pennsylvania................................. 20
Maine........................................ 3 South Carolina............................... 4
Maryland..................................... 12 Tennessee.................................... 6
Massachusetts................................ 14 Virginia..................................... 7
Michigan..................................... 11 Wisconsin.................................... 2
</TABLE>
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<PAGE>
STORE ENVIRONMENT. Over the past five years, our prototype store has been
reduced in size from approximately 5,500 square feet to approximately 3,800
square feet, which we believe is the most efficient size for our stores. Our
prototype features a design that incorporates light maple wood floors, fixtures
and trim set against white walls. We believe that the environment created by our
"apple-maple" prototype store promotes a shopping experience that is inviting
and friendly. The store is brightly lit, featuring floor-to-ceiling glass
windows that allow our colorful fashions to attract customers from the outside.
A customized grid system throughout the store's upper perimeter displays
featured merchandise, marketing photographs and key basic item prices. Each
merchandise line is displayed as a separate collection of coordinated basic and
fashion items, with matching accessories. We continually refine our merchandise
presentation strategy to improve the shopping experience of our customers. In
fiscal 1999, we are installing new wood fixtures and display tables which we
believe will further enhance the shopping experience at The Children's Place. In
addition, we expect that the new departmental structure we are implementing in
fiscal 1999 will allow us to simplify and facilitate The Children's Place
shopping experience and present our merchandise more clearly by eliminating
duplicative merchandise displays and creating more space for customers within
our stores. We believe that our merchandise presentation effectively displays
"The Children's Place" distinctive look and creates a visually attractive
selling environment that maximizes customer convenience and encourages the
purchase of multiple items.
To achieve uniform merchandise presentation and to maximize sales of
coordinated items, store management is provided monthly with detailed written
and visual store plans that specify merchandise placement. Standardization of
store design, merchandise presentation and window displays also promotes
effective usage and productivity of selling space and maximizes customer
convenience in merchandise selection. By seeking a uniform appearance in store
design and merchandise presentation, we believe that we are able to maintain and
enhance "The Children's Place" brand image.
As of February 15, 1999, approximately 85% of our stores (excluding outlet
stores) have the same design element as our "apple-maple" prototype. We
generally remodel our stores to the prototype specifications as their leases are
renewed. In some cases, conversion to the prototype involves relocation within a
mall as well as a reduction in space.
Our 15 outlet stores generally measure in excess of 5,000 square feet and
represent approximately 7% of our store base. The outlet stores are located in
outlet centers and are strategically placed within each market to serve as a
vehicle to consolidate markdown merchandise from our other stores.
STORE OPERATIONS. Our store operations are directed by our Vice President
of Store Operations, four regional managers and approximately 30 district
managers. Individual stores are managed by a store manager and up to three
co-managers depending on sales volume. A typical store employs one to two
full-time sales associates and several part-time sales associates. We hire
additional part-time associates based on seasonal needs.
Regional and district managers spend a majority of their work week on store
selling floors, providing direction, motivation, training and support to field
personnel. Store managers are responsible for achieving planned store sales
goals, staff scheduling and supervising customer service, store presentation
standards, payroll productivity and inventory shrink. Customer service is a
major focus for store management and sales associates, and continuing efforts
are made to maximize selling productivity. We engage in an ongoing process of
training management and sales associates in the areas of customer service,
selling skills, merchandise presentation, procedures and controls, utilizing
visual aids, training manuals and training workshops.
In order to motivate our regional, district and store managers, we offer an
incentive compensation plan. Under the plan, managers of our stores who meet
planned monthly goals for sales, payroll productivity and inventory shrink are
awarded a sliding bonus based upon the amount by which their respective stores
exceed such targets. District and regional managers receive bonuses based upon
the incentive compensation awarded to their store managers and management
turnover.
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<PAGE>
Management maintains a high level of communication between our corporate
headquarters and stores. Frequent communication 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, home office and district manager meetings engender a
strong team culture. We continue to improve the communication between our
corporate headquarters and our stores with the use of new technology. To this
end, and to enhance customer service, we are taking steps to replace our POS
software and hardware during fiscal 1999.
STORE EXPANSION PROGRAM
In fiscal 1996, we began to implement an aggressive growth strategy designed
to capitalize on our business strengths and strong store economics. In the last
three fiscal years we increased our number of stores from 91 to 209, opening 47
and 54 stores in fiscal 1997 and fiscal 1998, respectively. We intend to
continue our store expansion program and currently plan to open at least 70
stores in fiscal 1999 and at least 90 stores in fiscal 2000.
In fiscal 1998, new stores for which fiscal 1998 was the first full year of
operations had average net sales of approximately $1.3 million. The average
investment for these new stores, including capital expenditures (net of landlord
contribution), initial inventory (net of merchandise payables) and pre-opening
costs, was approximately $359,000. In fiscal 1998, store level operating cash
flow for these stores was approximatley $309,000 (23.8% of net sales), yielding
a cash-on-cash return on investment of approximately 86.1%.
Our expansion strategy focuses primarily on mall-based locations. The
regional malls which we target are typically high volume centers, generally
having at least three department stores or other anchor tenants and various
specialty retailers, as well as several entertainment features (such as
restaurants, a food court and/or movie theaters). We conduct extensive on-site
visits and analyses of potential store sites, taking into account the
performance of other specialty retail tenants, the existing anchor stores and
other stores, the size, type and average sales per square foot of the mall and
the demographics of the surrounding area. Our most important considerations in
evaluating a store location within a mall are placement of the store relative to
mall traffic patterns and proximity to other children's retailers. In addition,
we continuously evaluate opportunities to add stores in other types of
locations, including urban street locations and outlet and strip centers.
Our expansion strategy is to establish clusters of stores in states in which
we already have stores or in contiguous states in order to strengthen "The
Children's Place" brand name recognition. We plan to open stores in Colorado,
Utah and northern Florida in fiscal 1999, and in northern California,
Washington, Oregon, southern Florida, Louisiana and Texas in fiscal 2000.
MARKETING
ADVERTISING AND PROMOTION. We strive to enhance our reputation and image in
the marketplace and build recognition and equity in "The Children's Place" brand
name by advertising our image, product and value message through in-store
photographs, product displays and direct mail. To date, we have primarily relied
on pedestrian traffic and our reputation, loyal customer base and brand image to
generate sales. We have recently selected an advertising agency to assist us in
developing a new advertising campaign, including television, radio, print and
outdoor advertising, that is expected to be launched during fiscal 1999. We
believe that this advertising campaign will strengthen "The Children's Place"
brand name recognition. In fiscal 1999, we expect to spend approximately $6.0
million to $8.0 million on this campaign. Our point of purchase marketing
strategy uses aspirational images to highlight the individual departments and
seasonal fashion looks, promoting key basic items at price points representing
substantial value, and focusing on store-front and window displays and signage
to attract customers into the stores. We also occasionally offer promotions on
certain items to attract customers and increase sales. To encourage larger
purchases, we periodically distribute through direct mail coupons providing a
discount on purchases above a specified minimum.
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<PAGE>
PRIVATE LABEL CREDIT CARD. We view the use of a private label credit card
as an important marketing and communication tool and introduced "The Children's
Place" credit card in January 1995, with Hurley State Bank, through a third
party credit card service. Pursuant to a merchant services agreement with The
Children's Place, Hurley State Bank issues to our customers private label credit
cards for use exclusively at our stores and extends credit to such customers on
a non-recourse basis to The Children's Place. Hurley State Bank's agent, SPS
Payment Services, Inc., administers the approval, issuance and administration of
the credit card program. In connection with our efforts to increase the number
of cardholders and encourage use of our private label credit card, during fiscal
1999 we may consider changing these arrangements to provide for either full or
partial recourse. For its services, we pay to Hurley State Bank a merchant fee
which is calculated as a percentage of sales under the credit card and certain
other fees related to cardholder sales volume. In fiscal 1998, we paid
approximately $2.0 million to Hurley State Bank in fees. The number of holders
of our private label credit card has grown to over 460,000, of which
approximately 130,000 cardholders currently have a positive account balance.
Sales on the private label credit card accounted for approximately 12% of our
fiscal 1998 net sales. We believe that our private label credit card promotes
affinity and loyalty among those customers who use the card and facilitates
communication with such customers through delivery of coupons and promotional
materials. We market our private label credit card by offering customers who
apply for a card a 15% discount on their initial purchase using the card and a
10% discount on a subsequent purchase. Our average dollar sale to customers
using "The Children's Place" card has been substantially higher than our overall
average dollar sale.
MANAGEMENT INFORMATION SYSTEMS
Our management information and electronic data processing systems consist of
a full range of retail, financial and merchandising systems, including purchase
order management, advance shipping notification, inventory planning and control,
inventory distribution, sales reporting and accounts payable. These systems
operate on an IBM mainframe computer and utilize a combination of third party
and proprietary software packages. Management views technology as an important
tool in efficiently supporting our rapid growth and maintaining a competitive
industry position.
Unit and dollar sales information is updated daily in the merchandise
reporting systems by polling each store's POS terminals. Through automated
nightly two-way electronic communication with each store, sales information,
payroll hours and store inventory transfers are uploaded to the host system, and
price changes and other information are downloaded through the POS devices.
Information obtained from such daily polling generally results in automatic
merchandise replenishment in response to the specific SKU requirements of each
store. We evaluate information obtained through daily reporting to identify and
respond to sales trends and to implement merchandising decisions regarding
markdowns and allocation of merchandise.
We are committed to utilizing technology to further enhance our competitive
position. In this regard, we are scheduled to install an automated warehouse
management system during fiscal 1999 in connection with the planned relocation
of our distribution center. We are also taking steps to replace our POS software
and hardware and upgrade our back office software during fiscal 1999 to enhance
customer service and communication between our corporate headquarters and our
stores.
FACILITIES
Throughout fiscal 1998, all merchandise was received, inspected, processed
and distributed through our 90,000 square foot leased distribution center and
corporate headquarters in West Caldwell, New Jersey. We also lease a facility in
nearby Fairfield, New Jersey of approximately 35,000 square feet. The bulk of
the merchandise is collected at our distribution center and shipped as a
complete line to the stores once each month for each department. Replenishment
merchandise is shipped directly to stores each weekday by commercial carrier as
needed. We have experienced occasional shipment delays, but no such delay has
had a material adverse effect on our business.
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<PAGE>
We have entered into an eight-year lease with a three-year option period for
a 204,000 square foot distribution center and corporate headquarters facility in
Secaucus, New Jersey, approximately 18 miles from our present location, which we
intend to move into in the second quarter of fiscal 1999. Our current lease
expires on May 31, 1999. In conjunction with the move to the new distribution
center, we intend to implement a new automated warehouse management system which
will employ radio frequency technology, a conveyor system and automated flow
through slot location and product putaway. The new warehouse management system
will also support a distribution center reserve inventory that will be utilized
to enhance merchandise replenishment to the stores. We believe this new facility
will provide adequate space to support our growth over the next several years.
All of our existing store locations are leased by us, with lease terms
expiring between 1999 and 2011 and with an average unexpired lease term of 7.2
years. The leases for most of the existing stores are for terms of ten years and
provide for contingent rent based upon a percentage of sales in excess of
specific minimums. Leases for future stores will likely include similar
contingent rent provisions.
COMPETITION
The children's apparel retail business is highly competitive. We compete in
substantially all of our markets with GapKids, BabyGap and Old Navy (each of
which is a division of The Gap, Inc.), The Gymboree Corporation, Limited Too (a
division of The Limited, Inc.), J.C. Penney Company, Inc., Sears, Roebuck and
Co. and other department stores that sell children's apparel and accessories, as
well as certain discount stores such as Wal-Mart Stores, Inc., Kmart
Corporation, Target (a division of Dayton Hudson Corporation) and Kids "R" Us (a
division of Toys "R" Us, Inc.). We also compete with a wide variety of specialty
stores, other national and regional retail chains, catalog companies and
Internet retailers. One or more of our competitors are present in substantially
all of the malls in which we have stores. Many of our competitors are larger
than The Children's Place or have access to significantly greater financial,
marketing and other resources than we have.
We believe that the principal factors of competition in our marketplace are
perceived value, price, quality, merchandise assortment, brand name recognition,
customer service, and a friendly store environment. We believe that we have been
able to effectively compete in the children's apparel industry because of our
reputation in the marketplace and consistent merchandise offering of high-
quality, coordinated basic and fashion outfits for children at consistent value
prices, sold in a friendly environment.
TRADEMARKS AND SERVICE MARKS
"The Children's Place," "Baby Place," "Place," "The Place," "TCP" and
certain other marks have been registered as trademarks and/or service marks with
the United States Patent and Trademark Office. The registration of the
trademarks and the service marks may be renewed to extend the original
registration period indefinitely, provided the marks are still in use. We intend
to continue to use and protect our trademarks and service marks and maintain
their registrations. We are taking steps to register our trademarks in certain
foreign countries. We believe our trademarks and service marks have received
broad recognition and are of significant value to our business.
EMPLOYEES
As of February 15, 1999, we had approximately 1,100 full-time employees, of
whom approximately 285 are based at our distribution center and corporate
headquarters, and approximately 2,600 part-time employees. None of our employees
is covered by a collective bargaining agreement. We believe our relations with
our employees are good.
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<PAGE>
CERTAIN LEGAL PROCEEDINGS
STOCKHOLDER LITIGATION
On October 16, 1997, Stephen Brosious and Rudy Pallastrone, who allegedly
purchased shares of our Common Stock in our initial public offering in September
1997 (the "IPO"), filed a lawsuit against The Children's Place, several of our
directors and officers, and the underwriters of the IPO (the "Defendants") in
the United States District Court for the District of New Jersey (the "Court").
The named plaintiffs purport to maintain a class action on behalf of all
persons, other than the Defendants, who purchased our Common Stock issued in
connection with the IPO on or about September 19, 1997 through October 13, 1997.
The complaint alleges that the Defendants violated federal securities laws by
making false or misleading statements and/or omissions in connection with the
IPO. The plaintiffs seek monetary damages of an unspecified amount, rescission
or rescissory damages and fees and costs. Since October 16, 1997, 15 additional
putative class actions making substantially similar allegations and seeking
substantially similar relief have been filed against some or all of the
Defendants. On or about January 13, 1998, the 16 putative class actions were
consolidated in the Court and on February 26, 1998, the plaintiffs served and
filed their amended consolidated complaint. On April 16, 1998, the Defendants
moved to dismiss the complaint. On September 4, 1998 the Court entered an order
granting the motion to dismiss in part and denying it in part. The Court also
dismissed the case against the underwriters without prejudice. On October 5,
1998, the plaintiffs filed an amended complaint against all Defendants including
the underwriters. We filed our answer to the amended complaint on October 26,
1998. The parties have commenced discovery.
On October 27, 1997, Bulldog Capital Management, L.P., a limited partnership
that serves as a general partner for a series of investment funds which
allegedly purchased shares of The Children's Place's Common Stock issued in
connection with the IPO, also filed a lawsuit against The Children's Place and
several of our directors and officers in the Superior Court of New Jersey, Essex
County Division. The complaint also alleges that by making false or misleading
statements and/or omissions in connection with the IPO, The Children's Place and
several of our directors and officers violated provisions of federal and state
law. The plaintiff seeks monetary damages of an unspecified amount, rescission
or rescissory damages and fees and costs. This action and the federal action
described above have been coordinated for purposes of discovery.
We believe that the allegations made in the complaints described above are
untrue and totally without merit and intend to defend them vigorously. We do not
believe that any ultimate liability arising out of the actions described above
will have a material adverse effect on our business; however we can give no
assurance as to the ultimate resolution of the proceedings or the amount to be
paid, if any, in the disposition of the actions.
OTHER LITIGATION
We are also involved in various legal proceedings arising in the normal
course of our business. In the opinion of management, any ultimate liability
arising out of such proceedings will not have a material adverse effect on our
business.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers and directors of The Children's Place:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- ----- ------------------------------------------------------------------------
<S> <C> <C>
Ezra Dabah...................... 45 Chairman of the Board of Directors and Chief Executive Officer
Stanley B. Silver............... 60 President, Chief Operating Officer and Director
Clark Hinkley................... 57 Executive Vice President, Merchandising
Seth L. Udasin.................. 42 Vice President, Finance, Chief Financial Officer and Treasurer
Steven Balasiano................ 36 Vice President, General Counsel and Secretary
Mario A. Ciampi................. 38 Vice President, Real Estate and Construction
Edward DeMartino................ 47 Vice President, Management Information Systems
Robert Finkelstein.............. 46 Vice President, Merchandising Planning and Allocation
Charles Messina................. 55 Vice President, Human Resources
Nina L. Miner................... 49 Vice President, Trend Development
Salvatore W. Pepitone........... 51 Vice President, Distribution Center
Mark L. Rose.................... 33 Vice President, Sourcing and Production
Susan F. Schiller............... 38 Vice President, Store Operations
Diane M. Timbanard.............. 53 Vice President, Design and Product Development
Michael Zahn.................... 35 Vice President, General Merchandise Manager
Stanley Silverstein............. 73 Director
John F. Megrue.................. 40 Director
David J. Oddi................... 29 Director
</TABLE>
EZRA DABAH has been Chief Executive Officer since 1991 and Chairman of the
Board and a Director since purchasing The Children's Place in 1989 with certain
members of his family. Mr. Dabah has more than 25 years of apparel merchandising
and buying experience. From 1972 to May 1993, Mr. Dabah was a director and an
executive officer of The Gitano Group, Inc. and its affiliates (collectively,
"Gitano"), a company of which Mr. Dabah and certain members of his family were
principal stockholders and which became a public company in 1988. From 1973
until 1983, Mr. Dabah was in charge of product design, merchandising and
procurement for Gitano. In 1983, Mr. Dabah founded and became President of a
children's apparel importing and manufacturing division for Gitano which later
became an incorporated subsidiary, Eva Joia Incorporated, ("E.J. Gitano"). Mr.
Dabah is Stanley Silverstein's son-in-law and Nina Miner's brother-in-law.
STANLEY B. SILVER has been President and Chief Operating Officer since June
1996 and prior to that served as Executive Vice President and Chief Operating
Officer since joining The Children's Place in 1991. Mr. Silver has been a
Director since July 1996. Before joining The Children's Place in 1991, Mr.
Silver held various posts at Grand Met PLC and Mothercare PLC in the United
Kingdom and The Limited, Inc. in the United States. Mr. Silver has over 25 years
of retailing experience in Europe and the United States and currently serves as
Chairman of the Retail Council of New York State.
CLARK HINKLEY has been Executive Vice President, Merchandising since joining
The Children's Place in February 1998. Prior to joining The Children's Place,
Mr. Hinkley was the Executive Vice President and Chief Operating Officer of The
Talbots, Inc., a position he held since 1993. Mr. Hinkley has over 35 years of
retailing experience with over 25 years of senior level management and
merchandising experience. Prior to his 10 years with The Talbots, Inc., Mr.
Hinkley was with Dayton Hudson Corporation and its predecessor company, J.L.
Hudson, for 24 years.
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SETH L. UDASIN has been Vice President, Finance since 1994 and Chief
Financial Officer and Treasurer since 1996. Since joining The Children's Place
in 1983, Mr. Udasin has held various other positions, including Controller from
1988 to 1994.
STEVEN BALASIANO has been Vice President and General Counsel since joining
The Children's Place in December 1995 and Secretary since January 1996. Prior to
joining The Children's Place, Mr. Balasiano practiced law in the New York
offices of the national law firms of Stroock & Stroock & Lavan LLP from 1992 to
1995 and Kelley Drye & Warren from 1987 to 1992.
MARIO A. CIAMPI has been Vice President, Real Estate and Construction since
joining The Children's Place in June 1996. Prior to joining The Children's
Place, Mr. Ciampi was a principal of a private consulting firm, specializing in
retail and real estate restructuring, from 1991 to 1996, in which capacity he
was retained as an outside consultant on the Company's real estate activities
since 1991.
EDWARD DEMARTINO has been Vice President, Management Information Systems
since 1991. Mr. DeMartino began his career with The Children's Place in 1981 as
a System Development Project Manager and was subsequently promoted to
Director--MIS in 1989.
ROBERT FINKELSTEIN joined The Children's Place in 1989 as Vice President,
Merchandise Planning and Allocation. Immediately prior to joining The Children's
Place, Mr. Finkelstein was a Director of Distribution for Payless Shoe Stores.
CHARLES MESSINA has been Vice President, Human Resources since September
1998. Mr. Messina was Vice President Human Resources, International Sourcing and
Specialty Retailing at Meldisco/ Melville Corporation from 1992 to 1996. From
1996 to 1998, Mr. Messina was President of Basketeer Corp.
NINA L. MINER has been Vice President, Trend Development since August 1998,
prior to which time she was Vice President, Design and Product Development since
joining The Children's Place in 1990. Before joining The Children's Place, Ms.
Miner held various management positions at E.J. Gitano. Ms. Miner is Stanley
Silverstein's daughter and Ezra Dabah's sister-in-law.
SALVATORE W. PEPITONE has been Vice President, Distribution Center since
joining The Children's Place in 1991. Prior to joining The Children's Place, Mr.
Pepitone was employed in a similar capacity by E.J. Gitano.
MARK L. ROSE has been Vice President, Sourcing and Production since 1992.
Mr. Rose joined The Children's Place in 1990 and was promoted to Senior Product
Buyer that year. Prior to joining The Children's Place, Mr. Rose held various
positions at Macy's.
SUSAN F. SCHILLER has been Vice President, Store Operations since 1994. Ms.
Schiller began her career with The Children's Place as an Assistant Store
Manager in 1985 and subsequently served in various positions, including Director
of Store Communications from 1991 to 1993 and Director of Store Operations from
1993 to 1994.
DIANE M. TIMBANARD has been Vice President, Design and Product Development
since August 1998, prior to which time she served as Vice President,
Merchandising Manager since joining The Children's Place in 1991. Prior to
joining The Children's Place, Ms. Timbanard held various merchandising and
management positions, including Vice President of Merchandising for Macy's.
MICHAEL ZAHN has been Vice President, General Merchandise Manager since
September 1998. Prior to joining The Children's Place, Mr. Zahn held various
merchandising positions at Ann Taylor from 1995 to 1998. From 1992 to 1995, Mr.
Zahn was a merchandiser with Warner Bros. Retail.
STANLEY SILVERSTEIN has been a Director of The Children's Place since July
1996. Mr. Silverstein also serves as Chairman of the Board of Directors of Nina
Footwear, a company he founded with his brother in 1952. Mr. Silverstein is the
father of Nina Miner and Ezra Dabah's father-in-law.
36
<PAGE>
JOHN F. MEGRUE has been a Director of The Children's Place since July 1996.
Since 1992, Mr. Megrue has been a Partner of Saunders Karp & Megrue Partners,
L.L.C. (or its predecessor), which serves as the general partner of SKM
Partners, L.P., which serves as the general partner of the SK Funds and SKM.
From 1989 to 1992, Mr. Megrue was a Vice President and Principal at Patricof &
Co. and prior thereto he served as a Vice President at C.M. Diker Associates.
Mr. Megrue also serves as Vice Chairman of the Board and Director of Dollar Tree
Stores, Inc. and Chairman of the Board and Director of Hibbett Sporting Goods,
Inc.
DAVID J. ODDI has been a Director of The Children's Place since April 1997.
Mr. Oddi joined SKM as an Associate in 1994 and is currently a Partner of
Saunders Karp & Megrue Partners, L.L.C., which serves as the general partner of
SKM Partners, L.P., which serves as the general partner of the SK Funds and SKM.
Prior to joining SKM, Mr. Oddi served in the Leveraged Finance Group at Salomon
Brothers Inc.
Our Board of Directors is comprised of three classes, each of which serves
for three years, with one class being elected each year. The terms of Mr. Dabah
and Mr. Megrue will expire at the 1999 Annual Meeting of Stockholders. The term
of Mr. Silver will expire at the 2000 Annual Meeting of Stockholders. The terms
of Mr. Oddi and Mr. Silverstein will expire at the 2001 Annual Meeting of
Stockholders. For a description of certain voting agreements relating to the
selection of directors, see "Principal and Selling Stockholders--Stockholders
Agreement."
37
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table provides information at February 15, 1999, and after
giving effect to this offering (assuming the underwriters' over-allotment option
is not exercised), with respect to ownership of Common Stock by (1) each
beneficial owner of five percent or more of our Common Stock known to us, (2)
each director of The Children's Place and nominee for director, (3) each of our
five most highly compensated executive officers in fiscal 1998, (4) all
directors and executive officers as a group and (5) each selling stockholder.
For the purpose of computing the percentage of the shares of Common Stock owned
by each person or group listed in this table, any shares not outstanding which
are subject to options or warrants exercisable within 60 days after February 15,
1999 have been deemed to be outstanding and owned by such person or group, but
have not been deemed to be outstanding for the purpose of computing the
percentage of the shares of Common Stock owned by any other person. Except as
indicated in the footnotes to this 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>
BEFORE OFFERING AFTER OFFERING
------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
SHARES SHARES SHARES
BENEFICIALLY PERCENT OFFERED BENEFICIALLY PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OF CLASS HEREBY OWNED OF CLASS
- ------------------------------------------------ ------------ ----------- --------------- ------------ -----------
The SK Equity Fund, L.P. (1) (2)................ 7,566,553 30.3% 2,661,423 4,866,553 19.5%
SK Investment Fund, L.P. (1) (2)................ 7,566,553 30.3% 38,577 4,866,553 19.5%
John F. Megrue (1) (2) (3)...................... 7,568,553 30.3% 4,868,553 19.5%
Allan W. Karp (1) (2) (4)....................... 7,568,553 30.3% 4,868,553 19.5%
Thomas A. Saunders III (1) (2).................. 7,566,553 30.3% 4,866,553 19.5%
David J. Oddi (1) (5)........................... 3,000 * 3,000 *
Ezra Dabah (6) (7).............................. 8,480,244 33.9% 600,000(8) 7,880,244 31.5%
Stanley B. Silver (6) (9)....................... 653,400 2.6% 100,000 553,400 2.2%
Stanley Silverstein (6) (10).................... 6,199,360 24.8% 600,000(11) 5,599,360 22.4%
Clark Hinkley (6) (12).......................... 80,000 * 80,000 *
Diane M. Timbanard (6) (12)..................... 74,760 * 74,760 *
Nina L. Miner (6) (13).......................... 96,140 * 96,140 *
All Directors and Executive Officers as a Group
(18 persons) (12)............................. 18,608,249 71.6% 14,608,249 56.2%
</TABLE>
- ------------------------------
* Less than 1%
(1) The address of this person is Two Greenwich Plaza, Suite 100, Greenwich CT
06830.
(2) Includes (i) 7,458,445 shares owned by The SK Equity Fund, L.P., and (ii)
108,108 shares owned by SK Investment Fund, L.P. SKM Partners, L.P. is the
general partner of each of the SK Funds. Messrs. Karp, Megrue and Saunders
are Partners of Saunders Karp & Megrue Partners, L.L.C., which is the
general partner of SKM Partners, L.P., and therefore may be deemed to have
beneficial ownership of the shares shown as being owned by the SK Funds.
Messrs. Karp, Megrue and Saunders disclaim beneficial ownership of such
shares, except to the extent that any of them has a limited partnership
interest in SK Investment Fund, L.P.
(3) Includes 2,000 shares purchased by Mr. Megrue.
(4) Includes 2,000 shares purchased by Mr. Karp.
(5) Includes 3,000 shares purchased by Mr. Oddi and does not include shares
owned by The SK Equity Fund, L.P. or SK Investment Fund, L.P. Mr. Oddi is a
Partner of Saunders Karp & Megrue Partners, L.L.C., which is the general
partner of SKM Partners, L.P., which serves as the general partner of the SK
Funds and SKM and has a limited partnership interest in SK Investment Fund,
L.P.
(6) The address of this person is c/o The Children's Place Retail Stores, Inc.,
One Dodge Drive, West Caldwell, New Jersey 07006.
38
<PAGE>
(7) Includes (i) 5,221,680 shares held by trusts or custodial accounts for the
benefit of Mr. Dabah's children and certain other family members, of which
Mr. Dabah or his wife is a trustee or custodian and as to which Mr. Dabah or
his wife, as the case may be, has voting control, and as to which shares Mr.
Dabah disclaims beneficial ownership, (ii) 37,600 shares held by Mr. Dabah's
wife, and (iii) 39,864 shares subject to options exercisable within 60 days
after February 15, 1999. Does not include (i) 1,048,480 shares beneficially
owned by Stanley Silverstein, Mr. Dabah's father-in-law, (ii) a total of
1,745,300 shares beneficially owned by other members of Mr. Dabah's family,
(iii) 88,640 shares issuable upon exercise of outstanding stock options
exercisable within 60 days after February 15, 1999, which are beneficially
owned by Nina Miner, Mr. Dabah's sister-in-law, (iv) 1,000 shares owned by
Ms. Miner and (v) 6,500 shares owned by Ms. Miner's husband.
(8) Includes shares owned by Mr. Dabah and by various trusts for the benefit of
Mr. Dabah's children, of which Mr. Dabah is a trustee.
(9) Includes 149,400 shares issuable upon exercise of outstanding stock options
exercisable within 60 days of February 15, 1999.
(10) Includes 5,150,880 shares held by trusts for the benefit of Mr.
Silverstein's children and grandchildren, of which Mr. Silverstein's wife is
a trustee, and as to which Mrs. Silverstein has voting control, and as to
which shares Mr. Silverstein disclaims beneficial ownership. Does not
include (i) 3,181,100 shares beneficially owned by Ezra Dabah, Mr.
Silverstein's son-in-law, or Mr. Dabah's wife, (ii) 39,864 shares issuable
upon exercise of outstanding stock options exercisable within 60 days after
February 15, 1999, which are beneficially owned by Mr. Dabah, (iii) 88,640
shares issuable upon exercise of outstanding stock options exercisable
within 60 days after February 15, 1999, which are beneficially owned by Nina
Miner, Mr. Silverstein's daughter, (iv) 1,000 shares owned by Ms. Miner and
(v) 6,500 shares owned by Ms. Miner's husband.
(11) Includes shares owned by Mr. Silverstein and by various trusts for the
benefit of Mr. Silverstein's children, of which Mr. Silverstein is a
trustee.
(12) Reflects shares issuable upon exercise of outstanding stock options
exercisable within 60 days of February 15, 1999.
(13) Includes 6,500 shares purchased by Ms. Miner's husband, as to which Ms.
Miner disclaims beneficial ownership and 88,640 shares issuable upon
exercise of outstanding stock options exercisable within 60 days of February
15, 1999.
As of February 15, 1999, Ezra Dabah and certain members of his family
beneficially own 11,370,164 shares of our Common Stock, constituting
approximately 45.3% of the outstanding Common Stock. The SK Funds own 7,566,553
shares or approximately 30.3% of the outstanding Common Stock. Pursuant to the
Stockholders Agreement described below, the SK Funds and certain other
stockholders, who own in the aggregate a majority of the outstanding Common
Stock, have agreed to vote for the election of two nominees of the SK Funds and
three nominees of Ezra Dabah to our Board of Directors. As a result, the SK
Funds and Ezra Dabah are able to control the election of our directors. In
addition, if the SK Funds and Mr. Dabah were to vote together, they would be
able to determine the outcome of any matter submitted to a vote of our
stockholders for approval.
After giving effect to the offering of Common Stock in this prospectus, Ezra
Dabah and certain members of his family will beneficially own 10,170,164 shares
of our Common Stock, constituting approximately 40.5% of the outstanding Common
Stock (9,990,164 shares or approximately 39.8% of the outstanding Common Stock
if the over-allotment option is fully exercised), and the SK Funds will own
4,866,553 shares or approximately 19.5% of the outstanding Common Stock
(4,461,553 shares or approximately 17.9% of the outstanding Common Stock if the
over-allotment option is fully exercised).
STOCKHOLDERS AGREEMENT
The Children's Place and certain of our stockholders, who currently own, and
following this offering will own, in the aggregate a majority of the Common
Stock, are parties to a Stockholders Agreement (the "Stockholders Agreement").
The Stockholders Agreement places certain limitations upon the transfer in
privately negotiated transactions of shares of Common Stock beneficially owned
by Ezra Dabah, Stanley Silver and the SK Funds. In addition, the Stockholders
Agreement provides that (1) so long as Ezra Dabah, together with members of his
family, beneficially owns shares representing at least 25% of the shares of
Common Stock owned by such parties on the date of the Stockholders Agreement,
the stockholders party to the Stockholders Agreement will be obligated to vote
all shares as to which they have voting rights in a manner such that the Board
of Directors will at all times include three directors nominated by Ezra Dabah
and (2) so long as the SK Funds beneficially own
39
<PAGE>
shares representing at least 25% of the shares of Common Stock owned by such
parties on the date of the Stockholders Agreement, the stockholders party to the
Stockholders Agreement will be obligated to vote all shares as to which they
have voting rights in a manner such that the Board of Directors will at all
times include two directors nominated by the SK Funds. Should the number of
directors comprising the Board of Directors be increased, nominees for the
remaining director positions will be designated by our Board of Directors.
Pursuant to the Stockholders Agreement, Ezra Dabah, Stanley Silver and Stanley
Silverstein were designated as director nominees by Mr. Dabah and were elected
to the Board of Directors, and John Megrue and David Oddi were designated as
director nominees by the SK Funds and were elected to the Board of Directors.
The Stockholders Agreement provides that we will not, without the
affirmative vote of at least one director nominated by the SK Funds, engage in
specified types of transactions with certain of our affiliates (not including
the SK Funds), take action to amend our ByLaws or Certificate of Incorporation
or increase or decrease the size of the entire Board of Directors. The
Stockholders Agreement also provides that certain specified types of corporate
transactions and major corporate actions will require the approval of at least
two-thirds of the members of the Board of Directors.
Under the terms of the Stockholders Agreement, the rights of any party
thereunder will terminate at the time that such party's Common Stock constitutes
less than 25% of the shares of Common Stock owned by such party on the date of
the Stockholders Agreement. All the provisions of the Stockholders Agreement
will terminate when no party to the Stockholders Agreement beneficially owns
shares representing at least 25% of the outstanding Common Stock owned by such
party on the date of the Stockholders Agreement.
40
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
We have a total of 24,975,101 shares of Common Stock outstanding (excluding
shares issuable pursuant to stock options). Of these shares, 10,088,000 shares
of Common Stock (10,688,000 shares if the underwriters' over-allotment option is
fully exercised), including the shares of Common Stock offered hereby, are
freely tradable without restriction or registration under the Securities Act by
persons other than "affiliates" of The Children's Place, as defined in the
Securities Act, who would be required to sell in compliance with the
requirements of Rule 144 under the Securities Act. The remaining 14,887,101
shares of Common Stock outstanding (14,287,101 shares if the underwriters' over-
allotment is fully exercised) are "restricted securities" as such term is
defined by Rule 144 (the "Restricted Shares"). The Restricted Shares were issued
and sold by us in private transactions in reliance upon exemptions from
registration under the Securities Act.
Of the Restricted Shares, 1,008,000 shares are eligible for sale in the
public market in reliance on Rule 144(k). The remaining 13,879,101 Restricted
Shares are eligible for sale in the public market subject to the volume
limitations under Rule 144. See "Plan of Distribution."
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 Children's
Place, 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 249,751 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 Children's Place. In addition, a person who is not deemed to have been
an affiliate of The Children's Place 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 subject only to the manner of sale provisions of Rule 144,
and by affiliates subject to all provisions of Rule 144 except its one-year
minimum holding period.
The Children's Place is party to an Amended and Restated Registration Rights
Agreement pursuant to which the SK Funds and the other stockholders party
thereto may demand registration under the Securities Act of shares of the Common
Stock held by them at any time. We may postpone such a demand under certain
circumstances. In addition, the stockholders party to the Amended and Restated
Registration Rights Agreement may request that we include shares of the Common
Stock held by them in any registration proposed by The Children's Place of such
Common Stock under the Securities Act.
As of February 15, 1999, options to purchase a total of 1,428,776 shares of
Common Stock pursuant to the 1996 Plan were outstanding with a weighted average
exercise price of $4.59 per share. In addition, as of February 15, 1999, options
to purchase a total of 768,230 shares of Common Stock pursuant to the 1997 Plan
were outstanding with a weighted average exercise price of $10.19 per share.
Sales of substantial amounts of our Common Stock in the public market, or
the perception that such sales could occur, could materially and adversely
affect the market price of our Common Stock and could impair our future ability
to raise capital through an offering of our equity securities. See "Risk
Factors--Potential Impact of Shares Eligible for Future Sale on Stock Price."
41
<PAGE>
PLAN OF DISTRIBUTION
Each underwriter named below has agreed to purchase from the selling
stockholders the number of shares of Common Stock set forth opposite its name.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
BT Alex. Brown Incorporated..........................................................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated...................................................
Hambrecht & Quist LLC................................................................................
NationsBanc Montgomery Securities LLC................................................................
Thomas Weisel Partners LLC...........................................................................
----------
Total.......................................................................................... 4,000,000
----------
----------
</TABLE>
The underwriters will purchase the shares under an underwriting agreement
with The Children's Place and the selling stockholders (the "Underwriting
Agreement"). The underwriters will pay the selling stockholders the public
offering price less the underwriting discount specified on the cover page of
this prospectus. We estimate that our expenses for this offering will be
$600,000, which will be reimbursed by the selling stockholders. Certain
conditions contained in the Underwriting Agreement must be satisfied before the
underwriters are required to purchase the shares. The underwriters will either
purchase all of the shares or none of them.
The underwriters have advised the selling stockholders and us that they will
offer the shares directly to the public initially at the public offering price
and to certain dealers at the public offering price less a selling concession
not to exceed $ per share. The underwriters may allow and these dealers may
reallow a concession not to exceed $ per share to other dealers. After the
initial offering of the shares, the underwriters may change the public offering
price, the concession to selected dealers and the reallowance to other dealers.
The underwriters will offer the shares subject to prior sale, withdrawal,
cancellation or modification of the offer of the shares without notice, and to
their receipt and acceptance of the shares. The underwriters may reject any
order to purchase shares.
The selling stockholders have granted the underwriters an option,
exercisable not later than 30 days after the date of this prospectus, to
purchase up to 600,000 additional shares at the public offering price less the
underwriting discount specified on the cover page of this prospectus. To the
extent that the underwriters exercise such option, each of the underwriters will
have a firm commitment, subject to certain conditions, to purchase approximately
the same percentage thereof that the number of shares to be purchased by it
shown in the above table bears to 4,000,000 shares, and the selling stockholders
will be obligated to sell such shares, in the same percentage thereof that the
number of shares to be sold by them in this offering bears to 4,000,000 shares,
to the underwriters. The underwriters may exercise such option only to cover
over-allotments. If purchased, the underwriters will offer such additional
shares on the same terms as the other shares. If the underwriters exercise their
over-allotment option in full, the total public offering price will be ,
the total underwriting discount will be , and the total proceeds to
the selling stockholders will be , before expenses.
The Children's Place and the selling stockholders have agreed to indemnify
the underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments which the underwriters may be
required to make in respect thereof.
42
<PAGE>
We, each of our officers and directors, and certain of our stockholders,
including all of the selling stockholders, have agreed, subject to certain
exceptions, not to offer, sell or otherwise dispose of any shares of Common
Stock for a period of 90 days after the date of this prospectus without the
prior written consent of the underwriters. Stockholders who have agreed to this
lock-up arrangement hold an aggregate of 15,067,161 shares of Common Stock and
options exercisable for 549,388 shares of Common Stock. The underwriters may, in
their sole discretion and at any time without notice, release all or any portion
of the shares subject to such lock-up agreements.
In connection with this offering, the underwriters and other persons
participating in this offering may engage in transactions that stabilize,
maintain or otherwise affect the price of the Common Stock. Specifically, the
underwriters may over-allot in connection with this offering, creating a short
position in the Common Stock for their own account. To cover a short position or
to stabilize the price of the Common Stock, the underwriters may bid for, and
purchase, shares of Common Stock in the open market. The underwriters may also
impose a penalty bid whereby they may reclaim selling concessions allowed to an
underwriter or a dealer for distributing Common Stock in this offering, if the
underwriters repurchase previously distributed Common Stock in transactions to
cover their short position, in stabilization transactions or otherwise.
Furthermore, the underwriters may bid for, and purchase, shares of Common Stock
in market making transactions. These activities may stabilize or maintain the
market price of the Common Stock above market levels that may otherwise prevail.
The underwriters are not required to engage in these activities and may stop any
of these activities at any time without notice.
In connection with this offering, certain underwriters and other selling
group members or their affiliates may engage in passive market making
transactions in the Common Stock on the Nasdaq National Market in accordance
with Rule 103 of Regulation M under the Exchange Act. Rule 103 permits passive
market making during the period when Regulation M would otherwise prohibit
market making activity by the participants in this offering. Passive market
making consists of displaying bids on the Nasdaq National Market limited by the
bid prices of independent market makers and making purchases limited by such
prices and effected in response to order flow. Rule 103 limits the net purchases
by a passive market maker on each day to a specified percentage of the passive
market maker's average daily trading volume in the common stock during a
specified period. The passive market maker must stop its passive market making
transactions for the rest of that day when such limit is reached.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has co-managed fifteen public offerings of equity
securities and has acted as an underwriter in an additional five public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or controlling
persons, except with respect to its contractual relationship with us pursuant to
the Underwriting Agreement to be entered into in connection with this offering.
43
<PAGE>
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for The
Children's Place by Stroock & Stroock & Lavan LLP, New York, New York, and for
the underwriters by Fulbright & Jaworski L.L.P., New York, New York.
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). You may
read and copy any documents we file at the SEC's public reference room in
Washington, D.C. at 450 Fifth Street, N.W., Washington, D.C. 20549, or in the
public reference rooms located in New York, New York and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public at the SEC's
website at http://www.sec.gov.
The SEC allows us to "incorporate by reference" information from other
documents that we file with them, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus, and
information we later file with the SEC will automatically update and supersede
this information. We incorporate by reference our Annual Report on Form 10-K for
the fiscal year ended January 30, 1999 and any future filings we will make with
the SEC under Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act.
You may request a copy of these filings, at no cost, by writing or
telephoning us at The Children's Place Retail Stores, Inc., One Dodge Drive,
West Caldwell, New Jersey 07006, Attention: Investor Relations, telephone: (973)
227-8900.
We have filed with the SEC a registration statement on Form S-3 (the
"Registration Statement") under the Securities Act, with respect to the shares
offered pursuant to this prospectus. This prospectus, which constitutes a part
of the Registration Statement, does not contain all the information set forth in
the Registration Statement and exhibits thereto, certain portions of which have
been omitted from this prospectus as permitted by the rules and regulations of
the SEC. You may obtain copies of the Registration Statement and its amendments
(including the omitted portions), including exhibits thereto, from the SEC upon
payment of prescribed rates. For further information with respect to our Common
Stock, we refer you to the Registration Statement and the exhibits thereto.
Statements contained in this prospectus or the Registration Statement relating
to the contents of any contract or other document filed as an exhibit to the
Registration Statement are necessarily summaries of those documents and are not
necessarily complete, and each such statement is qualified in all respects by
reference to the full text of those contracts and documents as filed with the
SEC.
You should rely only on the information or representations provided in this
prospectus or incorporated herein by reference. We have not authorized anyone
else to provide you with different information. The selling stockholders will
not offer the shares of our Common Stock in any state where the offer is not
permitted. You should not assume that the information in this prospectus,
including information incorporated herein by reference, is accurate as of any
date other than the date on the cover page.
44
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED
FEBRUARY 1, 1997, JANUARY 31, 1998 AND JANUARY 30, 1999
THE CHILDREN'S PLACE RETAIL STORES, INC.
<TABLE>
<CAPTION>
PAGE:
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Income.......................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity................................................. F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated 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 consolidated balance sheets of The
Children's Place Retail Stores, Inc. (a Delaware corporation) and subsidiaries
(the "Company") as of January 31, 1998 and January 30, 1999 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three fiscal years in the period ended January 30, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Children's Place Retail
Stores, Inc. and subsidiaries as of January 31, 1998 and January 30, 1999, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended January 30, 1999, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
New York, New York
February 22, 1999
F-2
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 30,
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 887 $ 16,370
Accounts receivable................................................................... 1,904 2,742
Inventories........................................................................... 20,334 35,339
Prepaid expenses and other current assets............................................. 4,612 5,622
Deferred income taxes................................................................. 10,653 2,447
----------- -----------
Total current assets................................................................ 38,390 62,520
Property and equipment:
Leasehold improvements................................................................ 27,226 34,261
Store fixtures and equipment.......................................................... 16,219 23,825
Construction in progress.............................................................. 1,464 3,517
----------- -----------
44,909 61,603
Less accumulated depreciation and amortization........................................ (12,788) (19,299)
----------- -----------
Property and equipment, net......................................................... 32,121 42,304
Deferred income taxes................................................................... 8,244 5,144
Other assets............................................................................ 598 793
----------- -----------
Total assets........................................................................ $ 79,353 $ 110,761
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Revolving credit facility............................................................. $ 1,089 $ 0
Accounts payable...................................................................... 9,471 13,345
Accrued expenses, interest and other current liabilities.............................. 7,592 13,644
----------- -----------
Total current liabilities........................................................... 18,152 26,989
Other long-term liabilities............................................................. 2,734 3,165
----------- -----------
Total liabilities................................................................... 20,886 30,154
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value........................................................... 2,462 2,497
Additional paid-in capital.............................................................. 82,589 84,032
Accumulated deficit..................................................................... (26,584) (5,922)
----------- -----------
Total stockholders' equity.......................................................... 58,467 80,607
----------- -----------
Total liabilities and stockholders' equity.......................................... $ 79,353 $ 110,761
----------- -----------
----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-3
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
<S> <C> <C> <C>
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
----------- ----------- -----------
Net sales.................................................................. $ 143,838 $ 192,557 $ 283,853
Cost of sales.............................................................. 90,071 123,556 166,449
----------- ----------- -----------
Gross profit............................................................... 53,767 69,001 117,404
Selling, general and administrative expenses............................... 35,966 46,451 70,313
Pre-opening costs.......................................................... 982 2,127 3,030
Depreciation and amortization.............................................. 4,017 5,958 8,607
----------- ----------- -----------
Operating income........................................................... 12,802 14,465 35,454
Interest expense, net...................................................... 2,884 2,647 324
Other expense, net......................................................... 396 139 110
----------- ----------- -----------
Income before income taxes and extraordinary item.......................... 9,522 11,679 35,020
Provision (benefit) for income taxes....................................... (20,919) 4,695 14,358
----------- ----------- -----------
Income before extraordinary item........................................... 30,441 6,984 20,662
Extraordinary loss on extinguishment of debt, net.......................... 0 1,743 0
----------- ----------- -----------
Net income................................................................. $ 30,441 $ 5,241 $ 20,662
----------- ----------- -----------
Basic income per common share before extraordinary item.................... $ 0.32 $ 0.83
Extraordinary item......................................................... (0.08) 0.00
----------- -----------
Basic net income per common share.......................................... $ 0.24 $ 0.83
----------- -----------
----------- -----------
Basic weighted average common shares outstanding........................... 21,821 24,788
Diluted income per common share before extraordinary item.................. $ 0.29 $ 0.80
Extraordinary item......................................................... (0.07) 0.00
----------- -----------
Diluted net income per common share........................................ $ 0.22 $ 0.80
----------- -----------
----------- -----------
Diluted weighted average common shares outstanding......................... 24,358 25,909
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-4
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1997, JANUARY 31, 1998 AND JANUARY 30,
1999
(IN THOUSANDS)
<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, February 3,
1996................... 10 $ 10 137 $ 14 0 $ 0 0 $ 0
Surrendered preferred
stock.................. (10) (10) 0 0 0 0 0 0
Exercise of stock
options................ 0 0 3 0 0 0 0 0
Issuance of warrants..... 0 0 0 0 0 0 0 0
Conversion of common
stock to Series A
Common Stock........... 0 0 (140) (14) 16,800 1,680 0 0
Issuance of Series B
Common Stock, net of
transaction costs...... 0 0 0 0 0 0 47 5
Redemption of Series A
Common Stock........... 0 0 0 0 (4,039) (404) 0 0
Net income............... 0 0 0 0 0 0 0 0
-- -- --
--- ----------- ----------- --------- -----------
BALANCE, February 1,
1997................... 0 0 0 0 12,761 1,276 47 5
Return of funds toward
common stock
subscription........... 0 0 0 0 0 0 0 0
Series B Common Stock
conversion............. 0 0 0 0 7,660 766 (47) (5)
Series A Common Stock
conversion............. 0 0 20,421 2,042 (20,421) (2,042) 0 0
Issuance of Common
Stock.................. 0 0 4,000 400 0 0 0 0
Transaction fees......... 0 0 0 0 0 0 0 0
Redemption of Noteholder
Warrant................ 0 0 0 0 0 0 0 0
Redemption of two-thirds
of Legg Mason
Warrant................ 0 0 0 0 0 0 0 0
Exercise of one-third of
Legg Mason Warrant..... 0 0 201 20 0 0 0 0
Net income............... 0 0 0 0 0 0 0 0
-- -- --
--- ----------- ----------- --------- -----------
BALANCE, January 31,
1998................... 0 0 24,622 2,462 0 0 0 0
Exercise of stock options
and employee stock
purchases.............. 0 0 351 35 0 0 0 0
Net income............... 0 0 0 0 0 0 0 0
-- -- --
--- ----------- ----------- --------- -----------
BALANCE, January 30,
1999................... 0 $ 0 24,973 $ 2,497 0 $ 0 0 $ 0
-- -- --
-- -- --
--- ----------- ----------- --------- -----------
--- ----------- ----------- --------- -----------
<CAPTION>
ADDITIONAL TREASURY STOCK TOTAL
PAID-IN ACCUMULATED -------------------------- STOCKHOLDERS'
CAPITAL DEFICIT SHARES AMOUNT EQUITY
----------- ------------- ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, February 3,
1996................... $ 50,557 $ (62,266) (3) $ (50) $ (11,735)
Surrendered preferred
stock.................. 10 0 0 0 0
Exercise of stock
options................ 123 0 3 50 173
Issuance of warrants..... 1,501 0 0 0 1,501
Conversion of common
stock to Series A
Common Stock........... (1,666) 0 0 0 0
Issuance of Series B
Common Stock, net of
transaction costs...... 18,758 0 0 0 18,763
Redemption of Series A
Common Stock........... (11,441) 0 0 0 (11,845)
Net income............... 0 30,441 0 0 30,441
-
----------- ------------- --- --------
BALANCE, February 1,
1997................... 57,842 (31,825) 0 0 27,298
Return of funds toward
common stock
subscription........... (488) 0 0 0 (488)
Series B Common Stock
conversion............. (761) 0 0 0 0
Series A Common Stock
conversion............. 0 0 0 0 0
Issuance of Common
Stock.................. 51,680 0 0 0 52,080
Transaction fees......... (1,350) 0 0 0 (1,350)
Redemption of Noteholder
Warrant................ (20,605) 0 0 0 (20,605)
Redemption of two-thirds
of Legg Mason
Warrant................ (4,269) 0 0 0 (4,269)
Exercise of one-third of
Legg Mason Warrant..... 540 0 0 0 560
Net income............... 0 5,241 0 0 5,241
-
----------- ------------- --- --------
BALANCE, January 31,
1998................... 82,589 (26,584) 0 0 58,467
Exercise of stock options
and employee stock
purchases.............. 1,443 0 0 0 1,478
Net income............... 0 20,662 0 0 20,662
-
----------- ------------- --- --------
BALANCE, January 30,
1999................... $ 84,032 $ (5,922) 0 $ 0 $ 80,607
-
-
----------- ------------- --- --------
----------- ------------- --- --------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-5
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
<S> <C> <C> <C>
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................................. $ 30,441 $ 5,241 $ 20,662
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 4,017 5,958 8,607
Deferred financing fee amortization................................................... 359 405 25
Loss on disposals of property and equipment........................................... 0 164 803
Extraordinary loss.................................................................... 0 1,743 0
Deferred taxes........................................................................ (21,263) 4,205 11,959
Changes in operating assets and liabilities:
Accounts receivable................................................................... (249) (1,014) (838)
Inventories........................................................................... (1,812) (5,909) (15,005)
Prepaid expenses and other current assets............................................. (814) (1,449) (1,010)
Other assets.......................................................................... (128) (445) (519)
Accounts payable...................................................................... (4,536) 1,149 3,874
Accrued expenses, interest and other.................................................. 2,045 1,299 6,401
Payment of restructuring charges...................................................... (214) 0 0
----------- ----------- -----------
Total adjustments................................................................... (22,595) 6,106 14,297
----------- ----------- -----------
Net cash provided by operating activities............................................... 7,846 11,347 34,959
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases........................................................ (8,492) (17,183) (19,841)
----------- ----------- -----------
Net cash used in investing activities................................................... (8,492) (17,183) (19,841)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the sale of Common Stock.............................................. 0 50,730 0
Repurchase of Noteholder and Legg Mason Warrants........................................ 0 (25,757) 0
Borrowings under revolving credit facility.............................................. 141,907 193,210 143,155
Repayments under revolving credit facility.............................................. (150,596) (192,121) (144,244)
Proceeds from issuance of long-term debt................................................ 20,000 0 0
Repayment of long-term debt............................................................. (12,821) (21,360) 0
Payment of obligations under capital leases............................................. (690) (838) (24)
Return of funds toward common stock subscription........................................ 0 (488) 0
Redemption of Series A Common Stock..................................................... (11,845) 0 0
Net proceeds from sale of Series B Common Stock......................................... 18,763 0 0
Exercise of stock options and employee stock purchases.................................. 173 0 1,478
Deferred financing costs................................................................ (1,392) (75) 0
----------- ----------- -----------
Net cash provided by financing activities........................................... 3,499 3,301 365
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents................................ 2,853 (2,535) 15,483
Cash and cash equivalents, beginning of period...................................... 569 3,422 887
----------- ----------- -----------
Cash and cash equivalents, end of period................................................ $ 3,422 $ 887 $ 16,370
----------- ----------- -----------
----------- ----------- -----------
OTHER CASH FLOW INFORMATION:
Cash paid during the year for interest.................................................. $ 2,369 $ 2,551 $ 439
Cash paid during the year for income taxes.............................................. 70 607 2,085
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-6
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Company is a specialty retailer of apparel and accessories for children
from newborn to twelve years of age. The Company designs, sources and markets
its products under "The Children's Place" brand name for sale exclusively in its
stores. As of January 30, 1999, the Company operated 209 stores in 26 states,
located primarily in regional shopping malls in the eastern half of the United
States.
FISCAL YEAR
The Company's fiscal year is a 52-week or 53-week period ending on the
Saturday nearest to January 31. The results for fiscal 1996, 1997 and 1998
represent the 52-week periods ended February 1, 1997, January 31, 1998 and
January 30, 1999, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and amounts of revenues and expenses reported during the period.
Actual results could differ from the estimates made by and assumptions used by
management.
CONSOLIDATION
The consolidated financial statements include the accounts of The Children's
Place Retail Stores, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to current
year presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories, which consist primarily of finished goods, are stated at the
lower of average cost or market.
COST OF SALES
In addition to the cost of inventory sold, the Company includes its buying,
distribution and occupancy expenses in its cost of sales.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, except for store fixtures and
equipment under capital leases which are recorded at the present value of the
future lease payments as of lease inception. Property and equipment is
depreciated on a straight-line basis based upon their estimated useful lives,
F-7
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
which range from three to ten years. Amortization of property and equipment
under capital leases and leasehold improvements is computed on a straight-line
basis over the term of the lease or the estimated useful life, whichever is
shorter.
DEFERRED FINANCING COSTS
The Company capitalizes costs directly associated with acquiring third-party
financing. Deferred financing costs are included in other assets and are
amortized over the term of the indebtedness. As of January 30, 1999, unamortized
deferred financing costs represent the cost of acquiring the Company's working
capital revolving credit facility and were approximately $75,000, net of
accumulated amortization of $38,000. See Note 2--Initial Public Offering for a
discussion of the write-off of unamortized deferred financing costs in
conjunction with the Company's initial public offering.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
The Company continually evaluates the carrying value and the economic useful
lives of its long-lived assets based on the Company's operating performance and
the expected undiscounted future net cash flows and adjusts the carrying value
of assets which may not be recoverable. The Company does not believe that any
impairment exists as of January 30, 1999 in the recoverability of its long-lived
assets.
PRE-OPENING COSTS
Store pre-opening costs, which consist primarily of payroll, supply and
marketing expenses, are expensed as incurred.
ADVERTISING COSTS
The Company expenses the cost of advertising over the period when the
advertising is run or displayed. Included in selling, general and administrative
expenses for fiscal 1996, 1997 and 1998 are advertising costs of $1,706,000,
$2,004,000 and $3,526,000 respectively.
RESTRUCTURING
The payment of restructuring costs included in the statement of cash flows
for fiscal 1996 reflects the payments of restructuring charges which were
recorded by the Company prior to fiscal 1994. These payments represented the
resolution of lease and vendor payment agreements.
INCOME TAXES
The Company computes income taxes using the liability method. This standard
requires recognition of deferred tax assets and liabilities, measured by enacted
rates, attributable to temporary differences between financial statement and
income tax basis of assets and liabilities. Temporary differences result
primarily from accelerated depreciation and amortization for tax purposes and
various accruals and reserves being deductible for future tax periods.
F-8
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments,"
requires entities to disclose the fair value of financial instruments, both
assets and liabilities, recognized and not recognized in the balance sheets, for
which it is practicable to estimate fair value. For purposes of this disclosure,
the fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. Fair value is based on quoted market prices for
the same or similar financial instruments.
As cash and cash equivalents, accounts receivable and payable, and certain
other short-term financial instruments are all short-term in nature, their
carrying amount approximates fair value.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company accounts for its 1996 Stock Option Plan (the "1996 Plan"), its
1997 Stock Option Plan (the "1997 Plan") and its Employee Stock Purchase Plan
(the "ESPP") under the provisions of Accounting Principles Bulletin No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Refer to Note 10--Stock
Option and Purchase Plans for pro forma disclosures required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
NET INCOME PER COMMON SHARE
The Company reports its earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS 128"),
which requires the presentation of both basic and diluted earnings per share on
the statements of income. The Company adopted SFAS 128 during fiscal 1997.
During fiscal 1996, the Company was not publicly traded and due to the
significant change in capital structure resulting from the Private Placement (as
discussed in Note 3--1996 Private Placement), earnings per share for that year
is not presented due to a lack of comparability.
Basic income per common share for fiscal 1997 was calculated by dividing net
income by the basic weighted average common shares outstanding as if the Stock
Split, the Series B Conversion and the Reclassification (as discussed in Note
2--Initial Public Offering), occurred on the first day of fiscal 1997.
Diluted income per common share for fiscal 1997 was calculated by dividing
net income by the diluted weighted average common shares and common share
equivalents outstanding as if the Stock Split, the Series B Conversion and the
Reclassification occurred on the first day of fiscal 1997. For fiscal 1997,
common share equivalents included the Noteholder Warrant and Legg Mason Warrant
(each as discussed in Note 2--Initial Public Offering) prior to their exercise
and management options to purchase common stock under the 1996 Plan and the 1997
Plan calculated using the treasury stock method at an assumed public offering
price of $14.00 prior to the initial public offering and, after the initial
public offering, at the average market price in accordance with SFAS 128.
F-9
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In accordance with SFAS 128, the following table reconciles income and share
amounts utilized to calculate basic and diluted net income per common share:
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
--------------------------
JANUARY 31, JANUARY 30,
1998 1999
------------ ------------
<S> <C> <C>
Net income (in thousands)......................................... $ 5,241 $ 20,662
------------ ------------
------------ ------------
Basic weighted average common shares.............................. 21,821,160 24,787,698
Dilutive effect of stock options.................................. 2,536,495 1,120,901
------------ ------------
Diluted weighted average common shares............................ 24,357,655 25,908,599
------------ ------------
Antidilutive options.............................................. 183,753 223,807
</TABLE>
Antidilutive options consist of the weighted average of stock options for
the respective periods ended January 31, 1998 and January 30, 1999 that had an
exercise price greater than the average market price during the period. Such
options are therefore excluded from the computation of diluted shares.
DERIVATIVE INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at its fair value.
SFAS 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
133 is effective for fiscal years beginning after June 15, 1999 with early
adoption permitted. The Company does not expect that the adoption of SFAS 133
will have a material impact on its financial statements.
2. INITIAL PUBLIC OFFERING
On September 18, 1997, the Company sold 4,000,000 shares of Common Stock at
$14.00 per share in an initial public offering (the "Offering") pursuant to a
registration statement filed on Form S-1 (No. 333-31535) with the Securities and
Exchange Commission and in its prospectus dated September 18, 1997 (the
"Prospectus"). The Company used the net proceeds of $50.7 million, after
deducting the underwriters' discount of $3.9 million and transaction expenses of
$1.4 million, from this Offering to (i) pay the principal amount of, and accrued
interest on, the Senior Subordinated Notes held by Nomura Holding America Inc.,
(the "Noteholder") of $20.6 million, (ii) repurchase a warrant held by the
Noteholder (the "Noteholder Warrant"), for $20.6 million, (iii) repurchase
two-thirds of a warrant held by Legg Mason Wood Walker, Incorporated (the "Legg
Mason Warrant") for $5.2 million, and (iv) reduce borrowings outstanding under
the Company's working capital revolving credit facility (the "Foothill Credit
Facility") with the remainder of the net proceeds. The Senior Subordinated
Notes, the Noteholder Warrant and the Legg Mason Warrant were issued in
conjunction with a 1996 recapitalization of the Company (as discussed in Note
3--1996 Private Placement).
F-10
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INITIAL PUBLIC OFFERING (CONTINUED)
The Senior Subordinated Notes were prepaid without a prepayment premium
since concurrent with the prepayment the Noteholder was afforded the opportunity
to sell its Noteholder Warrant. The Company has had no long-term debt other than
obligations under capital leases as a result of the Offering.
As a result of the repayment of the Senior Subordinated Notes, the Company
incurred a non-cash, extraordinary charge to earnings during the third quarter
of Fiscal 1997 of $1.7 million, resulting from the write-off of unamortized
deferred financing costs of $1.4 million and unamortized debt discount of $1.5
million, net of a $1.2 million tax benefit.
The repurchase price of the Noteholder Warrant and two-thirds of the Legg
Mason Warrant was equal to the initial public offering price of $14.00 per
share, less the per share underwriting discount and exercise price of $2.677 per
warrant, multiplied by the number of shares covered by the warrant (or portion
thereof) being repurchased. The repurchase in cash of the Noteholder Warrant and
two-thirds of the Legg Mason Warrant was accounted for as a reduction of
additional paid-in capital. The repurchase in cash of two-thirds of the Legg
Mason Warrant was recorded net of deferred tax benefits of $0.9 million.
Concurrent with the Offering, the Company effected a 120-for-one stock split
of the Series A Common Stock (the "Stock Split"), and converted all outstanding
shares of the Series B Common Stock into 7,659,889 shares of Series A Common
Stock (the "Series B Conversion") and redesignated the Series A Common Stock as
Common Stock ("the Reclassification"). The Company also issued 201,414 shares of
Common Stock upon the cashless exercise of one-third of the Legg Mason Warrant.
The cashless exercise of one-third of the Legg Mason Warrant was recorded net of
deferred tax benefits of $0.6 million.
At the time of the Offering, the Company also amended and restated its
certificate of incorporation and bylaws in order to, among other things, (i)
effect the Stock Split, the Series B Conversion and the Reclassification, (ii)
authorize 100,000,000 shares of Common Stock, $0.10 par value per share, (iii)
authorize 1,000,000 shares of Preferred Stock, $1.00 par value per share, and
(iv) provide for certain anti-takeover provisions. The Company also entered into
an amended and restated stockholders agreement with all of its existing
stockholders. In addition, the Company adopted the 1997 Plan and the ESPP.
3. 1996 PRIVATE PLACEMENT
During fiscal 1996, the Company employed the services of Legg Mason Wood
Walker, Incorporated ("Legg Mason") to assist, as its placement agent, in the
recapitalization of the Company. As a result, pursuant to a note and warrant
purchase agreement dated June 28, 1996 (the "Note and Warrant Purchase
Agreement") between the Company and Nomura Holding America Inc., the Company
sold, for a purchase price of $20 million, the Company's 12% Senior Subordinated
Notes due 2002 (the "Senior Subordinated Notes") in the principal amount of $20
million, together with a Noteholder Warrant representing the right to purchase
1,992,252 shares of Common Stock at an exercise price of $2.677 per share. This
warrant was valued for financial reporting purposes by an independent appraisal
firm at approximately $1.9 million. This amount was accounted for as a credit to
additional paid-in capital, net of income tax effect of $0.8 million, and a
discount to the Senior Subordinated Notes, and was being amortized over the six
year term of the Senior Subordinated Notes.
F-11
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. 1996 PRIVATE PLACEMENT (CONTINUED)
The Company also paid the Noteholder funding and structuring fees in the
aggregate amount of $0.3 million.
Concurrent with the sale of the Senior Subordinated Notes, Legg Mason
assisted the Company in its sale of its newly issued Series B Common Stock to
two funds managed by Saunders Karp & Megrue L.P. ("SKM"). The aggregate proceeds
from the sale of the Series B Common Stock were approximately $20.5 million,
before deducting transaction costs of approximately $1.7 million.
Net proceeds from the sale of the Senior Subordinated Notes and the issuance
of the Series B Common Stock (collectively, the "1996 Private Placement"), were
used to (i) redeem certain outstanding shares of Common Stock ($11.8 million),
(ii) repay certain indebtedness and related interest ($13.5 million), (iii) pay
transaction costs ($3.1 million), (iv) reduce borrowings under the Company's
revolving credit facility and (v) for other general corporate purposes.
In conjunction with the 1996 Private Placement, Legg Mason received $1.6
million in cash fees and a warrant to purchase 747,096 shares of Common Stock at
an exercise price of $2.677 per share (the "Legg Mason Warrant"). This warrant
was valued for financial reporting purposes by an independent appraisal firm at
approximately $0.7 million. An amount equal to 49.4% of the value of the
warrant, determined on the basis of gross proceeds from the 1996 Private
Placement, was attributable to the placement of the Senior Subordinated Notes.
This amount was credited to additional paid-in capital and capitalized as
deferred financing costs in other assets, and was amortized over the term of the
Senior Subordinated Notes.
As discussed in Note 2--Initial Public Offering, the Company paid the
principal and accrued interest on its Senior Subordinated Notes and repurchased
in cash the Noteholder Warrant and two-thirds of the Legg Mason Warrant with a
portion of the net proceeds of the Offering. In addition, the Company issued
201,414 shares of Common Stock upon the cashless exercise of the remaining
one-third of the Legg Mason Warrant and also effected the Series B Conversion of
the stock issued to SKM.
4. SHORT-TERM BORROWINGS
THE FOOTHILL CREDIT FACILITY
The Company has a working capital revolving credit facility (the "Foothill
Credit Facility") with Foothill Capital Corporation ("Foothill Capital"). The
Foothill Credit Facility provides for up to $30 million in borrowings which
includes a sublimit of up to $20 million in letters of credit. The Foothill
Credit Facility expires in July 2000 and provides for one year automatic renewal
options. The Company had $1.1 million outstanding under the Foothill Credit
Facility as of January 31, 1998 and had no outstanding borrowings as of January
30, 1999. Letters of credit outstanding as of January 31, 1998 and January 30,
1999 were $5.7 million and $10.6 million, respectively. Availability as of
January 31, 1998 and January 30, 1999 was $15.8 million and $19.3 million,
respectively.
The availability of borrowings under the Foothill Credit Facility are
determined as an amount equal to the sum of (i) 90% of eligible accounts
receivable, (ii) 30% of the selling price of eligible inventory (not to exceed
65% of the cost of eligible inventory) and (iii) 30% of the retail selling price
of inventory to be acquired pursuant to the outstanding letters of credit not to
exceed the lower of (a) the face value of the outstanding letters of credit or
(b) 65% of the cost of inventory to be acquired
F-12
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SHORT-TERM BORROWINGS (CONTINUED)
pursuant to the outstanding letters of credit. The Company's obligations under
the Foothill Credit Facility are secured by a first priority security interest
on the Company's present and future assets.
The Foothill Credit Facility also contains certain financial covenants,
including, among others, the maintenance of minimum levels of tangible net
worth, working capital and current ratios and imposes certain limitations on the
Company's annual capital expenditures, as defined in the Foothill Credit
Facility, as well as a prohibition on the payment of dividends. As of January
30, 1999, the Company was in compliance with all of its covenants under the
Foothill Credit Facility. Noncompliance with these covenants could result in
additional fees or could affect the availability of the facility. To provide
greater financial flexibility, the Company has requested an increase in its
credit line under the Foothill Credit Facility and amendments to the financial
covenants contained in the Foothill Credit Facility.
Amounts outstanding under the Foothill Credit Facility bear interest at a
floating rate equal to the prime rate or, at the Company's option, the 30-day
LIBOR Rate plus a pre-determined spread. As of January 31, 1998 and January 30,
1999, the interest rate charged under the Foothill Credit Facility was 8.50% and
7.75%, respectively. In addition, the Company was also required to pay an
anniversary fee of $100,000 and $75,000 during fiscal 1997 and fiscal 1998,
respectively.
Borrowing activity under the Foothill Credit Facility was as follows
(dollars in thousands):
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
ENDED
------------------------
JANUARY 31, JANUARY 30,
1998 1999
----------- -----------
<S> <C> <C>
Weighted average balances outstanding............................... $ 5,266 $ 4,744
Weighted average interest rate...................................... 9.40% 7.50%
Maximum balance outstanding......................................... $ 16,440 $ 15,994
</TABLE>
5. ACCRUED EXPENSES, INTEREST AND OTHER CURRENT LIABILITIES
Accrued expenses, interest and other current liabilities is comprised of the
following (dollars in thousands):
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 30,
1998 1999
----------- -----------
<S> <C> <C>
Accrued salaries and benefits....................................... $ 2,034 $ 3,999
Accrued real estate expenses........................................ 1,317 1,845
Accrued professional fees........................................... 787 1,293
Customer liabilities................................................ 836 1,497
Income taxes payable................................................ 186 941
Accrued taxes other than income..................................... 358 793
Accrued capital expenditures........................................ 855 309
Other accrued expenses.............................................. 1,219 2,967
----------- -----------
Accrued expenses, interest and other current liabilities.......... $ 7,592 $ 13,644
----------- -----------
----------- -----------
</TABLE>
F-13
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Company leases all of its stores and distribution facilities, and
certain office equipment, store fixtures and automobiles, under leases expiring
at various dates through 2011. Certain leases include options to renew. The
leases require fixed minimum annual rental payments plus, under the terms of
certain leases, additional payments for taxes, other expenses and additional
rent based upon sales.
Rent expense is as follows (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Store and distribution facility rent:
Minimum rentals...................................... $ 11,221 $ 16,037 $ 23,022
Additional rent based upon sales..................... 195 242 351
----------- ----------- -----------
Total rent expense................................. $ 11,416 $ 16,279 $ 23,373
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Future minimum annual lease payments under the Company's operating leases
with initial or remaining terms of one year or more, at January 30, 1999, are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
Fiscal year--
1999.............................................................................. $ 31,457
2000.............................................................................. 32,612
2001.............................................................................. 30,150
2002.............................................................................. 29,717
2003.............................................................................. 28,051
Thereafter........................................................................ 115,352
----------
Total minimum lease payments...................................................... $ 267,339
----------
----------
</TABLE>
7. LITIGATION
STOCKHOLDER LITIGATION
On October 16, 1997, Stephen Brosious and Rudy Pallastrone, who allegedly
purchased shares of the Company's common stock in an initial public offering in
September 1997 (the "IPO"), filed a lawsuit against the Company, several of the
Company's directors and officers, and the underwriters of the IPO (the
"Defendants") in the United States District Court of the District of New Jersey
(the "Court"). The named plaintiffs purport to maintain a class action on behalf
of all persons, other than the Defendants, who purchased the Company's common
stock issued in connection with the IPO on or about September 19, 1997 through
October 13, 1997. The complaint alleges that the Defendants violated federal
securities laws by making materially false or misleading statements and/or
omissions in connection with the IPO. The plaintiffs seek monetary damages of an
unspecified amount, rescission or rescissory damages and fees and costs. Since
October 16, 1997, 15 additional putative class actions making substantially
similar allegations and seeking substantially similar relief have been filed
against some or all of the Defendants. On or about January 13, 1998, the 16
putative class actions were consolidated in the Court and on February 26, 1998,
the plaintiffs served and filed their amended
F-14
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LITIGATION (CONTINUED)
consolidated complaint. On April 16, 1998, the Defendants moved to dismiss the
complaint. On September 4, 1998, the Court entered an order granting the motion
to dismiss in part and denying in part. The Court also dismissed the case
against the underwriters without prejudice. On October 5, 1998, the plaintiffs
filed an amended complaint against the Defendants including the underwriters.
The Company filed its answer to the amended complaint on October 26, 1998. The
parties have commenced discovery.
On October 27, 1997, Bulldog Capital Management, L.P., a limited partnership
that serves as a general partner for a series of investment funds which
allegedly purchased shares of the Company's common stock issued in connection
with the IPO, also filed a lawsuit against the Company and several of the
Company's directors and officers in the Superior Court of New Jersey, Essex
County Division. The complaint also alleges that by making materially false or
misleading statements and/or omissions in connection with the IPO, the Company
and several of the Company's directors and officers violated provisions of
federal and state law. The plaintiff seeks monetary damages of an unspecified
amount, rescission or rescissory damages and fees and costs. This action and the
federal action described above have been coordinated for purposes of discovery.
The Company believes that the allegations made in the complaints described
above are untrue and totally without merit and intends to defend them
vigorously. The Company does not believe that any ultimate liability arising out
of the actions described above will have a material adverse effect on its
business; however the Company can give no assurance as to the ultimate
resolution of the proceedings or the amount to be paid, if any, in the
disposition of the actions.
OTHER LITIGATION
The Company is also involved in various legal proceedings arising in the
normal course of its business. In the opinion of management, any ultimate
liability arising out of such proceedings, will not have a material adverse
effect on the Company's financial position or results of operations.
8. INCOME TAXES
Components of the Company's provision (benefit) for income taxes consisted
of the following (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Current--
Federal.............................................. $ 244 $ 158 $ 799
State................................................ 100 332 1,600
Deferred--
Federal.............................................. 859 3,679 10,209
State................................................ 249 526 1,750
Valuation allowance.................................. (22,371) 0 0
----------- ----------- -----------
Provision (benefit) for income taxes................. $ (20,919) $ 4,695 $ 14,358
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-15
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The deferred portion of the tax provision for the fiscal year ended January
31, 1998 excludes (i) a tax benefit of $1.2 million recorded against the
extraordinary charge to earnings resulting from the write-off of deferred
financing costs and unamortized debt discount (see Note 2-Initial Public
Offering), and (ii) a tax benefit of $1.4 million resulting from the repurchase
and exercise of the Legg Mason Warrant recorded as paid-in capital.
A reconciliation between the calculated tax provision (benefit) on income
based on the statutory rates in effect and the effective tax rate follows
(dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Calculated income tax provision........................ $ 3,333 $ 4,088 $ 12,257
Reversal of valuation allowance........................ (21,042) 0 0
Utilization of operating loss carryforwards............ (3,540) 0 0
State income taxes, net of federal benefit............. 259 583 2,101
Nondeductible expenses................................. 24 30 (160)
Other.................................................. 47 (6) 160
----------- ----------- -----------
Tax provision (benefit) as shown on the statements of
income............................................... $ (20,919) $ 4,695 $ 14,358
----------- ----------- -----------
----------- ----------- -----------
</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.
Temporary differences and net operating loss carryforwards which give rise
to deferred tax assets and liabilities are as follows (dollars in thousands):
<TABLE>
<CAPTION>
JANUARY 31,
1998 JANUARY 30, 1999
--------------- -----------------
<S> <C> <C>
Current--
Uniform inventory capitalization......................... $ 247 $ 832
Inventory................................................ 166 941
Expenses not currently deductible........................ 360 638
Net operating loss carryforwards......................... 9,880 36
------- ------
Total current.......................................... $ 10,653 2,447
------- ------
Noncurrent--
Depreciation............................................. 1,496 2,424
Deferred rent............................................ 1,093 1,458
Net operating loss carryforwards......................... 5,230 0
Alternative minimum tax credit........................... 425 1,262
------- ------
Total noncurrent....................................... 8,244 $ 5,144
------- ------
Total deferred tax asset............................... $ 18,897 $ 7,591
------- ------
------- ------
</TABLE>
As a result of the Company's improved operating results during the second
half of fiscal 1996, the Company reversed its valuation allowance of $21.0
million, as it was deemed to be more likely than not
F-16
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
that the deferred tax assets would be utilized. Accordingly, the Company's net
income for fiscal 1997 and fiscal 1998 required the calculation of a tax
provision based on statutory rates in effect.
Until the NOLs are fully utilized or expire, the majority of the 1998 tax
provision will not be paid in cash, but will reduce the deferred tax asset on
the balance sheet. However, the Company expects to make cash tax payments of
approximately $2.3 million for its fiscal 1998 taxes related to payments of
federal Alternative Minimum Tax ("AMT"), state minimum taxes and state taxes
where the Company is not in an NOL status. The Company expects to utilize its
remaining NOL carryforwards during fiscal 1999. The amount and availability of
these NOLs are subject to review by the Internal Revenue Service.
9. STOCKHOLDERS' EQUITY
The Company's stockholders' equity is comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 30,
1998 1999
------------- -------------
<S> <C> <C>
Common stock:
Authorized number of shares, $0.10 per value................. 100,000,000 100,000,000
Issued and outstanding number of shares...................... 24,622,103 24,972,901
Preferred stock:
Authorized number of shares.................................. 1,000,000 1,000,000
Issued and outstanding number of shares...................... 0 0
</TABLE>
10. STOCK OPTION AND PURCHASE PLANS
STOCK OPTION PLANS
Effective February 1, 1997, the Company adopted the provisions of SFAS 123
in accounting for its stock option plans, which are described below.
Accordingly, no compensation expense has been recognized for stock-based
compensation, since the options granted were at prices that equaled or exceeded
their estimated fair market value at the date of grant. If compensation expense
for the Company's stock options issued in fiscal 1996, 1997 and 1998 had been
determined based on the fair value method of accounting, the Company's net
income would have been reduced to the pro forma amounts indicated below for the
three fiscal years in the period ended January 30, 1999:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
------------- ------------ -------------
<S> <C> <C> <C>
Net income--
As reported.................................... $ 30,441,000 $ 5,241,000 $ 20,662,000
Pro forma...................................... $ 30,210,000 $ 4,385,000 $ 19,042,000
Pro forma diluted net income per share--
As reported.................................... $ 0.22 $ 0.80
Pro forma...................................... $ 0.18 $ 0.73
</TABLE>
F-17
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
The fair value of issued stock options were estimated on the date of grant
using the Black-Scholes option pricing model, incorporating the following
assumptions:
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Dividend yield..................... 0% 0% 0%
Volatility factor.................. 0% 36.56% 45.00%
Weighted average risk-free interest
rate............................. 6.46% 6.02% 5.17%
Expected life of options........... 5 years 5 years 5 years
Weighted average fair value on
grant date....................... $ 0.74 per share $ 5.82 per share $ 3.52 per share
</TABLE>
On June 28, 1996, the Company approved the adoption of the 1996 Plan, which
authorized the granting of incentive stock options and nonqualified stock
options to key employees of the Company. The 1996 Plan provided for the granting
of options with respect to 1,743,240 shares of Common Stock. On September 17,
1997, the Company approved adoption of the 1997 Plan, which also authorizes the
granting of incentive stock options and nonqualified stock options to key
employees of the Company with respect to an additional 1,000,000 shares of
Common Stock. As of January 30, 1999, there were no shares available for grant
under the 1996 Plan and 215,240 shares available for grant under the 1997 Plan.
Both the 1996 Plan and the 1997 Plan are administered by the Board of
Directors. Options granted under the 1996 Plan and the 1997 Plan have exercise
prices established by the Board of Directors provided that the exercise price of
incentive stock options may not be less than the fair market value of the
underlying shares at the date of grant. The 1996 Plan and the 1997 Plan also
contain certain provisions that require the exercise price of incentive stock
options granted to stockholders owning greater than 10% of the Company be at
least 110% of the fair market value of the underlying shares.
The Company issued options to key employees in fiscal 1996 in conjunction
with the 1996 Private Placement and in fiscal 1997 in conjunction with the
Offering. During fiscal 1998, the 931,500 options granted were comprised of (i)
363,700 options that were canceled and re-granted on March 26, 1998, (ii)
290,000 options that were granted to officers hired during fiscal 1998, (iii)
135,000 options that were granted to existing officers and (iv) 142,800 options
that were granted to newly hired or existing key employees. The Board of
Directors authorized the cancellation and re-granting of certain options, which
were originally granted in conjunction with the Offering under the 1996 Plan and
the 1997 Plan, from an exercise price of $14.00 to the average market price on
March 27, 1998 of $8.70 per share. The cancellation and re-granting
re-established these options as an incentive to improve the overall performance
of the Company. Options granted to officers were not repriced.
The options granted in conjunction with the 1996 Private Placement vest at
20% six months from the date of grant and 20% on each of the first, second,
third and fourth anniversaries of the date of the grant. The options granted in
conjunction with the Offering vest 20% on December 31, 1997 and 20% on each of
the first, second, third and fourth anniversaries of the date of the grant. The
options canceled and re-granted during fiscal 1998 will vest in accordance with
their original vesting schedule. Unless otherwise specified by the Board of
Directors, options granted during fiscal 1998 vest at 20% on
F-18
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
the anniversaries of the Offering and 20% on the first, second, third and fourth
anniversaries of the Offering.
Changes in common shares under option for the three fiscal years in the
period ended January 31, 1999 are summarized below:
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
------------------------------ ---------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ------------------- --------- ----------------- --------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year.................. 0 -- 1,444,080 $ 2.68 1,981,120 $ 5.82
Granted............................ 1,444,080 $ 2.68 551,260 14.25 931,500(1) 9.66
Exercised.......................... 0 -- 0 -- (339,294) 3.41
Canceled........................... 0 -- (14,220) 14.00 (387,620 (1) 13.73
--------- ----- --------- ------ --------- -----
End of year........................ 1,444,080 $ 2.68 1,981,120 $ 5.82 2,185,706 $ 6.43
--------- ----- --------- ------ --------- -----
--------- ----- --------- ------ --------- -----
Exercisable at end of year......... 288,816 $ 2.68 684,576 $ 4.49 793,378 $ 4.85
</TABLE>
- ------------------------------
(1) Includes 363,700 options that were canceled and re-granted on March 26,
1998.
The following table summarizes information regarding options outstanding at
January 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- -------------------------------------------------------------------------------- OPTIONS EXERCISABLE
OUTSTANDING AT ------------------------------------
EXERCISE JANUARY 30, WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
PRICES(1) 1999 CONTRACTUAL LIFE EXERCISE PRICE JANUARY 30, 1999 EXERCISE PRICE
- ----------- --------------- ------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 2.68 1,145,916 7.4 $ 2.68 568,284 $ 2.68
$7.31-10.69 806,530 9.3 8.71 157,230 8.44
$14.00-19.06 183,660 8.7 15.12 67,864 14.82
$23.06-27.13 49,600 9.9 24.31 0 --
--
--------------- ------ ------- ------
$2.68-27.13 2,185,706 8.3 $ 6.45 793,378 $ 4.85
</TABLE>
- ------------------------------
(1) Exercise prices reflect the actual range of exercise prices at 150%
increments.
STOCK PURCHASE PLANS
On September 17, 1997, the Company approved the adoption of the ESPP, which
authorized up to 360,000 shares of Common Stock for employee purchase through
payroll deductions at 85% of fair market value. All employees of the Company,
who have completed at least 90 days of employment and attained 21 years of age,
are eligible to participate, except for employees who own Common Stock or
options on such common stock which represents 5% or more of the Company. During
fiscal 1997 and fiscal 1998, there were 0 shares and 11,504 shares issued under
the ESPP.
11. SAVINGS AND INVESTMENT PLAN
The Company has adopted The Children's Place 401(k) Savings and Investment
Plan (the "401(k) Plan"), which is intended to qualify under Section 401(k) of
the Internal Revenue Code of 1986, as amended. The 401(k) Plan is a defined
contribution plan established to provide retirement benefits for all employees
who have completed one year of service with the Company and attained 21 years of
age.
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
F-19
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SAVINGS AND INVESTMENT PLAN (CONTINUED)
Company did not exercise its discretionary contribution option during calendar
1996. In January 1997, the 401(k) Plan was amended whereby the Company will
match the lesser of 50% of the participant's contribution or 2.5% of the
participant's compensation. During fiscal 1997 and fiscal 1998, the Company's
matching contributions to the 401(k) Plan were approximately $247,000 and
$300,000, respectively.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the quarterly financial data for the periods
indicated (dollars in thousands, except for per share amounts):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31, 1998
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales............................................................. $ 39,203 $ 33,534 $ 54,489 $ 65,331
Gross profit.......................................................... 13,944 9,785 21,408 23,864
Net income (loss)..................................................... 1,011 (1,744) 1,754(1) 4,220
Basic net income (loss) per common share.............................. $ 0.05 $ (0.09) $ 0.08 $ 0.17
Diluted net income (loss) per common share............................ $ 0.04 $ (0.07) $ 0.07 $ 0.17
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 30, 1999
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales............................................................. $ 55,999 $ 48,014 $ 82,496 $ 97,344
Gross profit.......................................................... 21,915 15,489 36,126 43,874
Net income (loss)..................................................... 2,742 (511) 8,485 9,946
Basic net income (loss) per common share.............................. $ 0.11 $ (0.02) $ 0.34 $ 0.40
Diluted net income (loss) per common share............................ $ 0.11 $ (0.02) $ 0.33 $ 0.38
</TABLE>
- ------------------------
(1) Includes an extraordinary loss on the extinguishment of debt of $1,743. (see
Note 2--Initial Public Offering).
13. RELATED PARTY TRANSACTIONS
SKM FINANCIAL ADVISORY SERVICES
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. This management agreement remains in effect until SKM or any
of its affiliates' total ownership of the Company's Common Stock is less than
10% on a fully diluted basis. Pursuant to the management agreement, the Company
incurred fees and expenses of approximately $93,000, $153,000 and $151,000
during fiscal 1996, fiscal 1997 and fiscal 1998, respectively.
F-20
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RELATED PARTY TRANSACTIONS (CONTINUED)
STOCKHOLDERS AGREEMENT
The Company and certain of its stockholders, who currently own in the
aggregate a majority of the Common Stock, are parties to a Stockholders
Agreement (the "Stockholders Agreement"). The Stockholders Agreement places
certain limitations upon the transfer, in privately negotiated transactions, of
shares of Common Stock beneficially owned by Ezra Dabah, Stanley Silver and the
SK Funds. In addition, the Stockholders Agreement provides that (1) so long as
Ezra Dabah, together with members of his family, beneficially owns shares
representing at least 25% of the shares of Common Stock owned by such parties on
the date of the Stockholders Agreement, the stockholders party to the
Stockholders Agreement will be obligated to vote all shares as to which they
have voting rights in a manner such that the Board of Directors will at all
times include three directors nominated by Ezra Dabah and (2) so long as the SK
Funds beneficially own shares representing at least 25% of the shares of Common
Stock owned by such parties on the date of the Stockholders Agreement, the
stockholders party to the Stockholders Agreement will be obligated to vote all
shares as to which they have voting rights in a manner such that the Board of
Directors will at all times include two directors nominated by the SK Funds.
Should the number of directors comprising the Board of Directors be increased,
nominees for the remaining director positions will be designated by the Board of
Directors.
The Stockholders Agreement provides that the Company will not, without the
affirmative vote of at least one director nominated by the SK Funds, engage in
specified types of transactions with certain of our affiliates (not including
the SK Funds), take action to amend the ByLaws or Certificate of Incorporation
or increase or decrease the size of the entire Board of Directors. The
Stockholders Agreement also provides that certain specified types of corporate
transactions and major corporate actions will require the approval of at least
two-thirds of the members of the Board of Directors.
Under the terms of the Stockholders Agreement, the rights of any party
thereunder will terminate at the time that such party's Common Stock constitutes
less than 25% of the shares of Common Stock owned by such party on the date of
the Stockholders Agreement. All the provisions of the Stockholders Agreement
will terminate when no party to the Stockholders Agreement beneficially owns
shares representing at least 25% of the outstanding Common Stock owned by such
party on the date of the Stockholders Agreement.
MERCHANDISE FOR RE-SALE
During fiscal 1998, the Company purchased approximately $290,000 in bath
products from HBA Technologies, LLC. Haim Dabah, Ezra Dabah's brother, is the
majority owner of HBA Technologies, LLC.
During fiscal 1999, the Company placed orders for approximately $60,000 in
footwear from Nina Footwear Corporation. Stanley Silverstein, a member of the
Company's Board of Directors and Ezra Dabah's father-in-law, owns Nina Footwear
Corporation with his brother.
In the opinion of the Company, the transactions with HBA Technologies, LLC
and Nina Footwear Corporation were on terms no less favorable than could have
been obtained from an unaffiliated third party.
F-21
<PAGE>
[The inside back cover page of the Prospectus consists of a gatefold that shows
photographs of children wearing The Children's Place apparel and accessories,
interspersed with the Company's logo.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 1
Risk Factors.................................... 5
Use of Proceeds................................. 12
Price Range of Common Stock..................... 12
Dividend Policy................................. 12
Selected Financial and Operating Data........... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 15
Business........................................ 23
Certain Legal Proceedings....................... 34
Management...................................... 35
Principal and Selling Stockholders.............. 38
Shares Eligible for Future Sale................. 41
Plan of Distribution............................ 42
Legal Matters................................... 44
Experts......................................... 44
Where You Can Find More Information............. 44
Index to Financial Statements................... F-1
</TABLE>
4,000,000 SHARES
[LOGO]
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
BT ALEX. BROWN
MERRILL LYNCH & CO.
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY SECURITIES LLC
THOMAS WEISEL PARTNERS LLC
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the offering, all of which will be
borne by the selling stockholders, are as follows:
<TABLE>
<S> <C>
SEC Registration Fee........................................... $39,361.46
NASD Filing Fee................................................ 14,658.80
Printing Expenses.............................................. 200,000.00
Legal Fees and Expenses........................................ 250,000.00
Accounting Fees and Expenses................................... 75,000.00
Transfer Agent Fee............................................. 5,000.00
Miscellaneous.................................................. 15,979.74
----------
Total...................................................... $600,000.00
----------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Certificate of Incorporation limits the liability of directors (in their
capacity as directors but not in their capacity as officers) to The Children's
Place or our stockholders to the fullest extent permitted by the DGCL.
Specifically, no director of The Children's Place will be personally liable for
monetary damages for breach of the director's fiduciary duty as a director,
except for liability: (i) for any breach of the director's duty of loyalty to
the Company or our stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the DGCL, which relates to unlawful payments of dividends or
unlawful stock repurchases or redemptions, or any successor provision thereto;
or (iv) for any transaction from which the director derived an improper personal
benefit. The inclusion of this provision in the Certificate of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefited the Company and our
stockholders.
Under the Certificate of Incorporation, The Children's Place will indemnify
those persons whom we shall have the power to indemnify to the fullest extent
permitted by Section 145 of the DGCL, which may include liabilities under the
Securities Act of 1933. Accordingly, in accordance with Section 145 of the DGCL,
The Children's Place will indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than a "derivative" action by or in the right of the Company) by reason
of the fact that such person is or was a director, officer, employee or agent of
The Children's Place, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement in connection with such action, suit or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe was unlawful. A similar standard of care is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such an action and then, where the person is adjudged
to be liable to the Company, only if and to the extent that the Court of
Chancery of the State of Delaware or the court in which such action was brought
determines that such person is fairly and reasonably entitled to such indemnity
and then only for such expenses as the court deems proper.
The Certificate of Incorporation provides that The Children's Place will
advance expenses to the fullest extent permitted by Section 145 of the DGCL.
Accordingly, the Company, in accordance
II-1
<PAGE>
therewith, will pay for the expenses incurred by an indemnified person in
defending the proceedings specified in the preceding paragraph in advance of
their final disposition, provided that, if the DGCL so requires, such person
agrees to reimburse The Children's Place if it is ultimately determined that
such person is not entitled to indemnification. In addition, pursuant to the
DGCL we may purchase and maintain insurance on behalf of any person who is or
was a director, employee or agent of the Company against any liability asserted
against and incurred by such person in such capacity, or arising out of the
person's status as such whether or not we would have the power or obligation to
indemnify such person against such liability under the provisions of DGCL. We
maintain insurance for the benefit of the Company's officers and directors
insuring such persons against certain liabilities, including liabilities under
the securities laws.
The Children's Place has entered into agreements to indemnify our directors
which are intended to provide the maximum indemnification permitted by Delaware
law. These agreements, among other things, indemnify each of our outside
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 Children's Place, on account of
such director's service as a director of The Children's Place.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) List of Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.*
5.1 Opinion of Stroock & Stroock & Lavan LLP, counsel for Registrant.*
23.1 Consent of Stroock & Stroock & Lavan LLP (included in Exhibit 5.1 hereof).*
23.2 Consent of Independent Public Accountants.**
24.1 Power of Attorney (included on signature page hereto).**
</TABLE>
- ------------------------
* Filed herewith.
** Previously filed.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act of 1933 shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
II-2
<PAGE>
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
township of West Caldwell, State of New Jersey, on March 29, 1999.
<TABLE>
<S> <C> <C>
THE CHILDREN'S PLACE RETAIL STORES, INC.
(REGISTRANT)
By: /s/ STEVEN BALASIANO
-----------------------------------------
Name: Steven Balasiano
Title: Vice President and
General Counsel
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on March 29, 1999, by the following
persons in the capacities indicated.
<TABLE>
<C> <S> <C>
Chairman of the Board of
* Directors and Chief
- ------------------------------ Executive Officer March 29, 1999
Ezra Dabah (Principal Executive
Officer)
*
- ------------------------------ President, Chief Operating March 29, 1999
Stanley B. Silver Officer and Director
Vice President and Chief
* Financial Officer
- ------------------------------ (Principal Financial and March 29, 1999
Seth L. Udasin Accounting Officer)
- ------------------------------ Director March 29, 1999
Stanley Silverstein
*
- ------------------------------ Director March 29, 1999
John Megrue
*
- ------------------------------ Director March 29, 1999
David J. Oddi
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ STEVEN BALASIANO
-------------------------
Steven Balasiano, AS
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
1.1 Form of Underwriting Agreement.*
5.1 Opinion of Stroock & Stroock & Lavan LLP, counsel for Registrant.*
23.1 Consent of Stroock & Stroock & Lavan LLP (included in Exhibit 5.1 hereof).*
23.2 Consent of Independent Public Accountants.**
24.1 Power of Attorney (included on signature page hereto).**
</TABLE>
- ------------------------
* Filed herewith.
** Previously filed.
<PAGE>
Exhibit 1.1
FORM OF UNDERWRITING AGREEMENT
4,000,000 Shares
THE CHILDREN'S PLACE RETAIL STORES, INC.
Common Stock
($.10 Par Value)
_______________, 1999
BT Alex. Brown Incorporated
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Hambrecht & Quist LLC
NationsBanc Montgomery Securities LLC
Thomas Weisel Partners LLC
As Representatives of the
Several Underwriters
c/o BT Alex. Brown Incorporated
One South Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
Certain shareholders (the "Selling Shareholders") of The Children's
Place Retail Stores, Inc., a Delaware corporation (the "Company"), propose to
sell to the several underwriters (the "Underwriters") named in Schedule I hereto
for whom you are acting as representatives (the "Representatives") an aggregate
of 4,000,000 shares of the Company's Common Stock, $.10 par value (the "Firm
Shares"). The respective amounts of the Firm Shares to be so purchased by the
several Underwriters are set forth opposite their names in Schedule I hereto,
and the respective amounts to be sold by the Selling Shareholders are set forth
opposite their names in Schedule II hereto. The Selling Shareholders also
propose to sell at the Underwriters' option an aggregate of up to 600,000
additional shares of the Company's Common Stock (the "Option Shares") as set
forth below.
As the Representatives, you have advised the Company and the Selling
Shareholders (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the
<PAGE>
numbers of Firm Shares set forth opposite their respective names in Schedule
I, plus their pro rata portion of the Option Shares if you elect to exercise the
over-allotment option in whole or in part for the accounts of the several
Underwriters. The Firm Shares and the Option Shares (to the extent the
aforementioned option is exercised) are herein collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SHAREHOLDERS.
(a) The Company represents and warrants to each of the
Underwriters as follows:
(i) A registration statement on Form S-3 (File No. 333-72897)
with respect to the Shares has been prepared by the Company in conformity with
the requirements of the Securities Act of 1933, as amended (the "Act"), and the
Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission. The Company has complied with the conditions for the use of Form
S-3. Copies of such registration statement, including any amendments thereto,
the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by the
Company to you. Such registration statement, as amended, together with any
registration statement filed by the Company pursuant to Rule 462 (b) of the Act,
herein referred to as the "Registration Statement," which shall be deemed to
include all information omitted therefrom in reliance upon Rule 430A and
contained in the Prospectus referred to below, has become effective under the
Act and no post-effective amendment to the Registration Statement has been filed
as of the date of this Agreement. "Prospectus" means the form of prospectus
first filed with the Commission pursuant to Rule 424(b). Each preliminary
prospectus included in the Registration Statement prior to the time it becomes
effective is herein referred to as a "Preliminary Prospectus." Any reference
herein to the Registration Statement, any Preliminary Prospectus or to the
Prospectus shall be deemed to refer to and include any documents incorporated by
reference therein, and, in the case of any reference herein to any Prospectus,
also shall be deemed to include any documents incorporated by reference therein,
and any supplements or amendments thereto, filed with the Commission after the
date of filing of the Prospectus under Rules 424(b) or 430A, and prior to the
termination of the offering of the Shares by the Underwriters.
(ii) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement. Each of the
subsidiaries of the Company as listed in Exhibit A hereto (collectively, the
"Subsidiaries") has been duly organized and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its incorporation, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration
2
<PAGE>
Statement. The Subsidiaries are the only subsidiaries, direct or indirect, of
the Company. The Company and each of the Subsidiaries are duly qualified to
transact business in all jurisdictions in which the conduct of their business
requires such qualification, except where failure to be so qualified would not
have a material adverse effect on the Company and its Subsidiaries taken as a
whole. The outstanding shares of capital stock of each of the Subsidiaries have
been duly authorized and validly issued, are fully paid and non-assessable and
to the extent shown in Exhibit A hereto are owned by the Company or another
Subsidiary free and clear of all liens, encumbrances and equities and claims
except with respect to, in all cases, liens in favor of the Company's senior
lender; and no options, warrants or other rights to purchase, agreements or
other obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in the Subsidiaries are
outstanding.
(iii) The outstanding shares of Common Stock of the Company,
including all shares to be sold by the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable; and no
preemptive rights of stockholders exist with respect to any of the Shares or the
issue and sale thereof. Neither the filing of the Registration Statement nor the
offering or sale of the Shares as contemplated by this Agreement gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock.
(iv) The capitalization of the Company is as set forth in the
Company's financial statements. All of the Shares conform in all material
respects to the description thereof contained in the Registration Statement. The
form of certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation. The Shares have been authorized for
quotation on the Nasdaq National Market, subject to notice of issuance.
(v) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering of the
Shares nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be stated therein by, and will
conform in all material respects to the requirements of the Act and the Rules
and Regulations. The documents incorporated by reference in the Prospectus, at
the time filed with the Commission, conformed, in all material respects to the
requirements of the Securities Exchange Act of 1934 or the Act, as applicable,
and the rules and regulations of the Commission thereunder. The Registration
Statement and any amendment thereto do not contain, and will not contain, any
untrue statement of a material fact and do not omit, and will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus and any amendments and
supplements thereto do not contain, and will not contain, any untrue statement
of material fact; and do not omit, and will not omit, to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon, and in
conformity with, written information furnished to the Company by or on behalf of
any Underwriter through the Representatives, specifically for use in
3
<PAGE>
the preparation thereof.
(vi) The consolidated financial statements of the Company and
the Subsidiaries, together with related notes and schedules as set forth or
incorporated by reference in the Registration Statement, present fairly the
financial position and the results of operations and cash flows of the Company
and the consolidated Subsidiaries, at the indicated dates and for the indicated
periods. Such financial statements and related schedules have been prepared in
accordance with generally accepted principles of accounting, consistently
applied throughout the periods involved, except as disclosed therein. The
summary financial and statistical data included or incorporated by reference in
the Registration Statement presents fairly the information shown therein and
such financial data has been compiled on a basis consistent with the financial
statements presented therein.
(vii) Arthur Andersen LLP, who have certified certain of the
financial statements filed with the Commission as part of, or incorporated by
reference in, the Registration Statement, are independent public accountants as
required by the Act and the Rules and Regulations.
(viii) There is no action, suit, claim or proceeding pending
or, to the knowledge of the Company, threatened against the Company or any of
the Subsidiaries before any court or administrative agency or otherwise which if
determined adversely to the Company or any of its Subsidiaries would be
reasonably likely to result in any material adverse change in the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and of the Subsidiaries
taken as a whole or to prevent the consummation of the transactions contemplated
hereby (collectively, a"Material Adverse Change"), except as set forth in the
Registration Statement.
(ix) The Company and the Subsidiaries have good and marketable
title to all of the properties and assets reflected in the financial statements
(or as described in the Registration Statement) hereinabove described, subject
to no lien, mortgage, pledge, charge or encumbrance of any kind except those
reflected in such financial statements (or as described in the Registration
Statement) or which are not material. Subject to such exceptions as are not
material, the Company and the Subsidiaries do not own any real property. The
Company and the Subsidiaries occupy their leased properties under valid and
binding leases conforming in all material respects to the description thereof
set forth in the Registration Statement.
(x) The Company and the Subsidiaries have filed all Federal,
State, local and foreign tax returns which have been required to be filed except
where failure to do so would not cause a Material Adverse Change and have paid
all taxes indicated by said returns and all assessments received by them or any
of them to the extent that such taxes have become due and are not being
contested in good faith and for which an adequate reserve for accrual has been
established in accordance with generally accepted accounting principles. All tax
liabilities have been adequately provided for in the financial statements of the
Company, and the Company does not know of any actual or proposed additional
material tax assessments.
4
<PAGE>
(xi) Since the respective dates as of which information is
given in the Registration Statement, as it may be amended or supplemented, there
has not been any Material Adverse Change, whether or not occurring in the
ordinary course of business, and there has not been any material transaction
entered into by the Company or the Subsidiaries, other than transactions in the
ordinary course of business and changes and transactions described in the
Registration Statement, as it may be amended or supplemented. The Company and
the Subsidiaries have no material contingent obligations which are not disclosed
in the Registration Statement.
(xii) Neither the Company nor any of the Subsidiaries is or
with the giving of notice or lapse of time or both, will be, in violation of or
in default under its Charter or By-Laws or under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or by which
it, or any of its properties, is bound and which default would not result in a
Material Adverse Change. The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated and the fulfillment of the
terms hereof will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust or other agreement or instrument to which the Company or any Subsidiary is
a party, or of the Charter or By-Laws of the Company or any order, rule or
regulation applicable to the Company or any Subsidiary of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction.
(xiii) Each approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative or
other governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
the National Association of Securities Dealers, Inc. (the "NASD") or such
additional steps as may be necessary to qualify the Shares for public offering
by the Underwriters under state securities or Blue Sky laws) has been obtained
or made and is in full force and effect.
(xiv) The Company and each of the Subsidiaries holds all
material licenses, certificates and permits from governmental authorities which
are necessary to the conduct of their businesses.
(xv) Neither the Company, nor to the Company's knowledge, any
of its affiliates, has taken or will take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or resale of the
Shares. The Company acknowledges that the Underwriters may engage in passive
market making transactions in the Shares on The Nasdaq National Market in
accordance with Rule 10b-6A under the Exchange Act.
(xvi) Neither the Company nor any Subsidiary is an "investment
company" within the meaning of such term under the Investment Company Act of
1940, as amended, (the"1940 Act") and the rules and regulations of the
Commission thereunder.
5
<PAGE>
(xvii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xviii) The Company and each of its Subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as the Company
reasonably considers adequate for the conduct of their respective businesses and
the value of their respective properties.
(xix) The Company is in compliance in all material respects
with all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for
which the Company would have any liability; the Company has not incurred and
does not expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or
4971 of the Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each "pension plan"
for which the Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material respects and
nothing has occurred, whether by action or by failure to act, which would cause
the loss of such qualification.
(xx) To the Company's knowledge, there are no affiliations or
associations between any member of the NASD and any of the Company's officers,
directors or 5% or greater securityholders, except as set forth in the
Registration Statement.
(xxi) There are no business relationships or related-party
transactions involving the Company or any other person required to be described
in the Prospectus which have not been described as required.
(xxii) Except as would not, individually or in the aggregate,
result in a Material Adverse Change (i) the Company is not in violation of any
federal, state, local or foreign law or regulation relating to pollution or
protection of human health or the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata) or
wildlife, including without limitation, laws and regulations relating to
emissions, discharges, releases or threatened releases of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum and
petroleum products (collectively,"Materials of Environmental Concern"), or
otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Materials of
Environment
6
<PAGE>
Concern (collectively,"Environmental Laws"), which violation includes, but is
not limited to, noncompliance with any permits or other governmental
authorizations required for the operation of the business of the Company
under applicable Environmental Laws, or noncompliance with the terms and
conditions thereof, nor has the Company received any written communication,
whether from a governmental authority, citizens group, employee or otherwise,
that alleges that the Company is in violation of any Environmental Law; (ii)
there is no claim, action or cause of action filed with a court or
governmental authority, no investigation with respect to which the Company
has received written notice, and no written notice by any person or entity
alleging potential liability for investigatory costs, cleanup costs,
governmental responses costs, natural resources damages, property damages,
personal injuries, attorneys fees or penalties arising out of, based on or
resulting from the presence, or release into the environment, of any Material
of Environmental Concern at any location owned, leased or operated by the
Company, now or in the past (collectively,"Environmental Claims"), pending
or, to the best of the Company s knowledge, threatened against the Company or
any person or entity whose liability for any Environmental Claim the Company
has retained or assumed either contractually or by operation of law; and
(iii) to the best of the Company s knowledge, there are no past or present
actions, activities, circumstances, conditions, events or incidents,
including, without limitation, the release, emission, discharge, presence or
disposal of any Material of Environmental Concern, that reasonably could
result in a violation of any Environmental Law or form the basis of a
potential Environmental Claim against the Company or against any person or
entity whose liability for any Environmental Claim the Company has retained
or assumed either contractually or by operation of law.
(xxiii) The Company owns or possesses sufficient trademarks,
trade names, patent rights, copyrights, licenses, approvals, trade secrets and
other similar rights (collectively,"Intellectual Property Rights") reasonably
necessary to conduct its business as now conducted; and the expected expiration
of any of such Intellectual Property Rights would not result in a Material
Adverse Change. The Company has not received any notice of infringement or
conflict with asserted Intellectual Property Rights of others, which
infringement or conflict, if the subject of an unfavorable decision, would
result in a Material Adverse Change.
(b) Each of the Selling Shareholders severally represents and
warrants to each of the Underwriters as follows:
(i) Such Selling Shareholder now has and at the Closing Date
and the Option Closing Date, as the case may be (as such dates are hereinafter
defined) will have good and valid title to the Firm Shares and the Option Shares
to be sold by such Selling Shareholder, free and clear of any liens,
encumbrances and claims, and has the requisite right, power and authority to
effect the sale and delivery of such Firm Shares and Option Shares in accordance
with this Agreement; and upon the delivery of, against payment for, such Firm
Shares and Option Shares pursuant to this Agreement, the Underwriters will
acquire good and valid title thereto, free and clear of any liens, encumbrances,
equities and claims.
(ii) Such Selling Shareholder has the requisite right, power
and authority to execute and deliver this Agreement, the power of attorney
(the"Power of Attorney"),
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appointing certain individuals named therein as such Selling Shareholder's
attorneys-in-fact (each, an"Attorney-in-Fact") to the extent set forth therein,
relating to the transactions contemplated hereby and by the Prospectus, and the
Custodian Agreement referred to below and to perform its obligations under such
instruments. The execution and delivery of this Agreement and the consummation
by such Selling Shareholder of the transactions herein contemplated and the
fulfillment by such Selling Shareholder of the terms hereof will not require any
consent, approval, authorization, or other order of any court, regulatory body,
administrative agency or other governmental body (except as may be required
under the Act, state securities laws or Blue Sky laws) and will not result in a
breach of any of the terms and provisions of, or constitute a default under,
organizational documents of such Selling Shareholder, if not an individual, or
any indenture, mortgage, deed of trust or other agreement or instrument to which
such Selling Shareholder is a party, or of any order, rule or regulation
applicable to such Selling Shareholder of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
(iii) Such Selling Shareholder has not taken and will not
take, directly or indirectly, any action designed to, or which has constituted,
or which might reasonably be expected to cause or result in the stabilization or
manipulation of the price of the Common Stock of the Company and, other than as
permitted by the Act, the Selling Shareholder will not distribute any prospectus
or other offering material in connection with the offering of the Shares.
(iv) Such Selling Shareholder does not know that the
Registration Statement or Prospectus includes any untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
(a) On the basis of the representations, warranties and
covenants herein contained, and subject to the conditions herein set forth, the
Selling Shareholders agree to sell to the Underwriters and each Underwriter
agrees, severally and not jointly, to purchase, at a price of $_____ net price
per share, the number of Firm Shares set forth opposite the name of each
Underwriter in Schedule I hereof, subject to adjustments in accordance with
Section 9 hereof. The number of Firm Shares to be purchased by each Underwriter
from each Selling Shareholders shall be as nearly as practicable in the same
proportion to the total number of Firm Shares being sold by each Selling
Shareholder as the number of Firm Shares being purchased by each Underwriter
bears to the total number of Firm Shares to be sold hereunder. The obligations
of each of the Selling Shareholders shall be several and not joint.
(b) Certificates in negotiable form for the total number of
the Shares to be sold hereunder by the Selling Shareholders have been placed in
custody with American Stock Transfer & Trust Company, as custodian
(the"Custodian") pursuant to a custodian agreement (the"Custodian Agreement")
executed by each Selling Shareholder for delivery of all Firm Shares and any
Option Shares to be sold hereunder by the Selling Shareholders. Each of the
Selling Shareholders specifically agrees that the Firm Shares and any Option
Shares represented
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by the certificates held in custody for the Selling Shareholders under the
Custodian Agreement are subject to the interests of the Underwriters hereunder,
that the arrangements made by the Selling Shareholders for such custody are to
that extent irrevocable, and that the obligations of the Selling Shareholders
hereunder shall not be terminable by any act or deed of the Selling Shareholders
(or by any other person, firm or corporation including the Company, the
Custodian or the Underwriters) or by operation of law (including the death of an
individual Selling Shareholder or the dissolution of a corporate Selling
Shareholder) or by the occurrence of any other event or events, except as set
forth in the Custodian Agreement. If any such event should occur prior to the
delivery to the Underwriters of the Firm Shares or the Option Shares hereunder,
certificates for the Firm Shares or the Options Shares, as the case may be,
shall be delivered by the Custodian in accordance with the terms and conditions
of this Agreement as if such event has not occurred. The Custodian is authorized
to receive and acknowledge receipt of the proceeds of sale of the Shares held by
it against delivery of such Shares.
(c) Payment for the Firm Shares to be sold hereunder is to be
made in Federal (same day) funds to an account designated by the Custodian for
the shares to be sold by the Selling Shareholders, in each case against delivery
of certificates therefor to the Representatives for the several accounts of the
Underwriters. Such payment and delivery are to be made through the facilities of
the Depository Trust Company at 10:00 a.m., New York time, on the third business
day after the date of this Agreement or at such other time and date not later
than five business days thereafter as you, the Company and the Selling
Shareholders shall agree upon, such time and date being herein referred to as
the "Closing Date." (As used herein, "business day" means a day on which the New
York Stock Exchange is open for trading and on which banks in New York are open
for business and not permitted by law or executive order to be closed.)
(d) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth the Selling Shareholders hereby grant an option to the several
Underwriters to purchase the Option Shares at the price per share as set forth
in the first paragraph of this Section 2. The maximum number of Option Shares to
be sold by the Selling Shareholders is set forth opposite their respective names
on Schedule III hereto. The option granted hereby may be exercised in whole or
in part by giving written notice (i) at any time before the Closing Date and
(ii) only once thereafter within 30 days after the date of this Agreement, by
you, as Representatives of the several Underwriters, to the Company, the
Attorney-in-Fact, and the Custodian setting forth the number of Option Shares as
to which the several Underwriters are exercising the option, the names and
denominations in which the Option Shares are to be registered and the time and
date at which such certificates are to be delivered. If the option granted
hereby is exercised in part, the respective number of Option Shares to be sold
by each of the Selling Shareholders listed in Schedule III hereto shall be
determined on a pro rata basis in accordance with the percentages set forth
opposite their names on Schedule II hereto, adjusted by you in such manner as to
avoid fractional shares. The time and date at which certificates for Option
Shares are to be delivered shall be determined by the Representatives but shall
not be earlier than three nor later than 10 full business days after the
exercise of such option, nor in any event prior to the Closing Date (such time
and date being herein referred to as the "Option Closing Date"). If the date of
exercise of the option is three or more days before the
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Closing Date, the notice of exercise shall set the Closing Date as the Option
Closing Date. The number of Option Shares to be purchased by each Underwriter
shall be in the same proportion to the total number of Option Shares being
purchased as the number of Firm Shares being purchased by such Underwriter bears
to the total number of Firm Shares, adjusted by you in such manner as to avoid
fractional shares. The option with respect to the Option Shares granted
hereunder may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters. You, as Representatives of the several Underwriters,
may cancel such option at any time prior to its expiration by giving written
notice of such cancellation to the Company and the Attorney-in-Fact. To the
extent, if any, that the option is exercised, payment for the Option Shares
shall be made on the Option Closing Date in Federal (same day) funds drawn to
the order of "American Stock Transfer & Trust Company, AS CUSTODIAN" for the
Option Shares to be sold by the Selling Shareholders against delivery of
certificates therefor through the facilities of the Depository Trust Company,
New York, New York.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a
public offering of the Firm Shares as soon as the Representatives deem it
advisable to do so. The Firm Shares are to be initially offered to the public at
the initial public offering price set forth in the Prospectus. The
Representatives may from time to time thereafter change the public offering
price and other selling terms. To the extent, if at all, that any Option Shares
are purchased pursuant to Section 2 hereof, the Underwriters will offer them to
the public on the foregoing terms.
It is further understood that you will act as the
Representatives for the Underwriters in the offering and sale of the Shares in
accordance with a Master Agreement Among Underwriters entered into by you and
the several other Underwriters.
4. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDERS.
(a) The Company covenants and agrees with the several
Underwriters that:
(i) The Company will (A) prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form
approved by the Representatives containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A of
the Rules and Regulations, and (B) not file any amendment to the Registration
Statement or supplement to the Prospectus or document incorporated by reference
therein of which the Representatives shall not previously have been advised and
furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Rules and Regulations
and (C) file on a timely basis all reports and any definitive proxy or
information statements required to be filed by the Company with the Commission
subsequent to the date of the Prospectus and prior to the termination of the
offering of the Shares by the Underwriters.
(ii) The Company will advise the Representatives promptly (A)
when any post-effective amendment thereto shall have become effective, (B) of
any request of the
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Commission for amendment of the Registration Statement or for supplement to the
Prospectus or for any additional information, and (C) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the use of the Prospectus or of the institution of any proceedings
for that purpose. The Company will use its best efforts to prevent the issuance
of any such stop order preventing or suspending the use of the Prospectus and to
obtain as soon as possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports, and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver to, or
upon the order of, the Representatives during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representatives may
reasonably request. The Company will deliver to the Representatives such number
of copies, including originally executed copies, of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
reasonably be requested), including documents incorporated by reference therein,
and of all amendments thereto, as the Representatives may reasonably request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations of the Commission thereunder, so as to
permit the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the reasonable
opinion of the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances existing at the time the Prospectus is delivered to a purchaser,
not misleading, or, if it is necessary at any time to amend or supplement the
Prospectus to comply with any law, the Company promptly will either (i) prepare
and file with the Commission an appropriate amendment to the Registration
Statement or supplement to the Prospectus or (ii) prepare and file with the
Commission an appropriate filing under the Securities Exchange Act of 1934 which
shall be incorporated by reference in the Prospectus so that the Prospectus as
so amended or supplemented will not, in the light of the circumstances when it
is so delivered, be misleading, or so that the Prospectus will comply with the
law.
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(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later than
15 months after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a period of
at least 12 consecutive months beginning after the effective date of the
Registration Statement, which earning statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will
advise you in writing when such statement has been so made available.
(vii) Prior to the Closing Date, the Company will furnish to
the Underwriters, as soon as they have been prepared by or are available to the
Company, a copy of any unaudited interim financial statements of the Company for
any period subsequent to the period covered by the most recent financial
statements appearing in the Registration Statement and the Prospectus.
(viii) No offering, sale, short sale or other disposition of
any shares of Common Stock of the Company or other securities convertible into
or exchangeable or exercisable for shares of Common Stock or derivative of
Common Stock (or agreement for such) will be made for a period of 90 days after
the date of this Agreement, directly or indirectly, by the Company otherwise
than hereunder or with the prior written consent of BT Alex. Brown Incorporated.
(ix) The Company will use its best efforts to have the Shares
approved for quotation, subject to notice of issuance, on the Nasdaq National
Market.
(x) The Company has caused each officer and director and
specific shareholders of the Company to furnish to you, on or prior to the date
of this agreement, a letter or letters, in form and substance satisfactory to
the Underwriters, pursuant to which each such person shall agree not to offer,
sell, sell short or otherwise dispose of any shares of Common Stock of the
Company or other capital stock of the Company, or any other securities
convertible, exchangeable or exercisable for Common Shares or derivative of
Common Shares owned by such person or request the registration for the offer or
sale of any of the foregoing (or as to which such person has the right to direct
the disposition of) for a period of 90 days after the date of this Agreement,
directly or indirectly, except with the prior written consent of BT Alex. Brown
Incorporated ("Lockup Agreements").
(xi) The Company shall not invest in such a manner as would
require the Company or any of the Subsidiaries to register as an investment
company under the 1940 Act.
(xii) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
for the Common Stock.
(xiii) The Company will not take, directly or indirectly, any
action designed to cause or result in, or that has constituted or might
reasonably be expected to
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constitute, the stabilization or manipulation of the price of any securities of
the Company.
(b) Each of the Selling Shareholders covenants and agrees with
the several Underwriters that:
(i) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other capital stock of the Company or
other securities convertible, exchangeable or exercisable for Common Stock or
derivative of Common Stock owned by the Selling Shareholder or request the
registration for the offer or sale of any of the foregoing (or as to which the
Selling Shareholder has the right to direct the disposition of) will be made for
a period of 90 days after the date of this Agreement, directly or indirectly, by
such Selling Shareholder otherwise than hereunder or with the prior written
consent of BT Alex. Brown Incorporated.
(ii) In order to document the Underwriters' compliance with
the reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of
1983 with respect to the transactions herein contemplated, each of the Selling
Shareholders agrees to deliver to you prior to or at the Closing Date a properly
completed and executed United States Treasury Department Form W-8 or W-9 (or
other applicable form or statement specified by Treasury Department regulations
in lieu thereof).
(iii) Such Selling Shareholder will not take, directly or
indirectly, any action designed to cause or result in, or that has constituted
or might reasonably be expected to constitute, the stabilization or manipulation
of the price of any securities of the Company .
5. COSTS AND EXPENSES.
The Selling Shareholders will pay all costs, expenses and fees
incident to the performance of their and the Company's obligations of the under
this Agreement, including, without limiting the generality of the foregoing, the
following: accounting fees of the Company; the fees and disbursements of counsel
for the Company and the Selling Shareholders; the cost of printing and
delivering to, or as requested by, the Underwriters copies of the Registration
Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the
Underwriters' Selling Memorandum, the Underwriters' Invitation Letter, the
Listing Application, the Blue Sky Survey and any supplements or amendments
thereto; the filing fees of the Commission; the filing fees and expenses
(including legal fees and disbursements) incident to securing any required
review by the National Association of Securities Dealers, Inc. (the "NASD") of
the terms of the sale of the Shares; the Listing Fee of the Nasdaq National
Market; and the expenses, including the fees and disbursements of counsel for
the Underwriters, incurred in connection with the qualification of the Shares
under State securities or Blue Sky laws. The Selling Shareholders agree to pay
all costs and expenses of the Underwriters, including the fees and disbursements
of counsel for the Underwriters, incident to the offer and sale of directed
shares of the Common Stock by the Underwriters to employees and persons having
business relationships with the Company and its Subsidiaries. The Selling
Shareholders shall not, however, be required to pay for any of the
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Underwriters expenses (other than those related to qualification under NASD
regulation and State securities or Blue Sky laws) except that, if this Agreement
shall not be consummated because the conditions in Section 6 hereof are not
satisfied, or because this Agreement is terminated by the Representatives
pursuant to Section 11 hereof, or by reason of any failure, refusal or inability
on the part of the Company or the Selling Shareholders to perform any
undertaking or satisfy any condition of this Agreement or to comply with any of
the terms hereof on their part to be performed, unless such failure to satisfy
said condition or to comply with said terms be due to the default or omission of
any Underwriter, then the Selling Shareholders shall reimburse the several
Underwriters for reasonable out-of-pocket expenses, including fees and
disbursements of counsel, reasonably incurred in connection with investigating,
marketing and proposing to market the Shares or in contemplation of performing
their obligations hereunder; but the Company and the Selling Shareholders shall
not in any event be liable to any of the several Underwriters for damages on
account of loss of anticipated profits from the sale by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the
Firm Shares on the Closing Date and the Option Shares, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the Option
Closing Date, as the case may be, in all material respects, of the
representations and warranties of the Company and the Selling Shareholders
contained herein, and to the performance by the Company and the Selling
Shareholders in all material respects of their covenants and obligations
hereunder and to the following additional conditions:
(a) Any post-effective amendment to the Registration Statement
shall have become effective and any and all filings required by Rule 424 and
Rule 430A of the Rules and Regulations shall have been made, and any request of
the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company or the Selling Shareholders, shall be
contemplated by the Commission and no injunction, restraining order, or order of
any nature by a Federal or state court of competent jurisdiction shall have been
issued as of the Closing Date which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, the opinion of Stroock &
Stroock & Lavan LLP, counsel for the Company and the Selling Shareholders, dated
the Closing Date or the Option Closing Date, as the case may be, addressed to
the Underwriters (and stating that it may be relied upon by counsel to the
Underwriters) to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own or lease its properties and
conduct its business as described in the Registration
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Statement; each of the Subsidiaries has been duly organized and is validly
existing as a corporation, or other legal entity, as applicable, in good
standing under the laws of the jurisdiction of its incorporation or formation,
with corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement; the Company, each of
the Subsidiaries are duly qualified to transact business in all jurisdictions in
which the conduct of their business requires such qualification, or in which the
failure to qualify would have a materially adverse effect upon the business of
the Company and the Subsidiaries taken as a whole; and the outstanding shares of
capital stock of each of the Subsidiaries have been duly authorized and validly
issued and are fully paid and non-assessable and are owned by the Company or a
Subsidiary; and, to the best of such counsel's knowledge, the outstanding shares
of capital stock of each of the Subsidiaries is owned free and clear of all
liens, encumbrances and equities and claims, and no options, warrants or other
rights to purchase, agreements or other obligations to issue or other rights to
convert any obligations into any shares of capital stock or of ownership
interests in the Subsidiaries are outstanding.
(ii) The Company has authorized and outstanding capital stock
as set forth in the Company's financial statements; the authorized shares of the
Company's Common Stock have been duly authorized; the outstanding shares of the
Company's Common Stock, including the Shares to be sold by the Selling
Shareholders, have been duly authorized and validly issued and are fully paid
and non-assessable; all of the Shares conform to the description thereof
contained in the Prospectus; the certificates for the Shares, assuming they are
in the form filed with the Commission, are in due and proper form.
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no outstanding
securities of the Company convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of capital stock of the Company
and there are no outstanding or authorized options, warrants or rights of any
character obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of the
Shares or the right to have any Common Shares or other securities of the Company
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the best of the knowledge of such counsel, no stop order proceedings
with respect thereto have been instituted or are pending or threatened under the
Act.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto and each document incorporated by reference
therein comply as to form in all material respects with the requirements of the
Act or the Securities Exchange Act of 1934, as applicable, and the applicable
rules and regulations thereunder (except that such counsel need
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express no opinion as to the financial statements and related schedules included
therein). The conditions for the use of Form S-3, set forth in the General
Instructions thereto, have been satisfied.
(vi) The statements under the captions "Certain Legal
Proceedings," "Shares Eligible for Future Sale" and"Management - Employment
Agreements" in the Prospectus or in insofar as such statements constitute a
summary of documents referred to therein or matters of law, fairly summarize in
all material respects the information called for with respect to such documents
and matters.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to or incorporated by reference in the
Registration Statement or described in the Registration Statement or the
Prospectus which are not so filed, incorporated by reference or described as
required, and such contracts and documents as are summarized in the Registration
Statement or the Prospectus are fairly summarized in all material respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company, any of the Subsidiaries
or any of the Selling Shareholders except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Charter or By-Laws of the Company, or any
agreement or instrument known to such counsel to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiaries may
be bound.
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery of
this Agreement and the consummation of the transactions herein contemplated
(other than as may be required by the NASD or as required by State securities
and Blue Sky laws as to which such counsel need express no opinion) except such
as have been obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of
the consummation of the transactions contemplated by this Agreement, and
application of the net proceeds therefrom as described in the Prospectus,
required to register as an investment company under the 1940 Act.
(xiii) This Agreement has been duly authorized, executed and
delivered on behalf of the Selling Shareholders.
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(xiv) Each Selling Shareholder has full legal right, power and
authority, and any approval required by law (other than as required by State
securities and Blue Sky laws as to which such counsel need express no opinion),
to sell, assign, transfer and deliver the portion of the Shares to be sold by
such Selling Shareholder.
(xv) The Custodian Agreement and the Power of Attorney
executed and delivered by each Selling Shareholder is valid and binding.
(xvi) The Underwriters (assuming that they are bona fide
purchasers within the meaning of the Uniform Commercial Code) have acquired good
and marketable title to the Shares being sold by each Selling Shareholder on the
Closing Date, and the Option Closing Date, as the case may be, free and clear of
all liens, encumbrances, equities and claims.
In rendering such opinion Stroock & Stroock & Lavan LLP may
rely as to matters governed by the laws of states other than New York, Delaware
or Federal laws on local counsel in such jurisdictions and on opinions of other
counsel representing the Company or the Selling Shareholders, provided that in
each case Stroock & Stroock & Lavan LLP shall state that they believe that they
and the Underwriters are justified in relying on such other counsel. In addition
to the matters set forth above, such opinion shall also include a statement to
the effect that nothing has come to the attention of such counsel which leads
them to believe that (i) the Registration Statement, at the time it became
effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the Closing
Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
(ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (except that such counsel need express no view as to
financial statements, schedules and statistical information therein). With
respect to such statement, Stroock & Stroock & Lavan LLP may state that their
belief is based upon the procedures set forth therein, but is without
independent check and verification.
(c) The Representatives shall have received from Fulbright &
Jaworski L.L.P., counsel for the Underwriters, an opinion dated the Closing Date
or the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (ii), (iii), (iv), and (ix) and (xi) of Paragraph (b)
of this Section 6, and that the Company is a duly organized and validly existing
corporation under the laws of the State of Delaware. In rendering such opinion
Fulbright & Jaworski L.L.P. may rely as to all matters governed other than by
the laws of the State of Delaware or Federal laws on the opinion of counsel
referred to in Paragraph (b) of this Section 6. In addition to the matters set
forth above, such opinion shall also include a statement to the effect that
nothing has come to the attention of such counsel which leads them to believe
that (i) the Registration Statement, or any amendment thereto, as of the time it
became effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) as of the Closing Date
or the Option Closing Date, as the case may be,
17
<PAGE>
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and (ii) the Prospectus, or any supplement thereto, on the date
it was filed pursuant to the Rules and Regulations and as of the Closing Date or
the Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact, necessary in order to make
the statements, in the light of the circumstances under which they are made, not
misleading (except that such counsel need express no view as to financial
statements, schedules and statistical information therein). With respect to such
statement, Fulbright & Jaworski L.L.P. may state that their belief is based upon
the procedures set forth therein, but is without independent check and
verification.
(d) The Representatives shall have received at or prior to the
Closing Date from Fulbright & Jaworski L.L.P. a memorandum or summary, in form
and substance reasonably satisfactory to the Representatives, with respect to
the qualification for offering and sale by the Underwriters of the Shares under
the State securities or Blue Sky laws of such jurisdictions as the
Representatives may reasonably have designated to the Company.
(e) The Representatives shall have received, on each of the
dates hereof, the Closing Date and the Option Closing Date, as the case may be,
a letter dated the date hereof, the Closing Date or the Option Closing Date, as
the case may be, in form and substance reasonably satisfactory to you, of Arthur
Andersen LLP confirming that they are independent public accountants within the
meaning of the Act and the applicable published Rules and Regulations thereunder
and stating that in their opinion the financial statements and schedules
examined by them and included in the Registration Statement comply in form in
all material respects with the applicable accounting requirements of the Act and
the related published Rules and Regulations; and containing such other
statements and information as is ordinarily included in accountants' "comfort
letters" to Underwriters with respect to the financial statements and certain
financial and statistical information contained in the Registration Statement
and Prospectus.
(f) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, a certificate or
certificates of the Chief Executive Officer and the Chief Financial Officer of
the Company to the effect that, as of the Closing Date or the Option Closing
Date, as the case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registration Statement
has been issued, and no proceedings for such purpose have been taken or are, to
his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company
contained in Section 1(a) hereof are true and correct as of the Closing Date or
the Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
18
<PAGE>
(iv) He has carefully examined the Registration Statement and
the Prospectus and, in his opinion, as of the effective date of the Registration
Statement, such Registration Statement and Prospectus did not contain any untrue
statement of material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading, and since the effective date of the Registration Statement, no event
has occurred which should have been set forth in a supplement to or an amendment
of the Prospectus which has not been so set forth in such supplement or
amendment; and
(v) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been any
Material Adverse Change.
(g) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, a certificate or
certificates of each Selling Shareholder to the effect that, as of the Closing
Date or the Option Closing Date, as the case may be, he or it represents as
follows:
(i) The representations and warranties of such Selling
Shareholder contained in Section 1(b) hereof are true and correct as of the
Closing Date or the Option Closing Date, as the case may be; and
(ii) He or it has carefully examined the Registration
Statement and the Prospectus and, in his or its opinion, as of the effective
date of the Registration Statement, such Registration Statement and Prospectus
did not contain any untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, and since the effective date of the
Registration Statement, no event has occurred which should have been set forth
in a supplement to or an amendment of the Prospectus which has not been so set
forth in such supplement or amendment.
(h) The Company and the Selling Shareholders shall have
furnished to the Representatives such further certificates and documents
confirming the representations and warranties, covenants and conditions
contained herein and related matters as the Representatives may reasonably have
requested.
(i) The Firm Shares and Option Shares, if any, have been
approved for quotation upon notice of issuance on the Nasdaq National Market.
(j) The Lockup Agreements described in Section 4(a)(x) are in
full force and effect.
The opinions and certificates mentioned in this Agreement
shall be deemed to be in compliance with the provisions hereof only if they are
in all material respects reasonably satisfactory to the Representatives and to
Fulbright & Jaworski L.L.P., counsel for the Underwriters.
19
<PAGE>
If any of the conditions hereinabove provided for in this
Section 6 shall not have been fulfilled when and as required by this Agreement
to be fulfilled, the obligations of the Underwriters hereunder may be terminated
by the Representatives by notifying the Company and the Selling Shareholders of
such termination in writing or by telegram at or prior to the Closing Date or
the Option Closing Date, as the case may be.
In such event, the Selling Shareholders, the Company and the
Underwriters shall not be under any obligation to each other (except to the
extent provided in Sections 5 and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE SELLING SHAREHOLDER.
The obligations of the Selling Shareholders to sell and
deliver the portion of the Shares required to be delivered as and when specified
in this Agreement are subject to the conditions that at the Closing Date or the
Option Closing Date, as the case may be, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and in effect
or proceedings therefor initiated or threatened.
8. INDEMNIFICATION. [To be discussed]
(a) The Company agrees:
(1) to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of the
Act, against any losses, claims, damages or liabilities to which such
Underwriter or any such controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of
or are based upon (i) any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any act or alleged act, or
any failure to act or alleged failure to act, by any Underwriter in
connection with, or relating in any manner to, the Shares or the
offering contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or action arising out
of or based upon matters covered by clause (i) or (ii) above (PROVIDED,
that the Company shall not be liable under this clause (iii) to the
extent that it is determined in a final judgment by a court of
competent jurisdiction that such loss, claim, damage, liability or
action resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such Underwriter through its gross
negligence or willful misconduct); provided, however, that the Company
will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission
made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by or
through the Representatives
20
<PAGE>
specifically for use in the preparation thereof. This indemnity
obligation will be in addition to any liability which the Company may
otherwise have.
(2) to reimburse each Underwriter and each such controlling
person upon demand for any legal or other out-of-pocket expenses
reasonably incurred by such Underwriter or such controlling person in
connection with investigating or defending any such loss, claim, damage
or liability, action or proceeding or in responding to a subpoena or
governmental inquiry related to the offering of the Shares, whether or
not such Underwriter or controlling person is a party to any action or
proceeding. In the event that it is finally judicially determined that
the Underwriters were not entitled to receive payments for legal and
other expenses pursuant to this subparagraph, the Underwriters will
promptly return all sums that had been advanced pursuant hereto.
(b) The Selling Shareholders agree to indemnify the
Underwriters and each person, if any, who controls any Underwriter within the
meaning of the Act, against any losses, claims, damages or liabilities to which
such Underwriter or controlling person may become subject under the Act or
otherwise to the same extent as indemnity is provided by the Company pursuant to
Section 8(a) above. In no event, however, shall the liability of any Selling
Shareholder for indemnification under this Section 8(b) exceed the proceeds
received by such Selling Shareholder from the Underwriters in this offering.
Notwithstanding anything to the contrary in this paragraph (b), each Underwriter
and each person who controls such Underwriter agrees not to assert its rights to
indemnity under this paragraph (b) against the Selling Shareholders for losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
unless and until (i) such Underwriter or controlling person has damages or
liabilities (including any legal or other expense reasonably incurred) and (ii)
the Company does not within 90 days of such request (A) agree to so indemnify
such Underwriter or controlling person and (B) reimburse in full such
underwriter or controlling person for any such losses, claims, damages or
liabilities (including legal and other expenses) incurred. This indemnity
obligation will be in addition to any liability which the Selling Shareholders
may otherwise have.
(c) Each Underwriter severally and not jointly will indemnify
and hold harmless the Company, each of its directors, each of its officers who
have signed the Registration Statement, the Selling Shareholders, and each
person, if any, who controls the Company or the Selling Shareholders within the
meaning of the Act, against any losses, claims, damages or liabilities to which
the Company or any such director, officer, Selling Shareholder or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made; and
will reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer, Selling Shareholder or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding; provided, however, that each Underwriter will
be liable in each
21
<PAGE>
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company or the Selling Shareholders by or through
the Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 8, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a), (b) or (c) shall be available to
any party who shall fail to give notice as provided in this Section 8(d) if the
party to whom notice was not given was unaware of the proceeding to which such
notice would have related and was materially prejudiced by the failure to give
such notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of the
provisions of Section 8(a), (b) or (c). In case any such proceeding shall be
brought against any indemnified party and it shall notify the indemnifying party
of the commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense. Notwithstanding the foregoing, the indemnifying party shall
pay as incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by the Underwriters in the case of parties indemnified
pursuant to Section 8(a) or (b) and by the Company and the Selling Shareholders
in the case of parties indemnified pursuant to Section 8(c). The indemnifying
party shall not be liable for any settlement of any proceeding effected without
its written consent but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment. In addition, the indemnifying party will not, without
the prior written consent of the indemnified party, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim, action
or proceeding of which indemnification may be sought hereunder unless such
settlement, compromise or consent includes an unconditional release of such
indemnified party from all liability arising out of such
22
<PAGE>
claim, action or proceeding.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company and the
Selling Shareholders on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law then each indemnifying
party shall contribute to such amount paid or payable by such indemnified party
in such proportion as is appropriate to reflect not only such relative benefits
but also the relative fault of the Company and the Selling Shareholders on the
one hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, (or
actions or proceedings in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Shareholders on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company and the Selling Shareholders
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Selling Shareholders on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters
agree that it would not be just and equitable if contributions pursuant to this
Section 8(e) were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 8(e). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) referred to above in this Section 8(e) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (e), (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares purchased by
such Underwriter, and (ii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation, and (iii) no Selling Shareholder shall be required to
contribute any amount in excess of the proceeds (net of underwriting discount)
received by such Selling Shareholder from the Underwriters in the offering. The
Underwriters' obligations in this Section 8(e) to contribute are several in
proportion to their respective underwriting obligations and not joint.
23
<PAGE>
(f) In any proceeding relating to the Registration Statement,
any Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this Section 8
hereby consents to the jurisdiction of any court having jurisdiction over any
other contributing party, agrees that process issuing from such court may be
served upon him or it by any other contributing party and consents to the
service of such process and agrees that any other contributing party may join
him or it as an additional defendant in any such proceeding in which such other
contributing party is a party.
(g) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case
may be, any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company or a Selling
Shareholder), you, as Representatives of the Underwriters, shall use your
reasonable efforts to procure within 36 hours thereafter one or more of the
other Underwriters, or any others, to purchase from the Company and the Selling
Shareholders such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company and the
Selling Shareholders or you as the Representatives of the Underwriters will have
the right, by written notice given within the next 36-hour period to the parties
to this Agreement, to terminate this Agreement without liability on the part of
the non-defaulting Underwriters or of the Company or of the Selling
24
<PAGE>
Shareholders except to the extent provided in Section 8 hereof. In the event of
a default by any Underwriter or Underwriters, as set forth in this Section 9,
the Closing Date or Option Closing Date, as the case may be, may be postponed
for such period, not exceeding seven days, as you, as Representatives, may
determine in order that the required changes in the Registration Statement or in
the Prospectus or in any other documents or arrangements may be effected. The
term "Underwriter" includes any person substituted for a defaulting Underwriter.
Any action taken under this Section 9 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except
as otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows: if to the Underwriters, to BT Alex. Brown
Incorporated, One South Street, Baltimore, Maryland 21202, Attention: General
Counsel; with a copy to BT Alex. Brown Incorporated, One Bankers Trust Plaza,
130 Liberty Street, New York, New York 10006, Attention:
Gregory Shaia; if to the Company or the Selling Shareholders, to
The Children's Place Retail Stores, Inc.
One Dodge Drive
West Caldwell, NJ 07006
Attention: General Counsel
with copies to
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10004
Attn: ______________
11. TERMINATION.
(a) This Agreement may be terminated by you by notice to the
Company and the Selling Shareholders at any time prior to the Closing Date if
any of the following has occurred: (i) since the respective dates as of which
information is given in the Registration Statement and the Prospectus, any
Material Adverse Change, whether or not arising in the ordinary course of
business, (ii) any outbreak or escalation of hostilities or declaration of war
or national emergency or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
escalation, declaration, emergency, calamity, crisis or change on the financial
markets of the United States would, in your reasonable judgment, make it
impracticable or inadvisable to market the Shares or to enforce contracts for
the sale of the Shares, or (iii) suspension of trading in securities generally
on the New York Stock Exchange, the Nasdaq National Market or the American Stock
Exchange or limitation on
25
<PAGE>
prices (other than limitations on hours or numbers of days of trading) for
securities on such Exchange or the Nasdaq National Market, (iv) the enactment,
publication, decree or other promulgation of any statute, regulation, rule or
order of any court or other governmental authority which in your reasonable
opinion materially and adversely affects or may materially and adversely affect
the business or operations of the Company, (v) declaration of a banking
moratorium by United States or New York State authorities, (vi) any downgrading,
or placement on any watch list for possible downgrading, in the rating of the
Company's debt securities by any "nationally recognized statistical rating
organization" (as defined for purposes of Rule 436(g) under the Exchange Act);
(vii) the suspension of trading of the Company's common stock by the Nasdaq
National Market, the Commission, or any other governmental authority or, (viii)
the taking of any action by any governmental body or agency in respect of its
monetary or fiscal affairs which in your reasonable opinion has a material
adverse effect on the securities markets in the United States; or
(b) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of
the Underwriters, the Company and the Selling Shareholders and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign merely because of such
purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company, the Selling Shareholders and the Underwriters
acknowledge and agree that the only information furnished or to be furnished by
any Underwriter to the Company for inclusion in any Prospectus or the
Registration Statement consists of the information under the caption "Plan of
Distribution" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers or the Selling Shareholders and (c) delivery of and
payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
26
<PAGE>
This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Selling Shareholders, the
Company and the several Underwriters in accordance with its terms.
27
<PAGE>
Any person executing and delivering this Agreement as Attorney-in-Fact
for a Selling Shareholder represents by so doing that he has been duly appointed
as Attorney-in-Fact by such Selling Shareholder pursuant to a validly existing
and binding Power of Attorney which authorizes such Attorney-in-Fact to take
such action.
Very truly yours,
THE CHILDREN'S PLACE RETAIL STORES, INC.
By
-------------------------------------------
Selling Shareholders listed on Schedule II
By
-------------------------------------------
Attorney-in-Fact
The foregoing Underwriting Agreement is
hereby confirmed and accepted as of the
date first above written.
BT ALEX. BROWN INCORPORATED
MERRILL LYNCH, PIERCE FENNER & SMITH INCORPORATED
HAMBRECHT & QUIST LLC
NATIONSBANC MONTGOMERY SECURITIES LLC
THOMAS WEISEL PARTNERS LLC
As Representatives of the several
Underwriters listed on Schedule I
By: BT Alex. Brown Incorporated
By:
----------------------------
Authorized Officer
28
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
UNDERWRITER Number of Firm Shares
to be Purchased
---------------
<S> <C>
BT Alex. Brown Incorporated
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Hambrecht & Quist LLC
NationsBanc Montgomary Securities LLC
Thomas Weisel Partners LLC
---------
Total 4,000,000
---------
</TABLE>
29
<PAGE>
SCHEDULE II
SCHEDULE OF SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
Underwriter Number of Firm Shares
----------- to be Sold
----------
<S> <C>
The SK Equity Fund, L.P. 2,661,423
SK Investment Fund, L.P. 38,577
Ezra Dabah 600,000
Stanley B. Siver 600,000
Stanley Silverstein 100,000
---------
Total 4,000,000
---------
</TABLE>
30
<PAGE>
SCHEDULE III
SCHEDULE OF SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
Underwriter Number of Option Shares
----------- to be Sold
----------
<S> <C>
The SK Equity Fund, L.P. 399,130
SK Investment Fund, L.P. 5,870
Ezra Dabah 90,000
Stanley B. Siver 90,000
Stanley Silverstein 15,000
-------
Total 600,000
-------
</TABLE>
31
<PAGE>
EXHIBIT A
<PAGE>
Exhibit 5.1
March 29, 1999
The Children's Place Retail Stores, Inc.
One Dodge Drive
West Caldwell, NJ 07006
Ladies and Gentlemen:
We have acted as counsel to The Children's Place Retail Stores, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Act"), of a Registration Statement on Form S-3
(Registration No. 333-72897), as amended by Amendment No. 1 thereto (the
"Registration Statement"), relating to the proposed public offering (the
"Offering") by certain stockholders of the Company (the "Selling Stockholders")
of 2,000,000 shares of Common Stock of the Company, par value $.10 per share
(the "Common Stock"), and up to 300,000 additional shares of Common Stock in the
event the underwriters for the Offering elect to exercise their over-allotment
option (all such shares of Common Stock being hereinafter collectively referred
to as the "Shares").
As such counsel, we have examined copies of the Amended and Restated Certificate
of Incorporation and By-Laws of the Company, each as amended to the date hereof,
the Registration Statement, the Prospectus which forms a part of the
Registration Statement and originals or copies of such corporate minutes,
records, agreements and other instruments of the Company, certificates of public
officials and other documents, and have made such examinations of law, as we
have deemed necessary to form the basis for the opinion hereinafter expressed.
In our examination of such materials, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity to original documents of all copies submitted to us. As to
various questions of fact material to such opinion, we have relied, to the
extent we deemed appropriate, upon representations, statements and certificates
of officers and representatives of the Company, the selling stockholders and
others.
Attorneys involved in the preparation of this opinion are admitted to practice
law in the State of New York and we do not purport to express any opinion herein
concerning any law other than the laws of the State of New York and the federal
laws of the United States of America and the General Corporation Law of the
State of Delaware.
<PAGE>
The Children's Place Retail Stores, Inc.
March 29, 1999
Page 2
Based upon and subject to the foregoing, we are of the opinion that the Shares
being offered by the Selling Stockholders are legally issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this firm under the caption
"Legal Matters" in the Prospectus which forms a part of the Registration
Statement. In giving such consent, we do not admit hereby that we come within
the category of persons whose consent is required under Section 7 of the Act or
the Rules and Regulations of the Commission thereunder.
Very truly yours,
/s/ Stroock & Stroock & Lavan LLP
STROOCK & STROOCK & LAVAN LLP
