<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1999
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-----------
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 25, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-----------
COMMISSION FILE NUMBER 0-27677
-----------
CHARLOTTE RUSSE HOLDING, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 33-0724325
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
4645 MORENA BOULEVARD, SAN DIEGO, CA 92117
(Address, including Zip Code, of Registrant's Principal Executive Offices)
(858) 587-1500
(Registrant's Telephone Number, Including Area Code)
-----------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Each Class)
-----------
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
================================================================================
<PAGE>
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $53,805,900 as of December 15, 1999 based upon the
closing sale price per share of the registrant's common stock as reported on the
NASDAQ National Market on such date. Shares of common stock held by each
executive officer and director and by each person who owns 10% or more of the
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily
conclusive for other purposes. As of December 15, 1999, 20,136,980 shares of
common stock, $0.01 per share par value, of the registrant were outstanding.
-----------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's prospectus filed pursuant to Rule
424(b)(1) of the Securities Act of 1933 are incorporated by reference into Part
IV.
<PAGE>
-----------
The Charlotte Russe--Registered Trade Mark-- stylized trademark
referred to in this Form 10-K is federally registered in the United States
and the [HEART, MOON, STAR]--TM--, nonstylized Charlotte Russe--TM-- and
Charlotte's Room--TM-- trademarks referred to in this Form 10-K are subject
to pending applications for registration. These trademarks are the property
of Charlotte Russe Holding, Inc. or it subsidiaries. The Rampage--Registered
Trade Mark-- trademark referred to in this Form 10-K is federally registered
in the United States and is used by Charlotte Russe under a license agreement
with Rampage Clothing Company. The use of the Rampage trademark by other
parties, including other apparel manufacturers and retailers, should not be
attributed to our business. All other trademarks or trade names referred to
in this Form 10-K are the property of their respective owners.
<PAGE>
PART I
ITEM 1. BUSINESS
We are a rapidly growing mall-based specialty retailer of fashionable,
value-priced apparel and accessories targeting young women between the ages of
15 and 35. We have two distinct store concepts, "Charlotte Russe" and "Rampage,"
and operated a total of 96 stores as of the end of fiscal 1999. Through our
fashion content, merchandise mix, exciting store layout and design, and striking
merchandise presentation, we project fashion attitudes that appeal to customers
from a broad range of socioeconomic, demographic and cultural profiles. In
addition, our breadth of merchandise enables our customers to assemble
coordinated and complete outfits that satisfy many of their lifestyle needs. Our
success is dependent upon our ability to anticipate, identify and capitalize
upon the fashion preferences of our target customers.
Our Charlotte Russe stores offer fashionable, affordable apparel and
accessories that have been tested and accepted by the marketplace, thus
appealing to women who prefer established fashion trends. Our Rampage stores
feature emerging fashion trends and thus appeal to women with a flair for making
fashion statements who are willing to pay somewhat higher prices to create a
cutting-edge look. Our stores are located predominately in high visibility,
center court mall locations in spaces that average approximately 7,500 square
feet. These stores, which are generally twice as large as those of most of our
mall-based competitors, are designed to create an environment that is exciting
to shop and accentuates the fashion, breadth and value of our merchandise
selection.
Our broad assortment of merchandise is centered around styles that are
affordable, feminine and reflect the latest fashion trends. Our breadth of
merchandise enables our customers to assemble coordinated and complete outfits
that satisfy many of their lifestyle needs. Both our Charlotte Russe and Rampage
store concepts offer merchandise at value-oriented prices, generally 20% to 30%
less than prices for comparable items offered by most of our direct mall-based
competitors. Over 80% of our Charlotte Russe merchandise is sold under the
Charlotte Russe label and over 90% of our Rampage merchandise is sold under our
proprietary [HEART, MOON, STAR] label. The remainder of our merchandise consists
of nationally-recognized brands popular with our customers.
We opened our first store in 1975 in Carlsbad, California and slowly
expanded to 35 stores in southern California, Arizona and Nevada by the end of
fiscal 1996. In September 1996, we were acquired by two funds, SK Investment
Fund, L.P. and The SK Equity Fund, L.P. (collectively, the "SKM Funds"), managed
by Saunders Karp & Megrue, L.P., a private equity investment firm, and Bernard
Zeichner, our Chairman, Chief Executive Officer and President. Following the
acquisition, we implemented a series of strategic initiatives to position us to
support an accelerated national store roll-out, including:
- hiring a number of senior executives with national retail
experience to complement our senior management team;
- substantially upgrading our management information systems;
- adding a second store concept by acquiring 16 Rampage stores
in five states; and
- consolidating our corporate and distribution center operations
into a modern 125,000 square foot facility in San Diego.
These initiatives, together with superior store economics that on
average have historically generated a cash return on investment in excess of 90%
in the first year of operation, have allowed us to grow significantly since our
acquisition. There can be no assurance that our new stores will obtain this
level of performance in the future, and our continued high growth expansion
could strain our resources. As of the end of fiscal 1999, we operated 96 stores
throughout 15 states and Puerto Rico, an increase of 61 stores since our
acquisition at the beginning of fiscal 1997. Our net sales increased to $177.5
million in fiscal 1999 from $70.7 million in fiscal 1996, representing a
compound annual growth rate of 35.9%.
OUR BUSINESS STRATEGY DIFFERENTIATES US FROM OUR COMPETITORS.
The elements of our business strategy combine to create a merchandise
assortment that appeals to consumers from a broad range of socioeconomic,
demographic and cultural profiles and that differentiates us from our
competitors. We believe this broad consumer appeal, coupled with our superior
new store cash returns on investment, creates a highly portable store concept
and a significant opportunity for growth. The principal elements of our business
strategy include the following:
OFFER CONSISTENT VALUE PRICING. We offer a broad assortment of
fashionable, quality merchandise at prices generally 20% to 30% below most of
our direct mall-based competitors. We employ this value-pricing strategy across
both of our store concepts, with an average sales price for apparel items at our
Charlotte Russe and Rampage stores of approximately $18.25 and $29.00. Because
our prices are affordable and our merchandise quality is comparable to higher
priced specialty retailers and department stores, we create a strong perception
of value that has enabled us to build a broad and loyal base of customers.
-1-
<PAGE>
MAINTAIN DISTINCT BRAND IMAGES. We have created focused and
differentiated brand images based on fashion attitude, value pricing and
quality. These images are consistently communicated through all aspects of our
business, including merchandise assortments and in-store visual merchandising.
We also enhance brand recognition by offering over 80% of our Charlotte Russe
merchandise under the Charlotte Russe label and over 90% of our Rampage
merchandise under our proprietary [HEART, MOON, STAR] label. We believe that the
strength of our private label merchandise, along with other nationally branded
merchandise, provides opportunities for expansion of our current merchandise
categories and entry into new product categories.
TARGET A HIGHLY DESIRABLE MARKET. Our stores and fashionable
merchandise target women between the ages of 15 and 35, a broad and large group
that is expected to grow over the next ten years. We believe that our target
population spent a total of $28.1 billion on apparel in 1998, up from $25.7
billion in 1995. While our target customer base is expected to grow, the teenage
and early twenties population, a core group of our target market, is expected to
grow at a rate faster than that of the overall United States population
according to the United States Census Bureau. We believe that an increase in
minimum wage, higher employment and easier access to credit cards will continue
to contribute to substantial growth in the buying power of our target market.
OFFER BROAD, EXCITING MERCHANDISE ASSORTMENT. Our merchandising
strategy is founded on offering a broad assortment of apparel and accessories
that conveys a consistent fashion attitude. Our merchandise includes
ready-to-wear apparel such as knit and woven tops, dresses, shorts, pants and
skirts, as well as accessories such as shoes, handbags and jewelry that enable
our customers to create distinct ensembles complemented by color coordinated and
fashion-forward items. Our merchandise assortment is voguish enough to attract
teenage customers and yet stylish enough to retain those women as they mature
into young adults. We maintain a fresh and exciting shopping environment by
frequently introducing new merchandise into our stores and by regularly updating
our merchandise displays. In addition, our stores on average exceed 7,500 square
feet and thus provide a comfortable and spacious environment that accentuates
the breadth of our merchandise offerings.
CAPITALIZE ON STRONG STORE ECONOMICS. Based on our experience with
recent store openings, we estimate that the average net investment to open a new
store is approximately $450,000, which includes capital expenditures, net of
landlord contributions, and initial inventory, net of payables. During their
first year of operations, our new stores opened during fiscal 1997 and 1998
generated average net sales of approximately $1.8 million and store-level
operating cash flow in excess of $400,000, or more than 22.0% of net sales.
Accordingly, these stores generated an average cash return on investment in
excess of 90% in their first year of operations, although there can be no
assurance that our new stores will obtain these levels in the future.
LEVERAGE HIGHLY EXPERIENCED MANAGEMENT TEAM. We believe our senior
management team combines a unique blend of experience with the company and other
national growth retailers. Following our acquisition in September 1996, Mr.
Zeichner recruited eight members of our highly experienced management team, who
have participated in the successful national expansion of retailers such as
Contempo Casuals, Guess? and Price Club. As a group, these officers currently
have an average of over 19 years of retail experience. These new managers
complemented our core group of buying and operations managers who had
participated in the evolution and growth of the Charlotte Russe concept and who
currently have an average of over 16 years of retail experience with us. The
successful integration of these distinct skill sets has produced a unique
corporate culture that leverages the talents of each group. Our management is
positioned to capitalize on the strong economics of the Charlotte Russe and
Rampage concepts and to successfully execute our national expansion program.
ACTIVELY MANAGE INVENTORY. The cornerstone of our merchandising
strategy is our test-and-reorder philosophy. This strategy allows us to minimize
our inventory risk by ordering small quantities of fashion merchandise to test
customer acceptance before placing larger purchase commitments. Our
test-and-reorder strategy is successful in large part because we deal primarily
with domestic vendors, which in management's experience has generally resulted
in short lead times of three to six weeks. These short lead times, together with
our ability to monitor store sales on a daily basis, permit us to quickly react
to sell-through trends and fashion preferences. We have one of the highest
inventory turn rates in the industry and we believe that our approach to
managing our merchandise mix has contributed to strong gross margins and
lower-than-average markdown rates.
WE INTEND TO BECOME A LEADING NATIONAL SPECIALTY RETAILER.
Our long-term objective is to become a leading national specialty
retailer of affordable fashion-forward apparel and accessories to
youthful-minded women. We intend to achieve this objective by pursuing an
aggressive store opening campaign and by expanding the breadth of our product
categories.
OPEN NEW STORES. In connection with our acquisition in 1996, we
initiated a program to accelerate the rate of our new store openings and to
expand our operations to areas outside our core markets of southern
California, Arizona and Nevada. Since that time, we have more than doubled
our store base from 35 stores to 96 stores throughout 15 states and Puerto
Rico as of the end of fiscal 1999. Based on this successful track record,
favorable demographic trends and a solid infrastructure, we believe we are
well positioned for accelerated growth over the next several years. Our plan
is to open approximately 30 stores during fiscal 2000, for which we have
already completed our site selection and evaluation process. We expect to
open new stores in existing markets as well as in markets in which we
currently do not have a presence. We believe that our Charlotte Russe and
Rampage stores are highly portable store concepts that achieve superior new
store cash returns on investment and can operate successfully in a wide
variety of geographic and demographic markets. Our Charlotte Russe stores,
for instance, have generated similar
-2-
<PAGE>
store-level operating cash flow margins across a variety of mall types
throughout different geographic regions. In addition, we continually review our
store base and have identified two underperforming stores that we are
considering closing prior to the end of fiscal 2000.
EXPAND PRODUCT OFFERINGS. We also plan to grow by increasing the
breadth and depth of our product categories, which may be sold in either
existing stores or through new store concepts. We have historically been able to
leverage our strong brand images to expand single item offerings into an entire
collection of related merchandise. For example, over the past three fiscal years
we have expanded our initial offering of bras into an entire lingerie department
consisting of bras, panties, intimate nighttime apparel, robes and slippers. Our
sales of lingerie, as a percentage of net sales, increased from 1.8% to 5.4%
during this period. We experienced similar success in expanding our shoe product
category. We believe that a substantial market opportunity exists for adding
fashionable new products, particularly in the high-margin areas of accessories
and gift and decor items. To capitalize on this market opportunity, we are
testing a new store concept called "Charlotte's Room," through which we will
sell themed products aimed at the teenage consumer. We have begun testing this
concept in two stores.
OUR TARGET CUSTOMERS ARE YOUNG, FASHION-CONSCIOUS WOMEN.
Our two retail store concepts target young, fashion-conscious women.
Our Charlotte Russe customer is a woman who desires understandable trends at
substantial value. She is a hip teenager seeking the current fashion trends, as
well as the fashionable working woman looking for career dressing. Regardless of
her age, the Charlotte Russe customer is feminine and body conscious. Our
Rampage stores cater to women with definitive fashion sense who set rather than
follow trends. Our Rampage customer is hip, eclectic, body conscious and tapped
into pop culture. She wants her look to be cutting-edge, while recognizing the
value of competitive pricing.
WE MANAGE OUR INVENTORY THROUGH MERCHANDISE PLANNING AND ALLOCATION.
Our merchandise planning and allocation team works closely with our
General Merchandise Manager, merchants and store personnel to meet the
requirements of individual stores for appropriate merchandise in sufficient
quantities. This team is also responsible for managing inventory levels,
allocating merchandise to stores and replenishing inventory based upon
information generated by our management information systems. Our planning
department allocates merchandise for new store openings based on estimated units
per square foot, and all new stores are fully stocked prior to opening. Our
inventory control systems monitor current inventory levels at each store and for
our operations as a whole. If necessary, we shift slow moving inventory to other
stores for sell-through prior to instituting corporate-wide markdowns. We also
monitor recent selling history within each store by merchandise classification,
style, color and size.
OUR TWO RETAIL CONCEPTS OFFER ESTABLISHED FASHION AND CUTTING-EDGE MERCHANDISE.
CHARLOTTE RUSSE. Our Charlotte Russe stores provide an exciting,
fashionable assortment of merchandise that complements virtually every facet of
our customers' lifestyle. Our merchandise reflects established fashion trends
and includes a broad offering of ready-to-wear apparel, including knit and woven
tops, dresses, shorts, pants and skirts, as well as seasonal items such as prom
dresses and outerwear. This product assortment allows us to be fashionable
enough to attract teenage customers and yet stylish enough to retain customers
as they become young working women. We believe Charlotte Russe stores offer a
higher percentage of dresses as compared to other specialty retailers to better
meet our customers' broad lifestyle needs for casual, social, career and special
occasion wear. Our typical dresses range in price from $19.99 to $60.00,
although prices can be as high as $80.00 to $120.00 for special occasion
dresses. By offering a product mix that reflects a more mature stage of the
fashion cycle, our Charlotte Russe stores are able to learn from the experience
of our Rampage stores with emerging trends in order to more quickly identify
fashion that has a broad market appeal. Charlotte Russe stores also offer a
broad assortment of accessories, such as lingerie, shoes, jewelry, handbags and
cosmetics. Our expansive accessories category enables us to offer the
convenience of one-stop shopping to our customers, enabling them to complement
their ready-to-wear clothing with color coordinated items and fashion-forward
accessories. Over 80% of the merchandise sold in these stores carries the
Charlotte Russe label. Our average sales price for apparel items is $18.25, and
the average sales price for all of our merchandise, including accessories, is
$14.00.
RAMPAGE. Our Rampage stores offer essentially the same breadth of
ready-to-wear apparel as our Charlotte Russe stores, but the merchandise
reflects emerging trends and therefore a more cutting-edge look. There is also
less emphasis on the career customer in our Rampage stores. The retail prices
for our typical dresses range from $38.00 to $68.00, although prices can be
higher for special occasion dresses. Over 90% of the Rampage merchandise is
offered under our proprietary [HEART, MOON, STAR] label. We work with our
vendors to design a majority of the merchandise that is carried in our Rampage
stores. We also have established a standard fit for all of our apparel to ensure
consistent sizing among our merchandise. Our Rampage stores also offer specialty
accessories that complement our higher-end merchandise. By offering the latest
in emerging fashions, our Rampage stores are able to command higher price points
than Charlotte Russe, but still below our competitors. The average sales price
for apparel items in our Rampage stores is $29.00, and the average sales price
for all of our merchandise, including accessories, is $23.00.
-3-
<PAGE>
OUR VISUAL MERCHANDISING STRENGTHENS OUR BRAND NAME AND CREATES AN EXCITING
SHOPPING ENVIRONMENT.
We rely on a combination of merchandise presentation and complementary
in-store signage to communicate a consistent fashion point-of-view to our
customers and to encourage the purchase of coordinated outfits. Our visual
merchandising team also makes use of mannequins in store windows as well as on
the selling floor to enhance our merchandise presentation.
Within our Charlotte Russe stores, we seek to create an inviting
environment by grouping our fashionable merchandise into multiple in-store
boutiques centered around lifestyle themes. While shopping in our store, a
customer will observe separate and distinct areas devoted to her various
lifestyle needs, including casual, club and career wear, lingerie, shoes and
accessories, each offering a vast array of selections. Each lifestyle collection
is complemented by an extensive in-store image advertising campaign that
reinforces the lifestyles and aspirations of our target customers, while also
strengthening our brand image. We believe that this multi-boutique feel creates
an attractive atmosphere for our customers and that the breadth and depth of our
lifestyle categories makes us a destination location for their shopping needs.
At our Rampage stores, we employ a different, but equally effective
visual merchandising strategy in order to capture our customers' interest. Our
Rampage merchandise is grouped by color and fashion trends to keep the stores
looking vibrant, hip and visually stimulating. We have implemented a
comprehensive marketing program that builds on our in-store sign graphics to
accentuate the fashion, quality and cutting-edge style of our merchandise.
WE ORDER PRIMARILY FROM DOMESTIC SOURCES AND UTILIZE A TEST-AND-REORDER
STRATEGY.
All of our inventory is purchased from third party vendors. The
cornerstone of our merchandising strategy is our test-and-reorder philosophy.
This strategy allows us to manage our inventory risk by testing small quantities
of fashion merchandise in our stores before placing larger purchase commitments.
Our experienced buying staff then uses sophisticated information systems to
track the weekly sell-through of each merchandise item by classification, style,
color and size, and places appropriate reorders for popular merchandise.
Accordingly, our test-and-reorder strategy enables us to quickly react to
sell-through trends and fashion preferences.
Our test-and-reorder strategy is successful in large part because we
deal with domestic vendors, which in management's experience has generally
resulted in short lead times of three to six weeks. Accordingly, we have
established relationships with over 600 vendors to meet our ongoing fashion and
inventory needs. We believe that we generally are able to obtain attractive
pricing and other terms from vendors because of their desire to be associated
with the Charlotte Russe and Rampage images and the rapid consumer feedback
provided by our test-and-reorder philosophy. We maintain a buying office in the
California Merchandise Mart in Los Angeles, the primary apparel center in
southern California, to facilitate constant dialogue and feedback between our
buying staff and our vendors. During fiscal year 1999, our top five vendors
accounted for less than 11.9% of our total purchases and no single vendor
accounted for more than 4.1% of our total purchases.
WE DISTRIBUTE MERCHANDISE THROUGH OUR MODERN SAN DIEGO FACILITY.
The timely and efficient distribution of merchandise to our stores is
critical to the success of our test-and-reorder strategy. We process all of our
merchandise through our modern 125,000 square foot distribution center in San
Diego, California, which we built and took possession in April 1998. Our
distribution facility employs an automated system for sorting apparel by store
and facilitating packaging for display in our stores. We estimate that
approximately 20% of our apparel merchandise is currently pre-ticketed by our
vendors, and we expect that this percentage will increase substantially over the
next fiscal year. This pre-ticketing by vendors saves time, reduces labor costs
and enhances inventory management. Our merchandise is generally shipped to
stores within 24 hours of receipt at the distribution center for delivery on
common carrier within one to three business days. Our merchandise is available
for sale in our stores the same day it is received and, accordingly, the time
period from receipt of goods at our distribution center to display in our stores
is typically less than five days. Each store generally receives three to five
merchandise shipments per week. We believe our current distribution
infrastructure is sufficient to accommodate our expected store growth and
expanded product offerings over the next several years.
WE HAVE STORES IN NUMEROUS LOCATIONS THROUGHOUT THE UNITED STATES.
As of September 25, 1999, we operated 74 Charlotte Russe stores and 22
Rampage stores throughout 15 states and Puerto Rico. The number of our stores
located in each state is shown in the following map according to the state or
territory in which such store is located.
[MAP]
-4-
<PAGE>
The following table highlights the number of stores, by geographic
region, opened in each of the last five fiscal years:
<TABLE>
<CAPTION>
NORTHEAST
CALIFORNIA SOUTHWEST SOUTHEAST & OTHER TOTAL
---------- --------- --------- ---------- -----
<S> <C> <C> <C> <C> <C>
Store count as of October 1, 1994..................... 24 6 - - 30
FISCAL 1995
Stores opened...................................... 3 1 - - 4
Store closed....................................... (1) 0 - - (1)
---------- --------- --------- ---------- -----
26 7 - - 33
FISCAL 1996
Stores opened...................................... 0 2 - - 2
---------- --------- --------- ---------- -----
26 9 - - 35
FISCAL 1997
Stores opened...................................... 3 1 2 1 7
Store closed....................................... (1) 0 0 0 (1)
---------- --------- --------- ---------- -----
28 10 2 1 41
FISCAL 1998
Stores acquired (Rampage).......................... 7 2 3 4 16
Stores opened...................................... 4 4 9 0 17
---------- --------- --------- ---------- -----
39 16 14 5 74
FISCAL 1999
Stores opened...................................... 1 3 9 9 22
---------- --------- --------- ---------- -----
Store count at end of fiscal 1999..................... 40 19 23 14 96
---------- --------- --------- ---------- -----
---------- --------- --------- ---------- -----
</TABLE>
WE SEEK TO LOCATE OUR STORES IN LARGE, COMMANDING SPACES IN HIGH TRAFFIC AREAS
OF STRONG REGIONAL MALLS.
Our stores, which average approximately 7,500 square feet, are
generally twice the size of most of our mall-based competitors' stores and
provide a comfortable and spacious shopping environment that accentuates the
breadth of our merchandise offering. To distinguish our stores, we also seek
prominent center court locations with distinctive architectural features, such
as high angled ceilings, which our store designers and visual merchandisers can
use to create striking displays, facades and entrances. We believe that
specialized store design features, including finished ceilings, classic lighting
and detailed features, help create a differentiated store environment unique to
young women's apparel retailers in the mall. We have historically been able to
locate and profitably operate our stores in a variety of malls catering to
different socioeconomic, demographic and cultural profiles. We remodel our
stores as appropriate and economically feasible, generally in connection with
our lease renewals.
We engage an independent real estate consultant to initially identify
favorable store locations in existing or new markets. This consultant currently
does not advise any other operators within the women's apparel industry. Our
site selection criteria includes:
- a careful assessment of mall traffic;
- the performance of other retailers within the mall and in
particular those serving our target customers;
- the proposed location within the mall;
- population and demographic characteristics of the area; and
- projected profitability and cash return on investment.
Immediately after site approval, we simultaneously negotiate lease
terms and begin planning the store layout and design. We typically open a new
store within three months after lease execution and delivery of space.
STORE OPERATIONS
Our store operations are currently organized into a Western region
with seven districts, an Eastern region with four districts and a
Southeastern region with four districts. Each region is managed by a regional
manager and each district is managed by a district manager. Each district
manager is responsible for an average of seven stores. We expect to add at
least one additional district manager before the end of this fiscal year.
Individual store personnel generally consists of a store manager, one or two
assistant managers and seven to ten sales associates, the number of which
generally increases during our peak selling seasons. Our store managers are
responsible primarily for customer service
-5-
<PAGE>
training and hiring store level staff. Merchandise selections, inventory
management and visual merchandising strategies for each store are determined at
the corporate level. Our regional, district, and store managers receive a base
compensation plus incentive compensation based on sales goals.
Our commitment to customer satisfaction and service is an integral part
of building customer loyalty. We strive to hire enthusiastic sales personnel and
provide them with extensive training to create a sales staff with a strong
fashion sense, a focus on customer service and a willingness to assist customers
with assembling, accessorizing and coordinating outfits.
Our standard training program for store managers includes an initial
three week session at a store managed by one of our approved training managers,
as well as frequent regional and district meetings. In addition, our training
manual provides practical information and skill development for all store level
positions. We develop new store managers by promoting from within and
selectively hiring from other retail organizations. In anticipation of our
accelerated store expansion, we have increased the number of people in our store
manager training program.
WE FOCUS MARKETING AND PROMOTION ON DEVELOPING OUR BRANDS.
Our marketing and promotional activities contribute greatly to the
development of our brands, and as our operations continue to grow nationally,
these activities will expand in scope and become increasingly important to us.
Historically, our marketing and promotional activities have been primarily
focused on in-store initiatives. For example, we maintain store signage and
in-store graphics, packaging, and displays that convey our fashion-forward
orientation and brand. We have also conducted direct mail campaigns in
association with new store openings and utilized limited outdoor advertising.
Additionally, our periodic promotional activities are designed to drive traffic
into our stores and to further our brand image of fashion and value. In the
future, we expect our marketing and promotional program will include national
and regional print advertising, radio and television advertising and billboard
and bus stop advertising. We also plan to develop an Internet site that we
believe will further enhance our brand image and that we may eventually use as a
new channel for selling our merchandise.
MANAGEMENT INFORMATION SYSTEMS ARE IMPORTANT TO OUR BUSINESS.
We are committed to investing in and continually upgrading our
management information systems, as we believe those systems are critical to
implementing our expansion strategy in an efficient manner and to maintaining a
competitive industry position. Our management information systems address, among
others things, our stock keeping unit and classification inventory tracking,
purchase order management, merchandise distribution, automated ticket making,
general ledger, sales audit, accounts payable, fixed asset management, payroll,
integrated financials and point-of-sale information. Our buying, allocation and
distribution functions are supported by an ICM merchandising system that is
tailored for Charlotte Russe and we utilize a Lawson Software package for our
financial reporting and human resource functions. We believe our current systems
are adequate to meet future expansion plans over the next several years.
Our sales are updated daily in the merchandise reporting system by
polling sales information from each store's point-of-sale terminal. Our
point-of-sale system consists of registers providing price look-up, time and
attendance, supply ordering, bill of lading tracking and automated charge card
processing. We believe these features improve transaction accuracy, increase
speed of checkout time and overall store efficiency, and enable us to track the
productivity of individual sales associates. Through automated nightly two-way
electronic communication with each store, we upload sales information, payroll
hours and messages to our host system, and download new merchandise pricing,
price changes for existing merchandise, carton receipts and system maintenance
tasks to the point-of-sale devices. Based upon the evaluation of information
obtained through daily polling, our planning department implements merchandising
decisions regarding inventory levels, reorders, price changes and allocation of
merchandise to stores.
WE COMPETE WITH OTHER RETAILERS PRIMARILY ON THE BASIS OF TIMELINESS OF
FASHIONS, BREADTH OF MERCHANDISE, BRAND RECOGNITION, PRICING AND QUALITY.
We currently compete against a diverse group of retailers, including
national and local specialty retail stores, regional retail chains, traditional
retail department stores and, to a lesser extent, mass merchandisers. The
primary competitors of Charlotte Russe are Contempo/Wet Seal and Express, and
the primary competitors of Rampage are bebe and Arden B. Our competitors sell a
broad assortment of apparel and accessories that are similar and often identical
to those we sell. Furthermore, our competitors may at times sell their
merchandise at prices lower than what we charge for comparable merchandise. We
believe that the principal bases upon which we compete in our industry are
timeliness of fashions, breadth of merchandise, brand recognition, pricing and
quality. We believe that we have a significant competitive advantage over our
competitors because of our exciting shopping environment. Our stores are
generally twice as large as most of our mall-based competitors and provide a
feminine look that is exciting to shop and accentuates the value and breadth of
our merchandise selection. We also believe that we have a competitive advantage
because of high consumer recognition and acceptance of our brands, our strong
presence in major shopping malls throughout the United States, our relationship
with our vendors and the experience of our management. The retail and apparel
industries, however, are highly competitive and characterized by relatively low
barriers to entry.
OUR INTELLECTUAL PROPERTY IS IMPORTANT TO OUR SUCCESS.
-6-
<PAGE>
We believe that our trademarks are important to our success. Our
Charlotte Russe trademark is registered with the United States Patent and
Trademark Office. In addition, we have applications pending with the United
States Patent and Trademark Office for a number of additional marks, including
[HEART, MOON, STAR] and Charlotte's Room. We have also submitted applications
for additional uses related to the Charlotte Russe trademark. In connection with
the acquisition of our Rampage stores, we acquired the exclusive right within
the United States to use the Rampage trademark for use on exterior or interior
signages identifying our Rampage stores, as well as for the non-exclusive right
within the United States to use the Rampage trademark for promotional and
advertising materials. The right to market merchandise under the Rampage
trademark was retained by Rampage Clothing Company and, accordingly, we do not
have the right to use the Rampage trademark on our merchandise. Further, nothing
in our license agreement prohibits the sale of merchandise bearing the Rampage
trademark by other parties or the licensing of the Rampage trademark to other
parties. In fact, Rampage Clothing Company has licensed the trademark to other
parties. If the product quality or activities of the Rampage Clothing Company or
these other parties negatively impact our business reputation, we have the right
to rename our Rampage stores and terminate the license agreement upon thirty
(30) days written notice. Furthermore, over 90% of the merchandise in our
Rampage stores is sold under our proprietary [HEART, MOON, STAR] label, and only
a nominal amount is sold under the Rampage brand name. We pay a royalty under
the license agreement equal to the greater of a stated dollar amount or a
percentage of net sales during the fiscal year. The license agreement has an
initial term of four years with an automatic option to renew for another four
years. We may also extend the license for ten additional four-year periods. We
may exercise each of these extension periods, however, only if our net sales for
the last fiscal year of the current four-year extension period exceed by 10% our
net sales for the fiscal year ending immediately prior to the beginning of such
extension period.
WE CONSIDER THE RELATIONSHIP WITH OUR EMPLOYEES TO BE GOOD.
As of September 25, 1999, we employed 745 full-time and 1,247 part-time
employees. Of our full-time employees, 126 were employed at our corporate
offices, 92 were employed at our distribution center and 527 were employed at
our store locations. The number of part-time employees fluctuates depending on
our seasonal needs. None of our employees are represented by a labor union, and
we consider the relationship with our employees to be good.
ITEM 2. PROPERTIES
We operated 96 stores throughout 15 states and Puerto Rico at the end
of fiscal 1999. We currently lease all of our store locations. Most leases have
an initial term of at least ten years and do not contain options to extend the
lease. Our leases, however, often allow for termination after three years if
sales at that site do not exceed specified levels, although in some instances we
are required to pay back any landlord allowances received. We lease space
containing approximately 125,000 square feet for our executive offices and
distribution center in San Diego, California. This lease is for a term of twelve
years and is scheduled to expire on August 31, 2009. We believe our distribution
facility is adequate for our operations over the next several years. We also
lease approximately 4,100 square feet at the California Merchandise Mart in Los
Angeles. This lease expires May 31, 2002.
The number of our stores located in each state is shown in the
following store list according to the state or territory in which such store is
located.
ARIZONA (8)
- -----------
Arizona Mills (Tempe)+
Arrowhead Center (Glendale)
Fashion Square (Scottsdale)
Fiesta Mall (Mesa)
Metro Center (Phoenix)
Paradise Valley Mall (Phoenix)
Tucson Mall
CALIFORNIA (40)
- ---------------
Fresno Fashion Fair
Los Angeles
Beverly Center-(R)
Brea Mall
Del Amo Fashion Center (Torrance)+
Fox Hills Mall (Culver City)
Glendale Galleria+
Laguna Hills Mall
Lakewood Fashion Center
Los Cerritos Center
Main Place (Santa Ana)
Mission Viejo-(R)
-7-
<PAGE>
Montclair Plaza
Montebello Town Center
Moreno Valley Mall
Northridge Fashion Center
Ontario Mills
Plaza at West Covina
Santa Anita Fashion Park
Sherman Oaks-(R)
South Coast Plaza (Costa Mesa)-(R)
Thousand Oaks Center
Topanga Plaza (Canoga Park)+
Westminster Mall
Westside Pavillion-(R)
San Diego
Chula Vista Center
Fashion Valley Center
Grossmont Center (La Mesa)
Mission Valley
Plaza Camino Real (Carlsbad)
North County Fair (Escondido)
Parkway Plaza (El Cajon)
Plaza Bonita (National City)
University Towne Center
Santa Rosa Plaza
Serramonte Center (Daly City)
Sun Valley (Concord)-(R)
Valley Plaza (Bakersfield)
CONNECTICUT (1)
- ---------------
Meriden Square
FLORIDA (15)
- ------------
Aventura Mall-(R)
Broward Mall (Plantation)
Citrus Park Center (Tampa)
Coral Square
Dadeland Mall (Miami)-(R)
Edison Mall (Fort Meyers)
Melbourne Square
Orange Park Mall
Orlando Fashion Square
Oviedo Marketplace
Regency Square (Jacksonville)
Shops at Sunset (South Miami)
The Falls (Miami)-(R)
Tyrone Square (St. Petersburg)
West Oaks Mall (Ococe)
GEORGIA (6)
- -----------
Augusta Mall
Mall of Georgia at Mill Creek+
Northlake Mall (Atlanta)
Perimeter Mall (Atlanta)
Town Center at Cobb (Kennesaw)
HAWAII (1)
- ----------
Pearlridge (Aiea)
ILLINOIS (2)
- ------------
Stratford Square
-8-
<PAGE>
Water Tower Place (Chicago)-(R)
MICHIGAN (1)
- ------------
Great Lakes Crossing (Auburn Hill)
NEW JERSEY (1)
- --------------
Garden State Plaza (Paramus)-(R)
NEW YORK (6)
- ------------
Palisades Center (West Nyack)+
Roosevelt Field (Garden City)+
Soho-(R)
Walden Galleria (Buffalo)
NEVADA (4)
- ----------
Boulevard Mall (Las Vegas)+
Galleria (Henderson)
Meadows Mall (Las Vegas)
NORTH CAROLINA (1)
- ------------------
Concord Mills
PENNSYLVANIA (1)
- ----------------
Franklin Mills (Philadelphia)
PUERTO RICO (1)
- ---------------
Plaza Del Sol
SOUTH CAROLINA (1)
- ------------------
Haywood Mall (Greenville)
TEXAS (7)
- ---------
Collin Creek Mall (Plano)
Grapevine Mills
Highland Mall (Austin)
Houston Galleria-(R)
Lakeline Mall (Cedar Park)
Northpark Mall (Dallas)-(R)
Valley View (Dallas)
- -----
(R) Rampage store only
+ Both a Charlotte Russe and Rampage store
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating
to claims arising out of its operations. As of the date of this filing, the
Company is not engaged in any legal proceedings that are expected, individually
or in the aggregate, to have a material adverse effect on the Company's
business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
-9-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION AND HOLDERS
Our common stock began trading on the Nasdaq National Market at
$11.00 per share under the symbol "CHIC" on October 19, 1999, following our
initial public offering. As of December 15, 1999, the number of holders of
record of our common stock was approximately nine. Although it is difficult
to determine the precise number of beneficial holders of our common stock due
to the recent commencement of trading of our common stock, we estimate the
number of such holders to be in excess of 300. On December 15, 1999, the
closing sale price of our common stock as reported in the Nasdaq National
Market was $16 1/8 per share.
In our initial public offering, we offered 1,450,000 shares of our
common stock. Certain of our shareholders offered an additional 1,450,000 shares
of our common stock in the offering. Our initial public offering price was
$11.00 per share. Some of the selling stockholders also granted to the
underwriters an option to purchase up to 435,000 additional shares of common
stock at $11.00 per share, less the underwriting discount. On November 23, 1999,
the underwriters exercised this over-allotment option.
USE OF PROCEEDS
The net proceeds from our sale of 1,450,000 shares of common stock was
approximately $13.5 million, based on the initial public offering price of
$11.00 and after deducting applicable underwriting discounts and offering
expenses. We did not receive any proceeds from the sale of common stock by the
selling stockholders. The following table shows the per share and total proceeds
received and underwriting discounts and commissions paid by us and the selling
stockholders to the underwriters. This information reflects the exercise by the
underwriters of their over-allotment option.
<TABLE>
<CAPTION>
PER SHARE AGGREGATE
--------- ---------
<S> <C> <C>
Public offering price........................................................ $11.00 $36,685,000
Underwriting discounts and commission paid by Charlotte Russe................ $ 0.77 $ 1,116,500
Proceeds, before expenses to Charlotte Russe................................. $10.23 $14,833,500
Underwriting discounts and commissions paid by the selling stockholders...... $ 0.77 $ 1,451,450
Proceeds, before expenses, to the selling stockholders....................... $10.23 $19,283,550
</TABLE>
The expenses of the offering, other than underwriting discounts and commissions
referred to above, are approximately $1,300,000.
We applied all of our approximately $13.5 million of net proceeds from
our initial public offering to our secured indebtedness outstanding under our
revolving credit facility with BankBoston, N.A., as agent. After application of
our proceeds, the outstanding balance under the revolving credit facility was
reduced to $4.8 million from $18.3 million.
The effective date of our prospectus (registration no. 333-84297) was
October 19, 1999. The representative underwriters for our offering were
BancBoston Robertson Stephens Inc., Banc of America Securities LLC, PaineWebber
Incorporated and First Union Securities, Inc.
DIVIDENDS
We have never declared nor paid dividends on our common stock and we do
not intend to pay any dividends on our common stock in the foreseeable future.
We currently intend to retain earnings to finance future operations and
expansions. We are currently prohibited by the terms of our revolving credit
facility from paying cash dividends without the prior written consent of the
lender.
-10-
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
During fiscal 1999, we granted options to purchase a total of
120,000 shares of our common stock at a weighted average exercise price
of $7.00. Of this amount, options to purchase 10,800 shares of common
stock have been exercised for an aggregate consideration of $10,800 and
options to purchase 57,600 shares of common stock have been forfeited or
repurchased by us. The sale and issuance of these securities were deemed
to be exempt from registration under the Securities Act by virtue of
Rule 701 promulgated thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below is
qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto
included elsewhere in this Annual Report. The selected consolidated balance
sheet data as of September 26, 1998 and September 25, 1999, and the selected
consolidated statement of income data for the three years in the period ended
September 25, 1999 have been derived from our consolidated financial
statements, which have been audited by Ernst & Young LLP, independent
auditors, and are included elsewhere in this Annual Report. The selected
consolidated balance sheet data as of September 30, 1995, September 27, 1996
and September 27, 1997 and the selected consolidated statement of income data
for each of the two years in the period ended September 27, 1996 were derived
from audited financial statements which are not included in this Annual
Report.
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
PREDECESSOR CHARLOTTE RUSSE
FISCAL YEAR ENDED FISCAL YEAR ENDED
-------------------------- -------------------------------------------
SEPT. 30, SEPT. 27, SEPT. 27, SEPT. 26, SEPT. 25,
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales............................ $61,568 $70,663 $81,543 $134,091 $177,459
Cost of goods sold................... 38,014 43,774 50,723 93,142 119,141
------- ------- ------- -------- --------
Gross profit......................... 23,554 26,889 30,820 40,949 58,318
Selling, general and
administrative expenses............ 12,652 15,266 17,168 26,989 34,062
Amortization of goodwill and other
intangibles....................... - - 815 895 895
Predecessor shareholders' salaries 10,200 8,000 1,200 - -
------- ------- ------- -------- --------
Operating income..................... 702 3,623 11,637 13,065 23,361
Interest (expense) income, net....... (28) 42 (2,279) (3,026) (2,376)
Other charges, net................... (115) (143) (315) (280) (270)
------- ------- ------- -------- --------
Income before income taxes and
extraordinary item................ 559 3,522 9,043 9,759 20,715
Income taxes(1)...................... - - 3,987 4,245 8,701
------- ------- ------- -------- --------
Income before extraordinary item 559 3,522 5,056 5,514 12,014
------- ------- ------- -------- --------
Extraordinary loss from early debt
retirement........................ - - - - (519)
------- ------- ------- -------- --------
Net income........................... $ 559 $ 3,522 $ 5,056 $ 5,514 $ 11,495
------- ------- ------- -------- --------
------- ------- ------- -------- --------
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
SEPT. 30, SEPT. 27, SEPT. 27, SEPT. 26, SEPT. 25,
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings per share(2):
Basic earnings per share:
Income before extraordinary
item............................ - - $ 0.28 $ 0.30 $ 0.66
======= ======= ======= ======== ========
Net income........................ - - $ 0.28 $ 0.30 $ 0.63
======= ======= ======= ======== ========
Diluted earnings per share:
Income before extraordinary item - - $ 0.25 $ 0.27 $ 0.57
======= ======= ======= ======== ========
Net income........................ - - $ 0.25 $ 0.27 $ 0.54
======= ======= ======= ======== ========
Weighted average shares outstanding(2):
Basic................................ 18,300 18,300 18,304
Diluted.............................. 19,992 20,668 21,234
SELECTED OPERATING DATA:
Number of stores open at end
of period............................. 33 35 41 74 96
Average square footage
per store(3).......................... 8,363 8,290 8,206 7,603 7,546
Comparable store sales increase
(decrease)(4)........................ 0.8% 4.7% 5.1% (5.8)% 6.7%
Average stores sales(5)................. $ 2,031 $ 2,048 $ 2,219 $ 2,097 $ 2,136
Sales per square foot(6)................ $ 231 $ 247 $ 268 $ 272 $ 282
BALANCE SHEET DATA:
Working capital (deficiency) $ 1,285 $(3,589) $(2,676) $ (1,239) $ (7,038)
Total assets............................ 17,705 49,641 57,128 74,427 88,569
Total debt.............................. 5,459 21,900 22,325 28,525 18,493
Total stockholders' equity.............. 5,142 18,923 23,980 29,445 40,037
</TABLE>
- ---------------
(1) The Predecessor had elected S corporation status for federal and state
income tax reporting purposes. Accordingly, the income of the
Predecessor was included in the tax returns of the shareholders and no
provision for income taxes was made. We have elected to operate as a
C corporation since our inception.
(2) See Note 12 of Notes to the consolidated financial statements for the
method used to calculate the earnings per share and weighted average
shares outstanding.
(3) Our average square footage per store is based on open stores at the end
of the period.
(4) Our comparable store percentages are based on net sales, and stores are
considered comparable beginning on the first day of the month following
the fourteenth full month of sales.
(5) Our average store sales are based on the time weighted average of open
stores in the period.
(6) Our sales per square foot consists of net sales divided by the time
weighted average of gross square footage of open stores.
-12-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with the
Financial Statements and Notes thereto of the company included elsewhere in this
Form 10-K. The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risks That May
Affect Results" in this section.
OVERVIEW
We were founded in 1975 and opened our first store in Carlsbad,
California. As a result of the success achieved with this store, we gradually
expanded our business by adding 15 stores throughout southern California over
the next 15 years. In 1990, we opened our first store in Arizona, and in 1992 we
expanded into the Nevada market. As of the end of fiscal 1996, we were operating
a chain of 35 stores in three states, generating over $70.0 million of net
sales.
On September 26, 1996, two funds managed by Saunders Karp & Megrue,
L.P., a private equity investment firm, acquired Charlotte Russe from its
founders with the intention of pursuing an accelerated national new store
expansion program. Concurrent with the acquisition, Bernard Zeichner, who had
joined us as President in May 1996, acquired an ownership interest in the
business from the SKM Funds. The new owners believed a significant opportunity
existed to leverage the strength of our new store economics by further
penetrating existing markets and expanding the chain into other regions of the
country. Mr. Zeichner recognized the importance of developing the necessary
infrastructure to execute this strategic business plan and began hiring a number
of key senior executives with national retail experience to complement the
existing management team.
In fiscal 1997, the first fiscal year under our new ownership, we
opened seven new stores compared to two new stores opened in the prior fiscal
year, and entered the northern California, Florida, Texas and Hawaii markets. As
a result of this new store growth and a 5.0% increase in our comparable store
sales, our net sales grew to $81.5 million in fiscal 1997 from $70.7 million in
fiscal 1996, an increase of 15.4%.
In fiscal 1998, we undertook several strategic initiatives to enhance
our long-term national expansion plans. At the beginning of fiscal 1998, we
acquired 16 stores in a bankruptcy proceeding from Rampage Retailing, Inc. for a
total purchase price of $10.5 million. These stores provided us with a second
distinct retail concept as well as an additional vehicle for growth. In
addition, we opened 17 new Charlotte Russe stores, primarily in markets we
entered in the prior fiscal year and in new markets such as Georgia and South
Carolina. Accordingly, our total store base increased by 80.5% during fiscal
1998. Finally, we moved into new corporate offices and a larger, more automated
distribution center capable of supporting our expansion plans over the next
several years. These initiatives, particularly the Rampage acquisition,
significantly strained our managerial and other resources. Due to the expedited
timing of the Rampage acquisition, we initially diverted Charlotte Russe
merchandise to support the opening of these stores and devoted significant
managerial resources to integrating this new concept. As a result, our buying
department was distracted by having to purchase for two distinctly different
chains throughout much of the first half of fiscal 1998 until we were able to
establish separate and dedicated buying operations for each concept. While we
achieved significant growth in net sales during fiscal 1998, we were only able
to achieve a modest increase in our operating income.
Our strong operating performance in fiscal 1999 reflects the benefits
of the infrastructure building process that we undertook during fiscal 1998. Net
sales in fiscal 1999 increased to $177.5 million from $134.1 million, an
increase of 32.3% over last fiscal year. This increase resulted from a rise in
comparable store sales of 6.7% and our continued growth of new stores. During
the same period, our operating income grew to $23.4 million from $13.1 million,
an increase of 78.8%. We opened 22 new stores during fiscal 1999, including 11
during the fourth quarter of fiscal 1999. These stores include our first
locations in Michigan, Illinois, Pennsylvania, Connecticut, North Carolina and
Puerto Rico.
RESULTS OF OPERATIONS
The following table sets forth our operating results, expressed as a
percentage of sales, and store information for the periods indicated. We
acquired our Rampage stores in the beginning of fiscal 1998 and, accordingly,
our results for fiscal 1997 consist only of the results for our Charlotte Russe
stores.
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net sales..................................................... 100.0% 100.0% 100.0%
Cost of goods sold............................................ 62.2 69.5 67.1
---- ---- ----
Gross profit.................................................. 37.8 30.5 32.9
Selling, general and administrative expenses.................. 21.1 20.1 19.2
Amortization of goodwill and other intangibles................ 1.0 0.7 0.5
Predecessor shareholders' salaries............................ 1.4 0.0 0.0
---- ---- ----
Operating income.............................................. 14.3 9.7 13.2
Interest income (expense), net................................ (2.8) (2.2) (1.3)
Other charges, net............................................ (0.4) (0.2) (0.2)
---- ---- ----
Income before income taxes and extraordinary item............. 11.1 7.3 11.7
Income taxes.................................................. 4.9 3.2 4.9
---- ---- ----
Income before extraordinary item.............................. 6.2 4.1 6.8
Extraordinary loss from early debt retirement................. 0.0 0.0 (0.3)
Net income.................................................... 6.2% 4.1% 6.5%
---- ---- ----
---- ---- ----
Number of stores open at end of period........................ 41 74 96
---- ---- ----
---- ---- ----
</TABLE>
-13-
<PAGE>
YEAR ENDED SEPTEMBER 25, 1999 COMPARED TO YEAR ENDED SEPTEMBER 26, 1998
NET SALES. Net sales increased to $177.5 million from $134.1 million, an
increase of $43.4 million or 32.3% over the same period last year. This increase
is attributable primarily to $35.3 million of net sales for the 22 new stores
opened during fiscal 1999, as well as other stores opened in prior fiscal years
that did not qualify as comparable stores. Our comparable store sales increased
6.7% and contributed $8.1 million to the net sales increase during fiscal 1999.
GROSS PROFIT. Gross profit represents net sales less cost of goods sold,
which includes buying, distribution and occupancy costs. Gross profit
increased to $58.3 million from $40.9 million, an increase of $17.4 million
or 42.4% over last fiscal year. This increase is the result of higher net
sales and improved gross profit margins. As a percentage of net sales, gross
profit rose to 32.9% from 30.5%. The increase in gross profit as a percentage
of net sales was principally due to higher initial markups, improved shrink
expense and the impact of leveraging distribution center expenses over a
higher sales base, partially offset by higher markdown expense.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $34.1 million from $27.0 million, an
increase of $7.1 million or 26.2% over last fiscal year. This increase is
attributable to new store expansion, increased corporate expenses, and a
$722,000 impairment charge related to the plan to close two stores. The
impairment loss includes $537,000 representing the net carrying value of
leasehold improvements which will be abandoned and $185,000 for estimated
unamortized landlord allowances that are refundable upon closure. Employee
termination benefits related to the store closures will be insignificant. As a
percentage of sales, selling, general and administration expenses dropped to
19.2% from 20.1%, primarily due to the impact of leveraging store operating
expenses and corporate payroll expenses over a higher sales base. The decline in
expenses as a percentage of net sales was partially offset by management bonus
plan accruals, for which no comparable charge was incurred during the same
period of the prior year.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill and
other intangibles expense remained constant at $0.9 million during
fiscal years 1998 and 1999.
INCOME TAXES. The effective tax rate of 42.0% for fiscal 1999 compares to an
effective tax rate of 43.5% for fiscal 1998. Our effective tax rate exceeds
statutory tax rates due to non-deductible amortization of goodwill associated
with the acquisition of the business in September 1996. Since amortization is a
fixed amount, increases in pre-tax earnings reduce the effect of this tax
difference as a percentage of pre-tax earnings.
NET INCOME. Net income increased to $11.5 million from $5.5 million, an increase
of $6.0 million or 108.5% over the prior fiscal year. This increase was
primarily due to an increase in gross profit, and was partially offset by an
increase in selling, general and administrative expenses, an increase in income
taxes, and a $0.5 million charge relating to the early repayment of the 12.5%
subordinated debt in June 1999.
YEAR ENDED SEPTEMBER 26, 1998 COMPARED TO YEAR ENDED SEPTEMBER 27, 1997
NET SALES. Net sales increased to $134.1 million from $81.5 million, an increase
of $52.6 million or 64.4% over the prior fiscal year. The increase reflects
$35.5 million of net sales from the 17 Rampage stores that were acquired or
opened during fiscal 1998. An additional $21.6 million of net sales increases
are related to the 16 new Charlotte Russe stores opened in fiscal 1998, as well
as other stores opened in prior fiscal years that did not qualify as comparable
stores. This increase was partially offset by a 5.8% decrease in our comparable
store sales, which resulted in decreased sales of $4.5 million compared to the
prior fiscal year.
GROSS PROFIT. Gross profit increased to $40.9 million from $30.8 million, an
increase of $10.1 million or 32.9% over the same period last year. This increase
is a result of increased net sales, offset in part by decreased gross profit
margins. As a percentage of net sales, gross profit decreased to 30.5% from
37.8%. The decrease in gross profit as a percentage of sales resulted in part
from the inclusion of the Rampage stores
-14-
<PAGE>
acquired at the beginning of fiscal 1998, which stores have higher occupancy
costs. In addition, lower comparable stores sales at our Charlotte Russe stores
resulted in higher markdowns and higher occupancy expenses as a percentage of
net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $27.0 million from $17.2 million, an
increase of $9.8 million or 57.2% over the same period last year. This increase
is attributable to new store expansion and increased corporate expenses. These
expenses as a percentage of net sales declined to 20.1% from 21.1% as corporate
expenses were leveraged by the significant increase in our sales base. This
decline was partially offset by an increase in store operating expenses
resulting from the inclusion of the Rampage stores, which have slightly higher
expense levels than our Charlotte Russe stores, and higher expenses for our
Charlotte Russe stores resulting from a drop in average store volumes.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill and
other intangibles expense increased to $0.9 million from $0.8 million, an
increase of $0.1 million or 12.5% over the same period last year. This increase
is a result of our acquisition of a license agreement and other intangibles in
connection with the Rampage acquisition.
INCOME TAXES. The effective tax rate of 43.5% for the year ended September 26,
1998 compares to an effective tax rate of 44.1% for the prior fiscal year.
NET INCOME. Net income increased to $5.5 million from $5.1 million, an increase
of $0.4 million or 9.0% over the prior fiscal year. This increase was primarily
due to an increase in gross profit and a $1.2 million reduction in salaries paid
to predecessor shareholders pursuant to terms of the September 1996 acquisition.
This increase in net income was largely offset by higher selling, corporate and
interest expenses associated with the Rampage acquisition.
QUARTERLY RESULTS AND SEASONALITY
We have historically experienced and expect to continue to experience
seasonal and quarterly fluctuations in our net sales and operating income. As is
the case with many retailers of apparel and related merchandise, our business is
subject to seasonal influences, characterized by strong sales during the
back-to-school, Easter and winter holiday seasons. The strength of each of these
three seasons generally provides relatively balanced sales during our first,
third and fourth fiscal quarters. We typically experience lower net sales and
net income during the second fiscal quarter ending in March of each year. Our
quarterly results of operations may fluctuate significantly as a result of a
variety of factors, including the timing of new store openings, fashion trends
and shifts in timing of certain holidays, as well as other factors discussed in
the section entitled "Risks That May Affect Results."
The following table includes our unaudited quarterly results of
operations data for each of the four quarters in the fiscal years ended
September 25, 1999 and September 26, 1998. We believe that this information has
been prepared on the same basis as our audited consolidated financial statements
and that all necessary adjustments, consisting only of normal recurring
adjustments, have been included to present fairly the selected quarterly
information when read in conjunction with our audited consolidated financial
statements and the notes to those statements included elsewhere in the Annual
Report.
-15-
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR 1998 FISCAL YEAR 1999
THREE MONTHS ENDED THREE MONTHS ENDED
---------------------------------------------- ---------------------------------------------
DEC. 27, MAR. 28, JUNE 27, SEPT. 26, DEC. 28, MAR. 27, JUNE 26, SEPT. 25,
1997 1998 1998 1998 1998 1999 1999 1999
------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales...................... $35,251 $27,202 $31,957 $39,681 $46,007 $35,689 $44,682 $51,081
Gross profit................... 12,158 7,482 9,263 12,046 15,150 10,625 14,607 17,936
Operating income............... 5,324 1,532 2,283 3,926 6,385 2,784 5,798 8,394
Net income..................... 2,605 333 835 1,741 3,223 1,204 2,432 4,636
AS A PERCENTAGE OF NET SALES:
Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit................... 34.5 27.5 29.0 30.4 32.9 29.8 32.7 35.1
Operating income............... 15.1 5.6 7.1 9.9 13.9 7.8 13.0 16.4
Net income..................... 7.4 1.2 2.6 4.4 7.0 3.4 5.4 9.1
OPERATING DATA:
Comparable store sales increase
(decrease)................. . (10.5)% (10.4)% (6.8)% 4.1% 4.4% 4.5% 11.3% 6.3%
Stores open at end of period... 61 62 69 74 80 82 85 96
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements result primarily from capital expenditures
related to new store openings. We have historically satisfied our cash
requirements principally through cash flow from operations. We have used
borrowings under our revolving credit facility in the past for acquisitions,
including our acquisition by the SKM Funds and the acquisition of 16 stores from
Rampage Retailing, Inc. Due to the rapid turnover of our inventory, we generate
trade payables and other accrued liabilities sufficient to offset our working
capital requirements. As of September 25, 1999, we had negative working capital
of $7.0 million.
During fiscal years 1997, 1998 and 1999, net cash provided by
operations was $8.3 million, $9.4 million and $27.5 million. In fiscal 1999,
cash flows from operating activities increased as a result of increased
operating earnings and increased current liabilities. In fiscal 1997 and 1998
cash used in investing activities included $2.0 million and $7.3 million related
to the acquisition of 16 stores from Rampage Retailing, Inc. Cash flows used for
new store openings and the construction of our distribution center and corporate
facility were $5.2 million, $8.5 million and $14.5 million in fiscal 1997, 1998
and 1999.
Excluding the impact of financing activities related to the Rampage
acquisition, the net repayment of borrowings under our revolving credit facility
and capital lease obligations were $1.6 million and $2.6 million in fiscal 1997
and 1998 and net borrowings of $1.0 million in 1999. During fiscal 1999, we
repaid $11.0 million of our 12.5% subordinated debt to the SKM Funds, although
net borrowings under our revolving credit facility rose only $1.4 million during
the same period.
Based on our experience with recent store openings, we estimate that
the average net investment to open a new store is approximately $450,000,
which includes capital expenditures, net of landlord contributions, and
initial inventory, net of payables. During the first year of operations, our
new stores opened during fiscal 1997 and 1998 generated store-level operating
cash flow in excess of $400,000, representing an average cash return on
investment greater than 90% although there can be no assurance that our new
stores will obtain these levels in fiscal years after 1998. After taking into
account store remodelings, corporate capital projects and distribution center
enhancements, total capital expenditures for fiscal 2000 are projected to be
approximately $18.0 million.
Our revolving credit facility with BankBoston, N.A., as agent, provides
us with a $32.0 million revolving line of credit under which borrowed funds bear
interest at either the Eurodollar rate plus 2.50% or the base rate plus 1.00%.
The revolving credit facility restricts levels of capital expenditures and
indebtedness. For example, in fiscal 1999, capital expenditures were limited to
the greater of $13.0 million or 54.0% of consolidated earnings before interest,
taxes, depreciation and amortization, and our debt level, other than permitted
indebtedness, was limited to $750,000. The revolving credit facility also
requires us to maintain specified financial ratios such as:
- funded debt to earnings before interest, taxes, depreciation
and amortization;
- earnings before interest, taxes, depreciation and amortization
to total debt service;
- interest coverage; and
-16-
<PAGE>
- inventory turns.
Under the revolving credit facility, no stockholder, other than the SKM Funds,
may own thirty-five percent or more of our stock, on a fully diluted basis
without triggering an event of default. The revolving credit facility is secured
by substantially all of our assets. The revolving credit facility terminates and
all outstanding borrowings are due on September 30, 2002. At September 25, 1999,
our outstanding balance under the revolving credit facility was $18.0 million.
We applied the net proceeds of approximately $13.5 million received from our
sale of 1,450,000 shares of common stock in our initial public offering to
reduce the outstanding balance of our revolving credit facility with BankBoston,
N.A., as agent, to $4.8 million.
We believe that the proceeds from our initial public offering, together
with anticipated cash flow from operations and funds anticipated to be available
under our revolving credit facility, will be sufficient to fund our store
expansion program and working capital requirements through fiscal 2000. If our
cash flow from operations should decline significantly, or if we accelerate our
store expansion program, it may be necessary for us to seek additional sources
of capital.
Upon completion of our initial public offering, we issued options to
purchase 250,000 shares of our common stock at an exercise price equal to the
initial public offering price of our common stock. The terms of these options
are substantially the same as other options previously issued under our 1996 and
1999 Long-Term Incentive Plans.
Also, upon completion of our initial public offering, vesting of
options to purchase 274,500 shares of common stock held by Mr. Bernard Zeichner,
our President and Chief Executive Officer, accelerated and became fully vested.
We determined the stock option award to be a fixed award and as such, no
compensation was recorded upon the completion of the initial public offering.
YEAR 2000 READINESS DISCLOSURE STATEMENT
The Year 2000 issue refers to the potential for system and processing
failures of date-related calculations after December 31, 1999, and is the result
of computer-controlled systems using two digits rather than four to define the
applicable year. For example, computer programs that have date sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000.
STATE OF READINESS. We have made an assessment of the Year 2000
readiness of our core management information systems, including the hardware
supporting those systems. We have either replaced or upgraded substantially all
of these systems within the past two years and we have been advised by the
vendors of the hardware and software used in our financial accounting,
point-of-sale and inventory management, and distribution center sortation
systems that the versions of their products now used by us are Year 2000
compliant. Each of these replacements and upgrades were part of our budgeted
expenses for upgrading our computer infrastructure and were not primarily part
of an attempt to address the Year 2000 issue. We tested these systems ourselves
on a separate computer with simulated dates after December 31, 1999 to verify
compliance. We believe that any issues identified will be corrected prior to
December 31, 1999, although we cannot assure you that we will be able to
complete any necessary corrective actions in a timely manner.
We are also planning to investigate other less critical equipment and
machinery that may contain embedded technology with Year 2000 compliance
problems, such as our alarm system and uninterrupted power supply. We have
completed our initial assessment and any corrective actions with respect to
these systems. We also have material relationships with third-party service
providers outside of our control, such as financial institutions, major credit
card processors, telecommunications providers and public utilities, that may not
have adequately addressed the Year 2000 issue. We are contacting the financial
institutions and public utilities with which we do business to obtain their oral
assurance that they will be Year 2000 compliant. We have been orally advised by
our major credit card processors and telecommunications providers that they
believe their operations will not be significantly disrupted by Year 2000
issues. Other than minimal testing of the systems of our major credit card
processors, however, we have no assurance that our third-party service providers
will be Year 2000 compliant or that they are correct in their Year 2000
assessments. Significant disruptions in the services provided to us would
adversely affect our operations. We currently purchase merchandise from a
significant number of vendors, but do not make purchases or otherwise exchange
data with our vendors electronically. In addition, because we purchase
merchandise from a diverse group of vendors we do not believe that we are
dependent on the operations of any single vendor or group of vendors. As a
result, we do not intend to inquire systematically about the Year 2000 readiness
of our vendors and their ability to address Year 2000 issues.
OUR YEAR 2000 RISKS. We currently believe that our systems will be Year
2000 compliant and capable of functioning beyond December 31, 1999. In the most
reasonably likely worst case scenario, we could experience total system failure
for our management information systems. This would cause significant disruptions
in our operations, including a temporary inability to process financial
information or credit card transactions, receive shipments and timely deliver
our merchandise to our stores, execute our critical test-and-reorder strategy
effectively or otherwise engage in other normal business activities. We may also
suffer damage to our brand names if we are unable to execute our
test-and-reorder strategy to track changes in fashion trends, and we may
experience increased expenses associated with stabilization of operations after
critical systems failure and execution of contingency plans. In another
reasonably likely worst case scenario, a significant number of our vendors would
be unable to continue to supply adequate amounts of merchandise. Although the
adverse effects of any or all of these events are not
-17-
<PAGE>
quantifiable at this time, any of these events would likely result in a loss of
income and otherwise have a material adverse effect on our business and
operating results.
OUR CONTINGENCY PLANS. We have not yet developed and do not expect to
develop contingency plans to handle the most likely worst case Year 2000
scenarios because we believe our systems will be Year 2000 compliant and capable
of functioning beyond December 31, 1999. We expect, however, that the worst case
scenario involving the failure of our management information systems over a
sustained period would necessitate reverting to a number of manual systems for
recording sales, ordering merchandise and replenishing our store level
inventory. Further, we expect that the worst case scenario for the loss of a
significant number of vendors would require us to seek alternative sources of
supply, although there can be no assurance that such alternative sources would
be available on reasonable terms or at all. We intend to take appropriate
actions to mitigate the effects of third party failures to remediate Year 2000
issues and for unexpected failures in our systems. If it becomes necessary for
us to take corrective actions, it is uncertain whether these actions would
result in significant interruptions in service or delays in business operations
or whether it would have a material adverse effect on our results of operations,
financial position or cash flow.
OUR YEAR 2000 REMEDIATION COSTS. As of September 25, 1999, we have
spent less than $50,000 addressing the Year 2000 issue and expect to spend a
comparable amount during the remainder of this calendar year. These amounts do
not reflect the cost of our employees that are responsible for testing our
systems for Year 2000 compliance.
INFLATION
We do not believe that inflation has had a material adverse impact on
our business or operating results during the periods presented.
FORWARD-LOOKING STATEMENTS
We have made statements under the captions, "Business,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Risks That May Affect Results," as well as in other sections
of this Annual Report, that are forward-looking statements. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"intend," "anticipate," "believe," "estimate" and "continue" or similar
words. These forward-looking statements may also use different phrases. We
have based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements, which are
subject to risks, uncertainties, and assumptions about us, may include, among
other things, projections of our future results of operations or of our
financial condition, our anticipated growth strategies, and anticipated
trends in our business.
We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
accurately predict or which we do not fully control that could cause actual
results to differ materially from those expressed or implied in our
forward-looking statements. Because these forward-looking statements involve
risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by these
forward-looking statements, including without limitation, those factors
listed below.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this Annual Report might not occur.
WE WILL BE OPENING NEW STORES MORE RAPIDLY THAN WE HAVE IN THE PAST, WHICH COULD
STRAIN OUR RESOURCES AND CAUSE US TO EXECUTE OUR BUSINESS LESS EFFECTIVELY.
Our growth will largely be dependent on successfully opening and
operating new stores. During fiscal 1999, we opened 22 new stores, including 11
stores in the fourth quarter. The addition of 22 stores in fiscal 1999
represented an increase of approximately 30% from the number of stores open at
the end of fiscal 1998. We plan to open approximately 30 new stores during
fiscal 2000, an increase of 31% from the end of fiscal 1999. We intend to
continue to increase our number of stores at approximately this rate for at
least the next few years. Our managerial and operational resources were
significantly strained during our acquisition of the 16 Rampage stores in fiscal
1998. Our proposed expansion is more rapid than what we have experienced in the
past, including the Rampage acquisition, and will place increased demands on our
managerial, operational and administrative resources. These increased demands
could cause us to execute our business less effectively, which in turn could
cause deterioration in the financial performance of our individual stores and
slow our new store growth.
OUR PLANNED EXPANSION INVOLVES A NUMBER OF RISKS THAT COULD PREVENT OR DELAY THE
SUCCESSFUL OPENING OF NEW STORES AS WELL AS IMPACT THE PERFORMANCE OF OUR
EXISTING STORES.
Our ability to open and operate new stores successfully depends on many
factors, including, among others, our ability to:
- identify suitable store locations;
- negotiate acceptable lease terms, including desired tenant
improvement allowances;
- source sufficient levels of inventory to meet the needs of new
stores;
- hire and train store personnel;
- successfully integrate new stores into our existing
operations; and
- satisfy the fashion preferences of new geographic areas.
In addition, many of our new stores will be opened in regions of the
United States and its territories in which we currently have few or no stores.
The expansion into new markets may present competitive, merchandising and
distribution challenges that are different from those currently encountered in
our existing markets. Any of these challenges could adversely affect our
business and results of operations. In addition, to the extent our new store
openings are in existing markets, we may experience reduced net sales volumes in
existing stores in those markets.
-18-
<PAGE>
OUR STORES ARE HEAVILY DEPENDENT ON THE CUSTOMER TRAFFIC GENERATED BY SHOPPING
MALLS.
Most of our store locations are not sufficiently concentrated to make
significant marketing expenditures cost effective. As a result, we depend
heavily on locating our stores in prominent locations within successful shopping
malls in order to generate customer traffic. We cannot control the development
of new shopping malls, the availability or cost of appropriate locations within
existing or new shopping malls, or the success of individual shopping malls.
IF AT ANY TIME OUR COMPARABLE STORE SALES AND QUARTERLY RESULTS OF OPERATIONS
DECLINE OR DO NOT MEET THE EXPECTATIONS OF RESEARCH ANALYSTS, THE PRICE OF OUR
COMMON STOCK COULD DECLINE SUBSTANTIALLY.
Our quarterly results of operations for our individual stores have
fluctuated in the past and can be expected to continue to fluctuate in the
future. For instance, while quarterly comparable store sales increased at least
4.1% in each of the fourth quarter of fiscal 1998 and the four quarters of
fiscal 1999, we experienced quarterly comparable store sales decreases ranging
from 1.7% to 10.5% in each of the five quarters preceding the fourth quarter of
fiscal 1998. Our net sales and operating results are typically lower in the
second quarter of our fiscal year due to the traditional retail slowdown
immediately following the winter holiday season. Our comparable store sales and
quarterly results of operations are affected by a variety of factors, including:
- the timing of new store openings and the relative proportion
of new stores to mature stores;
- fashion trends;
- calendar shifts of holiday or seasonal periods;
- the effectiveness of our test-and-reorder strategy in
maintaining appropriate inventory levels;
- changes in our merchandise mix;
- timing of promotional events;
- general economic conditions and, in particular, the retail
sales environment;
- actions by competitors or mall anchor tenants;
- weather conditions; and
- the level of pre-opening expenses associated with new stores.
OUR BUSINESS AND REPUTATION MAY BE ADVERSELY AFFECTED IF OUR RAMPAGE STORES ARE
ASSOCIATED WITH NEGATIVE PUBLICITY RELATED TO THE USE OF THE RAMPAGE TRADEMARK
BY OTHER PARTIES.
In connection with the acquisition of our Rampage stores, we acquired
the exclusive right within the United States to use the Rampage trademark for
use on exterior or interior signages identifying our Rampage stores as well as
the non-exclusive right within the United States to use the Rampage trademark
for promotional and advertising materials. We do not, however, have the right to
use the Rampage trademark on our merchandise. The right to market merchandise
under the Rampage trademark was retained by Rampage Clothing Company. Further,
nothing in our license agreement with Rampage Clothing Company prohibits the
sale of merchandise bearing the Rampage trademark by other parties or the
licensing of the Rampage trademark to other parties. In fact, Rampage Clothing
Company has licensed the trademark to other parties. We believe a positive
Rampage brand image is important to our success. Accordingly, if the merchandise
sold by the Rampage Clothing Company or other parties under the Rampage
trademark is of low quality or if the Rampage Clothing Company or these parties
otherwise engage in activities that may negatively affect the Rampage trademark
or are otherwise inconsistent with our Rampage store concept, consumers could
lose confidence in our merchandise and our reputation and business could be
materially adversely affected.
OUR SUCCESS DEPENDS ON OUR ABILITY TO IDENTIFY AND RAPIDLY RESPOND TO CONSUMERS'
FASHION TASTES.
The apparel industry is subject to rapidly evolving fashion trends and
shifting consumer demands. Accordingly, our success is heavily dependent both on
the priority our target customers place on fashion and on our ability to
anticipate, identify and capitalize upon emerging fashion trends. Current
fashion tastes place significant emphasis on a fashionable look. In the past
this emphasis has increased and decreased through fashion cycles, and decreased
emphasis has adversely affected our results. Although we rely on a
test-and-reorder merchandise strategy to minimize our exposure to misjudging
fashion tastes and to reduce inventory risks, we can not assure you that this
strategy will continue to be successful. Our failure to anticipate, identify or
react appropriately to changes in styles, trends, desired images or brand
preferences could lead to, among other things, excess inventories and higher
markdowns, as well as decreased appeal of our brands.
-19-
<PAGE>
OUR MARKET SHARE MAY BE ADVERSELY IMPACTED AT ANY TIME BY A SIGNIFICANT NUMBER
OF COMPETITORS.
We operate in a highly competitive environment characterized by low
barriers to entry. We compete against a diverse group of retailers, including
national and local specialty retail stores, regional retail chains, traditional
department stores and, to a lesser extent, mall merchandisers. Our market share
and results of operations may be adversely impacted by this significant number
of competitors. Many of our competitors also are larger and have substantially
greater resources than we do.
WE RELY ON OUR GOOD RELATIONSHIPS WITH VENDORS TO IMPLEMENT OUR BUSINESS
STRATEGY SUCCESSFULLY.
Our business is dependent on continued good relations with our vendors.
In particular, we believe that we generally are able to obtain attractive
pricing and other terms from vendors because we are perceived as a desirable
customer. Our test-and-reorder merchandise strategy also relies in large part on
our ability to obtain merchandise from our vendors within three to six weeks
from the date of order. Our failure to maintain good relations with our vendors
could increase our exposure to changing fashion cycles, which may in turn lead
to increased inventory markdown rates.
OUR SOUTHWESTERN UNITED STATES CONCENTRATION MAKES US SUSCEPTIBLE TO ADVERSE
CONDITIONS IN THIS REGION.
A majority of our stores are located in southern California, Arizona
and Nevada. As a result, our operations are more subject to regional factors
than the operations of more geographically diversified competitors. These
factors include, among others, economic and weather conditions, demographic and
population changes and fashion tastes.
In addition, our corporate offices and distribution center are located
in San Diego, and we transact business with vendors at our offices in the
California Merchandise Mart in Los Angeles. A natural disaster or other
catastrophic event, such as an earthquake, affecting southern California could
significantly disrupt our operations.
OUR FAILURE TO RETAIN OUR EXISTING SENIOR MANAGEMENT TEAM COULD ADVERSELY AFFECT
OUR BUSINESS.
Our business requires disciplined execution at all levels of our
organization in order to timely deliver and display fashionable merchandise in
appropriate quantities in our stores. This execution requires experienced and
talented management. We currently have a management team with a great deal of
experience with us and in apparel retailing. If we were to lose the benefit of
this experience, and in particular if we were to lose the services of Bernard
Zeichner, our President and Chief Executive Officer, or Harriet Sustarsic, our
Executive Vice President and General Merchandise Manager, our business could be
adversely affected. We do not have employment agreements with any member of our
senior management team other than Mr. Zeichner. We do not maintain key man
insurance on any of our management team.
WE RELY ON THIRD PARTIES FOR UPGRADING AND MAINTAINING OUR MANAGEMENT
INFORMATION SYSTEMS. IF THESE THIRD PARTIES DO NOT ADEQUATELY PERFORM THESE
FUNCTIONS APPROPRIATELY, OUR BUSINESS COULD BE DISRUPTED.
The efficient operation of our business is heavily dependent on our
information systems. In particular, we rely heavily on the automated sortation
system used in our distribution center and the merchandise management system
used to track sales and inventory. We depend on our vendors to maintain and
periodically upgrade these systems for the continued ability of these systems to
support our business as we expand. The software programs supporting our
automated sorting equipment and processing our inventory management information
were licensed to us by independent software developers. The inability of these
developers to continue to maintain and upgrade these software programs would
disrupt our operations if we are unable to convert to alternate systems in an
efficient and timely manner.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF OUR CRITICAL COMPUTER SYSTEMS DO NOT
PROPERLY HANDLE DATE INFORMATION AFTER DECEMBER 31, 1999.
Our operations may face risks associated with the fact that many
computer systems and software programs do not properly recognize dates after
December 31, 1999. This could result in system failures or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to receive shipments, process financial information or credit card
transactions, deliver our merchandise to our stores or engage in other normal
business activities.
Despite preliminary testing of the hardware and software used in our
accounting, point of sale and inventory control, and distribution information
systems indicating that the versions of those products now used by us are Year
2000 compliant, those systems may nevertheless contain errors or defects
associated with Year 2000 date functions. We are unable to predict to what
extent our business may be affected if our internal systems experience a
material Year 2000 failure. The computer systems of financial institutions,
major credit card processors, utility companies, telecommunications providers
and other third-party service providers outside of our control may not be Year
2000 compliant. The failure by such entities to achieve timely Year 2000
compliance could result in significant disruptions in the services provided to
us, which could adversely affect our business, operating results and financial
condition.
-20-
<PAGE>
We currently purchase merchandise from a significant number of vendors,
and do not make purchases or otherwise exchange data with our vendors
electronically. Because we purchase from such a diverse group of vendors, we do
not believe that we are dependent on the operations of any single vendor or
group of vendors. As a result, we do not intend to inquire systematically about
the Year 2000 readiness of our vendors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risks relate primarily to changes in interest rates. We
bear this risk in two specific ways. First, we have debt outstanding under
our $32.0 million revolving credit facility. This debt has a maturity date of
September 30, 2002 and bears interest at a rate per annum equal to either (1)
the base rate established by BankBoston, N.A. plus 1.00% or (2) the
Eurodollar rate of BankBoston, N.A. plus 2.50%, at our option and subject to
adjustments. As of September 25, 1999, our outstanding balance under the
revolving credit facility was $18.0 million, with an interest rate on
outstanding borrowings of 8.22%. Subsequent to our initial public offering
on October 19, 1999, we applied the approximately $13.5 million of net
proceeds from our initial public offering to our secured indebtedness
outstanding at the time of such payment. We may borrow additional funds under
our facility as needed. Our revolving credit facility carries a variable
interest rate pegged to market indices and, therefore, our statement of
income and our cash flows will be exposed to changes in interest rates.
The second component of interest rate risk involves the short-term
investment of excess cash in short-term, investment-grade interest-bearing
securities. These are considered to be cash equivalents and are shown that way
on our balance sheet. Changes in interest rates affect the investment income we
earn on our investments and, therefore, impact our cash flows and results of
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information with respect to this Item is set forth in "Index to
Financial Statements."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-21-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning our executive
officers and directors. We expect to add two independent directors in fiscal
2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Bernard Zeichner............................... 55 Chairman of the Board, Chief Executive Officer, President and Director
Harriet A. Bailiss-Sustarsic................... 42 Executive Vice President, General Merchandise Manager
Daniel T. Carter............................... 43 Executive Vice President, Chief Financial Officer
R. Tina Kernohan............................... 46 Executive Vice President, Store Operations
Allan W. Karp.................................. 44 Director
David J. Oddi.................................. 29 Director
</TABLE>
BERNARD ZEICHNER has been our President since May 1996. Mr. Zeichner
also serves as Chief Executive Officer and Chairman of the Board of Directors.
Prior to joining us, he was President of the retail division of Guess? from 1993
to 1995. Prior to that, Mr. Zeichner was employed by Contempo Casuals, serving
as President from 1982 to 1993 and as Chief Executive Officer from 1989 to 1993.
From 1977 to 1982, Mr. Zeichner was Executive Vice President of Joske's of
Texas, a department store chain.
HARRIET A. BAILISS-SUSTARSIC has been Executive Vice President and
General Merchandise Manager since October 1996. From 1993 to 1996, Ms. Sustarsic
was Director of Merchandising for the knits division of Rampage Clothing
Company, a junior apparel manufacturer. Previously, Ms. Sustarsic worked for
Contempo Casuals from 1987 to 1993, starting as a buyer and rising to a
Divisional Merchandise Manager. Ms. Sustarsic began her retail career in 1980 at
The Broadway department store chain and served in various merchandising
positions.
DANIEL T. CARTER joined us in June 1998 as our Executive Vice President
and Chief Financial Officer. Prior to joining us, from September 1997 through
May 1998, Mr. Carter was Chief Financial Officer for Advanced Marketing
Services, a public company that wholesales books to Costco and Sam's Club. From
1986 to September 1997, Mr. Carter was employed by The Price Company, the
operator of Price Clubs, and follow-up entities, serving as Senior Vice
President for PriceCostco and Chief Financial Officer for Price Enterprises. Mr.
Carter is a Certified Public Accountant.
R. TINA KERNOHAN began her employment with us in June 1996 as Regional
Manager and was promoted to Executive Vice President, Store Operations in
October 1997. From 1991 to 1996, Ms. Kernohan held the title of District Manager
at Miller's Outpost, where she supervised the operation of 20 stores. Ms.
Kernohan was employed by Contempo Casuals from 1974 to 1990, where she advanced
from sales to regional management, supervising 40 stores across five states.
ALLAN W. KARP has been a Director since September 1996. Since 1990, Mr.
Karp 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 SKM Funds and Saunders Karp & Megrue, L.P.
Before founding Saunders Karp & Megrue, L.P., Mr. Karp was a Principal in the
Merchant Banking Department at Morgan Stanley & Co., Inc.
DAVID J. ODDI has been a Director since September 1996. Mr. Oddi joined
Saunders Karp & Megrue, L.P. 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 SKM Funds and
Saunders Karp & Megrue, L.P. Prior to joining Saunders Karp & Megrue, L.P., Mr.
Oddi was a financial analyst in the Leveraged Finance Group at Salomon Brothers
Inc. Mr. Oddi also serves on the board of directors of The Children's Place
Retail Stores, Inc., a specialty retailer of apparel and accessories for
children.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the cash compensation paid or accrued for
fiscal years ended September 25, 1999 and September 26, 1998, to our Chief
Executive Officer and the other executive officers other than the Chief
Executive Officer who received more than $100,000 in salary and bonus during
these fiscal years. We did not make any restricted stock awards or long-term
incentive plan payments in fiscal years ended September 25, 1999 and September
26, 1998. The amount of cash compensation does not include the aggregate value
of personal benefits or securities, property or other non-cash compensation paid
or distributed other than pursuant to a plan which was less than the lesser of
$50,000 and ten percent (10%) of the cash compensation received by such officer.
-22-
<PAGE>
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------
NAME/PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)
------------------------ ---- ---------- ---------
<S> <C> <C> <C>
Bernard Zeichner 1999 280,288 275,000
Chief Executive Officer and President 1998 275,001 --
Harriet A. Bailiss-Sustarsic 1999 200,346 111,000
Executive Vice President, 1998 161,231 --
General Merchandise Manager
Daniel T. Carter 1999 206,834 120,000
Executive Vice President, 1998 56,154 --
Chief Financial Officer
R. Tina Kernohan 1999 102,558 48,780
Executive Vice President, 1998 93,942 13,247
Store Operations
</TABLE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
The table sets forth information for the officers indicated below
with respect to options held as of September 25, 1999. There was no public
trading market for our common stock as of September 25, 1999 and no options
were exercised by officers during fiscal 1999. Accordingly, the values in the
table have been calculated on the basis of an initial public offering price
of $11.00 per share less the applicable exercise price.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END (#) FISCAL YEAR END ($)
------------------- -------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Bernard Zeichner...................................... 366,000 549,000 $3,550,200 $5,325,300
Harriet A. Bailiss-Sustarsic.......................... 43,200 64,800 $ 432,000 $ 648,000
Daniel T. Carter...................................... 20,000 80,000 $ 150,000 $ 600,000
R. Tina Kernohan...................................... 21,600 32,400 $ 216,000 $ 324,000
</TABLE>
DIRECTOR COMPENSATION
Our by-laws require that each non-employee director will be entitled to
an annual fee of $10,000 plus $500 for each meeting attended, which fee may be
waived by any such director. For fiscal 1999, Messrs. Karp and Oddi have waived
these fees. Our directors will also be eligible to participate in the 1999
Equity Incentive Plan.
EMPLOYMENT CONTRACTS
We have entered into an employment agreement with Bernard Zeichner that
will remain effective through September 30, 2001. Under the terms of the
employment agreement, Mr. Zeichner has agreed to serve as the President and
Chief Executive Officer of our operating subsidiary and as a member of the board
of directors of such subsidiary. Mr. Zeichner will receive an annual base salary
of $350,000, an annual incentive bonus, lump sum cash payments in the amount of
$25,000 in each of fiscal years 2000 and 2001 and medical and other benefits.
Such bonus will be based on a percentage, up to 0.75%, of our earnings before
interest, taxes, depreciation and amortization, depending on the growth in such
earnings. Upon completion of our initial public offering, the vesting for 75% of
Mr. Zeichner's outstanding unvested options accelerated. This resulted in
accelerated vesting for options to purchase 274,500 shares of our common stock.
If Mr. Zeichner's employment is terminated without cause or Mr. Zeichner resigns
his position as a consequence of a material alteration of his responsibilities,
movement of our headquarters outside San Diego or a material breach of the
employment agreement or the Stockholders Agreement, he will be entitled to one
year of his base salary at the time of termination, payable in 12 equal monthly
installments.
STOCK OPTION PLANS
We have historically granted options for the purchase of our common
stock pursuant to our 1996 Long-Term Incentive Plan and our
-23-
<PAGE>
1999 Long-Term Incentive Plan. The board of directors has resolved, however,
that no further grants may be made under either the 1996 Long-Term Incentive
Plan or the 1999 Long-Term Incentive Plan. There are currently options to
purchase 1,824,600 shares of our common stock outstanding under these plans.
Our board of directors and stockholders adopted the 1999 Equity
Incentive Plan, effective as of the completion of our initial public offering.
Our 1999 Equity Incentive Plan was adopted by the board of directors and our
stockholders on July 29, 1999. The 1999 Equity Incentive Plan will be
administered by the compensation committee of our board of directors. See the
"Report of The Compensation Committee of the Board of Directors of Executive
Compensation."
CHANGE OF CONTROL ARRANGEMENTS
Under our 1999 Equity Incentive Plan, upon an acquisition of us by
merger or asset sale, the compensation committee shall have the discretion to:
- make any outstanding stock option and stock appreciation right
exercisable in full;
- remove the restrictions from any restricted stock;
- cause us to make any payment and provide any benefit under any
deferred stock award or performance award; and
- remove any performance or other conditions or restrictions on
any award.
In lieu of the action described above, the compensation committee may
arrange to have the successor corporation assume any outstanding award or grant
a substantially equivalent replacement award. Furthermore, if any person or
entity acquires more than 25% of our voting power, other than by consolidation
or merger, or if within any 24 month period, persons who were members of the
board of directors immediately prior to such 24-month period, together with
any persons who were first elected as directors (other than as a result of
any settlement of a proxy or consent solicitation contest) during such
24-month period, and who constituted a majority of the board of directors at
the time of such election, cease to constitute such a majority, then:
- any options outstanding at such time shall become exercisable
to the full extent of the original grant and all shares of
restricted stock not otherwise vested shall vest;
- holders of performance awards with unfilled conditions shall
be entitled to receive a cash payment per performance award
equal to the full value of the cash component of the award
plus the fair value of the stock included in the award;
- options and stock appreciation awards shall not be terminated
as a result of termination of employment, other than by reason
of death, disability or retirement, until seven months after
the employment termination or the expiration of the original
terms of the option or stock appreciation right; and
- neither the compensation committee nor our board of directors
will be able to amend or further restrict any option, stock
appreciation right, share of restricted stock or performance
award, or amend the terms of the 1999 Equity Incentive Plan in
any manner adverse to the holder of an award without the
written consent of that holder.
STOCK PURCHASE PLAN
We implemented an employee stock purchase plan following the completion
of our initial public offering. The employee stock purchase plan is designed to
enable eligible employees to purchase shares of our common stock at a discount
on a periodic basis through payroll deductions. We have reserved an aggregate of
350,000 shares of our common stock for issuance pursuant to this plan. The
purchases under the stock purchase plan will occur at the beginning of each
option period. The first option period commenced on the date of our initial
public offering and will end on June 30, 2000. Thereafter, each option period
will be six months in duration. Our employees are eligible to participate if
they have been employed by us or our subsidiaries for at least six months, as of
the first day of any option period, and are scheduled to work for at least 20
hours per week. Under the stock purchase plan, eligible employees, including
executive officers, are permitted to purchase on an after-tax basis our common
stock through payroll deductions that may not exceed 15% of their cash
compensation, including commissions, bonuses, and overtime. Notwithstanding the
foregoing, no employee who is a 5% or greater holder of our voting stock is
eligible to participate in the plan. The amount contributed by each participant
over the course of an option period will be used to purchase shares of our
common stock at a purchase price equal to 85% of the fair market value of the
common stock at the beginning or the end of a purchase period, whichever is
lower. Participants may purchase no more than 83 1/3 shares of common stock for
each full month of the initial option period and 500 shares of common stock for
each option period thereafter. Unless terminated sooner, the stock purchase plan
will terminate following the end of the first option period beginning ten years
from its effective date. The employee stock purchase plan is intended to qualify
for favorable tax treatment under Section 423 of the Internal Revenue Code. The
board of directors has authority to amend or terminate the stock purchase plan,
provided no such action may adversely affect the rights of any participant.
-24-
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We have a compensation committee comprised of Messrs. Karp and Oddi.
The compensation committee has the authority to approve salaries and bonuses and
other compensation matters for our officers, to approve employee health and
benefit plans and to administer our stock option plans.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
OF EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors for fiscal 1999
consisted of our two nonemployee directors.
The Compensation Committee is responsible for setting and administering
the policies governing compensation of our executive officers, including cash
compensation and stock ownership programs. The goals of the Company's
compensation policy are to attract and retain executive officers who contribute
to our overall success, by offering compensation that is competitive in the
retail apparel industry for companies our size, to motivate executives to
achieve our business objectives and to reward them for their achievements. We
generally use salary, incentive compensation and stock options to meet these
goals.
SALARY
Salaries are set by the Compensation Committee for the Chief
Executive Officer within the range of salary for similar positions in other
companies of similar size in the retail apparel industry, based on a variety
of available published information. The CEO's salary approximates the average
for salaries among comparable companies, although his salary is also adjusted
based on the CEO's experience, tenure, prior performance and the level of
equity ownership in the Company. Our CEO currently determines the salaries of
the other executive officers.
EQUITY COMPENSATION
We believe that employee equity ownership provides additional
motivation to maximize value for our shareholders. Because our stock options are
granted at the prevailing market price, the stock options will only have value
if our stock price increases over the exercise price. The Compensation Committee
believes, therefore, that the stock options align the interests of our employees
with those of our shareholders.
We have historically granted options for the purchase of our common
stock pursuant to our 1996 Long-Term Incentive Plan and our 1999 Long-Term
Incentive Plan. The board of directors has resolved, however, that no further
grants may be made under either of these plans. Each of these plans provides
that, so long as the SKM Funds own more than 25% of our outstanding common
stock, the option holders have tag along rights in the event of a private sale
by the SKM Funds of their shares of common stock. Currently, there are options
to purchase 1,824,600 shares of our common stock outstanding under these plans.
Our board of directors and stockholders adopted the 1999 Equity
Incentive Plan, effective upon the competition of our initial public offering on
October 19, 1999. The 1999 Equity Incentive Plan provides for the grant of a
variety of stock and stock-based awards and related benefits, including stock
options, restricted and unrestricted shares, deferred stock, performance awards,
rights to receive cash or shares with respect to an increase in the value of our
common stock. The 1999 Equity Incentive Plan's eligibility criteria are intended
to encompass those employees, officer, directors and consultants who are in a
position to make a significant contribution to the success of Charlotte Russe.
The 1999 Equity Incentive Plan permits the grant of options that
qualify as incentive stock options and nonqualified options. The option exercise
price of each incentive stock option shall be determined by the compensation
committee of our board of directors. In the case of incentive stock options,
however, the exercise price shall not be less than 100% of the fair market value
of the shares on the date of grant. Options granted at below the fair market
value of the common stock on the grant date could result in a charge against our
reported earnings.
In general, and except as otherwise determined by the compensation
committee of our board of directors, all rights under awards granted pursuant to
the 1999 Equity Incentive Plan to which the participant has not become
irrevocably entitled will terminate upon termination of the participant's
employment, consulting or service relationship with us. No award granted under
the 1999 Equity Incentive Plan, other than an award in the form of an outright
transfer of cash or unrestricted stock, may be transferred other than by will or
by the laws of descent and distribution. During a participant's lifetime an
award requiring exercise may be exercised only by the participant, or in the
event of the participant's incapacity, the person legally appointed to act on
the participant's behalf.
Subject to adjustment for stock splits and similar events, the total
number of shares of common stock that can be issued under the 1999 Equity
Incentive Plan is 750,000 shares. The maximum number of shares of common stock
as to which options or stock appreciation rights
-25-
<PAGE>
may be granted to any participant in any one calendar year is 200,000. Upon the
completion of our initial public offering, we issued options under the 1999
Equity Incentive Plan to purchase 250,000 shares of our common stock at an
exercise price equal to the initial public offering price of our common stock.
CHIEF EXECUTIVE OFFICER COMPENSATION
Under an employment contract, which was revised and extended in
October 1999, Mr. Zeichner serves as President and Chief Executive Officer of
Charlotte Russe, Inc., as a member of its board of directors and as a member
of Charlotte Russe Holding, Inc.'s board of directors through September 30,
2001. The employment agreement provides Mr. Zeichner with an annual base
salary, an annual incentive bonus opportunity and the grant of options to
purchase up to 3.5% of our common stock on a primary basis. Such options have
a ten year term and vest and become exercisable in five equal annual
installments, subject to acceleration based on the market performance of our
stock. For years prior to fiscal 2000, Mr. Zeichner was eligible for a bonus
based upon achievement of budgeted annual performance goals established by
the board of directors. The bonus opportunity ranged from 0% to 100% of Mr.
Zeichner's base salary, with 35% of base salary payable upon attainment of
100% of the budgeted performance goals. Under the terms of the amended
employment agreement, Mr. Zeichner will receive an annual base salary of
$350,000, an annual incentive bonus, lump sum cash payments in the amount of
$25,000 in each of fiscal years 2000 and 2001 and medical and other benefits.
Such bonus will be based on a percentage, up to 0.75%, of our earnings before
interest, taxes, depreciation and amortization, depending on the growth in
such earnings. If Mr. Zeichner's employment is terminated without cause or
Mr. Zeichner resigns his position as a consequence of a material alteration
of his responsibilities, movement of our headquarters outside San Diego or a
material breach of the employment agreement or the Stockholders Agreement, he
will be entitled to one year of his base salary at the time of termination,
payable in 12 equal monthly installments.
In accordance with the terms of the employment agreement, Mr.
Zeichner was paid a salary of $280,288 during fiscal 1999. Mr. Zeichner also
received a bonus of $275,000 based on the achievement of earnings before
interest, taxes, depreciation and amortization in excess of a targeted amount
of $26.0 million, which represented a 47.0% increase over the performance of
the preceding fiscal year. Upon completion of our initial public offering,
the vesting for 75% of Mr. Zeichner's outstanding unvested options
accelerated. This resulted in accelerated vesting for options to purchase
274,500 shares of our common stock. We believe that Mr. Zeichner's stock
ownership directly aligns his interests to those of our stockholders, and
will enhance our stockholders' returns.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of December 15, 1999 for:
(1) each person who is known by us to own beneficially more than
5% of our outstanding shares of common stock;
(2) each director and executive officer; and
(3) all directors and executive officers as a group.
As of December 15, 1999, there were 20,136,980 shares of outstanding
common stock. Unless otherwise indicated below, to our knowledge, all persons
listed below have sole voting and investment power with respect to their shares
of common stock, except to the extent authority is shared by spouses under
applicable law. Unless otherwise indicated, each entity or person listed below
maintains a mailing address of c/o Charlotte Russe Holding, Inc., 4645 Morena
Boulevard, San Diego, CA 92117.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
-----
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------ ------ -------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Bernard Zeichner(1)....................................... 1,372,772 6.55%
Harriet A. Bailiss-Sustarsic(2)........................... 64,800 *
Daniel T. Carter(3)....................................... 21,500 *
R. Tina Kernohan(4)....................................... 32,400 *
Allan W. Karp(5).......................................... 18,212,848 82.40
David J. Oddi(5).......................................... 18,209,348 82.39
All Directors and Executive Officers
as a Group.............................................. 19,706,320 85.52
FIVE PERCENT (5%) STOCKHOLDERS
John F. Megrue(5)......................................... 18,207,348 82.38
Thomas A. Saunders, III(5)................................ 18,207,348 82.38
</TABLE>
-26-
<PAGE>
- -----
* Less than one percent
(1) Includes 549,000 shares of common stock subject to options exercisable
within sixty days after September 25, 1999 and options to purchase
274,500 shares of common stock which vested immediately upon the
closing of our initial public offering on October 19, 1999.
(2) Includes 64,800 shares of common stock subject to options exercisable
within sixty days after September 25, 1999.
(3) Includes 20,000 shares of common stock subject to options exercisable
within sixty days after September 25, 1999.
(4) Includes 32,400 shares of common stock subject to options exercisable
within sixty days after September 25, 1999.
(5) Includes (a) 16,074,572 shares of common stock owned by The SK Equity
Fund, L.P., (b) 167,336 shares of common stock owned by SK Investment
Fund, L.P. (collectively with The SK Equity Fund, L.P., the "SKM
Funds") and (3) 1,965,440 shares of common stock which may be acquired
by the SKM Funds pursuant to the exercise of warrants. SKM Partners,
L.P. is the general partner of each of The SK Equity Fund, L.P. and SK
Investment Fund, L.P. Messrs. Karp, Megrue, Oddi and Saunders are
partners of Saunders Karp & Megrue Partners, L.L.C., which serves as
the general partner of SKM Partners, L.P. and, therefore, may be deemed
to have beneficial ownership of the shares of common stock shown as
being owned by the SKM Funds above. Messrs. Karp, Megrue, Oddi and
Saunders disclaim beneficial ownership of such shares, except to the
extent that any of them has a limited partnership interest in the SK
Investment Fund, L.P. The address for each of these entities or persons
is 262 Harbor Drive, Stamford, CT 06902.
The number of shares beneficially owned by each stockholder is
determined in accordance with the rules of the Securities and Exchange
Commission and are not necessarily indicative of beneficial ownership for any
other purpose. Under these rules, beneficial ownership includes those share of
common stock that the stockholder has sole or shared voting of investment power
and any shares of common stock that the stockholder has right to acquire within
sixty (60) days after September 25, 1999 through the exercise of any option,
warrant or other right. The percentage ownership of the outstanding common
stock, however, is based on the assumption, expressly required by the rules of
the Securities and Exchange Commission, that only the person or entity whose
ownership is being reported has converted options or warrants into shares of
common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED TRANSACTIONS
In April, 1999, we agreed to loan Mr. Zeichner $1.5 million to fund
the purchase of a home, and Mr. Zeichner has borrowed an aggregate of $1.0
million. The loan is evidenced by a promissory note due April 26, 2004 and
the loan bears interest at a rate of 7.47% per annum. Mr. Zeichner used the
net proceeds from the sale of shares of common stock in our initial public
offering to repay the promissory note in full.
In March, 1999, we loaned Ms. Bailiss-Sustarsic $120,000 to fund the
purchase of a home. The loan was evidenced by a promissory note due March 12,
2004 bearing interest at a rate of 8.5% per annum. This loan was repaid in full
on July 1, 1999.
During fiscal 1998 and 1999, we purchased an aggregate of approximately
$113,000 of merchandise from Slant, Inc., a manufacturer of women's apparel. Mr.
Zeichner's daughter is the President and Chief Executive Officer of Slant and
his wife is also a principal officer. Mr. Zeichner's wife and daughter also own
a majority of the outstanding equity interests in Slant, Inc.
We believe that our transactions have been no less favorable to us than
could have been obtained from a disinterested third party.
STOCKHOLDERS AGREEMENT
Charlotte Russe, the SKM Funds and Mr. Bernard Zeichner have entered
into a stockholders agreement. This agreement provides that (1) so long as the
SKM Funds own at least 25% of our total outstanding shares of common stock, they
will have the right to nominate three directors and designate the chairman of
the board of directors and (2) so long as the SKM Funds own at least 10% of the
shares of common stock held by them immediately after the completion of our
initial public offering, including shares of common stock issuable upon exercise
-27-
<PAGE>
of outstanding warrants at such date, they will have the right to nominate two
directors and include one director elected by the SKM Funds on each committee of
the board of directors. The stockholders agreement grants Mr. Zeichner tag along
rights in the event of a private sale by the SKM Funds of their shares of common
stock. The stockholders agreement also grants, subject to limitations and
exceptions, demand and piggyback registration rights to the SKM Funds and
piggyback registration rights to Mr. Zeichner. In the case of an underwritten
demand registration, we agreed that we will not, without the managing
underwriter's consent, sell or otherwise dispose of our common stock or
securities convertible into our common stock for a period from 30 days prior to
the effective date of the registration statement until 180 days after the
effective date of our registration statement, other than pursuant to our equity
plans.
The stockholders agreement provides for Saunders Karp & Megrue, L.P.,
an affiliate of the SKM Funds, to render financial advisory services, including
review and analysis of operational results and budgets, to us in exchange for an
annual fee of $250,000, payable in advance, plus reimbursement for out-of-pocket
expenses. This fee terminates when the SKM Funds own less than 10% of the shares
of common stock held by them immediately after the completion of our initial
public offering, including shares of common stock issuable upon exercise of
outstanding warrants at such date.
-28-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The financial statements listed in the "Index to Financial
Statements" at page F-1 are filed as part of this report.
2. The exhibits are listed in the Exhibit Index, which are incorporated
herein by reference.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the last quarter
of the fiscal year covered by this report.
-29-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Diego, Sate of California, on the 23rd day of December, 1999.
CHARLOTTE RUSSE HOLDING, INC.
By: /s/ DANIEL T. CARTER
----------------------------------------------------
Daniel T. Carter
Executive Vice President and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Bernard Zeichner and Daniel T.
Carter, and each of them acting individually, as his true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him in
any and all capabilities, to sign any and all amendments to this Annual Report
on Form 10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, with full power of each to act alone, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully for all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to
the requirements of the Securities Exchange Act of 1934, this Annual Report on
Form 10-K has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Chief Executive Officer, President and Director
/s/ BERNARD ZEICHNER (Principal Executive Officer) December 23, 1999
--------------------
Chief Financial Officer and Treasurer (Principal
/s/ DANIEL T. CARTER Financial Officer and Principal Accounting Officer) December 23, 1999
--------------------
/s/ ALLAN W. KARP Director December 23, 1999
-----------------
/s/ DAVID J. ODDI Director December 23, 1999
-----------------
</TABLE>
-30-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CHARLOTTE RUSSE HOLDING, INC.
Report of Ernst & Young LLP, Independent Auditors........................................................................ F-2
Consolidated Balance Sheets as of September 25, 1999 and September 26, 1998............................................... F-3
Consolidated Statements of Income for the years ended September 25, 1999, September 26, 1998 and September 27, 1997....... F-4
Consolidated Statement of Stockholders' Equity for the years ended September 25, 1999, September 26, 1998 and
September 27, 1997..................................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended September 25, 1999, September 26, 1998 and September 27, 1997... F-6
Notes to Consolidated Financial Statements................................................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Charlotte Russe Holding, Inc.
We have audited the accompanying consolidated balance sheets of
Charlotte Russe Holding, Inc. as of September 25, 1999 and September 26, 1998,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended September 25, 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 consolidated financial position of
Charlotte Russe Holding, Inc., at September 25, 1999 and September 26, 1998, and
the results of its operations and its cash flows for each of the three years in
the period ended September 25, 1999, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Diego, California
October 29, 1999
F-2
<PAGE>
CHARLOTTE RUSSE HOLDING, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1999 1998
----------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 2,982,025 $ 1,003,906
Inventories......................................................... 11,193,914 8,864,789
Other current assets................................................ 2,454,230 2,013,474
Deferred tax assets................................................. 2,450,000 1,190,000
----------- -----------
Total current assets................................................ 19,080,169 13,072,169
Fixed assets, net...................................................... 37,028,566 27,625,046
Goodwill, net.......................................................... 30,446,323 31,274,707
Deferred financing costs, net.......................................... 547,603 1,100,159
Other assets........................................................... 1,466,359 1,354,886
----------- -----------
Total assets........................................................ $88,569,020 $74,426,967
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable trade.............................................. $11,893,255 $ 7,398,038
Accounts payable other.............................................. 5,860,818 2,914,331
Accrued payroll and related expense................................. 1,427,665 1,153,010
Income taxes payable................................................ 627,145 615,163
Other accrued expenses.............................................. 5,932,154 1,803,064
Capital leases, current portion..................................... 376,790 428,000
----------- -----------
Total current liabilities........................................... 26,117,827 14,311,606
Notes payable to bank.................................................. 18,000,000 16,600,000
Subordinated notes payable to related parties.......................... -- 11,000,000
Capital leases, net of current portion................................. 115,926 496,874
Deferred rent.......................................................... 1,991,252 955,633
Other liabilities...................................................... 506,706 452,834
Deferred tax liabilities............................................... 1,800,000 1,165,000
----------- -----------
Total liabilities................................................... 48,531,711 44,981,947
Commitments
Stockholders' equity:
Preferred Stock $0.01 par value, 3,000,000 shares authorized,
none issued and outstanding...................................... -- --
Common Stock $0.01 par value, 100,000,000 shares authorized,
issued and outstanding shares - 18,310,800 at September 25,
1999 and 18,300,000 at September 27, 1998........................ 183,108 183,000
Additional paid-in capital.......................................... 19,448,073 18,691,381
Deferred compensation............................................... (660,000) --
Notes receivable from officers...................................... (1,000,000) --
Retained earnings................................................... 22,066,128 10,570,639
----------- -----------
Total stockholders' equity.......................................... 40,037,309 29,445,020
----------- -----------
Total liabilities and stockholders' equity............................. $88,569,020 $74,426,967
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CHARLOTTE RUSSE HOLDING, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 27,
1999 1998 1997
-------------------- --------------------- ----------------
<S> <C> <C> <C>
Net sales..................................... $177,459,298 $134,091,459 $ 81,543,232
Cost of goods sold, including buying,
distribution and occupancy costs........... 119,141,254 93,142,372 50,722,934
------------ ------------ ------------
Gross profit.................................. 58,318,044 40,949,087 30,820,298
Selling, general and administrative expenses.. 34,061,732 26,988,510 17,168,370
Amortization of goodwill and other
intangibles.............................. 895,368 895,360 814,411
Predecessor shareholders' salaries............ -- -- 1,200,000
------------ ------------ ------------
Operating income.............................. 23,360,944 13,065,217 11,637,517
Other expenses:
Interest expense (income).................. 2,375,889 3,025,378 2,278,730
Other charges, net......................... 270,074 280,354 315,363
------------ ------------ ------------
Total other expenses................... 2,645,963 3,305,732 2,594,093
------------ ------------ ------------
Income before income taxes and extraordinary item 20,714,981 9,759,485 9,043,424
Income taxes.................................. 8,700,392 4,245,376 3,986,894
------------ ------------ ------------
Income before extraordinary item.............. 12,014,589 5,514,109 5,056,530
Extraordinary loss from early debt retirement (519,100) -- --
------------ ------------ ------------
Net income.................................... $ 11,495,489 $ 5,514,109 $ 5,056,530
============ ============ ============
Basic earnings per share:
Income before extraordinary item........... $ 0.66 $ 0.30 $ 0.28
============ ============ ============
Net income................................. $ 0.63 $ 0.30 $ 0.28
============ ============ ============
Diluted earnings per share:
Income before extraordinary item........... $ 0.57 $ 0.27 $ 0.25
============ ============ ============
Net income................................. $ 0.54 $ 0.27 $ 0.25
============ ============ ============
Weighted average shares outstanding:
Basic...................................... 18,304,000 18,300,000 18,300,000
============ ============ ============
Diluted.................................... 21,234,000 20,668,000 19,992,000
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
CHARLOTTE RUSSE HOLDING, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL NOTES TOTAL
COMMON STOCK PAID-IN DEFERRED RECEIVABLE FROM RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION OFFICERS EARNINGS EQUITY
---------- -------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 27,1996... 18,300,000 $183,000 $18,739,981 $ -- $ -- $ - $18,922,981
Net income.................. -- -- -- -- -- 5,056,530 5,056,530
---------- -------- ----------- --------- ----------- ----------- -----------
Balance at September 27, 1997.. 18,300,000 183,000 18,739,981 -- -- 5,056,530 23,979,511
Stock option transactions,
net of tax benefit....... -- -- (48,600) -- -- -- (48,600)
Net income.................. -- -- -- -- -- 5,514,109 5,514,109
---------- -------- ----------- --------- ----------- ----------- -----------
Balance at September 26, 1998.. 18,300,000 183,000 18,691,381 -- -- 10,570,639 29,445,020
Stock option transactions,
net of tax benefit....... 10,800 108 36,692 -- -- -- 36,800
Deferred compensation
related to stock options. -- -- 720,000 (720,000) -- -- --
Amortization of deferred
compensation............. -- -- -- 60,000 -- -- 60,000
Notes receivable from
officers................. -- -- -- -- (1,000,000) -- (1,000,000)
Net income.................. -- -- -- -- -- 11,495,489 11,495,489
---------- -------- ----------- --------- ----------- ----------- -----------
Balance at September 25, 1999.. 18,310,800 $183,108 $19,448,073 $(660,000) $(1,000,000) $22,066,128 $40,037,309
========== ======== =========== ========== ============ =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CHARLOTTE RUSSE HOLDING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 27,
1999 1998 1997
----------------- ------------------ ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Reconciliation of net income to net cash
provided by operating activities:
Net income................................................ $11,495,489 $ 5,514,109 $ 5,056,530
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of deferred compensation.................. 60,000 -- --
Depreciation and amortization.......................... 6,078,447 4,959,105 2,838,168
Deferred rent.......................................... 1,035,619 737,609 218,024
Loss on disposal of asset.............................. 146,039 -- --
Extraordinary loss from early debt retirement.......... 455,295 -- --
Changes in operating assets and liabilities:
Inventories.......................................... (2,329,125) (5,064,754) (1,016,955)
Other current assets................................. (440,756) (1,156,706) 369,464
Deferred financing costs............................. (175,799) (254,748) (4,319)
Other assets......................................... (178,457) (54,930) (6,542)
Accounts payable..................................... 7,441,704 4,692,204 356,192
Accrued payroll and related expense.................. 274,655 333,640 159,545
Income taxes payable................................. 37,982 294,381 320,782
Other accrued expenses............................... 4,129,090 (1,095,985) 141,314
Other liabilities.................................... 53,872 286,136 30,000
Deferred taxes....................................... (625,000) 168,054 (193,054)
----------- ----------- -----------
Net cash provided by operating activities.................... 27,459,055 9,358,115 8,269,149
INVESTING ACTIVITIES
Net cash invested in acquisition of Rampage assets........... -- (7,276,463) (2,046,000)
Purchases of fixed assets.................................... (14,459,578) (8,537,486) (5,245,194)
Net cash invested in acquisition of predecessor.............. -- -- (419,591)
----------- ----------- -----------
Net cash used in investing activities........................ (14,459,578) (15,813,949) (7,710,785)
FINANCING ACTIVITIES
Payments on capital leases................................... (432,158) (631,918) --
Payments on notes payable to bank and revolving
credit facility........................................... (21,400,000) (18,925,000) (2,575,000)
Proceeds from notes payable to bank and revolving credit
facility...................................................... 22,800,000 24,200,000 3,000,000
Payments on notes payable to related parties................. (11,000,000) -- --
Funding of notes receivable from officers.................... (1,120,000) -- --
Repayments of notes receivable from officers................. 120,000 -- --
Proceeds from issuance of common stock....................... 10,800 -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities (11,021,358) 4,643,082 425,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents......... 1,978,119 (1,812,752) 983,364
Cash and cash equivalents at beginning of the year........... 1,003,906 2,816,658 1,833,294
----------- ----------- -----------
Cash and cash equivalents at end of the year................. $ 2,982,025 $ 1,003,906 $ 2,816,658
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
Stock option transactions, net of tax benefit................ $ -- $ 48,600 $ --
=========== =========== ===========
Fixed assets acquired through assumption of capital lease.... $ -- $ 1,567,313 $ --
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest..................................................... $ 3,731,697 $ 2,947,606 $ 2,211,966
=========== =========== ===========
Income taxes, net............................................ $ 8,911,510 $ 3,751,000 $ 4,088,756
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
CHARLOTTE RUSSE HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Charlotte Russe Holding, Inc. (the "Company") was incorporated in
Delaware in July 1996. On September 27, 1996, the Company was capitalized
through the issuance of Common Stock and long-term debt. Effective September 27,
1996, the Company acquired all of the stock of Lawrence Merchandising
Corporation, a California corporation, and its affiliates, Lawrence
Merchandising Corporation of Nevada and Lawrence Merchandising Corporation of
Nevada II, both Nevada corporations, (collectively, the "Predecessor" companies)
for approximately $35 million in cash. In addition, the Company repaid $5
million of the Predecessor's short-term borrowings concurrent with the
consummation of the purchase transaction.
The acquisition was accounted for using the purchase method of
accounting. The excess of the aggregate purchase price over the fair value of
net assets acquired of approximately $32.9 million was recognized as goodwill.
DESCRIPTION OF BUSINESS
The Company operates in one segment selling clothing and accessories
for women through its retail stores that operate under the names Charlotte Russe
and Rampage (Note 2). As of September 25, 1999, the Company operated 96
mall-based retail stores in Arizona, California, Connecticut, Florida, Georgia,
Hawaii, Illinois, Michigan, Nevada, New Jersey, New York, North Carolina,
Pennsylvania, Puerto Rico, South Carolina, and Texas.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
FISCAL YEAR
The Company's fiscal year is the 52/53 week period ending on the
last Saturday in September. Fiscal years ended September 25, 1999, September
26, 1998 and September 27, 1997 each contained 52 weeks.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all liquid investments with maturities of three
months or less when purchased to be cash equivalents.
F-7
<PAGE>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are accounted for by the retail method. The cost of
inventory is determined at the lower of the first-in, first-out (FIFO) method or
market. During fiscal 1997, the Company changed from the last-in, first-out
(LIFO) method to the FIFO method. The change did not have a material effect on
fiscal 1997 results of operations.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
five to seven years. Leasehold improvements are amortized on a straight-line
basis over the estimated useful lives of the respective assets or the term of
the lease, whichever is less. Depreciation expense for the years ended September
25, 1999, September 26, 1998 and September 27, 1997 was $4,910,019, $3,798,194
and $1,808,165, respectively.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of the cost over the fair value of net
assets acquired by the Company. Goodwill is amortized on a straight-line basis
over 40 years. The amortization period was determined based upon the following
factors, among others: operating history, brand name recognition, merchandising
strategy, vendor network, proven portability to new markets and demographics of
the junior women's market. Accumulated amortization for goodwill at September
25, 1999, September 26, 1998 and September 27, 1997 was $2,471,179, $1,642,795
and $814,411, respectively.
Other intangibles, included in Other Assets in the accompanying balance
sheet, result from the Company's acquisition of Retailing, Inc. ("Rampage") and
represent amounts attributable to a license agreement allowing the Company to
utilize the Rampage name and other intangibles. These assets are stated at cost
and are amortized using the straight-line method over the estimated useful life
of 20 years. The amortization period was primarily determined based on the
expectation that the Rampage license renewal options would be exercised. (See
Note 7). Accumulated amortization for other intangibles at September 25, 1999
and September 26, 1998 was $133,960 and $66,976, respectively.
DEFERRED FINANCING COSTS
Debt issuance costs are amortized to interest expense using the
straight line method over the life of the related debt, ranging from September
30, 2002 to September 27, 2003. Unamortized issuance costs remaining upon early
retirement of debt are expensed. Accumulated amortization at September 25, 1999
and September 26, 1998 was $488,898 and $482,142, respectively.
DEFERRED RENT
Rent expense on noncancellable leases containing known future scheduled
rent increases are recorded on a straight-line basis over the term of the
respective leases. The excess rent expense over rent paid is accounted for as
deferred rent.
F-8
<PAGE>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in operations in
the period that includes the enactment date.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, whenever events or changes in circumstances indicate that the
carrying amount of its assets might not be recoverable, the Company, using its
best estimates based upon reasonable and supportable assumptions and
projections, reviews the carrying value of long-lived assets for impairment.
Impairment for long-lived assets to be held is measured by comparing the
carrying amount of the asset to its fair value. Impairment is reviewed at the
lowest levels for which there are identifiable cash flows that are independent
of the cash flows of other groups of assets. The Company performs such analysis
on an individual store basis and estimates fair values based on sales prices for
comparable assets. The Company measures impairment for long-lived assets to be
disposed of at the lower of the carrying amount or net realizable value (fair
market value less cost to dispose). The Company has identified two
underperforming stores and plans to close these locations by the end of fiscal
2000. Accordingly, the Company recorded an impairment loss of $722,000, which is
included in selling, general and administrative expenses. The impairment loss
includes $537,000 representing the net carrying value of leasehold improvements
which will be abandoned net of the expected future cash flows through the end of
fiscal 2000. In addition, the impairment loss includes $185,000 for the
estimated unamortized landlord allowances that are refundable upon closure.
Employee termination benefits related to the store closures will be
insignificant. The operating results for the two stores is not material for the
years ended September 25, 1999 and September 26, 1998, respectively.
STOCK BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, establishes the use of the fair value based method
of accounting for stock-based compensation arrangements, under which
compensation cost is determined using the fair value of stock-based compensation
determined as of the grant date, and is recognized over the periods in which the
related services are rendered. SFAS No. 123 also permits companies to elect to
continue using the current intrinsic value accounting method specified in
Accounting Principles Board Opinion (APB) No. 25 to account for stock-based
compensation. The Company has decided to retain the current intrinsic value
based method, and has disclosed the pro forma effect of using the fair value
based method to account for its stock-based compensation.
REVENUE RECOGNITION
Retail merchandise sales are recognized at the point of sale, less
estimated sales returns. A reserve is provided for anticipated returns based
on prior experience.
STORE PRE-OPENING COSTS
Costs incurred in connection with the opening of a new store are
expensed as incurred.
F-9
<PAGE>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average
outstanding common shares. Dilutive earnings per share is computed based on the
weighted average outstanding shares and potentially dilutive stock options and
warrants.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments, including cash and cash equivalents, accounts
payable, accrued expenses, income tax payable and capital lease obligations are
carried at cost, which management believes approximates fair value because of
the short-term maturity of these instruments. Interest on long-term debt is
primarily based on variable rates; therefore, management believes the carrying
amounts for the outstanding borrowings at September 25, 1999 and September 26,
1998 approximate fair value.
COMPREHENSIVE INCOME
In fiscal 1999, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. The Company did not have any
component of other comprehensive income for any periods presented.
ADVERTISING COSTS
Advertising costs are expensed as incurred and were $379,116, $241,603
and $15,758, for the years ended September 25, 1999, September 26, 1998 and
September 27, 1997, respectively.
RECLASSIFICATIONS
Certain amounts in the prior years financial statements have been
reclassified to conform with the fiscal 1999 presentation.
2. ACQUISITION OF RAMPAGE ASSETS
On September 30, 1997, the Company completed the acquisition of certain
assets of Rampage, a retailer of women's apparel, for a purchase price of
$10,500,000, consisting of cash of which $2,000,000 was prepaid in fiscal year
1997 as a deposit, and the assumption of certain capital lease obligations. The
transaction was accounted for under the purchase method and the purchase price
was primarily allocated to fixed assets. The cash portion of the purchase price
was funded from the Company's credit facilities.
F-10
<PAGE>
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1999 1998
----------- -----------
<S> <C> <C>
Leasehold improvements................................................. $32,845,734 $23,690,119
Furniture and fixtures................................................. 10,219,482 6,764,970
Equipment and vehicles................................................. 3,738,720 3,113,396
----------- -----------
46,803,936 33,568,485
Less accumulated depreciation and amortization......................... (9,775,370) (5,943,439)
----------- -----------
$37,028,566 $27,625,046
----------- -----------
----------- -----------
</TABLE>
4. NOTES RECEIVABLE FROM OFFICERS
In April 1999, the Company loaned $1,000,000 under a note agreement to
its President and Chief Executive Officer. The full amount of the note is
secured by a pledge of 750,000 shares of Common Stock of the Company, plus any
shares obtained by the officer in the future. All principal and accrued interest
(7.47% per annum) is due and payable on April 26, 2004, except in the event that
all or any part of the pledged Common Stock is sold, the net proceeds of the
sale of such shares of Common Stock must be used to repay any outstanding
principal and interest. The entire amount of outstanding principal and accrued
interest was repaid subsequent to September 25, 1999.
In March 1999, the Company loaned $120,000 under a note agreement to an
Executive Vice President of the Company. The full amount of the note is secured
by a pledge of all shares of Common Stock of the Company obtained by the officer
in the future. All principal and accrued interest (8.5% per annum) is due and
payable on March 12, 2004. The entire amount of outstanding principal and
accrued interest was repaid on July 1, 1999.
5. CREDIT ARRANGEMENTS
At September 25, 1999, the Company has a revolving credit facility
which provides for aggregate commitments of $32.0 million through September
1999; $30.5 million from October 1999 through September 2000; $25.0 million from
October 2000 through September 2001; and $18.0 million from October 2001 through
maturity. All outstanding borrowings under the revolving credit facility are due
on September 30, 2002. Substantially all of the Company's assets secure the bank
credit agreement. At September 25, 1999, there was $18.0 million outstanding
under the revolving credit facility.
Interest on the amended revolving credit facility is payable
quarterly at either (i) the bank's Base Rate, as defined, plus 1.00% or (ii)
the bank's Eurodollar rate plus 2.50%, at the Company's option, subject to
certain adjustments. At September 25, 1999, the interest rate on outstanding
borrowings was 8.22%.
Pursuant to the terms of the bank credit agreement, the Company can
issue up to $5.0 million of commercial or standby letters of credit. The annual
fee incurred is 2.00% for commercial and standby letters of credit plus
customary issuance and amendment charges. Fees are paid quarterly in arrears and
charges are paid as incurred. At September 25, 1999 and September 26, 1998,
there were outstanding letters of credit in the amount of $1.6 million and $1.3
million, respectively.
The bank credit agreement requires that the Company maintain certain
financial ratios and restricts future liens and indebtedness, sales of assets,
and dividend payments. As of September 25, 1999, the Company is in compliance
with the terms of the bank credit agreement.
F-11
<PAGE>
5. CREDIT ARRANGEMENTS (CONTINUED)
In connection with the original bank credit agreement, the Company
issued warrants to purchase approximately 413,560 shares of the Company's Common
Stock at $1.00 per share. The number of shares of common stock issuable under
the warrant increased by an aggregate of 216 shares pursuant to anti-dilution
provisions. The warrants are exercisable immediately and expire on September 27,
2006. The warrants were valued at approximately $152,000, which is included in
deferred financing costs and the warrants are being amortized on a straight-line
basis over the life of the agreement, as amended. The fair value of the warrants
was estimated at the date of grant using the minimum value method with the
following assumptions: risk free interest rate of 6.0%; an expected warrant life
of 7.5 years; and no annual dividends. On October 19, 1999, the warrants were
exercised in conjunction with the Company's initial public offering in a
cashless transaction resulting in the issuance of 376,180 shares of the
Company's common stock.
The Company has entered into an interest rate swap agreement to
manage certain of its interest rate exposure. The notional amount associated
with this agreement was established at $11.0 million with annual reductions
of $2.0 million during the contract life until expiration in May 2001. The
notional amount is used to measure interest to be paid or received and does
not represent the exposure to credit loss. As a result of the agreement, a
portion of the Company's variable rate bank debt is effectively converted to
fixed rate debt and has a pay rate of 8.56%, subject to certain adjustments.
The interest rate differential to be received or paid is recognized as a
component of interest expense over the life of the agreement. This instrument
is not recorded on the balance sheet. However, if the instrument was recorded
based on its fair value, the Company would have recorded a liability of
$260,000 at September 26, 1998. On August 24, 1999, the Company paid $20,775
to terminate the interest swap agreement.
6. SUBORDINATED NOTES PAYABLE TO RELATED PARTIES
The Company had two senior subordinated note agreements with
affiliated investors which were paid off in June 1999. Interest accrued at
12.5% and was due semi-annually. Principal was due upon maturity of the
notes, September 27, 2003. The Company recognized interest expense of
$1,349,900, $1,371,000, and $1,375,000 for the years ended September 25,
1999, September 26, 1998 and September 27, 1997, respectively.
In conjunction with the issuance of the two senior subordinated notes,
the Company issued warrants to purchase approximately 1,964,410 shares of Common
Stock at $1 per share. The number of shares of common stock issuable under these
warrants increased by an aggregate of 1,030 shares pursuant to anti-dilution
provisions. The warrants are exercisable immediately and expire on September 27,
2006. The warrants are valued at approximately $722,000, which is included in
deferred financing costs and were being amortized on a straight-line basis over
the term of the notes. The fair value of the warrants was estimated at the date
of grant using the minimum value method with the following assumptions: risk
free interest rate of 6.0%; an expected warrant life of 7.5 years; and no annual
dividends.
In connection with the repayment of all outstanding principal under the
two agreements in June 1999, the Company incurred a prepayment fee of $255,200,
which was charged to income in the accompanying statement of income for the year
ended September 25, 1999 and accounted for as an extraordinary item. In
addition, unamortized warrant issue costs of approximately $263,900, were
written off in June 1999 resulting in total extraordinary item charges of
$519,100.
F-12
<PAGE>
7. COMMITMENTS
LEASES
The Company leases its retail stores, warehouse, and office facilities
under various operating leases which expire between 2001 and 2012. Under certain
retail store leases, the Company is required to pay the greater of a minimum
lease payment or 5% to 11% of annual sales volume. Rent expense, including
reimbursement of our proportional share of common area maintenance expenses, for
the years ended September 25, 1999, September 26, 1998 and September 27, 1997
was $22,837,051, $17,049,570, and $8,766,335, respectively, including
$1,122,680, $610,267 and $452,564, respectively, of contingent rentals.
The following is a summary of the annual future minimum capital and
operating lease commitments as of September 25, 1999:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ------------
<S> <C> <C>
Year ending September:
2000.............................................................. $398,078 $ 19,040,826
2001.............................................................. 95,027 19,506,509
2002.............................................................. 28,548 19,237,018
2003.............................................................. -- 18,660,759
2004.............................................................. -- 18,470,690
Thereafter........................................................ -- 70,066,603
-------- ------------
Total minimum lease payments...................................... 521,653 $165,340,260
============
Less amount representing interest................................. (28,937)
--------
Present value of net minimum lease payments, including $376,790
which is current............................................... $492,716
========
</TABLE>
LICENSE AGREEMENT
In conjunction with the acquisition of Rampage assets on September 30,
1997, the Company entered into a license agreement enabling the Company to
operate stores under the Rampage name. The license fee is calculated as the
greater of an annual fee (ranging between $300,000 to $450,000) or a percent of
sales at stores operating under the Rampage name (ranging between 1.0% and
1.5%). The license agreement is for an initial term of four years with an
automatic option to renew for another four years. The agreement may be renewed
for ten additional four year periods, provided certain conditions are met.
Currently, management believes the license agreement will be renewed for at
least four additional periods. License fees are recorded monthly based on the
greater of a percentage of sales or the annual fee, as defined. License fees
incurred during the years ended September 25, 1999, September 26, 1998 and
September 27, 1997 totaled $451,723, $354,526, and $0, respectively and are
included in selling, general and administrative expenses.
STOCK OPTIONS
In 1996, the Company established a Long-Term Incentive Plan (the 1996
Plan). The 1996 Plan provides for the issuance of shares of Common Stock under
incentive and non qualified stock options. Options vest ratably at 20% per year
over five years from the date of the grant, subject to certain acceleration
provisions and are exercisable for a period of up to ten years from the date of
grant. Incentive stock options are granted at prices which approximate the fair
value of the common shares at the date of grant as determined by the Board of
Directors.
F-13
<PAGE>
7. COMMITMENTS (CONTINUED)
In May 1999, the Company established a 1999 Long-Term Incentive Plan
(the 1999 Plan). The 1999 Plan provides for the issuance of shares of common
stock under non qualified stock options and stock appreciation rights. The
exercise price of options shall not be less than 85% of the fair market value at
the date of grant, or 110% in the case of any person possessing 10% combined
voting power of all classes of stock of the Company. The Company's Board of
Directors determines the vesting and other provisions of option and stock
appreciation rights granted under the 1999 Plan.
Pursuant to the terms of the grant in October 1996, upon completion
of the Company's initial public offering on October 19, 1999, vesting for
options to purchase 274,500 shares of Common Stock related to the President
and CEO was accelerated and the options became fully vested. The Company has
determined the stock option award to be a fixed award and as such, no
compensation will be recorded.
In July 1999, the Company's Board of Directors resolved that no further
stock option grants will be made from the 1996 Plan or 1999 Plan.
8. EQUITY
A summary of the Company's stock option activity and related
information for the plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at September 27, 1996................................... -- $ --
Granted.......................................................... 1,815,000 1.15
Cancelled........................................................ (57,000) 1.00
--------- ---------
Outstanding at September 27, 1997................................... 1,758,000 1.16
Granted.......................................................... 216,000 3.65
Cancelled........................................................ (201,000) 1.58
--------- ---------
Outstanding at September 26, 1998................................... 1,773,000 1.41
Granted.......................................................... 120,000 7.00
Cancelled........................................................ (57,600) 1.00
Exercised........................................................ (10,800) 1.00
--------- ---------
Outstanding at September 25, 1999................................... 1,824,600 $ 1.80
========= =========
Exercisable, September 27, 1997..................................... -- --
Exercisable, September 26, 1998..................................... 319,200 $1.17
Exercisable, September 25, 1999..................................... 648,600 $1.31
</TABLE>
F-14
<PAGE>
8. EQUITY (CONTINUED)
The following table summarizes information about stock options
outstanding as of September 25, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------ ---------------------------------
WEIGHTED AVERAGE
NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.00............... 1,253,100 7.0 $1.00 503,400 $1.00
$2.00-$3.50......... 424,500 7.6 $2.53 139,800 $2.32
$4.00-$7.00......... 147,000 9.3 $6.45 5,400 $4.00
</TABLE>
The weighted average fair value of options granted was $2.56, $1.30 and
$0.36 for the years ended September 25, 1999, September 26, 1998 and September
27, 1997, respectively.
The Company has recorded deferred compensation in connection with the
grants of certain stock options to employees during the year ended September 25,
1999. The options were granted at the then deemed fair value of $7 per share. In
conjunction with the Company's initial public offering registration statement,
the Company revised the estimate of the deemed fair value of its Common Stock
resulting in $720,000 of deferred compensation. The deemed fair value per share
represents a discount from the initial public offering per share price and is
attributable to restrictions on the availability of these shares for sale
(vesting provisions) and improved operating results since the date of their
grant. The deferred compensation will be amortized ratably over the vesting
period of the respective options. No deferred compensation was recorded for
option grants prior to this period. The remaining options to purchase Common
Stock were granted at exercise prices equal to the deemed fair value, as
determined by the Company's Board of Directors based on valuation analyses of
publicly traded peer companies.
Pro forma information regarding net income is required by SFAS No. 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value of options
granted were estimated at the date of grant using the minimum value option
pricing model with the following weighted-average assumptions: risk free
interest rate of 6%, dividend yield of 0%, and weighted-average expected life of
the option of 5 years.
The minimum value option pricing model is similar to the Black-Scholes
option valuation model which was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor of volatility. In addition, option valuation
models require the input of highly subjective assumptions. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
F-15
<PAGE>
8. EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the related options.
The Company's pro forma information follows:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------------------------------------
SEPTEMBER 25, 1999 SEPTEMBER 26, 1998 SEPTEMBER 27, 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net income as reported............................... $11,495,489 $5,514,109 $5,056,530
Pro forma net income................................. $11,392,119 $5,396,784 $4,950,679
Net income per share basic as reported............... $ 0.63 $ 0.30 $ 0.28
Pro forma............................................ $ 0.62 $ 0.29 $ 0.27
Net income per share diluted as reported............. $ 0.54 $ 0.27 $ 0.25
Pro forma............................................ $ 0.53 $ 0.26 $ 0.25
</TABLE>
1999 EQUITY INCENTIVE PLAN
The Company's Board of Directors and stockholders adopted the 1999
Equity Incentive Plan, effective as of the completion of its initial public
offering. The 1999 Equity Incentive Plan permits the grant of options that
qualify as incentive stock options and non-qualified options. The option
exercise price of each option shall be determined by the compensation committee
of the Board of Directors. In the case of incentive stock options, however, the
exercise price shall not be less than 100% of the fair market value of the
shares on the date of grant, or 110% in the case of incentive stock options
granted to an individual with ownership in excess of certain limits. Subject to
adjustment for stock splits and similar events, the total number of shares of
Common Stock that can be issued under the 1999 Equity Incentive Plan is 750,000
shares. The Company expects to issue options to purchase 250,000 shares of its
common stock at an exercise price equal to the initial public offering price of
its common stock. The terms of these options will be substantially the same as
other options previously issued.
STOCK SPLIT
In connection with the completion of its initial public offering on
October 19, 1999, the Company approved a 100-for-1 stock split. In addition, the
Company's certificate of incorporation was amended upon completion of its
initial public offering, to authorize the issuance of up to 100,000,000 shares
of Common Stock and 3,000,000 shares of Preferred Stock. Consequently, the stock
option data and per share data, throughout the consolidated financial statements
and the notes to the consolidated financial statements, have been restated to
reflect the stock split.
INITIAL PUBLIC OFFERING
On October 19, 1999, the Company completed its initial public offering
of 1,450,000 shares of common stock for net proceeds of approximately $13.5
million.
F-16
<PAGE>
9. INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 27,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal........................................... $7,801,816 $3,232,670 $3,505,000
State............................................. 1,523,576 844,652 870,000
---------- ---------- ----------
9,325,392 4,077,322 4,375,000
Deferred:
Federal........................................... (526,703) 143,054 (369,984)
State............................................. (98,297) 25,000 (18,122)
---------- ---------- ----------
(625,000) 168,054 (388,106)
---------- ---------- ----------
Income taxes......................................... $8,700,392 $4,245,376 $3,986,894
========== ========== ==========
</TABLE>
A reconciliation of the calculated income tax provision based on
statutory tax rates in effect and the effective tax rate follows:
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 27,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Tax at U.S. statutory rates.......................... $7,250,183 $3,318,225 $3,074,795
State income taxes, net of federal tax benefit....... 908,862 573,970 574,200
Non deductible expenses.............................. 197,761 161,256 187,222
Other, net........................................... 343,586 191,925 150,677
---------- ---------- ----------
$8,700,392 $4,245,376 $3,986,894
========== ========== ==========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 25, 1999 SEPTEMBER 26, 1998
------------------ ------------------
<S> <C> <C>
Deferred tax assets:
Inventory......................................... $ 1,014,152 $ 525,547
Deferred rent..................................... 788,870 378,274
State income taxes................................ 343,743 208,293
Employee benefit programs......................... 221,523 176,520
Other accrued expenses............................ 870,582 279,640
----------- -----------
Total deferred tax assets............................ 3,238,870 1,568,274
Deferred tax liabilities:
Tax over book depreciation........................ (1,763,168) (1,102,251)
Intangibles....................................... (825,702) (441,023)
----------- -----------
Total deferred tax liabilities....................... (2,588,870) (1,543,274)
----------- -----------
Net deferred tax assets.............................. $ 650,000 $ 25,000
=========== ===========
</TABLE>
F-17
<PAGE>
10. RELATED PARTY TRANSACTIONS
The Company expensed a management fee of $250,000 to its majority
shareholder during each of the years ended September 25, 1999, September 26,
1998 and September 27, 1997. This fee terminates at any time when the majority
shareholder owns less than 10% of the shares of common stock, including shares
of common stock issuable upon exercise of outstanding warrants at such date.
The Company's majority shareholder and its CEO have entered into a
stockholders agreement. This agreement provides that (1) as long as the majority
shareholder owns more than 25% but less than 50% of the Company's outstanding
shares, they will have the right to nominate three directors and (2) as long as
the majority shareholder own at least 10% of the shares of common stock held by
them immediately after the completion of this offering, they will have the right
to nominate two directors. The stockholders agreement grants the Company's CEO
certain tag along rights in the event of a private sale by the majority
shareholder of their shares of common stock. The stockholders agreement also
grants, subject to limitations and exceptions, demand and piggyback registration
rights to the majority shareholder and piggyback registration rights to the CEO.
For the years ended September 25, 1999 and September 26, 1998, the
Company purchased approximately $89,000 and $24,000, respectively, of
merchandise from a company primarily owned by family members of one of our
officers.
11. EMPLOYEE SAVINGS PLAN
The Company has an Internal Revenue Code Section 401(k) profit-sharing
plan (the Plan) for eligible employees. The Plan is funded by employee
contributions and provides for the Company to make discretionary contributions.
The Company matches 25% of participants contributions up to 4% of eligible
compensation. Amounts contributed and expensed under this plan were $50,062,
$30,648 and $0 for the years ended September 25, 1999, September 26, 1998, and
September 27, 1997, respectively.
F-18
<PAGE>
12. EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in basic and
diluted earnings per share is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 27,
1999 1998 1997
------------- ------------- -------------
<C> <C> <C>
Net income......................................... $11,495,489 $5,514,109 $5,056,530
----------- ---------- ----------
Income before extraordinary item................... $12,014,589 $5,514,109 $5,056,530
=========== ========== ==========
Income before extraordinary item per share:
Basic........................................... $ 0.66 $ 0.30 $ 0.28
Effect of dilutive securities stock options..... (0.03) (0.01) (0.01)
Effect of dilutive securities warrants.......... (0.06) (0.02) (0.02)
----------- ---------- ----------
Diluted......................................... $ 0.57 $ 0.27 $ 0.25
----------- ---------- ----------
Earnings per share:
Basic........................................... $ 0.63 $ 0.30 $ 0.28
Effect of dilutive securities stock options..... (0.03) (0.02) (0.02)
Effect of dilutive securities warrants.......... (0.06) (0.01) (0.01)
----------- ---------- ----------
Diluted......................................... $ 0.54 $ 0.27 $ 0.25
=========== ========== ==========
Weighted average number of shares:
Basic........................................... 18,304,000 18,300,000 18,300,000
Effect of dilutive securities stock options..... 844,000 627,000 444,000
Effect of dilutive securities warrants.......... 2,086,000 1,741,000 1,248,000
----------- ---------- ----------
Diluted......................................... 21,234,000 20,668,000 19,992,000
=========== ========== ==========
</TABLE>
F-19
<PAGE>
EXHIBIT INDEX
(a) Exhibits marked with an asterisk are filed herewith. The remainder of the
exhibits have heretofore been filed with the Commission and are incorporated
herein by reference.
EXHIBIT DESCRIPTION
- ------- -----------
2.1 Stock Purchase Agreement dated as of August 26, 1996 by and among
Charlotte Russe Holding, Inc., Daniel Lawrence, Frank Lawrence and
Larry Lawrence (Exhibit 2.1 to Registration Statement 333-84297
filed October 19, 1999)
3.1 Certificate of Incorporation of Charlotte Russe Holding, Inc., as
amended+ (Exhibit 3.1 to Registration Statement 333-84297 filed
October 19, 1999)
3.2 Certificate of Amendment to the Certificate of Incorporation of
Charlotte Russe Holding, Inc. (Exhibit 3.2 to Registration Statement
333-84297 filed October 19, 1999)
3.3 Amended and Restated By-laws of Charlotte Russe Holding, Inc.+
(Exhibit 3.3 to Registration Statement 333-84297 filed October 19,
1999)
4.1 Form of common stock Certificate (Exhibit 4.1 to Registration
Statement 333-84297 filed October 19, 1999)
10.1 The Second Amended and Restated Revolving Credit Agreement dated as
of December 23, 1998, as amended, by and among Charlotte Russe,
Inc., as Borrower, Charlotte Russe Holding, Inc., as Guarantor, and
BankBoston, N.A. (Exhibit 10.1 to Registration Statement 333-84297
filed October 19, 1999)
10.2 The Second Amended and Restated Security Agreement dated as of
December 23, 1998 by and among the Charlotte Russe, Inc., Charlotte
Russe Holding, Inc., Charlotte Russe Merchandising, Inc. of
Charlotte Russe Inc. and BankBoston, N.A. (Exhibit 10.2 to
Registration Statement 333-84297 filed October 19, 1999)
10.3 The Second Amended and Restated Trademark Collateral Security and
Pledge Agreement dated as of December 23, 1998 by and between
Charlotte Russe, Inc. and BankBoston, N.A. (Exhibit 10.3 to
Registration Statement 333-84297 filed October 19, 1999)
10.4 The Second Amended and Restated Stock Pledge Agreement dated as of
December 23, 1998 by and between Charlotte Russe Holding, Inc. and
Bank Boston, N.A. (Exhibit 10.4 to Registration Statement 333-84297
filed October 19, 1999)
10.5 The Stock Pledge Agreement, dated as of December 23, 1998 by and
between Charlotte Russe, Inc. and BankBoston, N.A. (Exhibit 10.5 to
Registration Statement 333-84297 filed October 19, 1999)
10.6 The Second Amended and Restated Guaranty dated as of December 23,
1998 by Charlotte Russe Holding, Inc. in favor of BankBoston, N.A.
(Exhibit 10.6 to Registration Statement 333-84297 filed October 19,
1999)
10.7 Stockholders Agreement by and among Charlotte Russe Holding, Inc.,
The SK Equity Fund, L.P., SK Investment Fund, L.P., and Bernard
Zeichner (Exhibit 10.7 to Registration Statement 333-84297 filed
October 19, 1999)
10.8 Charlotte Russe, Inc. Agency Account Agreement dated December 5,
1997 by and between Charlotte Russe, Inc. and BankBoston, N.A.
(Exhibit 10.8 to Registration Statement 333-84297 filed October 19,
1999)
10.9 Employment Agreement by and between Charlotte Russe, Inc. and
Bernard Zeichner dated October 1, 1996 (Exhibit 10.9 to Registration
Statement 333-84297 filed October 19, 1999)
10.10 Amendment No. 1 to Employment Agreement by and between Charlotte
Russe, Inc. and Bernard Zeichner (Exhibit 10.10 to Registration
Statement 333-84297 filed October 19, 1999)
10.11 Trade Secret and Confidentiality Agreement dated as of October 1,
1996 by and between Charlotte Russe Holding, Inc. and Bernard
Zeichner (Exhibit 10.11 to Registration Statement 333-84297 filed
October 19, 1999)
<PAGE>
10.12 Charlotte Russe Holding, Inc. 1999 Long-Term Incentive Plan (Exhibit
10.12 to Registration Statement 333-84297 filed October 19, 1999)
10.13 Charlotte Russe Holding, Inc. 1996 Long-Term Incentive Plan (Exhibit
10.13 to Registration Statement 333-84297 filed October 19, 1999)
10.14 Lease Agreement for San Diego Distribution Center dated July 24,
1997 by and between Price Enterprises, Inc. and Charlotte Russe,
Inc. (Exhibit 10.14 to Registration Statement 333-84297 filed
October 19, 1999)
10.15 Charlotte Russe Holding, Inc. 1999 Equity Incentive Plan (Exhibit
10.15 to Registration Statement 333-84297 filed October 19, 1999)
10.16 License Agreement dated September 30, 1997 by and between Rampage
Clothing Company and Charlotte Russe, Inc. (Exhibit 10.16 to
Registration Statement 333-84297 filed October 19, 1999)
10.17 Charlotte Russe Holding, Inc. 1999 Employee Stock Purchase Plan
(Exhibit 10.17 to Registration Statement 333-84297 filed October 19,
1999)
10.18 Common Stock Purchase Warrant No. 2 by and between Charlotte Russe
Holding, Inc. and The SK Equity Fund, L.P., dated as of September
27, 1996 (Exhibit 10.19 to Registration Statement 333-84297 filed
October 19, 1999)
10.19 Common Stock Purchase Warrant No. 3 by and between Charlotte Russe
Holding, Inc. and SK Investment Fund, L.P., dated as of September
27, 1996 (Exhibit 10.20 to Registration Statement 333-84297 filed
October 19, 1999)
10.20 First Amendment dated October 1, 1999 to the common stock Purchase
Warrant by and between Charlotte Russe Holding, Inc. and The SK
Equity Fund, L.P., dated as of September 27, 1996 (Exhibit 10.22 to
Registration Statement 333-84297 filed October 19, 1999)
10.21 First Amendment dated October 1, 1999 to the common stock Purchase
Warrant by and between Charlotte Russe Holding, Inc. and SK
Investment Fund, L.P., dated as of September 27, 1996 (Exhibit 10.23
to Registration Statement 333-84297 filed October 19, 1999)
10.22 Form of Indemnification Agreement for Directors and Officers of
Charlotte Russe Holding, Inc. (Exhibit 10.24 to Registration
Statement 333-84297 filed October 19, 1999)
10.23 Stockholders Agreement dated as of October 1, 1999 by and among
Charlotte Russe Holdings, Inc., The SK Equity Fund, L.P. and SK
Investment Fund, L.P. (Exhibit 10.25 to Registration Statement
333-84297 filed October 19, 1999)
21 Subsidiaries (Exhibit 21 to Registration Statement 333-84297 filed
October 19, 1999)
23.1 Consent of Ernst & Young LLP*
24 Power of Attorney (See Signature Page)
27 Financial Data Schedule*
(b) Financial Statement Schedules
All financial statement schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission have been omitted because they are not required under the
related instructions or are inapplicable as the information has been
provided in the consolidated financial statements or related notes
thereto.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the 1996 Long-Term Incentive Plan, the 1999
Long-Term Incentive Plan, the 1999 Equity Incentive Plan, the 1999 Employee
Stock Purchase Plan of Charlotte Russe Holding, Inc., of our report dated
October 29, 1999 with respect to the consolidated financial statements of
Charlotte Russe Holding, Inc. included in its Annual Report on Form 10-K for
the year ended September 25, 1999.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Diego, California
December 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROMO THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES F-3 AND F-4 OF THE COMPANY'S FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-25-1999
<PERIOD-START> SEP-27-1998
<PERIOD-END> SEP-25-1999
<CASH> 2,985,025
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 11,193,914
<CURRENT-ASSETS> 19,080,169
<PP&E> 46,803,936
<DEPRECIATION> 9,775,370
<TOTAL-ASSETS> 88,569,020
<CURRENT-LIABILITIES> 26,117,827
<BONDS> 0
0
0
<COMMON> 183,108
<OTHER-SE> 39,854,201
<TOTAL-LIABILITY-AND-EQUITY> 88,569,020
<SALES> 177,459,298
<TOTAL-REVENUES> 0
<CGS> 119,141,254
<TOTAL-COSTS> 34,957,100
<OTHER-EXPENSES> 270,074
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,375,889
<INCOME-PRETAX> 20,714,981
<INCOME-TAX> 8,700,392
<INCOME-CONTINUING> 12,014,589
<DISCONTINUED> 0
<EXTRAORDINARY> 519,100
<CHANGES> 0
<NET-INCOME> 11,495,489
<EPS-BASIC> .63
<EPS-DILUTED> .54
</TABLE>
