SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended November 1, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _____________ to
_____________
Commission file number 0-23071
THE CHILDREN'S PLACE RETAIL STORES, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1241495
(State or other jurisdiction of (I. R. S. employer identification
incorporation or organization) number)
One Dodge Drive
West Caldwell, New Jersey 07006
(Address of Principal Executive Offices) (Zip Code)
(973) 227-8900
(Registrant's Telephone Number, Including Area Code)
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 / / No /X/
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $0.10 per share, outstanding at December
1, 1997: 24,622,103 shares
THE CHILDREN'S PLACE RETAIL STORES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED NOVEMBER 1, 1997
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements: Page
----
Balance Sheets.................................................... 1
Statements of Income.............................................. 2
Statements of Cash Flows.......................................... 3
Notes to Financial Statements.................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 10
Part II - Other Information
Item 1. Legal Proceedings................................................. 11
Item 2. Changes in Securities and Use of Proceeds......................... 11
Item 6. Exhibits and Reports on Form 8-K.................................. 12
Signatures................................................................... 13
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE CHILDREN'S PLACE RETAIL STORES, INC.
BALANCE SHEETS
(Dollars in thousands, except per share amounts)
November 1, 1997 February
(unaudited) 1, 1997
--------------------------
ASSETS
Cash and cash equivalents .......................... $ 789 $ 3,422
Accounts receivable ................................ 2,225 890
Inventories ........................................ 26,965 14,425
Prepaid expenses and other current assets .......... 4,431 3,163
Deferred income taxes, net of valuation
allowance ........................................ 5,788 5,788
-------- --------
Total current assets ......................... 40,198 27,688
Property and equipment, net ........................ 31,425 20,299
Deferred income taxes, net of valuation
allowance ........................................ 14,473 14,711
Other assets ....................................... 525 1,781
-------- --------
Total assets ................................. $ 86,621 $ 64,479
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Revolving credit facility .......................... $ 9,782 $ 0
Current portion of long-term debt .................. 0 600
Current maturities of obligations under
capital leases ................................. 286 772
Accounts payable ................................... 13,239 8,322
Accrued expenses, interest and
other current liabilities ...................... 7,826 6,043
-------- --------
Total current liabilities .................... 31,133 15,737
Long-term debt ..................................... 0 19,040
Obligations under capital leases ................... 7 92
Other long-term liabilities ........................ 2,675 2,312
-------- --------
Total liabilities ............................ 33,815 37,181
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, Series A, $.10 par value ............. -- 1,276
Common stock, Series B, $.10 par value ............. -- 5
Common stock, $.10 par value ....................... 2,462 --
Additional paid-in capital ......................... 81,146 57,842
Accumulated deficit ................................ (30,802) (31,825)
-------- --------
Total stockholders' equity ................... 52,806 27,298
-------- --------
Total liabilities and stockholders' equity
$ 86,621 $ 64,479
======== ========
The accompanying notes to financial statements are an integral part
of these statements.
1
THE CHILDREN'S PLACE RETAIL STORES, INC.
STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-----------------------------------------------------------------------
November 1, 1997 November 2, 1996 November 1, 1997 November 2, 1996
---------------- ---------------- ---------------- ----------------
Net sales ........................ $ 54,489 $ 40,353 $ 127,226 $ 96,765
Cost of sales .................... 33,081 23,377 81,998 61,678
------------ ----------- ------------ -----------
Gross profit ..................... 21,408 16,976 45,228 35,087
Selling, general and
administrative expenses ...... 12,411 9,163 31,698 25,089
Pre-opening costs ................ 740 461 1,962 673
Depreciation and amortization .... 1,601 1,005 4,216 2,859
------------ ----------- ------------ -----------
Operating income ................. 6,656 6,347 7,352 6,466
Interest expense, net ............ 708 891 2,523 2,073
Other expense, net ............... 18 1 124 378
------------ ----------- ------------ -----------
Income before income
taxes and extraordinary item . 5,930 5,455 4,705 4,015
Provision for income taxes ....... 2,433 143 1,940 165
------------ ----------- ------------ -----------
Income before extraordinary
item ......................... 3,497 5,312 2,765 3,850
Extraordinary loss on
extinguishment of debt ....... 1,743 -- 1,743 --
------------ ----------- ------------ -----------
Net income ....................... $ 1,754 $ 5,312 $ 1,022 $ 3,850
============ =========== ============ ===========
Pro forma income per common share:
Pro forma income per
common share before
extraordinary item ........... $ 0.14 $ 0.22 $ 0.11 $ 0.16
Extraordinary item ............... (0.07) -- (0.07) --
============ =========== ============ ===========
Pro forma net income per
common share ................. $ 0.07 $ 0.22 $ 0.04 $ 0.16
============ =========== ============ ===========
Pro forma weighted average
common shares outstanding .... 24,439,310 23,804,185 24,015,894 23,804,185
------------ ----------- ------------ -----------
The accompanying notes to financial statements are an integral part
of these statements.
2
THE CHILDREN'S PLACE RETAIL STORES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Thirty-Nine Weeks Ended
-----------------------
November 1, November 2,
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................... $ 1,022 $ 3,850
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................. 4,216 2,859
Extraordinary loss on extinguishment of debt .. 1,743 0
Deferred financing cost amortization .......... 398 204
Loss on disposals of property and
equipment ................................... 30 0
Deferred taxes ................................ 1,401 0
Changes in operating assets and liabilities:
Accounts receivable ........................... (1,335) (292)
Inventories ................................... (12,540) (2,126)
Prepaid expenses and other current assets ..... (1,268) (620)
Other assets .................................. (307) (129)
Accounts payable .............................. 4,919 (3,671)
Accrued expenses, interest and other
current liabilities ......................... 1,688 1,882
Other long-term liabilities ................... 455 0
Payment of restructuring charges .............. 0 (214)
--------- ---------
Total adjustments .......................... (600) (2,107)
--------- ---------
Net cash provided by operating activities ............ 422 1,743
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases ..................... (15,316) (6,397)
--------- ---------
Net cash used in investing activities ................ (15,316) (6,397)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of Common Stock ............... 50,730 0
Repurchase of Noteholder and Legg Mason Warrants ..... (25,757) 0
Borrowings under revolving credit facility ........... 141,642 92,684
Repayments under revolving credit facility ........... (131,860) (100,517)
Repayment of long-term debt .......................... (21,360) (12,671)
Proceeds from issuance of long-term debt ............. 0 20,000
Payment of obligations under capital leases .......... (571) (510)
Return of funds toward common stock subscription ..... (488) 0
Redemption of Series A Common Stock .................. 0 (11,845)
Net proceeds from sale of Series B Common Stock ...... 0 18,763
Exercise of stock options ............................ 0 173
Deferred financing costs ............................. (75) (1,334)
--------- ---------
Net cash provided by financing activities ........... 12,261 4,743
--------- ---------
Net increase (decrease) in cash and cash
equivalents .................................... (2,633) 89
Cash and cash equivalents, beginning of period ... 3,422 569
--------- ---------
Cash and cash equivalents, end of period ......... $ 789 $ 658
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Interest paid .................................... $ 2,149 $ 1,632
Income taxes paid ................................ 538 70
The accompanying notes to financial statements are an integral part
of these statements.
3
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Certain information and footnote disclosures required by
generally accepted accounting principles for complete financial statements have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying unaudited financial statements contain all material adjustments,
consisting of normal recurring accruals, necessary to present fairly the
Company's financial position, results of operations and cash flow for the
periods indicated, and have been prepared in a manner consistent with the
audited financial statements as of February 1, 1997. These financial statements
should be read in conjunction with the audited financial statements and
footnotes for the fiscal year ended February 1, 1997 included in the Company's
registration statement on Form S-1 (No 333-31535) as filed with the Securities
and Exchange Commission and in its prospectus dated September 18, 1997 (the
"Prospectus"). Due to the seasonal nature of the Company's business, the results
of operations for the thirteen and thirty-nine weeks ended November 1, 1997 are
not necessarily indicative of operating results for a full fiscal year.
2. INITIAL PUBLIC OFFERING
On September 18, 1997, the Company sold 4,000,000 shares of Common
Stock at $14.00 per share in an initial public offering (the "Offering"). The
Company used the net proceeds of $50.7 million, after deducting the
underwriters' discount of $3.9 million and estimated transaction expenses of
$1.4 million from this Offering, to (i) pay the principal amount of, and accrued
interest on, its Senior Subordinated Notes (the "Senior Subordinated Notes")
held by Nomura Holding America Inc. (the "Noteholder") in the total amount of
$20.6 million, (ii) repurchase a warrant held by the Noteholder (the "Noteholder
Warrant") for $20.6 million, (iii) repurchase two-thirds of a warrant held by
Legg Mason Wood Walker Inc. (the "Legg Mason Warrant") for $5.2 million, and
(iv) reduce borrowings outstanding under the Company's revolving credit facility
("the Foothill Credit Facility") with the remainder of the net proceeds. The
Senior Subordinated Notes, the Noteholder Warrant and the Legg Mason Warrant
were issued in conjunction with a 1996 private placement of the Company, as
discussed in Note 3-Private Placement in the financial statements in the
Prospectus. As of November 1, 1997, the Company had no long-term borrowings.
As a result of the repayment of the Senior Subordinated Notes, the
Company incurred a non-cash, extraordinary charge to earnings during the third
quarter of Fiscal 1997 of $1.7 million, resulting from the write-off of
unamortized deferred financing costs of $1.4 million and unamortized debt
discount of $1.5 million, net of a $1.2 million tax benefit. The repurchase of
the Noteholder Warrant and two-thirds of the Legg Mason Warrant was accounted
for as a reduction of additional paid-in capital.
The repurchase price of the Noteholder Warrant and two-thirds of the
Legg Mason Warrant was equal to the initial public offering price of $14.00 per
share, less the per share underwriting discount, less the exercise price of
$2.677 per warrant, multiplied by the number of shares covered by the warrant
(or portion thereof) being purchased.
Concurrently with the Offering, the Company effected a 120-for-one
stock split of the Series A Common Stock (the "Stock Split"), and converted all
outstanding shares of the Series B Common Stock into 7,659,889 shares of Series
A Common Stock (the "Series B Conversion") and redesignated the Series A Common
Stock as Common Stock (the "Reclassification"). The Company also issued 201,414
shares of Common Stock upon the exercise of one-third of the Legg Mason Warrant.
The Company also amended and restated its certificate of
incorporation and bylaws in order to, among other things, (i) effect the Stock
Split, the Series B Conversion, and the Reclassification, (ii) authorize
100,000,000 shares of Common Stock, $.10 par value per share, (iii) authorize
1,000,000 shares of Preferred Stock, $1.00 par value per share, and (iv) provide
for certain anti-takeover provisions.
The Company also entered into an amended and restated stockholders'
agreement with all of its existing stockholders. In addition, the Company
adopted the 1997 Stock Option Plan (the "1997 Plan") and an Employee Stock
Purchase Plan. See Note 6 -Stock Option Plans.
3. NET INCOME PER COMMON SHARE
For the thirteen and thirty-nine weeks ended November 2, 1996 and
November 1, 1997, pro forma net income per common share is calculated by
dividing net income by the pro forma weighted average common shares and common
share equivalents outstanding as if (i) the Stock Split, the Series B Conversion
and the Reclassification (as discussed above in Note 2-Initial Public
4
Offering), (ii) the 1996 private placement (as discussed in Note 3-Private
Placement in the financial statements in the Prospectus), (iii) the cancellation
of outstanding preferred shares which were surrendered for no consideration on
June 28, 1996, and (iv) the granting of management options in conjunction with
the 1996 private placement, occurred on the first day of the periods presented.
Common share equivalents include the Noteholder Warrant and the Legg Mason
Warrant (as discussed in Note 3-1996 Private Placement in the financial
statements in the Prospectus), and management options to purchase common stock
under the 1996 Plan (the "1996 Plan"), and the 1997 Plan calculated using the
treasury stock method in accordance with APB Opinion No. 15, "Earnings per
Share", ("APB No. 15"). Prior to the Offering, the Offering price was utilized
for the treasury stock calculations due to the lack of a public market.
Subsequent to the Offering, the average market price was utilized in accordance
with APB No. 15. Pro forma fully diluted net income per common share is equal to
the amount presented.
In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings per Share." Under SFAS No. 128, the presentation of both
basic and diluted earnings per share is required on the statements of income for
periods ending after December 15, 1997, at which time restatement will be
necessary. Had the provisions of SFAS No. 128 been in effect, the Company would
have reported pro forma basic income per share before the extraordinary item of
$0.16 per share and $0.13 per share for the thirteen and thirty-nine weeks ended
November 1, 1997, respectively. The extraordinary item, representing the
write-off of unamortized debt financing costs and unamortized debt discount, net
of taxes, in connection with the Offering, would have represented a charge of
$0.08 per share for the thirteen and thirty-nine weeks ended November 1, 1997.
For the thirteen and thirty-nine weeks ended November 1, 1997, the Company would
have reported pro forma basic net income of $0.08 per share and $0.05 per share,
respectively, had the provisions of SFAS No.128 been in effect. For the thirteen
and thirty-nine weeks ended November 2, 1996, the Company would have reported
pro forma basic net income of $0.26 per share and $0.19 per share, respectively,
had the provisions of SFAS No. 128 been in effect. Under SFAS No. 128, pro forma
diluted earnings per share is equal to the pro forma net income per share
currently disclosed by the Company.
4. LITIGATION
Between October 17 and October 31, 1997, twelve lawsuits were filed
in the United States District Court for the District of New Jersey by certain
shareholders of the Company, naming the Company, its directors, certain of its
officers, and certain other parties as defendants. Two additional lawsuits were
filed subsequent to November 1, 1997. The complaints allege violations of
federal securities laws in connection with the Company's initial public offering
in September 1997, relating to alleged misrepresentations and alleged omissions
in the Prospectus. Each lawsuit seeks class action status, monetary damages and
other potential relief. The Company believes that the allegations made in these
complaints are untrue and totally without merit and intends to defend them
vigorously.
5. STOCKHOLDERS' EQUITY
The Company's preferred stock, Series A Common Stock, Series B
Common Stock and the Common Stock are comprised of the following (dollars in
thousands):
November 1, 1997 February 1, 1997
---------------- ----------------
Preferred stock:
Authorized number of shares ............. 1,000,000 10,000
Issued and outstanding number of shares . 0 0
Liquidation preference .................. $ 0 $ 0
Series A Common Stock:
Authorized number of shares ............. 0 27,600,000
Issued and outstanding number of shares . 0 12,760,800
Series B Common Stock:
Authorized number of shares ............. 0 70,000
Issued and outstanding number of shares . 0 47,238
Liquidation preference .................. 0 $ 22,001
Common stock:
Authorized number of shares ............. 100,000,000 n/a
Issued and outstanding number of shares . 24,622,103 n/a
Warrants:
Number of shares of Series A Common
Stock ................................... 0 2,739,348
The Company's financial statements retroactively reflect the Stock
Split. See Note 2 - Initial Public Offering for a further discussion of changes
to the Company's Stockholders' Equity.
5
6. STOCK OPTION PLANS
Under the Company's 1996 Plan, the 299,160 options remaining
available for grant were granted on September 18, 1997 in conjunction with the
Company's Offering. All such options were granted at an exercise price of $14.00
per share, the price at which the Company's Common Stock was sold in the
Offering, except that 99,660 options were granted to the Company's Chief
Executive Officer, who holds more than 10% of the Company's Common Stock, which
were granted at an exercise price of $15.40 per share, or 110% of the market
price on the date of the grant. As of November 1, 1997, options to purchase
288,816 shares were exercisable and no options had been exercised under the 1996
Stock Option Plan.
In conjunction with the Company's Offering, on September 18, 1997,
the Company issued 252,100 options to employees under the 1997 Plan to purchase
shares of Common Stock at the Offering price of $14.00 per share. No
compensation expense was recognized in September 1997, since the options granted
under the 1996 Plan and the 1997 Plan were at or above the market price on the
date of the grant.
7. INCOME TAXES
During the thirteen and thirty-nine weeks ended November 2, 1996,
the Company's tax provision of $0.1 million and $0.2 million, respectively,
provided for the payment of federal income taxes based on the Alternative
Minimum Tax ("AMT") at an effective tax rate of 2% and minimum taxes in most
states due to the Company's utilization of its Net Operating Loss ("NOL")
carryforwards. During the fourth quarter of Fiscal 1996, management determined,
based on the Company's results of operations and projected future results, that
it was more likely than not that the NOL carryforwards would be used in
subsequent years to offset tax liabilities. As a result of this determination,
the Company reversed its valuation allowance during the fourth quarter of Fiscal
1996 on the Company's deferred tax asset. Accordingly, the Company's net income
for the thirteen and thirty-nine weeks ended November 1, 1997 reflects a tax
provision, of $2.4 million and $1.9 million, respectively, based on effective
statutory rates. Until the NOL is fully utilized or expires, this tax provision
will not be paid in cash (other than to the extent of the federal AMT and state
minimum taxes) but will reduce the deferred tax asset on the balance sheet.
6
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Form 10-Q contains certain forward-looking statements within the
meaning of federal securities laws, which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to,
the discussions of the Company's operating and growth strategy. Investors are
cautioned that all forward-looking statements involve risks and uncertainties
including, without limitation, those set forth under the caption "Risk Factors"
in the Prospectus. Although the Company believes that the assumptions underlying
the forward-looking statements contained herein are reasonable, any of the
assumptions could prove to be inaccurate, and therefore, there can be no
assurance that the forward-looking statements included in this Form 10-Q will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved. The Company
undertakes no obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events and circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
The following discussion should be read in conjunction with the
Company's unaudited financial statements and notes thereto included elsewhere in
this Form 10Q and to the annual audited financial statements and notes thereto
included in the Company's registration statement on Form S-1 filed with the
Securities and Exchange Commission and declared effective on September 18, 1997.
Results of Operations
The following table sets forth, for the periods indicated, selected income
statement data expressed as a percentage of net sales:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------------------------------------------------------
November 1, 1997 November 2, 1996 November 1, 1997 November 2, 1996
---------------- ---------------- ---------------- ----------------
Net sales ........................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales .................................... 60.7 57.9 64.5 63.7
----- ----- ----- -----
Gross profit ..................................... 39.3 42.1 35.5 36.3
Selling, general and administrative expenses ..... 22.8 22.7 24.9 25.9
Pre-opening costs ................................ 1.4 1.2 1.5 .7
Depreciation and amortization .................... 2.9 2.5 3.3 3.0
----- ----- ----- -----
Operating income ................................. 12.2 15.7 5.8 6.7
Interest expense, net ............................ 1.3 2.2 2.0 2.1
Other expense, net ............................... -- -- .1 .4
----- ----- ----- -----
Income before income taxes and
extraordinary item ............................. 10.9 13.5 3.7 4.2
Provision for income taxes ....................... 4.5 0.3 1.5 .2
Extraordinary item ............................... 3.2 -- 1.4 --
----- ----- ----- -----
Net income ....................................... 3.2 13.2 0.8 4.0
===== ===== ===== =====
Number of stores, end of period .................. 151 104 151 104
----- ----- ----- -----
Thirteen Weeks Ended November 1, 1997 Compared to the Thirteen Weeks Ended
November 2, 1996
Net sales increased by $14.1 million, or 35%, to $54.5 million
during the thirteen weeks ended November 1, 1997 (the "Third Quarter 1997"),
from $40.4 million during the thirteen weeks ended November 2, 1996 (the "Third
Quarter 1996"). Net sales for the 17 new stores opened during the Third Quarter
1997, as well as the stores opened or remodeled during fiscal 1996 and fiscal
1997 that did not qualify as comparable stores, contributed $14.3 million of the
sales increase, partially offset by the closing of one store during fiscal 1996
which contributed $0.2 million of net sales during the Third Quarter 1996. Sales
from new stores performed below management's expectations during the Third
Quarter 1997. The Company's comparable store sales were flat during the Third
Quarter 1997, as compared with an 8% comparable store sales increase during the
Third Quarter 1996. The Company defines its comparable store sales as net sales
from stores that have been open for more than 14 full months and that have not
been substantially remodeled during that time. During the Third Quarter 1997,
comparable store sales and new store sales were unfavorably impacted by
unusually warm weather in late September and early October.
Gross profit increased by $4.4 million to $21.4 million during the
Third Quarter 1997 from $17.0 million during the Third
7
Quarter 1996. As a percentage of net sales, gross profit declined to 39.3% in
the Third Quarter 1997 from 42.1% in the Third Quarter 1996. The decrease in
gross profit as a percentage of net sales was principally due to higher
markdowns and increased store occupancy costs, partially offset by a higher
initial markup. The increased markdowns were required to clear excess inventory.
The increased store occupancy costs resulted from new stores that had not been
open long enough to leverage their rent through an established sales base.
Selling, general and administrative expenses increased $3.2 million
to $12.4 million during the Third Quarter 1997 from $9.2 million during the
Third Quarter 1996, and increased slightly as a percentage of net sales to 22.8%
during the Third Quarter 1997 from 22.7% during the Third Quarter 1996. The
increase in selling, general and administrative expenses was primarily due to
higher store payroll and other store expenses.
During the Third Quarter 1997, pre-opening costs were $0.7 million
as compared with $0.5 million in the Third Quarter 1996, reflecting the opening
of 17 new stores in the Third Quarter 1997, as compared to the nine new stores
opened during the Third Quarter 1996.
Depreciation and amortization amounted to $1.6 million in the Third
Quarter 1997 as compared to $1.0 million during the Third Quarter 1996. The
increase in depreciation and amortization expense primarily was a result of the
increase in stores.
Interest expense, net, for the Third Quarter 1997 was $0.7 million,
or 1.3% of net sales , as compared with $0.9 million, or 2.2% of net sales, in
the comparable prior year period. The decrease in interest expense was primarily
due to the repayment of the Senior Subordinated Notes with a portion of the
proceeds from the Company's initial public offering, partially offset by
increased utilization of the Foothill Credit Facility.
The Company recorded income before income taxes and extraordinary
item of $5.9 million during the Third Quarter 1997 as compared with $5.5 million
in the comparable prior year period. As a percentage of net sales, the Company's
income before income taxes and extraordinary item decreased to 10.9% during the
Third Quarter 1997 from 13.5% during the Third Quarter 1996, due to the factors
discussed above.
The Company's income tax provision for the Third Quarter 1997 was
$2.4 million, or 4.5% of net sales, as compared with an income tax provision of
$0.1 million, or 0.3% of sales, for the comparable prior year period. During the
Third Quarter 1996, the Company's income tax provision provided for the payment
of federal taxes based on the AMT at an effective rate of 2% and minimum taxes
in most states due to the Company's utilization of its NOL carryforwards. During
the fourth quarter of fiscal 1996, the Company reversed a valuation allowance on
the Company's deferred tax asset on its balance sheet. Accordingly, the
Company's tax provision for the Third Quarter 1997 reflects a tax provision
based on effective statutory rates. Until the NOL is fully utilized or expires,
this tax provision will not be paid in cash (other than to the extent of the
federal AMT and state minimum taxes) but will reduce the deferred tax asset on
the balance sheet.
In the Third Quarter 1997, as a result of the repayment of the
Senior Subordinated Notes with a portion of the net proceeds from the Offering,
the Company recorded a non-cash extraordinary item of $1.7 million, net of
taxes, that represented the write-off of unamortized deferred financing costs
and unamortized debt discount.
The Company had net income of $1.8 million and $5.3 million for the
Third Quarter 1997 and Third Quarter 1996, respectively.
Thirty-nine Weeks Ended November 1, 1997 Compared to the Thirty-nine Weeks Ended
November 2, 1996
Net sales increased by $30.4 million, or 31%, to $127.2 million
during the thirty-nine weeks ended November 1, 1997, from $96.8 million during
the comparable prior year period. Net sales for the 43 new stores opened during
the thirty-nine weeks ended November 1, 1997, as well as the stores opened or
remodeled during fiscal 1996 and fiscal 1997 that did not qualify as comparable
stores, contributed $29.5 million of the sales increase, partially offset by the
closing of one store during 1996 which contributed $0.4 million of net sales
during the thirty-nine weeks ended November 2, 1996. During the thirty-nine
weeks ended November 1, 1997, the Company's comparable store sales increased 1%,
or $1.3 million, as compared with an 8% comparable store sales increase during
the comparable prior year period.
During the thirty-nine weeks ended November 1, 1997, the Company's
comparable store sales increase was partially attributable to strength in the
Company's big girls, legwear and newborn departments, partially offset by weaker
sales in the boys' departments. In addition, during the Third Quarter 1997,
comparable store sales and new store sales were unfavorably impacted by
unusually warm weather in late September and early October.
Gross profit increased by $10.1 million to $45.2 million during the
thirty-nine weeks ended November 1, 1997 from $35.1
8
million during the comparable prior year period. As a percentage of net sales,
gross profit declined to 35.5% in the thirty-nine weeks ended November 1, 1997
from 36.3% in the thirty-nine weeks ended November 2, 1996. The decrease in
gross profit as a percentage of net sales was primarily due to higher markdowns
offset by a higher initial markup. The increased markdowns were utilized to sell
through excess inventory.
Selling, general and administrative expenses increased $6.6 million
to $31.7 million during the thirty-nine weeks ended November 1, 1997 from $25.1
million during the thirty-nine weeks ended November 2, 1996. As a percentage of
net sales, selling, general and administrative expenses decreased to 24.9%
during the thirty-nine weeks ended November 1, 1997 from 25.9% during the
thirty-nine weeks ended November 2, 1996. The decrease in selling, general and
administrative expenses as a percentage of net sales primarily resulted from
corporate administrative expenses that were leveraged over an increased sales
base.
During the thirty-nine weeks ended November 1, 1997, pre-opening
costs were $2.0 million as compared with $0.7 million in the thirty-nine weeks
ended November 2, 1996, reflecting the opening of 43 new stores in the
thirty-nine weeks ended November 1, 1997 as compared to the 13 new stores opened
during the thirty-nine weeks ended November 2, 1996.
Depreciation and amortization amounted to $4.2 million in the
thirty-nine weeks ended November 1, 1997 as compared to $2.9 million during the
thirty-nine weeks ended November 2, 1996. The increase in depreciation and
amortization expense primarily was a result of the increase in stores.
Interest expense, net, for the thirty-nine weeks ended November 1,
1997, was $2.5 million, or 2.0% of net sales, as compared with $2.1 million, or
2.1% of net sales, in the thirty-nine weeks ended November 2, 1996. The increase
in interest expense during the thirty-nine weeks ended November 1, 1997 was
primarily due to interest on the Senior Subordinated Notes and the amortization
of deferred financing costs of the Senior Subordinated Notes, which were only
outstanding for approximately four months of the prior year period, partially
offset by the elimination of interest expense on various loans repaid by the
Company with proceeds from the 1996 Private Placement and lower interest under
the Foothill Credit Facility during the thirty-nine weeks ended November 1,
1997. The lower interest under the Foothill Credit Facility during the
thirty-nine weeks ended November 1, 1997 was attributable to lower outstanding
loan balances during the first five months of fiscal 1997 and an interest rate
reduction during the Third Quarter 1997 resulting from a loan amendment.
Other expense, net, for the thirty-nine weeks ended November 1, 1997
amounted to $0.1 million, or 0.1% of net sales, as compared to $0.4 million , or
0.4% of net sales, during the thirty-nine weeks ended November 2, 1996. During
the thirty-nine weeks ended November 1, 1997, other expenses primarily consisted
of an anniversary fee on the Foothill Credit Facility. During the thirty-nine
weeks ended November 2, 1996, other expenses primarily comprised anniversary and
credit amendment fees relating to the Foothill Credit Facility.
The Company recorded income before income taxes and extraordinary
item of $4.7 million during the thirty-nine weeks ended November 1, 1997 as
compared with $4.0 million in the thirty-nine weeks ended November 2, 1996. As a
percentage of net sales, the Company's income before income taxes and
extraordinary item decreased to 3.7% during the thirty-nine weeks ended November
1, 1997 from 4.2% during the thirty-nine weeks ended November 2, 1996 due to the
factors discussed above.
The Company's income tax provision for the thirty-nine weeks ended
November 1, 1997, was $1.9 million, or 1.5% of net sales, as compared with an
income tax provision of $0.2 million, or 0.2% of net sales, for the comparable
prior year period. During the thirty-nine weeks ended November 2, 1996, the
Company's income tax provision provided for the payment of federal taxes based
on the AMT at an effective rate of 2% and minimum taxes in most states due to
the Company's utilization of its NOL carryforwards. During the fourth quarter of
fiscal 1996, the Company reversed a valuation allowance on the Company's
deferred tax asset on its balance sheet. Accordingly, the Company 's tax
provision for the thirty-nine weeks ended November 1, 1997 reflects a tax
provision based on effective statutory rates. Until the NOL is fully utilized or
expires, this tax provision will not be paid in cash (other than to the extent
of the federal AMT and state minimum taxes) but will reduce the deferred tax
asset on the balance sheet.
As a result of the repayment of the Senior Subordinated Notes with a
portion of the net proceeds from the Offering, the Company recorded a non-cash
extraordinary item of $1.7 million, net of taxes, that represented the write-off
of unamortized deferred financing costs and unamortized debt discount.
The Company had net income of $1.0 million and $3.9 million for the
thirty-nine weeks ended November 1, 1997, and the thirty-nine weeks ended
November 2, 1996, respectively.
9
LIQUIDITY AND CAPITAL RESOURCES
Debt Service / Liquidity
Since February 1, 1997, the Company's primary uses of cash have been
to finance new store openings, provide working capital, which primarily
represents the purchase of inventory, and make required interest payments on its
debt. The Company has been able to meet its cash needs, including those
associated with the opening of new stores, principally by using cash flow from
operations, borrowings under the Foothill Credit Facility and proceeds from the
Offering.
Pursuant to its Offering on September 18, 1997, the Company received
net proceeds of $50.7 million , after deducting the underwriters' discount of
$3.9 million and estimated transaction fees of $1.4 million. The Company used
the net proceeds from the Offering to (i) pay the principal amount of, and
accrued interest on, its Senior Subordinated Notes of $20.6 million, (ii)
repurchase the Noteholder Warrant for $20.6 million, (iii) repurchase two-thirds
of the Legg Mason Warrant for $5.2 million, and (iv) reduce borrowings
outstanding under the Foothill Credit Facility with the remainder of the
proceeds. As of November 1, 1997, the Company had no long-term debt obligations.
As of November 1, 1997, there was $9.8 million outstanding in
borrowings and $6.0 million in letters of credit outstanding under the Foothill
Credit Facility. Availability under the Foothill Credit Facility as of November
1, 1997 was $11.3 million and the interest rate charged under the Foothill
Credit Facility was 8.5% for reference rate borrowings and 7.625% for LIBOR
borrowings.
As of November 1, 1997, the Company was in compliance with all of
its covenants under the Foothill Credit Facility. Management believes that
compliance with these covenants will not interfere with its business and that
cash flows from operations and borrowings under the Foothill Credit Facility
will be sufficient to meet the Company's liquidity needs and will support the
implementation of its growth strategy.
During fiscal 1998 the Company anticipates entering into a
commitment with respect to a new distribution center and corporate office. The
Company's lease for its current distribution center and headquarters facility is
scheduled to expire in March 1999. During the Third Quarter 1997, the Company
entered into a one year lease for interim warehouse space at an annual cost of
approximately $200,000.
Cash Flows / Capital Expenditures
Cash flows provided from operating activities during the thirty-nine
weeks ended November 1, 1997, were $0.4 million as compared with $1.7 million in
the comparable prior year period. The decrease in cash flow from operations in
the thirty-nine weeks ended November 1, 1997 primarily resulted from an increase
in inventory to support the 43 new stores opened during fiscal 1997 and an
overall increase in chain wide inventory to support a higher sales plan
partially offset by an increase in accounts payable.
Cash flows used in investing activities were $15.3 million and $6.4
million, during the thirty-nine weeks ended November 1, 1997 and the thirty-nine
weeks ended November 2, 1996, respectively. Net cash used for investing
activities increased as a result of capital expenditures made primarily in
connection with the Company's store expansion and remodel program. In a typical
new store, capital expenditures (net of landlord contribution) approximate $0.2
million. During the thirty-nine weeks ended November 1, 1997 and the thirty-nine
weeks ended November 2, 1996, the Company opened 43 and 13 stores and remodeled
7 and 5 stores, respectively. Management anticipates that capital expenditures
in 1997 for 1997 new store openings and remodels as well as ongoing maintenance
programs will be approximately $16 million. In addition, management anticipates
spending approximately $1 to $2 million in fiscal 1997 for fiscal 1998 new store
openings and remodels. Management continually assesses the number of new stores
openings based upon the performance of new and existing stores and the
availability of suitable sites. The Company may determine to open fewer stores
in fiscal 1998 than originally planned.
Cash flows provided by financing activities were $12.3 million and
$4.7 million in the thirty-nine weeks ended November 1, 1997 and the thirty-nine
weeks ended November 2, 1996, respectively. The increase in cash flows provided
by financing activities reflects the Company's Offering, the repayment of the
Senior Subordinated Notes and the repurchase of the Noteholder and two-thirds of
the Legg Mason Warrants, offset partially by increased borrowings under the
Foothill Credit Facility. Cash flows provided by financing activities during the
thirty-nine weeks ended November 2, 1996 reflect the 1996 Private Placement with
the SKM investors and the Noteholder. The net proceeds of the 1996 Private
Placement were used to redeem certain shares of outstanding Common Stock, repay
long-term debt and reduce borrowings under the Foothill Credit Facility.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
10
Part II - Other Information
Item 1. Legal Proceedings
Between October 17 and October 31, 1997, twelve lawsuits were filed
in the United States District Court for the District of New Jersey by certain
shareholders of the Company, naming the Company, its directors, certain of its
officers, and certain other parties as defendants. Two additional lawsuits were
filed subsequent to November 1, 1997. The complaints allege violations of
federal securities laws in connection with the Company's initial public offering
in September 1997, relating to alleged misrepresentations and alleged omissions
in the Prospectus. Each lawsuit seeks class action status, monetary damages and
other potential relief. The Company believes that the allegations made in these
complaints are untrue and totally without merit and intend to defend them
vigorously.
Item 2. Changes in Securities and Use of Proceeds
The Company used the net proceeds from the Offering of $50.7
million, after deducting the underwriters' discount of $3.9 million and
estimated transaction expenses of $1.4 million, to (i) pay the principal amount
of, and accrued interest on, its Senior Subordinated Notes of $20.6 million,
(ii) repurchase the Noteholder Warrant for $20.6 million, (iii) repurchase
two-thirds of the Legg Mason Warrant for $5.2 million, and (iv) reduce borrowing
outstanding under the Foothill Credit Facility with the remainder of the net
proceeds.
11
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description of Document
- ------- -----------------------------------------------------------------------
10.1 Amendment as of October 27, 1997 to Merchant Services Agreement dated
December 12, 1994 between the Company and Hurley State Bank.
10.2 Employee Stock Purchase Servicing Agreement, between the Company and
Merrill Lynch, Pierce, Fenner and Smith Incorporated dated October 30,
1997.
11.1 Statement re: computation of per share earnings.
27.1 Financial data schedule
(b) Reports on Form 8-K
None
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE CHILDREN'S PLACE
RETAIL STORES, INC.
Date: December 16, 1997 By: /s/ Ezra Dabah
-----------------------------
Ezra Dabah
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: December 16, 1997 By: /s/ Seth L. Udasin
-----------------------------
Seth L. Udasin
Vice President &
Chief Financial Officer
(Principal Financial Officer)
13
Exhibit 10.1
FIRST AMENDMENT
TO THE
MERCHANT SERVICES AGREEMENT
The First Amendment to the Merchant Services Agreement ("First
Amendment") is dated as of October , 1997, by and between HURLEY STATE BANK
("Bank") and THE CHILDREN'S PLACE RETAIL STORES, INC. ("Company").
WHEREAS, Bank and Company have entered into the Merchant Services
Agreement dated as of December 12, 1994, as amended and supplemented ("Merchant
Services Agreement"); and
WHEREAS, Bank and Company desire to amend certain provisions of the
Merchant Services Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and
mutual covenants hereinafter set forth, Bank and Company agree as follows:
1. The Merchant Fee as set forth in paragraph 3.1 (a) of the
Merchant Services Agreement is changed from 3.41% to 3.91%. The Merchant Fee of
3.91% will remain in effect until August 1, 1998. Thereafter the Merchant Fee
will be subject to change.
2. In addition to the other fees provided for in Article III of the
Merchant Services Agreement, Bank will charge and Company agrees to pay an Open
Active Account Fee and a Never Active Account Fee.
(a) Open Active Account Fee. Company shall pay an Open Active
Account Fee for each calendar month. Subject to the cap set
forth in the following sentence, the amount of the Open Active
Account Fee for each calendar month will be the product of (i)
the number of Accounts that have a debit or credit balance at
any time during the month ("Open Active Accounts") and (ii)
the applicable per Account fee, which will be determined
according to the following schedule and will be based on the
calendar year-to-date average active Account balance, as
calculated by Bank.
Year-To-Date Average
Active Account Balance Per Account Fee
---------------------- ---------------
$151.00 or more $ 0
$141.00 - $150.99 $ .08
$131.00 - $140.99 $ .16
$121.00 - $130.99 $ .39
$111.00 - $120.99 $ .65
$101.00 - $110.99 $ .97
$ 91.00 - $100.99 $1.36
The Open Active Account Fee payable by Company for each
calendar month will be no more than an amount equal to the
greater of (i) 2.22% of the net amount of Card Sales made by
Company during such calendar month ("Current Net Sales"), or
(ii) 2.22% of the net amount of Card Sales made by Company
during the same calendar month of the prior year, as set forth
in Exhibit A attached hereto and incorporated herein ("Prior
Year Net Sales"). Bank will calculate the amount of the Open
Active Account Fee on or about the last day of each calendar
month and will collect the Open Active Account Fee each month
in accordance with paragraph 3.1 (d) of the Merchant Services
Agreement. Until August 1, 1998, the sum of the Merchant Fee
and Open Active Account Fee payable by Company for each
calendar month will be no more than 6.13% of the net amount of
Current Net Sales or Prior Year Net Sales, as applicable
(determined in accordance with this paragraph). The amount of
the Open Active Account Fee will be subject to change on or
after August 1, 1998.
(b) Never Active Account Fee. On August 31, 1997 and on September
30, 1997, Bank will determine the number of Accounts which are
180 days and older and which have never been active (that is,
had a debit or credit balance at any time) ("Never Active
Account"). Company shall pay a Never Active Account Fee in the
amount of $.43 per Account for each Never Active Account
identified on August 31, 1997 and an additional Never Active
Account Fee for each Never Active Account identified on
September 30, 1997. Bank will collect the Never Active Account
Fee in accordance with paragraph 3.1(d) of the Merchant
Services Agreement.
3. Company has requested that Bank provide to Company each month
until August 1, 1998, a tape file of the names and addresses of Cardholders
whose Accounts have been open at least 90 days and have never been active, to
enable Company to direct market to such Cardholders to activate their Accounts.
Bank will provide the requested file to Company, provided Company shall use such
names and addresses for the sole purpose of marketing to Cardholders to activate
their Accounts. Notwithstanding Company's direct marketing programs to such
Cardholders, Bank shall have the right, among other rights provided under the
Hurley State Bank Credit Card Agreement and Merchant Services Agreement, to
terminate Accounts which are 180 days and older and which have never been
active.
4. This First Amendment will be effective as of August 1, 1997.
5. Any capitalized terms used herein and not otherwise defined will
have the meanings given to them in the Merchant Services Agreement. Except as
provided in this First Amendment, or as necessary and appropriate to give
meaning to the terms and conditions of this First Amendment, the terms and
conditions of the Merchant Services Agreement will remain in full force and
effect. In the event of any conflict between the terms of the Merchant Services
Agreement and this First Amendment, this First Amendment will govern.
2
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment.
THE CHILDREN'S PLACE RETAIL STORES, INC. HURLEY STATE BANK
By: /s/ Stanley Silver By: /s/ Richard F. Atkinson
-------------------------------- --------------------------
Name: Stanley Silver Name: Richard F. Atkinson
Title: President Title: Senior Vice President
Date: 10/27/97 Date: 11/3/97
3
EXHIBIT A
The Children's Place
Prior Year
Net Sales
------------
Aug-96
------------
$2,645,182
------------
------------
Sep-96
------------
$2,922,475
------------
------------
Oct-96
------------
$2,140,691
------------
------------
Nov-96
------------
$2,228,979
------------
------------
Dec-96
------------
$2,771,653
------------
------------
Jan-97
------------
$1,030,300
------------
------------
Feb-97
------------
$1,277,198
------------
------------
Mar-97
------------
$1,866,892
------------
------------
Apr-97
------------
$1,443,810
------------
------------
May-97
------------
$1,378,114
------------
------------
Jun-97
------------
$1,369,468
------------
------------
Jul-97
------------
$1,314,753
------------
4
Exhibit 10.2
THE CHILDREN'S PLACE
MERRILL LYNCH
EMPLOYEE STOCK PURCHASE
SECTION 423 SERVICING AGREEMENT
OCTOBER 30, 1997
EMPLOYEE STOCK PURCHASE PLAN SERVICING AGREEMENT
FOR INTERNAL REVENUE CODE SECTION 423 PLANS
Agreement dated as of 10/30, 1997 between The Children's Place____
(the "Employer") and Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch").
WHEREAS, the Employer desires to use the services of Merrill Lynch
in connection with the Employer's Stock Purchase Plan, named on the accompanying
Schedule A and subject to the fees described in Schedule B, (the "Plan") to
which Section 423 of the Internal Revenue Code of 1986 (the "Code") applies.
NOW, THEREFORE IN CONSIDERATION of the mutual covenants set forth
herein, the Employer and Merrill Lynch agrees as follows:
SERVICE DESCRIPTION AND RESPONSIBILITIES
Section 1. Merrill Lynch Services
During the term of this Agreement, Merrill Lynch will perform the
following services with respect to the Plan and Employer's common stock (the
"Stock").
(a) Merrill Lynch will establish a separate brokerage Account for
each Participant in the Plan and maintain records of the Stock and transactions
in that Account.
(b) Merrill Lynch will: 1) allocate shares of Stock to the Accounts
of Participants, but only following Merrill Lynch's ( i ) receipt of either a
certificate or certificates from the Employer, registered in the name of Merrill
Lynch or its nominee, for the total number of full shares to be allocated,
including instruments of transfer in a form acceptable to Merrill Lynch
permitting registration of such shares in the name of Merrill Lynch or its
nominee, (ii) receipt from the "Employer" of "available funds" for the residual
fraction of a share, if any, (iii) receipt of a file (a "Payroll File) from the
Employer setting forth a total payroll deduction amount in U.S. dollars for each
participant involved, (iv) receipt of a written statement from the Employer
specifying the fair market price and allocation price of the Stock and the date
to be reflected on Merrill Lynch's records for use in allocating Sock to
Participant's Accounts and for reporting purposes, and such additional
information as Merrill Lynch may specify from time to time, and (v)
reconciliation of the shares of Stock received and the "available funds"
received with the Payroll File to determine that the aggregate amount of shares
and "available funds" received corresponds to the aggregate of the amounts
specified in the Payroll File; 2) provide a
2
periodic report to the Employer in Merrill Lynch's standard from as in effect
from time to time setting forth information concerning shares of Stock acquired
under the Plan which were held in the account of each Participant and which
prior to a specified date have been sold on the market, delivered to
Participants, or transferred to another Merrill Lynch account, to another
broker, or to a third party. Merrill Lynch makes no representation or warranty
as to whether the information set forth on such periodic reports will be
sufficient for the Employer to determine whether the holding period specified in
Section 423(a) of the Code has been satisfied with regard to any share of Stock
or to determine the amount of any tax deduction to which the Employer may be
entitled by reason of any "disposition" or shares of Stock as that term is used
in Section 423 of the Code, and 3) to comply with Section 423 of the Code,
Merrill Lynch will maintain and age the Employer's Stock held in Participants'
Accounts in the following categories: Plan shares held under 2 years and Plan
shares held over 2 years and shares not acquired through payroll deduction under
the Plan (non-plan shares). Upon participants' instructions to liquidate shares
held in their Accounts, the disposition of shares will be as follows: non-plan
shares first. Followed by Plan shares held in a Participant's Account over 2
years and lastly Plan shares held under 2 years. Plan shares under 2 years are
disposed of on a first-in first-out basis.
(c) Merrill Lynch will arrange for the production of "Enrollment
Materials" to explain the Plan to employees and to enroll participants.
Enrollment materials consist of 1) an employee enrollment brochure to describe
the Plan, and 2) an enrollment form to establish the payroll deduction with the
Employer and the Account with Merrill Lynch. The contents of the enrollment form
will not be subject to change; however, supplemental information may be included
to satisfy the Employer's requirements. The Employer understands and agrees that
Merrill Lynch must review and approve all Enrollment Materials prior to printing
and distribution to employees. The production of the Enrollment Materials shall
be treated as an additional service pursuant to Section 9 of the Agreement.
(d) Merrill Lynch will hold all Stock in each Account in the name of
Merrill Lynch or its nominee, unless otherwise directed by the Participant for
whom the Account is maintained, in which case Merrill Lynch may charge a fee to
the Participant for re-registration and delivery of the Shares involved unless
the Employer has agreed to pay for the Transfer/Delivery Fee in accordance with
Schedule B to the Agreement by checking the appropriate line thereon:
(e) Merrill Lynch will automatically reinvest all cash dividends on
Stock received in each Account in shares of the Employer's Stock to the extent
possible, unless the Participant directs otherwise, in which case all such
dividends
3
shall be remitted in check format to the Participant as soon as practicable.
(f) Merrill Lynch will transmit to each participant all proxy
statements, annual reports, meeting notices, etc. received from the Employer
with respect to Stock acquired pursuant to the Plan and held in the
Participant's Account. Proxies will be voted with respect to full Shares held in
a Participant's Account in accordance with the Participant's instructions duly
delivered to Merrill Lynch. For purposes of consolidating annual report mailings
and proxy solicitation, Merrill Lynch will, at the Employer's request and
subject to Section 9 of this Agreement, provide the Employer with name, address
and share balance information in the standard Merrill Lynch format for those
Plan Participants who have objected to disclosure of this information pursuant
to Rule 14b-1(b)(3)(i) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
(g) Merrill Lynch will prepare and distribute quarterly to each
Participant a statement as to the Stock acquired for the Participant's Account
under the Plan. If a separate confirmation for one or more such purchases is
requested by the Employer, a fee for the furnishings of such confirmations shall
be charged to the Employer pursuant to Section 9 of the Agreement.
Section 2. Employer Responsibilities
During the term of the Agreement, the Employer will assume the
responsibilities and perform the duties set forth below:
(a) The Employer will furnish to Merrill Lynch, on information forms
provided by Merrill Lynch or its designated agents or otherwise in a format
prescribed by Merrill Lynch, all Payroll Files and employee payroll and other
information which Merrill Lynch may require in order to establish an Account and
to perform its services or calculate its fees under this Agreement. In
particular, but not by way of limitation, the Employer will notify Merrill Lynch
in the manner specified by Merrill Lynch of the name and Account number of each
Participant who terminates participation in the Plan whether by reason of
termination of employment with the Employer, cessation of payroll deductions or
otherwise. Merrill Lynch shall have the right to close such terminated or
inactive Plan Participant's Account, subject to the notification process
described in Section 8 subsection (b). Merrill Lynch shall be entitled to rely
upon the accuracy and completeness of all information which it reasonably
believes to have been furnished to it by the Employer or at the Employer's
direction and shall have no duty to inquire about such information or about the
application of any funds,
4
securities or other assets held by the Employer under the Plan. Other than with
respect to a Participant's Account and transactions therein, the Employer shall
be solely responsible for resolving any dispute between the Employer and a
Participant and answering any inquiries relating to the Participant's rights and
entitlements under the Plan. Merrill Lynch shall have no obligation or liability
in this regard or for answering any inquiries concerning any transaction or
event affecting any Account which occurs prior to the later of (i) the date of
the Agreement and (ii) the establishment of such Account in accordance with the
Agreement.
(b) The Employer agrees to use the enrollment form designed by
Merrill Lynch for the purpose of authorizing payroll deductions and establishing
an Account with Merrill Lynch. This enrollment form will be distributed,
collected and maintained by the Employer. The Employer agrees to maintain a
record of these forms in such a manner as to allow retrieval and delivery of the
forms to Merrill Lynch within two business days, to comply with any Internal
Revenue Service (IRS), state, or other taxing authority inquiry, request or
audit. If such a request is made, a copy will be made for Merrill Lynch and the
original maintained by the Employer at all times, unless otherwise required by
law, regulation or legal process. The Employer agrees to maintain these original
enrollment forms on file for the life of the account plus a period of at least
seven years. In addition, The Employer agrees to follow identical procedures in
the event of other tax authority requests for documentation or information
relating to the Plan or its participants.
In order to establish an Account under this Agreement, the Employer
agrees to furnish the information requested by Merrill Lynch in a
machine-readable format. Accounts will be established automatically through the
processing of the Payroll File with the content and format specified by Merrill
Lynch. Specifically, the Employer must provide Participant name, address, social
security number (account number), and dollar contribution information. Since
Merrill Lynch will not retain the enrollment forms, The Employer understands and
agrees t review all enrollment forms received for 1) completeness, 2) for
exceptions indicated on the form, and 3) for any participants indicating foreign
residency or citizenship. The Employer is responsible for obtaining any missing
information or incomplete forms and further understands and agrees that Merrill
Lynch will rely on all social security number, name and address information
provided by the Employer to be current and accurate for individual Participant
tax reporting purposes. In the case of exceptions to the form or if foreign
residency or citizenship is indicated, copies of the forms will be provided by
the Employer to Merrill Lynch for special processing. Upon receipt of these
copies, Merrill Lynch will update the Account
5
according to the information indicated on the enrollment form .
The Employer will in no event permit the following employees to
become Participants in the Plan: 1) an employee who has not attained the age of
majority in the state or country in which the employee resides, and the Employer
will refuse to accept any enrollment forms submitted by such a individual, or 2)
an employee who has not completed enrollment form to the Employer. The Employer
further agrees to obtain and file executed enrollment forms on all employees
wishing to enroll in the Plan before including them on a Payroll File and
submitting to Merrill Lynch as active Plan Participants.
In the event another firm has provided services similar to those
provided by Merrill Lynch hereunder in respect of the Plan, the Employer agrees
to obtain executed enrollment forms from al Participants on the Payroll File
pursuant to the procedures described above and shall not be obligated to receive
in any Account assets from such firm until reconciliation of the assets so
received with information received from such firm or Employer detailing the
allocation of these assets to each relevant Account; provided that Merrill Lynch
will have no responsibility for determining the accuracy of the information
received or for reconciling such information with any Participant's entitlements
under the Plan; provided further that Merrill Lynch shall not be obligated in
any event to accept assets in an Account which are not allowable as an
investment in the Account in accordance with Section 8.
(c) The Employer will collect all amounts deductible pursuant to the
Plan from the compensation of Participants and other amounts contributed by the
Participant pursuant to the Plan and will make all required Employer
contributions, if any, in accordance with the Plan, and shall hold such amounts
or shares until delivered to Merrill Lynch in accordance with the schedule
specified on Schedule A. Merrill Lynch shall not be obligated to accept delivery
of shares other than in accordance with such schedule but may do so in its sole
discretion as an additional service pursuant to Section 9. The Employer will
promptly notify Merrill Lynch of any change in the information specified on
Schedule A to this Agreement.
(d) The Employer will consolidate all information and deliver a
single Payroll File to Merrill Lynch in a machine-readable format, conforming to
specifications furnished by Merrill Lynch from time to time. In the event that,
(i) the Employer is unable to submit one Payroll File, (ii) a Payroll File does
not conform to such specifications, the processing of such Payroll File by
Merrill Lynch shall not be required, or (iii) Merrill Lynch processes a file and
it does
6
not conform to such specifications, such processing shall be an additional
service pursuant to Section 9.
Each Payroll File shall be reconciled by the Employer against the
funds and Stock referenced in such file prior to delivery of the file to Merrill
Lynch. If any Payroll File submitted to Merrill Lynch in incomplete, incorrect
or subsequently changed by the Employer, the work performed by Merrill Lynch to
correct, change or otherwise prepare the Payroll File for processing also shall
be treated as an additional service by Merrill Lynch pursuant to Section 9. If
the Employer requests that Merrill Lynch make entry corrections to the Payroll
File after an investment has been made, the Employer agrees to provide Merrill
Lynch with a letter of authorization detailing the date of the error, type of
adjustment, Participant name and account number. An adjustment will be processed
by Merrill Lynch and a refund will be returned to the Employer, if applicable,
and this work shall also be treated as an additional service pursuant to Section
9.
(e) All remittances of funds by the Employer to Merrill Lynch in
respect to the Plan shall be made either by check or by wire transfer in
accordance with instructions received from Merrill Lynch. All Stock delivered
directly by the Employer to Merrill Lynch in respect of the Plan shall be fully
paid and nonassessable and registered in the name of Merrill Lynch or its
nominee, and all Stock and Payroll files shall be delivered to Merrill Lynch at
the place and in the manner specified in instructions transmitted by Merrill
Lynch to the Employer.
(f) All Stock and Payroll Files delivered to Merrill Lynch on behalf
of the Employer and any of its subsidiaries participating in the Plan, as well
as other notices and instructions relating to the Plan or this Agreement, shall
be delivered by the department, office or single source within the Employer, or
other person acting on behalf of the Employer, specified on Schedule A. For
purposes of the Agreement, any action taken by any person acting on behalf of
the Employer shall be considered as an action by the Employer. Delivery of Stock
or Payroll Files other than in accordance with Sections 2(e) and 2(f) shall not
constitute delivery within the meaning of Section 1(b).
(g) The Employer is solely responsible for the administration of the
Plan and execution and filing with any governmental authority of other person of
all reports or other documents required in connection with the Plan, and Merrill
Lynch shall have no reporting or tax withholding obligation in connection with
any aspect of the Plan. The foregoing, however, shall in no way limit any
reporting and withholding obligations which Merrill Lynch may have under
applicable law with respect to brokerage accounts generally.
7
(h) Merrill Lynch shall have no responsibility to monitor compliance
by the Employer with the terms and conditions of the Plan or any law applicable
thereto.
(i) Except as in Section 3 (c), each report and statement issued by
Merrill Lynch shall be deemed correct unless Merrill Lynch receives written
notice of any incorrectness, incompleteness or inaccuracy in the report or
statement within 30 days after the sending thereof to the person to whom the
report or statement is to be sent in accordance with the agreement.
(j) Except for the internal newsletters or other documents not
dedicated solely to describing the Plan and Merrill Lynch services under this
Agreement, The Employer shall obtain the prior written consent of Merrill Lynch
to any reference to Merrill Lynch or to services to be furnished by Merrill
Lynch in any communication or document pertaining to the Plan not prepared by
Merrill Lynch; provided that Merrill Lunch shall have no responsibility or
liability for the content of any such communication or document.
(k) The Employer shall pay all sales or use taxes or any taxes in
lieu thereof with respect to the services of Merrill Lynch under the Agreement.
(l) The Employer shall notify Merrill Lynch as soon as possible in
advance of any stock, Split, stock dividend or similar event which may affect
the Stock, and of any bankruptcy, insolvency, moratorium or other proceeding in
respect of the Employer affecting the enforcement of creditor's rights.
Likewise, Merrill Lynch will notify the Employer of any bankruptcy, insolvency,
moratorium or other proceeding with respect to Merrill Lynch affecting the
enforcement of creditor's rights. Notwithstanding any other provision of the
Agreement to the contrary, Merrill Lynch will have no obligation to perform any
services under this Agreement subsequent to the commencement of any bankruptcy,
insolvency, moratorium or other proceeding in respect to the Employer affecting
the enforcement of creditors' rights unless Merrill Lynch receives assurance
satisfactory to it that it will receive full payment for such services.
Section 3. Responsibility for Errors and Indemnification
(a) The Employer will promptly notify Merrill Lynch of any errors or
omissions in information supplied by the Employer to Merrill Lynch. In such an
event, or in the event that Merrill Lynch executes an allocation of shares of
Stock pursuant to Section 1(b) prior to satisfaction of all of the conditions
specified in clauses (i), (ii) and (iii) of the Section and subsequently
discovers an error or omission in information supplied to it by the Employer,
Merrill Lynch's
8
sole obligation shall be to us reasonable best efforts to correct any resulting
errors in its own records or in any reports it has prepared for the Employer or
any participant, and such services shall be treated as an additional service
pursuant to Section 9.
(b) The Employer will defend, indemnify and hold harmless Merrill
Lynch and its parent company and each of their directors, officers and
employees, and any affiliate or subcontractor to which Merrill Lynch has
delegated (as permitted by Section 12 of this Agreement), any of its duties
hereunder, from and against all claims, liabilities, losses, damages or
expenses, including attorney's fees and reasonable costs of investigating,
preparing or defending any related litigation, asserted by the Employer or any
Participant, or any other person, (i) arising out of any failure of the Employer
to supply time and accurate information or funds needed to enable Merrill Lynch
to discharge its duties under the Agreement, (ii) arising out of any untrue
statement or alleged untrue statement of material fact contained in the
registration statement covering Stock or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to make
the statement therein, in light of the circumstances under which it was made,
not misleading, or, if applicable, the Plan, (iii) arising out of any violation
or alleged violation of any "blue sky" or state securities law, or (iv) arising
out of any other cause other than Merrill Lynch's gross negligence or willful
misconduct. The Employer further agrees to indemnify and hold harmless Merrill
Lynch for any fines, taxes and penalties imposed by the IRS, state or other
taxing authority, or for any other claims or costs arising from or relating to
inaccurate or omitted tax-related information.
(c) Merrill Lynch will at its own expense, correct, or cause the
correction of, any errors in its records and in any reports prepared by it which
are attributable to errors of its employees.
(d) In case of errors or loss of data caused by power failure,
mechanical difficulties with information storage and retrieval systems, or other
events not attributable to its own gross negligence or willful misconduct or to
the gross negligence or willful misconduct of its agents or subcontractors,
Merrill Lynch's sole obligation will be, at its own expense, to use its
reasonable efforts to reconstruct any records maintained by Merrill Lynch and to
amend any reports prepared by it which have been affected by such event.
Performance by Merrill Lynch and the Employer of their obligations hereunder is
subject to appropriate adjustment and extension of time in the event of strike,
fir, war, insurrection, riot, electrical failure or any other event that would
constitute force majeure under New York law, or in the
9
event of a circumstance beyond Merrill Lynch's or the Employer's control.
Section 4. Survival
The provisions of Sections 3,5,8,13,14 and 20 shall survive the
termination of this Agreement.
Section 5. Proprietary Information
The Employer agrees that all computer programs, software, forms,
plans and procedures developed by Merrill Lynch to perform the services required
under the Agreement are trade secrets or other property of Merrill Lynch. In
addition, Merrill Lynch reserves the right to include the Employer's name on a
client list as an active plan sponsor of the Employee Stock Purchase Plan
Service.
Section 6. Confidentiality of Records
(a) Merrill Lynch will treat confidentially by not disclosing to
unaffiliated persons all records of, or other information in its possession
regarding the Plan, subject to Section 8, and will not, without written
authority from the Employer, disclose to such unaffiliated persons during the
term of the Agreement or thereafter any such records or information except (i)
in connection with the proper operation of the Agreement and the Plan, (ii)
incident to an assignment, subcontract or service contract or relationship
permitted by Section 12 of the Agreement, (iii) in connection with a proxy
solicitation, audit or regulatory examination, (iv) as may otherwise be legally
required, or (v) as directed by the Employer to transfer existing records and
accounts to a successor administrator. The transfer of records to a successor
administrator or additional reporting after the termination of this Agreement
will be treated as an additional service pursuant to Section 9 of the Agreement.
(b) During the term of the Agreement all records of the Plan in the
possession of Merrill Lynch will, subject to Section 8, be open to inspection
and audit at reasonable times by the Employer.
Section 7. Status of Parties
The relationship of the parties to each other in the execution and
performance of the Agreement shall be that of independent contractors. Nothing
in the Agreement or with respect to the obligations or services of Merrill Lynch
in connection with the Agreement shall constitute Merrill Lynch a fiduciary of
the Employer, the Plan, any Participant or any other person.
10
Section 8. Accounts
(a) Each Account established for a participant may be used by that
Participant for transactions in such securities designated by the Employer, and
that are allowable for investment under the Merrill Lynch Account (or any
successor program or account). The relationship between Merrill Lynch and each
participant with respect to the Account and transactions therein shall be
governed by a separate agreement of terms and conditions between them (an
"Account Agreement"), which constitutes part of the Enrollment Materials. Each
Account Agreement, unless previously terminated, shall survive the termination
of this Agreement, and each Account Agreement and the fees and commissions
applied thereunder may be amended from time to time in accordance with the terms
thereof without notice to or consent from the Employer.
(b) Merrill Lynch may notify any participants, including those
participants who have terminated employment with the Employer or inactive
Participants (those persons who have suspended payroll deductions for a
consecutive (12) month period), of their account closing options. On a regular
basis, Merrill Lynch will forward a report to the Employer listing inactive
accounts. At that time, the Employer may decide to pay the maintenance fee to
retain the accounts on the plan base or allow Merrill Lynch to contact these
Participants for the purpose of notification of the following options: i) sale
of the Participant's holdings of Stock and other securities, if any, subject to
applicable transaction and handling fees and closure of their account; ii)
receipt of a Stock certificate, and certificates for other securities in their
account, if any, subject to a certificate fee and closure of their account; or
iii) conversion of their Plan Account to a Merrill Lynch account, subject to
minimum balance requirements and applicable account maintenance, transaction and
handling fees. The above rights of Merrill Lynch shall be in addition to any
other rights and privileges included but not limited to the right to charge its
prevailing account maintenance fees for security registration, mailing and other
related brokerage or administrative services accorded to Merrill Lynch under the
terms and conditions of the Account Agreement governing the Participants'
Accounts at Merrill Lynch.
(c) The records maintained by Merrill Lynch in respect of each
Account in accordance with the Account Agreement will be confidential and will
not, without written authority from the Participant involved, be disclosed too
the Employer except to the extent otherwise specifically set forth in the
Agreement, as required by operation of law or to transfer existing records and
accounts to a successor administrator.
11
Section 9. Additional Services
In addition to each of those categories of work specified in this
Agreement as an additional service pursuant to this Section 9, the parties may
agree from time to time that Merrill Lynch shall perform other additional
services for the Employer in connection with the Plan. Charges for additional
services shall be in accordance with Merrill Lynch's then current fees for such
services.
Section 10. Merrill Lynch Compensation
(a) The Employer will pay Merrill Lynch the fees indicated on the
accompanying Schedule B for the services involved and any fees for additional
services pursuant to Section 9 within 30 days of the date of receipt of Merrill
Lynch's invoice for the fees specified thereon. Merrill Lynch shall be entitled
to charge the Employer interest at the rate which is 2 percent above the
prevailing "Prime Rate" charged during such time by Citibank, N.A. on the
outstanding balance of all fees payable hereunder that are not paid by the
Employer within 30 days after the date of receipt of Merrill Lynch's invoice
therefor. The fees and commissions provided for herein are in addition to, and
not in substitution for, Merrill Lynch's usual fees for mailings of proxy
statements, annual reports, meeting notices, etc., services rendered as a
nominee for customers and other services performed by Merrill Lynch for which it
normally charges a separate fee. Merrill Lynch retains their right to change any
fees listed on Schedule B from time to time on 30 days' prior written notice to
the Employer.
(b) The Employer shall not be required to pay transaction fees
incurred in connection with the transactions executed upon the instructions of
Participants (other than transactions entered into in connection with the
processing of a Payroll File) or in connection with the reinvestment of
dividends (unless the Employer had assumed that obligation as specified on
Schedule B, in which case the fee payable in connection therewith shall be
billed to the Employer separately from the other fees provided for herein),
which transaction fees shall otherwise be for the accounts of the Participants
involved.
(c) The Employer understands and agrees that the service fee
schedule described in Schedule B will be modified each year to reflect any
increase in the Consumer Price Index on the anniversary date of each yearly
renewal of the Agreement.
12
Section 11. Term
This Agreement shall remain in effect for a period of one year
subsequent to the execution date. This Agreement will automatically renew for an
additional one year period thereafter, unless either party gives written notice
to the other not less than 90 days prior to the expiration of such one year
period of its election not to renew the Agreement.
Section 12. Assignments/Subcontracts
Neither party may assign this Agreement or any right or obligation
hereunder in whole or in part without the written consent of the other party,
except that (i) Merrill Lynch may assign any or all of its rights and duties
hereunder to any corporation directly or indirectly owned by Merrill Lynch Co.,
Inc. and (ii) Merrill Lynch may in any case employ independent subcontractors or
other agents to perform all or any part of the services otherwise to be
performed by Merrill Lynch itself under this Agreement. Merrill Lynch may also
contract or establish relationships with third parties for the provision of
services to Merrill Lynch which are useful to Merrill Lynch in connection with
its servicing Accounts.
Section 13. Waiver of Jury Trial
Each of Merrill Lynch and the Employer (in its own behalf and, to
the extent permitted by applicable law, on behalf of its shareholders) waives
all right to trial by jury in any action, proceeding or counterclaim (whether
based upon contract, tort, or otherwise) related to or arising out of the
engagement of Merrill Lynch pursuant to, or the performance by Merrill Lynch of
the services contemplated by, this Agreement.
Section 14. Representation and Warranties
(a) The Employer hereby represents and warrants that (i) it has full
power, authority and capacity to execute and deliver this Agreement and perform
its obligations hereunder on behalf of itself and on behalf of any subsidiary
participating in the plan, and that this Agreement constitutes a legal, valid
and binding obligation of the Employer, enforceable against the Employer in
accordance with its terms, except as enforcement may be limited by bankruptcy,
insolvency, moratorium or other laws affecting the enforcement of creditors'
rights generally, (ii) stock delivered to Merril Lynch in connection with the
Plan (if any), and all interests in the Plan (if required), will be the subject
of an effective registration statement under the Securities Act of 1933, as
amended, and will be registered or qualified under
13
the securities laws of each state in which such registration or qualification is
necessary and the Employer will keep such registration statements and
qualifications in effect during such period of time as is required by applicable
law, and (iii) that it is not a broker dealer registered under the Exchange Act
and is not a member of the National Association of Securities Dealers, Inc.
(b) Merrill Lynch hereby represents and warrants that it has full
power, authority and capacity to execute and deliver this Agreement and performs
its obligations hereunder, and that this Agreement constitutes a legal, valid
and binding obligation of Merrill Lynch, enforceable against Merrill Lynch in
accordance with its terms, except as enforcement may be limited by bankruptcy,
insolvency, moratorium or other laws affecting the enforcement of creditor's
rights generally.
Section 15. Notices
Any notice or instructions to be given to the Employer or Merrill
Lynch under this Agreement shall be in writing or on such other medium as may be
agreed to by the Employer and Merrill Lynch, and delivered by hand, or sent by
certified mail, postage prepaid, return receipt requested, or by courier or
overnight delivery service to the address listed below, or to such other address
as may be designated in a written notice transmitted in accordance with this
Section 15.
14
If to Merrill Lynch by overnight, hand or courier delivery:
Merril Lynch, Pierce, Fenner & Smith Incorporated
Group Employee Services
265 Davidson Avenue - 2nd Floor
Somerset, New Jersey 08873
United States of America
Attn: Employee Stock Purchase Plan Manager
If to Merrill Lynch by first class or certified mail:
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Group Employee Services
P.O. Box 30430
New Brunswick, New Jersey 08989-0430
United States of America
Attn: Employee Stock Purchase Plan Manager
If to the Employer:
The address of the employer set forth on Schedule A
Any report or statement to be sent to a Participant by Merrill Lynch
under this Agreement shall be sent by first class mail, postage prepaid, to the
most recent address of such Participant as shown on Merrill Lynch's records
maintained for the purposes of this Agreement.
Section 16. Successors
This Agreement shall be binding upon, and inure to the benefit of,
the Employer and Merrill Lynch and their respective successors and
permitted assigns.
Section 17. Amendment
This Agreement will not be modified or amended except by an
instrument in writing signed by the Employer and Merrill Lynch.
Section 18. Waiver
No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be an estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such shall operate only as the
specific term or condition waived and shall not constitute a waiver of such term
or condition for the future or as to any act other than that specifically
waived.
15
Section 19. Severability
The invalidity or unenforceability of any provision of the Agreement
shall not affect the other provisions, and this Agreement is to be construed in
all respects to the extent possible to fulfill the purposes of this Agreement as
if such invalid or unenforceable provision was omitted.
Section 20. Governing Law
THIS AGREEMENT SHALL BE CONSIDERED AS EXECUTED AND DELIVERED IN THE
STATE OF NEW YORK AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THAT STATE.
Section 21. Counterparts
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
Section 22. Entire Agreement
This Agreement (including Schedule A and Schedule B hereto)
constitutes the entire agreement between the parties with respect to the matters
dealt with herein, and supersedes all previous agreements and documents with
respect to such matters.
16
AUTHORIZATION
IN WITNESS WHEREOF, the Employer and Merrill Lynch have each caused this
Agreement to be executed in its corporate name by the duly authorized officers,
all as of the date first above written.
EMPLOYER'S NAME
Attest: /s/ Seth Udasin By: /s/ Steven Balasiano
----------------------------- -----------------------------
Print Name: Seth Udasin Print Name: Steven Balasiano
Title: Chief Financial Officer Title: Vice President
MERRILL LYNCH, PIERCE, FENNER
SMITH INCORPORATED
Attest: /s/ Juliet Parsons-Betzel By: /s/ Kurt A. Breme
----------------------------- -----------------------------
Print Name: Juliet Parsons-Betzel Print Name: Kurt A. Breme
Title: Assistant Vice President Title: Vice President
17
SCHEDULE A
Data Sheet for Merrill Lynch
Employee Stock Purchase Plan Servicing Agreement
1. Name of Employer: The Children's Place Retail Stores, Inc.
2. Name of Subsidiaries or Affiliates of the Employer
Participating in the Plan: None
3. Name of Plan: The Children's Place Retail Stores, Inc. Employee Stock
Purchase Plan.
4. Stock to be Allocated: 360,000 shares of common stock par value .10
5. Exchange/Market on which Stock is Traded: NASDAQ
6. Source of Stock (check one): Treasury |_|
New Issue |X|
7. Single Source for all Information, Payments and Documents
to Employer:
Company Name: The Children's Place
Address: 1 Dodge Drive
West Caldwell, NJ 07006
Attention: Laurel Anderson
Title: Manager of Human Resources
Telephone Number: (973) 227-8900 X 2219
Fax Number: (973) 808-6491
10/8/97
18
8. Employer Discount Percentage: 15%
9. a. Schedule for Delivery of Money and/or Stock and Payroll Files to
Merrill Lynch under the Plan (check one):
Monthly |X|
Quarterly |_|
Semi-Annual |_|
Other |_|
b. First month in which delivery is to be made: January 1998
10. Medium in which Payroll Files Furnished (check one):
Magnetic Tape |X|
PC Transmission |_|
Cartridge |_|
Electronic Data Transmission |_|
11. Shares to be delivered by (check one):
Delivery of physical certificates |_|
DTC transfer |X|
12. Other Additions or Modifications to Agreement:
19
SCHEDULE B
Service Fees
1. Service Fee:
Annual Per Participant Fee
$25.00
The number of participants is the number of Participants referenced in the
Payroll File with respect to which the Service Fee is to be determined.
The Per Participant Fee is determined by multiplying (a) the number of
Participants referenced in the Payroll File being processed by (b) a prorata
portion of the indicated per Participant Dollar amount specified above. The pro
ration is determined on the basis of the number of Payroll Files scheduled to be
delivered on an annual basis under the schedule for delivery specified in
Schedule A to the Agreement (e.g., if Schedule A to the Agreement provides for
semi-annual delivery of Payroll Files, the Per Participant Fee Payable with
respect to each Payroll File delivered is one-half of the indicated dollar
amount).
The Service Fee is payable with respect to each Payroll File processed by
Merrill Lynch under the Plan. If the aggregate Fee calculated as described above
for a Payroll File processed by Merrill Lynch during any calendar year is less
than $5,000.00 the Employer will be billed, and will pay the difference between
$5,000.00 and the amount of Fee so calculated.
The Service Fee schedule will be modified each year on the execution date of
this Agreement upon the annual plan renewal to reflect any increase in the
Consumer Price Index.
20
2. Fees for reinvestment of dividends paid on company stock.
a. |X| Not applicable, the company does not currently pay dividends.
Should the company declare a dividend in the future and checked
Section 2 item (a) of Schedule B, Merrill Lynch will automatically
supply Section 2 item (b) of Schedule B unless noted otherwise,
below.
If currently paying a dividend or intend to pay a dividend, please check
one:
b. |_| To be paid in all events by Participants at the applicable rate.
c. |_| To be paid by the Employer at the rates set forth below with
respect to Accounts shown on Merrill Lynch's records. Designate
which classification of account holders you will assume
responsibility for dividend reinvestment fees.
(check one)
|_| Active Plan Participants (Employees currently participating in
the Plan.)
|_| Active and Inactive Plan Participants (Employees currently
participating in the Plan and those not participating but are
shown on Merrill Lynch's records as Plan Accounts.)
Fee as Percentage
Average Cash Dividend of Aggregate Dividend
Payable to Accounts Amount (All Accounts)
------------------- ---------------------
$ 0.01 - 100.00 4.0 %
100.01 - 500.00 2.0 %
more than $500.00 1.5 %
* If the fee payable at the 2% rate is less than the product of
$4.00 and the number of accounts with respect to which the Employer has assumed
this obligation, the fee payable by the Employer is equal to that product.
To determine the Average Cash Dividend Payable to Accounts, determine the sum of
the cash dividend payable to accounts with respect to which the employer has
assumed this obligation and divide that sum by the number of such accounts.
3. The Employer (check one) |_| has / |X| has not agreed to pay the fee for
Monthly Confirmations ($1.00 per confirmation)
4. The Employer (check one) |_| has/ |X| has not agreed to pay the Fee
Transfer Delivery of Certificates $15.00 per certificate)
5. The Employer (check one) |X| has/ |_| has not chosen to receive a Key
Officer Report and must contact Merrill Lynch with a list of appropriate
officers.
There is a fee of $25.00 per entry correction made to the Payroll File as
requested by the Employer after a plan purchase has been executed.
21
EXHIBIT 11.1
THE CHILDREN'S PLACE RETAIL STORES, INC.
CALCULATION OF EARNINGS PER SHARE
(Dollars in thousands, except for per share data)
For the Thirteen Weeks Ended For the Thirty-Nine Weeks Ended
----------------------------------- ----------------------------------
November 1, 1997 November 2, 1996 November 1, 1997 November 2, 1996
---------------- ---------------- ---------------- ----------------
Income before extraordinary item ......... $ 3,497 $ 5,312 $ 2,765 $ 3,850
Extraordinary item ....................... 1,743 -- 1,743 --
------------ ----------- ------------ -----------
Net income ............................... $ 1,754 $ 5,312 $ 1,022 $ 3,850
============ =========== ============ ===========
Pro forma weighted average shares
outstanding (1) ....................... 24,439,310 23,804,185 24,015,894 23,804,185
------------ ----------- ------------ -----------
Pro forma income per common share:
Pro forma income before extraordinary item $ 0.14 $ 0.22 $ 0.11 $ 0.16
Extraordinary item ....................... (0.07) -- (0.07) --
------------ ----------- ------------ -----------
Pro forma net income per common share .... $ 0.07 $ 0.22 $ 0.04 $ 0.16
============ =========== ============ ===========
(1) For the thirteen and thirty-nine weeks ended November 2, 1996 and November
1, 1997, pro forma net income per common share is calculated by dividing
net income by the pro forma weighted average common shares and common
share equivalents outstanding as if (i) the Stock Split, Series B
Conversion, and Reclassification (as discussed in Note 2-Initial Public
Offering), (ii) the 1996 Private Placement of Common Stock (as discussed
in Note 3-Private Placement in the financial statements in the
Prospectus), (iii) the cancellation of outstanding preferred shares which
were surrendered for no consideration on June 28, 1996, and (iv) the
granting of management options in conjunction with the 1996 Private
Placement occurred on the first day of the periods presented. Common share
equivalents include the Noteholder Warrant and the Legg Mason Warrant, (as
discussed in Note 3-1996 Private Placement in the Prospectus), and
management options to purchase common stock, calculated using the treasury
stock method in accordance with APB Opinion No. 15, "Earnings per Share,"
("APB No. 15"). Prior to the Offering, the Offering price was utilized for
the treasury stock calculations due to the lack of a public market.
Subsequent to the Offering, the average market price was utilized in
accordance with APB No. 15. Pro forma fully diluted net income per common
share is equal to the amount presented.
EXHIBIT 11.1
THE CHILDREN'S PLACE RETAIL STORES, INC.
CALCULATION OF EARNINGS PER SHARE
CALCULATION OF WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
# of Shares Weighted
Thirteen Weeks ended November 2, 1996 Outstanding # of Months Average
- ------------------------------------- ----------- ----------- ---------
Outstanding common stock.................. 12,760,800 3 12,760,800
Series B conversion to common stock....... 7,659,889 3 7,659,889
Legg Mason Warrant (a).................... 604,240 3 604,240
Noteholder Warrant (b).................... 1,611,305 3 1,611,305
1996 Management Options (c)............... 1,167,951 3 1,167,951
---------- ----------
23,804,185
# of Shares Weighted
Thirty-nine Weeks ended November 1, 1996 Outstanding # of Months Average
- ---------------------------------------- ----------- ----------- ---------
Outstanding common stock.................. 12,760,800 9 12,760,800
Series B conversion to common stock....... 7,659,889 9 7,659,889
Legg Mason Warrant (a).................... 604,240 9 604,240
Noteholder Warrant (b).................... 1,611,305 9 1,611,305
1996 Management Options (c)............... 1,167,951 9 1,167,951
---------- ----------
23,804,185
==========
Options or Warrants outstanding prior to # of Shares under Exercise Initial Public Common Share
the initial public offering Option or Warrant Price Offering Price Equivalents
- ---------------------------------------- ----------------- -------- -------------- ------------
(a) Legg Mason Warrant ................... 747,096 $2.677 $14.00 604,240
(b) Noteholder Warrant.................... 1,992,252 2.677 14.00 1,611,305
(c) 1996 Management Option................ 1,444,080 2.677 14.00 1,167,951
2
EXHIBIT 11.1
THE CHILDREN'S PLACE RETAIL STORES, INC.
CALCULATION OF EARNINGS PER SHARE
CALCULATION OF WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
# of Shares Weighted
Thirteen Weeks ended November 1, 1997 Outstanding # of Months Average
- ------------------------------------- ----------- ----------- ---------
Outstanding common stock............. 12,760,800 2 8,507,200
Series B conversion to common stock.. 7,659,889 2 5,106,593
Legg Mason Warrant (a)............... 604,240 2 402,827
Noteholder Warrant (b)............... 1,611,305 2 1,074,203
1996 Management Option (c).......... 1,167,951 2 778,634
---------- ----------
15,869,457
Outstanding common stock (g)......... 24,622,103 1 8,207,368
1996 Management Option (d).......... 1,087,456 1 362,485
1997 Management Option (e).......... -- 1 --
Options issued to a 10% owner (f).... -- 1 --
---------- ----------
8,569,853
----------
24,439,310
==========
# of Shares Weighted
Thirty-nine Weeks ended November 2, 1997 Outstanding # of Months Average
- ---------------------------------------- ----------- ----------- ---------
Outstanding common stock................ 12,760,800 8 11,342,933
Series B conversion to common stock..... 7,659,889 8 6,808,790
Legg Mason Warrant (a).................. 604,240 8 537,103
Noteholder Warrant (b).................. 1,611,305 8 1,432,271
1996 Management Options (c)............. 1,167,951 8 1,038,179
---------- ----------
21,159,276
----------
Outstanding common stock (g)............ 24,622,103 1 2,735,789
1996 Management Option (d)............. 1,087,456 1 120,829
1997 Management Option (e)............. -- 1 --
Options issued to a 10% owner (f)....... -- 1 --
---------- ----------
2,856,618
----------
24,015,894
==========
Options or Warrants outstanding prior to # of Shares under Exercise Initial Public Common Share
the initial public offering Option or Warrant Price Offering Price Equivalents
- ---------------------------------------- ----------------- -------- -------------- ------------
(a) Legg Mason Warrant ................. 747,096 $2.677 $14.00 604,240
(b) Noteholder Warrant.................. 1,992,252 2.677 14.00 1,611,305
(c) 1996 Management Option.............. 1,444,080 2.677 14.00 1,167,951
Options or Warrants outstanding
subsequent to the initial public # of Shares under Exercise Average Market Common Share
offering Option or Warrant Price Price Equivalents
- ---------------------------------------- ----------------- -------- -------------- ------------
(d) 1996 Management Option ............. 1,444,080 $2.677 $10.84 1,087,456
(e) 1997 Management Option.............. 451,600 14.00 10.84 --
(f) 1997 Options issued to a 10% owner.. 99,660 15.40 10.84 --
(g) Outstanding stock includes the 12,760,800 outstanding shares prior to the
initial public offering, the conversion of 7,659,889 shares of Series B
Common Stock into Common Stock, the initial public offering of 4,000,000
shares of Common Stock, and 201, 414 shares of Common Stock issued upon
the exercise of one-third of the Legg Mason Warrant.
3
EXHIBIT 11.1
THE CHILDREN'S PLACE RETAIL STORES, INC.
CALCULATION OF BASIC AND DILUTED EARNINGS PER SHARE
(Dollars in thousands, except for per share data)
For the Thirteen Weeks Ended For the Thirty-Nine Weeks Ended
----------------------------------- -----------------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
-------------- -------------- -------------- --------------
Income before extraordinary item ......... $ 3,497 $ 5,312 $ 2,765 $ 3,850
Extraordinary item ....................... 1,743 -- 1,743 --
-------------- -------------- -------------- --------------
Net income ............................... $ 1,754 $ 5,312 $ 1,022 $ 3,850
============== ============== ============== ==============
Pro forma basic weighted average shares
outstanding (1) ....................... 21,821,160 20,420,689 20,887,513 20,420,689
-------------- -------------- -------------- --------------
Pro forma basic income per common share:
Income before extraordinary item ......... $ 0.16 $ 0.26 $ 0.13 $ 0.19
Extraordinary item ....................... (0.08) -- (0.08) --
-------------- -------------- -------------- --------------
Net income per common share .............. $ 0.08 $ 0.26 $ 0.05 $ 0.19
Diluted average shares outstanding: (2) .. 24,439,310 23,804,185 24,015,894 23,804,185
-------------- -------------- -------------- --------------
Pro forma diluted income per common share:
Income before extraordinary item ......... $ 0.14 $ 0.22 $ 0.11 $ 0.16
Extraordinary item ....................... (0.07) -- (0.07) --
-------------- -------------- -------------- --------------
Net income per common share .............. $ 0.07 $ 0.22 $ 0.04 $ 0.16
============== ============== ============== ==============
(1) Pro forma basic net income per common share was calculated by dividing net
income by the pro forma weighted average common shares outstanding as if
(i) the Stock Split, Series B Conversion and Reclassification (as
discussed in Note 2-Initial Public Offering), (ii) the 1996 Private
Placement of Common Stock (as discussed in Note 3-Private Placement in the
financial statements in the Prospectus), and (iii) the cancellation of
outstanding preferred shares which were surrendered for no consideration
on June 28, 1996 occurred on the first day of the periods presented.
(2) Pro forma diluted net income per common share was calculated by dividing
net income by the pro forma weighted average common shares outstanding as
if (i) the Stock Split, Series B Conversion and Reclassification (as
discussed in Note 2-Initial Public Offering), (ii) the 1996 Private
Placement of Common Stock (as discussed in Note 3-Private Placement in the
Prospectus), and (iii) the cancellation of the outstanding preferred
shares which were surrendered for no consideration of June 28, 1996
occurred on the first day of the periods presented. Common share
equivalents for the thirteen and thirty-nine weeks ended November 2, 1996
include the Noteholder Warrant and the Legg Mason Warrant, (as discussed
in Note 3-Private Placement in the Prospectus), and management options to
purchase to purchase common stock, calculated using the treasury stock
method. Prior to the Offering, the Offering price was utilized for the
treasury stock calculations due to the lack of a public market. Subsequent
to the Offering, the average market price was utilized in accordance with
FAS No. 128.
4
EXHIBIT 11.1
THE CHILDREN'S PLACE RETAIL STORES, INC.
CALCULATION OF BASIC EARNINGS PER SHARE
CALCULATION OF BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
# of Shares Weighted
Thirteen Weeks ended November 2, 1996 Outstanding # of Months Average
- ------------------------------------- ----------- ----------- ---------
Outstanding common stock.................. 12,760,800 3 12,760,800
Series B conversion to common stock....... 7,659,889 3 7,659,889
----------
20,420,689
==========
# of Shares Weighted
Thirty-Nine weeks ended November 2, 1996 Outstanding # of Months Average
- ---------------------------------------- ----------- ----------- ---------
Outstanding common stock.................. 12,760,800 9 12,760,800
Series B conversion to common stock....... 7,659,889 9 7,659,889
----------
20,420,689
==========
# of Shares Weighted
Thirteen Weeks ended November 1, 1997 Outstanding # of Months Average
- ------------------------------------- ----------- ----------- ---------
Outstanding common stock.................. 12,760,800 2 8,507,200
Series B conversion to common stock....... 7,659,889 2 5,106,593
Outstanding common stock (a).............. 24,622,103 1 8,207,368
----------
21,821,160
==========
# of Shares Weighted
Thirty-Nine Weeks ended November 1, 1997 Outstanding # of Months Average
- ---------------------------------------- ----------- ----------- ---------
Outstanding common stock.................. 12,760,800 8 11,342,933
Series B conversion to common stock....... 7,659,889 8 6,808,790
----------
18,151,724
Outstanding common stock (a).............. 24,622,103 1 2,735,789
----------
20,887,513
==========
(a) Outstanding stock includes the 12,760,800 outstanding shares prior to the
initial public offering, conversion of 7,659,889 shares of Series B Common
Stock into Common Stock , the initial public offering of 4,000,000 shares
of Common Stock, and 201,414 shares of Common Stock issued upon the
exercise of one-third of the Legg Mason Warrant.
5
EXHIBIT 11.1
THE CHILDREN'S PLACE RETAIL STORES, INC.
CALCULATION OF DILUTED EARNINGS PER SHARE
CALCULATION OF DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
# of Shares Weighted
Thirteen Weeks ended November 2, 1996 Outstanding # of Months Average
- ------------------------------------- ----------- ----------- ---------
Outstanding common stock............. 12,760,800 3 12,760,800
Series B conversion to common stock.. 7,659,889 3 7,659,889
Legg Mason Warrant (a)............... 604,240 3 604,240
Nomura (Noteholder) Warrant (b)...... 1,611,305 3 1,611,305
1996 Management Option (c).......... 1,167,951 3 1,167,951
---------- ----------
23,804,185
==========
----------- ----------- ----------
# of Shares Weighted
Thirty-nine Weeks ended November 2, 1996 Outstanding # of Months Average
- ---------------------------------------- ----------- ----------- ----------
Outstanding common stock............. 12,760,800 9 12,760,800
Series B conversion to common stock.. 7,659,889 9 7,659,889
Legg Mason Warrant (a)............... 604,240 9 604,240
Nomura (Noteholder) Warrant (b)...... 1,611,305 9 1,611,305
1996 Management Options (c).......... 1,167,951 9 1,167,951
---------- ----------
23,804,185
==========
Options or Warrants outstanding prior to # of Shares under Exercise Initial Public Common Share
the initial public offering Option or Warrant Price Offering Price Equivalents
- ---------------------------------------- ----------------- -------- -------------- ------------
(a) Legg Mason Warrant ................. 747,096 $2.677 $14.00 604,240
(b)Noteholder Warrant................... 1,992,252 2.677 14.00 1,611,305
(c) 1996 Management Option.............. 1,444,080 2.677 14.00 1,167,951
6
EXHIBIT 11.1
THE CHILDREN'S PLACE RETAIL STORES, INC.
CALCULATION OF EARNINGS PER SHARE
CALCULATION OF DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
# of Shares Weighted
Thirteen Weeks ended November 1, 1997 Outstanding # of Months Average
- ------------------------------------- ----------- ----------- ---------
Outstanding common stock............. 12,760,800 2 8,507,200
Series B conversion to common stock.. 7,659,889 2 5,106,593
Legg Mason Warrant (a)............... 604,240 2 402,827
Noteholder Warrant (b)............... 1,611,305 2 1,074,203
1996 Management Option (c).......... 1,167,951 2 778,634
---------- ----------
15,869,457
Outstanding common stock (g)......... 24,622,103 1 8,207,368
1996 Management Option (d).......... 1,087,456 1 362,485
1997 Management Option (e).......... -- 1 --
Options issued to a 10% owner (f).... -- 1 --
---------- ----------
8,569,853
----------
24,439,310
==========
# of Shares Weighted
Thirty-nine Weeks ended November 1, 1997 Outstanding # of Months Average
- ---------------------------------------- ----------- ----------- ---------
Outstanding common stock................ 12,760,800 8 11,342,933
Series B conversion to common stock..... 7,659,889 8 6,808,790
Legg Mason Warrant (a).................. 604,240 8 537,103
Noteholder Warrant (b).................. 1,611,305 8 1,432,271
1996 Management Options (c)............. 1,167,951 8 1,038,179
---------- ----------
21,159,276
----------
Outstanding common stock (g)............ 24,622,103 1 2,735,789
1996 Management Option (d)............. 1,087,456 1 120,829
1997 Management Option (e)............. -- 1 --
Options issued to a 10% owner (f)....... -- 1 --
---------- ----------
2,856,618
----------
24,015,894
==========
Options or Warrants outstanding prior to # of Shares under Exercise Initial Public Common Share
the initial public offering Option or Warrant Price Offering Price Equivalents
- ---------------------------------------- ----------------- -------- -------------- ------------
(a) Legg Mason Warrant ................. 747,096 $2.677 $14.00 604,240
(b) Noteholder Warrant.................. 1,992,252 2.677 14.00 1,611,305
(c) 1996 Management Option.............. 1,444,080 2.677 14.00 1,167,951
Options or Warrants outstanding
subsequent to the initial public # of Shares under Exercise Initial Public Common Share
offering Option or Warrant Price Offering Price Equivalents
- ---------------------------------------- ----------------- -------- -------------- ------------
(d) 1996 Management Option ............. 1,444,080 $2.677 $10.84 1,087,456
(e) 1997 Management Option.............. 451,600 14.00 10.84 --
(f) 1997 Options issued to a 10% owner.. 99,660 15.40 10.84 --
(g) Outstanding stock includes the 12,760,800 outstanding shares prior to the
initial public offering, the conversion of 7,659,889 shares of Series B
Common Stock into Common Stock, the initial public offering of 4,000,000
shares of Common Stock, and 201, 414 shares of Common Stock issued upon
the exercise of one-third of the Legg Mason Warrant.
7
5
1,000
3-MOS
JAN-31-1998
FEB-02-1997
NOV-01-1997
789
0
2,225
0
26,965
40,198
47,622
16,197
86,621
31,133
0
0
0
2,462
50,344
86,621
54,489
54,489
33,081
13,151
18
0
708
5,930
2,433
3,497
0
1,743
0
1,754
0.07
0.07
