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 July 31, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _____________ to
_____________
Commission file number 0-23071
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)
915 Secaucus Road
Secaucus, New Jersey 07094
(Address of Principal Executive Offices) (Zip Code)
(201) 558-2400
(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 |X| No |_|
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 September 3, 1999:
25,453,272 shares.
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JULY 31, 1999
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Consolidated Financial Statements: Page
----
Consolidated Balance Sheets............................. 1
Consolidated Statements of Income....................... 2
Consolidated Statements of Cash Flows................... 3
Notes to Consolidated Financial Statements.............. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 6
Item 3. Quantitative and Qualitative Disclosures about Market
Risk ................................................... 10
Part II - Other Information
Item 1. Legal Proceedings ...................................... 11
Item 6. Exhibits and Reports on Form 8-K ....................... 12
Signatures...................................................... 13
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
July 31, 1999 January 30, 1999
------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 1,722 $ 16,370
Accounts receivable ......................................... 5,063 2,742
Inventories ................................................. 46,438 35,339
Prepaid expenses and other current assets ................... 14,580 5,622
Deferred income taxes ....................................... 1,977 2,447
-------- --------
Total current assets ...................................... 69,780 62,520
Property and equipment, net ................................. 70,925 42,304
Deferred income taxes ....................................... 5,144 5,144
Other assets ................................................ 2,444 793
-------- --------
Total assets .............................................. $148,293 $110,761
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Revolving credit facility ................................... $ 16,549 $ 0
Accounts payable ............................................ 18,177 13,345
Accrued expenses, interest and other current liabilities .... 18,457 13,644
-------- --------
Total current liabilities ................................. 53,183 26,989
Other long-term liabilities .................................... 3,551 3,165
-------- --------
Total liabilities ......................................... 56,734 30,154
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value; 100,000,000 shares
authorized; 25,327,889 shares and 24,972,001 shares
issued and outstanding, at July 31, 1999 and
January 30, 1999, respectively .............................. 2,533 2,497
Additional paid-in capital ..................................... 86,166 84,032
Translation adjustments ........................................ (4) 0
Accumulated earnings (deficit) ................................. 2,864 (5,922)
-------- --------
Total stockholders' equity ................................ 91,559 80,607
-------- --------
Total liabilities and stockholders' equity ................ $148,293 $110,761
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
1
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Thirteeen Weeks Ended Twenty-Six Weeks Ended
--------------------- ----------------------
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales ............................................... $ 73,920 $ 48,014 $ 166,541 $ 104,013
Cost of sales ........................................... 47,123 32,525 100,421 66,608
--------- --------- --------- ---------
Gross profit ............................................ 26,797 15,489 66,120 37,405
Selling, general and administrative expenses ............ 20,855 13,793 43,449 28,254
Pre-opening costs ....................................... 767 552 1,968 1,663
Depreciation and amortization ........................... 2,891 1,808 6,187 3,471
--------- --------- --------- ---------
Operating income (loss) ................................. 2,284 (664) 14,516 4,017
Interest expense (income), net .......................... (39) 100 (189) 159
Other expense, net ...................................... 40 77 45 77
--------- --------- --------- ---------
Income (loss) before income taxes ....................... 2,283 (841) 14,660 3,781
Provision (benefit) for income taxes .................... 881 (330) 5,875 1,550
--------- --------- --------- ---------
Net income (loss) ....................................... $ 1,402 $ (511) $ 8,785 $ 2,231
========= ========= ========= =========
Basic net income (loss) per common share ................ $ 0.06 $ (0.02) $ 0.35 $ 0.09
Basic weighted average common shares outstanding ........ 25,246 24,766 25,180 24,713
Diluted net income (loss) per common share .............. $ 0.05 $ (0.02) $ 0.33 $ 0.09
Diluted weighted average common shares outstanding ...... 26,742 25,822 26,681 25,716
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
2
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
----------------------
July 31, 1999 August 1, 1998
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $8,785 $2,231
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................. 6,187 3,471
Deferred financing fee amortization ....................... 12 12
Loss on disposals of property and equipment ............... 272 216
Deferred taxes ............................................ 1,187 1,377
Changes in operating assets and liabilities:
Accounts receivable ....................................... (2,321) (1,052)
Inventories ............................................... (11,099) (10,511)
Prepaid expenses and other current assets ................. (8,958) (1,969)
Other assets .............................................. (1,668) (284)
Accounts payable .......................................... 4,832 3,026
Accrued expenses, interest and other current liabilities .. 2,513 1,835
-------- --------
Total adjustments ....................................... (9,043) (3,879)
-------- --------
Net cash used in operating activities .......................... (258) (1,648)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases ............................... (32,329) (10,351)
-------- --------
Net cash used in investing activities .......................... (32,329) (10,351)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and employee stock purchases ......... 1,454 448
Borrowings under revolving credit facility ..................... 44,101 34,530
Repayments under revolving credit facility ..................... (27,552) (22,984)
Payment of obligations under capital leases .................... (2) (14)
Deferred financing costs ....................................... (62) 0
-------- --------
Net cash provided by financing activities ...................... 17,939 11,980
-------- --------
Net decrease in cash and cash equivalents ................. (14,648) (19)
Cash and cash equivalents, beginning of period ............ 16,370 887
-------- --------
Cash and cash equivalents, end of period ....................... $1,722 $868
======== ========
OTHER CASH FLOW INFORMATION:
Cash paid during the period for interest ....................... $141 $165
Cash paid during the period for income taxes ................... 10,238 616
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
3
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated 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 January 30, 1999. These financial statements
should be read in conjunction with the audited financial statements and
footnotes for the fiscal year ended January 30, 1999 included in the Company's
Annual Report on Form 10-K for the year ended January 30, 1999 filed with the
Securities and Exchange Commission. Due to the seasonal nature of the Company's
business, the results of operations for the twenty-six weeks ended July 31, 1999
are not necessarily indicative of operating results for a full fiscal year.
2. NET INCOME PER COMMON SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," the following table reconciles income and share amounts
utilized to calculate basic and diluted net income per common share.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) .............. $1,402 $(511) $8,785 $2,231
============ ============ ============ ============
Basic shares ................... 25,245,919 24,765,564 25,180,103 24,713,028
Dilutive effect of stock options 1,496,376 1,056,364 1,500,968 1,002,543
------------ ------------ ------------ ------------
Dilutive shares ................ 26,742,295 25,821,928 26,681,071 25,715,571
============ ============ ============ ============
Antidilutive options ........... 0 169,660 7,000 177,677
</TABLE>
Antidilutive options consist of the weighted average of stock options for
the respective periods ended July 31, 1999 and August 1, 1998 that had an
exercise price greater than the average market price during the period. Such
options are therefore excluded from the computation of diluted shares.
3. LITIGATION
Class Action Suits
On October 16, 1997, Stephen Brosious and Rudy Pallastrone, who allegedly
purchased shares of the Company's common stock in an initial public offering in
September, 1997 (the "IPO"), filed a lawsuit against the Company, several of the
Company's directors and officers, and the underwriters of the IPO (the
"Defendants") in the United States District Court of the District of New Jersey
(the "Court"). The named plaintiffs purport to maintain a class action on behalf
of all persons, other than the Defendants, who purchased the Company's common
stock issued in connection with the IPO on or about September 19, 1997 through
October 13, 1997. The complaint alleges that the Defendants violated federal
securities laws by making materially false or misleading statements and/or
omissions in connection with the IPO. The plaintiffs seek monetary damages of an
unspecified amount, rescission or rescissory damages and fees and costs. Since
October 16, 1997, 15 additional putative class actions making substantially
similar allegations and seeking substantially similar relief have been filed
against some or all of the Defendants. On or about January 13, 1998, the 16
putative class actions were consolidated in the Court and on February 26, 1998,
the plaintiffs served and filed their amended consolidated complaint. On April
16, 1998, the Defendants moved to dismiss the complaint. On September 4, 1998,
the Court entered an Order granting the motion to dismiss in part and denying it
in part. The Court also dismissed the case against the underwriters without
prejudice. On October 5, 1998, the plaintiffs filed an amended complaint against
all defendants including the underwriters. The Company filed its answer to the
amended complaint on October 26, 1998. On August 23, 1999, the Court entered an
Order granting in part and denying in part plaintiffs' motion for class
certification. Defendants have filed a motion for reconsideration of that
portion of the Order granting plaintiffs' motion. Discovery is ongoing.
4
<PAGE>
On October 27, 1997, Bulldog Capital Management, L.P., a limited
partnership that serves as a general partner for a series of investment funds
which allegedly purchased shares of the Company's common stock issued in
connection with the IPO, also filed a lawsuit against the Company and several of
the Company's directors and officers in the Superior Court of New Jersey, Essex
County Division. The complaint also alleges that by making materially false or
misleading statements and/or omissions in connection with the IPO, the Company
and several of the Company's directors and officers violated provisions of
federal and state law. The plaintiff seeks monetary damages of an unspecified
amount, rescission or rescissory damages and fees and costs. This action and the
federal action described above have been coordinated for purposes of discovery.
The Company believes that the allegations made in the complaints described
above are untrue and totally without merit and intends to defend them
vigorously. The Company does not believe that any ultimate liability arising out
of the actions described above will have a material adverse effect on its
business; however, the Company can give no assurance as to the ultimate
resolution of the proceedings or the amount to be paid, if any, in the
disposition of the actions.
Other Litigation
The Company is also involved in various legal proceedings arising in the
normal course of its business. In the opinion of management, any ultimate
liability arising out of such proceedings will not have a material adverse
effect on the Company's financial position or results of operations.
5
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of federal securities laws, which are intended to be covered
by the safe harbors created thereby. Those statements include, but may not be
limited to, the discussions of the Company's operating and growth strategy.
Investors are cautioned that all forward-looking statements involve risks and
uncertainties including, without limitation, those set forth under the caption
"Risk Factors" in the Business section of the Company's Annual Report on Form
10-K for the year ended January 30, 1999. 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
Quarterly Report on 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
Quarterly Report on Form 10-Q and the annual audited financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended January 30, 1999 filed with the Securities and Exchange Commission.
Results of Operations
The following table sets forth, for the periods indicated, selected income
statement data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales .................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................. 63.7 67.7 60.3 64.0
----- ----- ----- -----
Gross profit ............................... 36.3 32.3 39.7 36.0
Selling, general and administrative expenses 28.2 28.7 26.1 27.2
Pre-opening costs .......................... 1.1 1.2 1.2 1.6
Depreciation and amortization .............. 3.9 3.8 3.7 3.3
----- ----- ----- -----
Operating income (loss) .................... 3.1 (1.4) 8.7 3.9
Interest expense (income), net ............. (0.1) 0.2 (0.1) 0.2
Other expense, net ......................... 0.1 0.2 -- 0.1
----- ----- ----- -----
Income (loss) before income taxes .......... 3.1 (1.8) 8.8 3.6
Provision (benefit) for income taxes ....... 1.2 (0.7) 3.5 1.5
----- ----- ----- -----
Net income (loss) .......................... 1.9% (1.1)% 5.3% 2.1%
===== ===== ===== =====
Number of stores, end of period ............ 261 189 261 189
</TABLE>
6
<PAGE>
Thirteen Weeks Ended July 31, 1999 (the "Second Quarter 1999") Compared to
Thirteen Weeks Ended August 1, 1998 (the "Second Quarter 1998")
Net sales increased by $25.9 million, or 54%, to $73.9 million during the
Second Quarter 1999 from $48.0 million during the Second Quarter 1998. Net sales
for the 22 new stores opened during the Second Quarter 1999, as well as the
other stores that did not qualify as comparable stores, contributed $17.9
million of the net sales increase. During the Second Quarter 1999, we continued
our expansion strategy of opening the majority of new stores in clusters within
existing and contiguous markets. As of July 31, 1999, we operated 261 stores in
31 states, primarily located in regional shopping malls in the eastern half of
the United States, with 24 stores in operation west of the Mississippi River.
During the Second Quarter 1999, we entered several new markets including
Mississippi, Arkansas and Utah.
Our comparable store sales increased 19% and contributed $8.0 million of
our net sales increase during the Second Quarter 1999. Comparable store sales
increased 8% during the Second Quarter 1998. The Second Quarter 1999 comparable
store sales increase was experienced across all merchandise divisions.
Gross profit increased by $11.3 million to $26.8 million during the Second
Quarter 1999 from $15.5 million during the Second Quarter 1998. As a percentage
of net sales, gross profit increased to 36.3% during the Second Quarter 1999
from 32.3% during the Second Quarter 1998. The increase in gross profit, as a
percentage of net sales, was principally due to the leveraging of store
occupancy costs over a higher sales base, higher initial markups achieved
through effective product sourcing and the continued strength of the dollar and
lower markdowns, partially offset by costs incurred by our new Hong Kong office.
Selling, general and administrative expenses increased $7.1 million to
$20.9 million during the Second Quarter 1999 from $13.8 million during the
Second Quarter 1998. Selling, general and administrative expenses were 28.2% of
net sales during the Second Quarter 1999 as compared with 28.7% during the
Second Quarter 1998. The decrease as a percentage of net sales was primarily due
to the leveraging of store and administrative expenses over a higher sales base,
partially offset by costs relating to the relocation to our new distribution
center and corporate headquarters facility and increased advertising and
marketing costs.
During the Second Quarter 1999, pre-opening costs were $0.8 million, or
1.1% of net sales, as compared to $0.6 million, or 1.2% of net sales, during the
Second Quarter 1998. We opened 22 stores and 11 stores, during the Second
Quarter 1999 and the Second Quarter 1998, respectively. During the Second
Quarter 1999, pre-opening costs were favorably impacted by the timing of
pre-opening costs which are expensed as incurred.
Depreciation and amortization amounted to $2.9 million, or 3.9% of net
sales, during the Second Quarter 1999, as compared to $1.8 million, or 3.8% of
net sales, during the Second Quarter 1998. The increase in depreciation and
amortization primarily was a result of increases to our store base and
accelerated depreciation taken in conjunction with store re-fixturings. During
the Second Quarter 1999, we accelerated depreciation expense by $0.4 million, or
0.5% of net sales, in conjunction with our store re-fixturings. This increase as
a percentage of net sales was partially offset by the leveraging of depreciation
and amortization expense over a higher sales base.
Our provision for income taxes for the Second Quarter 1999 was $0.9
million, as compared to $0.3 million benefit from income taxes during the Second
Quarter 1998. The increase in our provision for income taxes during the Second
Quarter 1999 is due to our profitability during the Second Quarter 1999 as
compared with a loss during the Second Quarter 1998.
We recorded net income of $1.4 million during the Second Quarter 1999
compared to a net loss of $0.5 million during the Second Quarter 1998.
7
<PAGE>
Twenty-Six Weeks Ended July 31, 1999 Compared to Twenty-Six Weeks Ended August
1, 1998
Net sales increased $62.5 million, or 60%, to $166.5 million during the
twenty-six weeks ended July 31, 1999 from $104.0 million during the twenty-six
weeks ended August 1, 1998. Net sales for the 52 new stores opened during the
twenty-six weeks ended July 31, 1999, as well as the other stores that did not
qualify as comparable stores, contributed $38.6 million of the net sales
increase. During the twenty-six weeks ended July 31, 1999, we entered several
new markets in the western and southeastern United States.
Our comparable store sales increased 26% and contributed $23.9 million of
our net sales increase during the twenty-six weeks ended July 31, 1999.
Comparable store sales increased 7% during the twenty-six weeks ended August 1,
1998.
Gross profit increased by $28.7 million to $66.1 million during the
twenty-six weeks ended July 31, 1999 from $37.4 million during the twenty-six
weeks ended August 1, 1998. As a percentage of net sales, gross profit increased
to 39.7% during the twenty-six weeks ended July 31, 1999 from 36.0% during the
twenty-six weeks ended August 1, 1998. The increase in gross profit, as a
percentage of net sales, was principally due to a higher initial markup achieved
through effective product sourcing and the continued strength of the dollar, and
the leveraging of store occupancy costs over a higher sales base, partially
offset by higher markdowns and costs incurred by our new Hong Kong office. Our
higher markdowns were attributable to several planned promotions during the
first quarter 1999 that the Company did not have in the prior year.
Selling, general and administrative expenses increased $15.2 million to
$43.4 million during the twenty-six weeks ended July 31, 1999 from $28.2 million
during the twenty-six weeks ended August 1, 1998. Selling, general and
administrative expenses were 26.1% of net sales during the twenty-six weeks
ended July 31, 1999 as compared with 27.2% during the twenty-six weeks ended
August 1, 1998. The decrease as a percentage of net sales was primarily due to
the leveraging of store and administrative expenses over a higher sales base,
partially offset by increased advertising and marketing costs associated with
The Children's Place brand development and costs associated with the relocation
to our new distribution center and corporate headquarters facility.
During the twenty-six weeks ended July 31, 1999, pre-opening costs were
$2.0 million, or 1.2% of net sales, as compared to $1.7 million, or 1.6% of net
sales, during the twenty-six weeks ended August 1, 1998. The decrease in
pre-opening costs, as a percentage of net sales, during the twenty-six weeks
ended July 31, 1999 reflected the leveraging of such costs over a higher sales
base. We opened 52 stores and 34 stores during the twenty-six weeks ended July
31, 1999 and the twenty-six weeks ended August 1, 1998, respectively.
Depreciation and amortization amounted to $6.2 million, or 3.7% of net
sales, during the twenty-six weeks ended July 31, 1999, as compared with $3.5
million, or 3.3% of net sales, during the twenty-six weeks ended August 1, 1998.
The increase in depreciation and amortization primarily was a result of
accelerated depreciation taken in conjunction with store re-fixturings and
renovations, as well as the increase in our store base. During the twenty-six
weeks ended July 31, 1999, we accelerated depreciation expense by $1.8 million,
or 1.1% of net sales, in conjunction with these programs. These increases as a
percentage of net sales were partially offset by the leveraging of depreciation
and amortization expense over a higher sales base.
During the twenty-six weeks ended July 31, 1999, we recorded net interest
income of $0.2 million, or 0.1% of net sales, due to a net cash investment
position during most of the period. During the twenty-six weeks ended August 1,
1998, we recorded interest expense of $0.2 million, or 0.2% of net sales, due to
earlier utilization of our working capital revolving credit facility.
Our provision for income taxes during the twenty-six weeks ended July 31,
1999 was $5.9 million, as compared to $1.6 million during the twenty-six weeks
ended August 1, 1998. The increase in our provision for income taxes during the
twenty-six weeks ended July 31, 1999 is due to our increased profitability.
During the twenty-six weeks ended July 31, 1999, we utilized our remaining $0.1
million of net operating loss carryforwards ("NOLs") and we expect to pay the
majority of our tax provision in cash. During the twenty-six weeks ended August
1, 1998, the majority of our tax provision was not paid in cash due to
utilization of our NOLs.
We recorded net income of $8.8 million and $2.2 million during the
twenty-six weeks ended July 31, 1999 and the twenty-six weeks ended August 1,
1998, respectively.
8
<PAGE>
Liquidity and Capital Resources
Debt Service/Liquidity
Our primary uses of cash are financing new store openings and providing
for working capital, which principally represents the purchase of inventory. Our
working capital needs follow a seasonal pattern, peaking during the second and
third quarters when inventory is purchased for the back to school and holiday
merchandise lines. During the twenty-six weeks ended July 31, 1999, we have also
utilized cash to relocate, remodel and furnish our new distribution center and
corporate headquarters facility. We have been able to meet our cash needs
principally by using cash flows from operations and seasonal borrowings under
our working capital revolving credit facility. We have no long-term debt
obligations other than obligations under capital leases.
In June 1999, we increased our working capital revolving credit facility
with Foothill Capital Corporation. The facility currently provides for
borrowings up to $50.0 million (including a sublimit for letters of credit of
$40.0 million). Previously our working capital revolving credit facility
provided for borrowings of $30.0 million (including a sublimit for letters of
credit of $20.0 million).
As of July 31, 1999, we had $16.5 million of borrowings under our working
capital revolving credit facility and had outstanding letters of credit of $20.1
million. Availability under our working capital revolving credit facility as of
July 31, 1999 was $11.4 million. During the Second Quarter 1999, the interest
rate charged under our working capital revolving credit facility for reference
rate borrowings was 7.84% per annum. As of July 31, 1999, we were in compliance
with all of our covenants under our working capital revolving credit facility.
Cash Flows/Capital Expenditures
Cash flows used in operating activities were $0.3 million during the
twenty-six weeks ended July 31, 1999 as compared with $1.6 million during the
twenty-six weeks ended August 1, 1998. During the twenty-six weeks ended July
31, 1999, cash flows used in operating activities decreased primarily as a
result of our improved operating earnings and increases in our current
liabilities, partially offset by increases in our current assets.
Cash flows used in investing activities were $32.3 million and $10.4
million in the twenty-six weeks ended July 31, 1999 and the twenty-six weeks
ended August 1, 1998, respectively. During the twenty-six weeks ended July 31,
1999, cash flows used in investing activities represented capital expenditures
of approximately $20 million for store openings, remodelings and re-fixturings
and approximately $10 million to renovate and furnish our new distribution
center and corporate headquarters facility. The remainder of capital
expenditures were used for our new warehouse management system, our new
point-of-sale ("POS") system and other capital projects. In the twenty-six weeks
ended July 31, 1999 and twenty-six weeks ended August 1, 1998, we opened 52 and
34 stores and remodeled 7 and 2 stores, respectively. We anticipate that total
capital expenditures during fiscal 1999 will approximate $55 million, which we
plan to fund principally from cash flow from operations. During fiscal 1999, we
plan to utilize the majority of our capital expenditures to open approximately
80 stores and remodel 11 stores. During the remainder of fiscal 1999, capital
expenditures will also include costs related to the completion of our new
distribution center and corporate headquarters facility, our new POS system and
ongoing store capital programs.
During the Second Quarter 1999, we completed the relocation of our
distribution center and corporate headquarters to a 204,000 square foot facility
in Secaucus, New Jersey. We expect to make a cash outlay of approximately $13
million to renovate and furnish our facility. The lease on this facility
provides for an eight year term, plus a three year renewal option period. The
lease also provides the Company the option to terminate the lease after the
fifth year. Annual rent on the facility is approximately $1.4 million. We
believe this distribution center can support approximately 500 stores.
At the end of July 1999, we commenced utilization of our new warehouse
management system. We continue to make modifications to this system to improve
its performance and to improve the flow of merchandise to our stores. The total
cost of this system is approximately $5 million.
Cash flows provided by financing activities were $17.9 million and $12.0
million during the twenty-six weeks ended July 31, 1999 and the twenty-six weeks
ended August 1, 1998, respectively. During the twenty-six weeks ended July 31,
1999 and the twenty-six weeks ended August 1, 1998, cash flows provided by
financing activities reflected net borrowings under our working capital
revolving facility, partially offset by funds received from the exercise of
employee stock options and employee stock purchases.
We believe that cash generated from operations and funds available under
our working capital revolving credit facility will be sufficient to fund our
capital and other cash flow requirements for at least the next 12 months. In
addition, as we continue our store expansion program, we will consider
additional sources of financing to fund our long-term growth.
Our ability to meet our capital requirements will depend on our ability to
generate cash from operations and successfully implement our store expansion
plans.
9
<PAGE>
Year 2000 Compliance
The Year 2000 issue exists because many computer applications currently
use two-digit date fields to designate a year. As the century date occurs, date
sensitive systems may not properly recognize and process the Year 2000, which
could cause a system failure or other computer errors, leading to disruptions in
normal business processing. During fiscal 1997, we began a program to ensure
that our operations would not be adversely impacted by software and other system
and equipment failures related to the Year 2000.
During the second quarter of fiscal 1998, we engaged the services of a
consulting firm to help ensure that we have fully assessed the risks associated
with the Year 2000 and to assist in the development of a comprehensive
implementation plan. In addition, we established a project team to coordinate
and address the Year 2000 issue. The Year 2000 project has been divided into
four phases: (1) inventory and risk assessment; (2) remediation of non-compliant
systems, equipment and suppliers; (3) implementation and testing; and (4)
contingency planning.
The inventory and risk assessment phase of the Year 2000 project is
complete. During this phase, we assessed our information systems hardware and
software, equipment containing date-sensitive embedded chips, electronic data
interchange and the Year 2000 preparedness of our key suppliers and service
providers.
Our plans call for our critical information systems to be Year 2000
compliant by the end of the third quarter of fiscal 1999. We believe that
approximately 80% of our systems are currently Year 2000 compliant. We plan to
perform a systems test of our applications software by the end of October 1999.
We have installed a new automated warehouse management system in our new
facility, which became operational in July 1999. We recently implemented our new
POS system in several stores and plan to install it in the remainder of our
stores during fiscal 1999. We replaced our general ledger system in June 1999.
We believe these new systems are all Year 2000 compliant. Contingency plans
continue to be modified to provide uninterrupted management information systems
support in the event that we are unable to replace our POS system.
We plan to rely primarily on existing management information systems staff
supplemented by outside consultants to modify, replace and test systems for Year
2000 compliance. During fiscal 1998, we incurred external costs of approximately
$0.3 million in connection with our Year 2000 compliance and we incurred no
external costs during the twenty-six weeks ended July 31, 1999. We expect to
incur a total of $0.3 million in external costs in fiscal 1999. In addition, we
utilized approximately $0.4 million in internal management information systems
resources during fiscal 1998 and we incurred $0.1 million in internal management
information systems resources during the twenty-six weeks ended July 31, 1999.
We expect to utilize a total of $0.4 million in internal management information
systems resources in fiscal 1999. The cost of Year 2000 remediation is not
expected to have a material adverse impact on our financial position, results of
operation or cash flows in future periods.
We have completed our initial assessment of the Year 2000 preparedness of
our service providers and key suppliers through written communications, oral
communications and visual inspection. Despite these efforts, we cannot assure
the timely compliance of these service providers and suppliers and may be
adversely affected by a failure of a significant third party to become Year 2000
compliant. Additionally, since we procure most of our merchandise from foreign
sources, we are also at risk to the extent foreign suppliers and infrastructures
are not properly prepared to handle the Year 2000. Contingency plans have been
implemented to mitigate the risk of dependence on foreign suppliers and
distribution channels through an accelerated receipt of merchandise for the
spring 2000 selling season. We anticipate that we will incur approximately $0.2
million in additional inventory carrying costs associated with the earlier
receipt of this merchandise. We believe that the accelerated receipt of
inventory should mitigate the risk of a material failure to receive our
merchandise for re-sale.
Although we are working to minimize any business disruption caused by the
Year 2000, we may be adversely impacted by a failure related to the Year 2000.
These risks include, but are not limited to, power and communications
disruptions, failures of our information technology systems, the inability of a
significant supplier or service provider to become Year 2000 compliant and
disruptions in the distribution channels including both foreign and domestic
ports, customs, and transportation vendors.
As noted above, we have developed and continue to modify our contingency
plans which will allow for the continuation of business operations in the event
that we or any of our significant suppliers or service providers do not properly
address Year 2000 issues. We expect to continue to modify and fine-tune our
contingency plans through the fourth quarter of fiscal 1999. Where needed, we
will modify our contingency plans based on the test results of our information
systems hardware and software, the timeliness of replacement system
implementations and the ongoing assessment of risk associated with third party
suppliers and service providers. The cost of the conversions and the completion
dates set forth above are based on our estimates and may be updated as
additional information becomes available.
10
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risks
(Not applicable)
11
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
Class Action Suits
On October 16, 1997, Stephen Brosious and Rudy Pallastrone, who allegedly
purchased shares of the Company's common stock in an initial public offering in
September, 1997 (the "IPO"), filed a lawsuit against the Company, several of the
Company's directors and officers, and the underwriters of the IPO (the
"Defendants") in the United States District Court of the District of New Jersey
(the "Court"). The named plaintiffs purport to maintain a class action on behalf
of all persons, other than the Defendants, who purchased the Company's common
stock issued in connection with the IPO on or about September 19, 1997 through
October 13, 1997. The complaint alleges that the Defendants violated federal
securities laws by making materially false or misleading statements and/or
omissions in connection with the IPO. The plaintiffs seek monetary damages of an
unspecified amount, rescission or rescissory damages and fees and costs. Since
October 16, 1997, 15 additional putative class actions making substantially
similar allegations and seeking substantially similar relief have been filed
against some or all of the Defendants. On or about January 13, 1998, the 16
putative class actions were consolidated in the Court and on February 26, 1998,
the plaintiffs served and filed their amended consolidated complaint. On April
16, 1998, the Defendants moved to dismiss the complaint. On September 4, 1998
the Court entered an Order granting the motion to dismiss in part and denying it
in part. The Court also dismissed the case against the underwriters without
prejudice. On October 5, 1998, the plaintiffs filed an amended complaint against
all defendants including the underwriters. The Company filed its answer to the
amended complaint on October 26, 1998. On August 23, 1999, the Court entered an
Order granting in part and denying in part plaintiffs' motion for class
certification. Defendants have filed a motion for reconsideration of that
portion of the Order granting plaintiffs' motion. Discovery is ongoing.
On October 27, 1997, Bulldog Capital Management, L.P., a limited
partnership that serves as a general partner for a series of investment funds
which allegedly purchased shares of the Company's common stock issued in
connection with the IPO, also filed a lawsuit against the Company and several of
the Company's directors and officers in the Superior Court of New Jersey, Essex
County Division. The complaint also alleges that by making materially false or
misleading statements and/or omissions in connection with the IPO, the Company
and several of the Company's directors and officers violated provisions of
federal and state law. The plaintiff seeks monetary damages of an unspecified
amount, rescission or rescissory damages and fees and costs. This action and the
federal action described above have been coordinated for purposes of discovery.
The Company believes that the allegations made in the complaints described
above are untrue and totally without merit and intends to defend them
vigorously. The Company does not believe that any ultimate liability arising out
of the actions described above will have a material adverse effect on its
business; however, the Company can give no assurance as to the ultimate
resolution of the proceedings or the amount to be paid, if any, in the
disposition of the actions.
Other Litigation
The Company is also involved in various legal proceedings arising in the
normal course of its business. In the opinion of management, any ultimate
liability arising out of such proceedings will not have a material adverse
effect on the Company's financial position or results of operations.
12
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description of Document
------- -------------------------------------------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
13
<PAGE>
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: September 14, 1999
By: /s/ Ezra Dabah
-------------------------------
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: September 14, 1999 By: /s/ Seth L. Udasin
-------------------------------
Vice President and
Chief Financial Officer
(Principal Financial Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE CHILDREN'S PLACE RETAIL STORES, INC. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> MAY-02-1999
<PERIOD-END> JUL-31-1999
<CASH> 1,722
<SECURITIES> 0
<RECEIVABLES> 5,063
<ALLOWANCES> 0
<INVENTORY> 46,438
<CURRENT-ASSETS> 69,780
<PP&E> 95,825
<DEPRECIATION> 24,900
<TOTAL-ASSETS> 148,293
<CURRENT-LIABILITIES> 53,183
<BONDS> 0
0
0
<COMMON> 2,533
<OTHER-SE> 89,026
<TOTAL-LIABILITY-AND-EQUITY> 91,559
<SALES> 73,920
<TOTAL-REVENUES> 73,920
<CGS> 47,123
<TOTAL-COSTS> 21,622
<OTHER-EXPENSES> 40
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (39)
<INCOME-PRETAX> 2,283
<INCOME-TAX> 881
<INCOME-CONTINUING> 1,402
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,402
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.05
</TABLE>
