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 October 30, 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
incorporation or organization) identification 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 December 6, 1999:
25,591,716 shares.
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED OCTOBER 30, 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 ......................................... 5
Item 3. Quantitative and Qualitative Disclosures about Market Risks ... 9
Part II - Other Information
Item 1. Legal Proceedings ............................................. 10
Item 6. Exhibits and Reports on Form 8-K .............................. 11
Signatures ............................................................ 12
<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>
October 30, 1999 January 30, 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 1,836 $ 16,370
Accounts receivable ........................................................ 6,938 2,742
Inventories ................................................................ 57,666 35,339
Prepaid expenses and other current assets .................................. 8,182 5,622
Deferred income taxes ...................................................... 3,238 2,447
--------- ---------
Total current assets ..................................................... 77,860 62,520
Property and equipment, net ................................................ 83,702 42,304
Deferred income taxes ...................................................... 5,144 5,144
Other assets ............................................................... 3,661 793
--------- ---------
Total assets ............................................................. $ 170,367 $ 110,761
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Revolving credit facility .................................................. $ 15,139 $ 0
Accounts payable ........................................................... 21,486 13,345
Accrued expenses, interest and other current liabilities ................... 24,520 13,644
--------- ---------
Total current liabilities ................................................ 61,145 26,989
Other long-term liabilities ................................................... 3,918 3,165
--------- ---------
Total liabilities ........................................................ 65,063 30,154
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value; 100,000,000 shares authorized; 25,587,772
shares and 24,972,001 shares issued and outstanding, at October 30, 1999 and
January 30, 1999, respectively ............................................. 2,558 2,497
Additional paid-in capital .................................................... 87,151 84,032
Translation adjustments ....................................................... (5) 0
Retained earnings (accumulated deficit) ....................................... 15,600 (5,922)
--------- ---------
Total stockholders' equity ............................................... 105,304 80,607
--------- ---------
Total liabilities and stockholders' equity ............................... $ 170,367 $ 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 Thirty-Nine Weeks Ended
--------------------- -----------------------
October 30, 1999 October 31, 1998 October 30, 1999 October 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales ........................................ $119,442 $ 82,496 $285,983 $186,509
Cost of sales .................................... 64,935 46,370 165,356 112,978
-------- -------- -------- --------
Gross profit ..................................... 54,507 36,126 120,627 73,531
Selling, general and administrative expenses ..... 28,328 18,664 71,777 46,917
Pre-opening costs ................................ 1,156 837 3,124 2,500
Depreciation and amortization .................... 3,310 2,006 9,497 5,477
-------- -------- -------- --------
Operating income ................................. 21,713 14,619 36,229 18,637
Interest expense, net ............................ 324 222 135 381
Other expense, net ............................... 4 15 49 92
-------- -------- -------- --------
Income before income taxes ....................... 21,385 14,382 36,045 18,164
Provision for income taxes ....................... 8,651 5,897 14,526 7,447
-------- -------- -------- --------
Net income ....................................... $ 12,734 $ 8,485 $ 21,519 $ 10,717
======== ======== ======== ========
Basic net income per common share ................ $ 0.50 $ 0.34 $ 0.85 $ 0.43
Basic weighted average common shares outstanding . 25,539 24,830 25,300 24,752
Diluted net income per common share .............. $ 0.48 $ 0.33 $ 0.81 $ 0.42
Diluted weighted average common shares outstanding 26,680 25,798 26,681 25,742
</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>
Thirty-Nine Weeks Ended
-----------------------
October 30, 1999 October 31, 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................. $ 21,519 $ 10,717
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................... 9,497 5,477
Deferred financing fee amortization .................... 24 18
Loss on disposals of property and equipment ............ 272 338
Deferred taxes ......................................... (74) 6,542
Changes in operating assets and liabilities:
Accounts receivable .................................... (4,196) (1,299)
Inventories ............................................ (22,328) (20,550)
Prepaid expenses and other current assets .............. (2,560) (836)
Other assets ........................................... (2,937) (583)
Accounts payable ....................................... 8,140 5,313
Accrued expenses, interest and other current liabilities 7,330 4,620
--------- ---------
Total adjustments .................................... (6,832) (960)
--------- ---------
Net cash provided by operating activities ................... 14,687 9,757
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases ............................ (46,760) (15,106)
--------- ---------
Net cash used in investing activities ....................... (46,760) (15,106)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and employee stock purchases ...... 2,465 632
Borrowings under revolving credit facility .................. 167,951 90,243
Repayments under revolving credit facility .................. (152,812) (85,184)
Payment of obligations under capital leases ................. (2) (20)
Deferred financing costs .................................... (63) 0
--------- ---------
Net cash provided by financing activities ................... 17,539 5,671
--------- ---------
Net decrease in cash and cash equivalents .............. (14,534) 322
Cash and cash equivalents, beginning of period ......... 16,370 887
--------- ---------
Cash and cash equivalents, end of period .................... $ 1,836 $ 1,209
========= =========
OTHER CASH FLOW INFORMATION:
Cash paid during the period for interest .................... $ 454 $ 339
Cash paid during the period for income taxes ................ 10,393 756
</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 thirty-nine weeks ended October 30,
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 Thirty-Nine Weeks Ended
-------------------- -----------------------
October 30, 1999 October 31, 1998 October 30, 1999 October 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income ..................... $ 12,734 $ 8,485 $ 21,519 $ 10,717
=========== =========== =========== ===========
Basic shares ................... 25,538,560 24,830,397 25,299,589 24,752,151
Dilutive effect of stock options 1,141,934 967,489 1,381,290 989,392
----------- ----------- ----------- -----------
Dilutive shares ................ 26,680,494 25,797,886 26,680,879 25,741,543
=========== =========== =========== ===========
Antidilutive options ........... 178,150 182,993 64,050 295,564
</TABLE>
Antidilutive options consist of the weighted average of stock options for
the respective periods ended October 30, 1999 and October 31, 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
The Company has reached an agreement in principle to resolve the federal
securities class action litigation which was filed against the Company and
others in the United States District Court for the District of New Jersey and
the securities litigation filed in Superior Court of New Jersey, Essex County
Division. The proposed settlements provide for the payment of $1.7 million in
the aggregate and would be funded entirely from insurance proceeds. The proposed
federal action settlement requires Court approval. The proposed settlements
would have no material impact on the Company.
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.
4
<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 Thirty-Nine Weeks Ended
-------------------- -----------------------
October 30, 1999 October 31, 1998 October 30, 1999 October 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales .................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................. 54.4 56.2 57.8 60.6
----- ----- ----- -----
Gross profit ............................... 45.6 43.8 42.2 39.4
Selling, general and administrative expenses 23.7 22.6 25.1 25.2
Pre-opening costs .......................... 1.0 1.0 1.1 1.3
Depreciation and amortization .............. 2.7 2.5 3.3 2.9
----- ----- ----- -----
Operating income ........................... 18.2 17.7 12.7 10.0
Interest expense, net ...................... 0.3 0.3 0.1 0.2
Other expense, net ......................... -- -- -- 0.1
----- ----- ----- -----
Income before income taxes ................. 17.9 17.4 12.6 9.7
Provision for income taxes ................. 7.2 7.1 5.1 4.0
----- ----- ----- -----
Net income ................................. 10.7% 10.3% 7.5% 5.7%
===== ===== ===== =====
Number of stores, end of period ............ 282 203 282 203
</TABLE>
5
<PAGE>
Thirteen Weeks Ended October 30, 1999 (the "Third Quarter 1999") Compared to
Thirteen Weeks Ended October 31, 1998 (the "Third Quarter 1998")
Net sales increased by $36.9 million, or 45%, to $119.4 million during the
Third Quarter 1999 from $82.5 million during the Third Quarter 1998. Net sales
for the 21 new stores opened during the Third Quarter 1999, as well as the other
stores that did not qualify as comparable stores, contributed $26.3 million of
the net sales increase. During the Third Quarter 1999, we continued our
expansion strategy of opening new stores in existing and contiguous markets. As
of October 30, 1999, we operated 282 stores in 34 states, primarily located in
regional shopping malls in the eastern half of the United States, with 30 stores
in operation west of the Mississippi River. During the fourth quarter of fiscal
1999, we are opening an additional 11 stores to end the year with 293 stores.
Our comparable store sales increased 15% and contributed $10.6 million of
our net sales increase during the Third Quarter 1999. Comparable store sales
increased 18% during the Third Quarter 1998.
Gross profit increased by $18.4 million to $54.5 million during the Third
Quarter 1999 from $36.1 million during the Third Quarter 1998. As a percentage
of net sales, gross profit increased to 45.6% during the Third Quarter 1999 from
43.8% during the Third Quarter 1998. The increase in gross profit, as a
percentage of net sales, was principally due to higher initial markups achieved
through effective product sourcing and the leveraging of store occupancy costs
over a higher sales base, partially offset by higher markdowns, higher
distribution costs related to the implementation of our new warehouse management
system and costs incurred by our new Hong Kong office.
Selling, general and administrative expenses increased $9.6 million to
$28.3 million during the Third Quarter 1999 from $18.7 million during the Third
Quarter 1998. Selling, general and administrative expenses were 23.7% of net
sales during the Third Quarter 1999 as compared with 22.6% during the Third
Quarter 1998. The increase, as a percentage of net sales, was primarily due to
increased marketing costs and higher store payroll. Our higher store payroll
costs were largely due to higher wage rates.
During the Third Quarter 1999, pre-opening costs were $1.2 million, or
1.0% of net sales, as compared to $0.8 million, or 1.0% of net sales, during the
Third Quarter 1998. We opened 21 stores and 14 stores, during the Third Quarter
1999 and the Third Quarter 1998, respectively. During the Third 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 $3.3 million, or 2.7% of net
sales, during the Third Quarter 1999, as compared to $2.0 million, or 2.5% of
net sales, during the Third Quarter 1998. The increase in depreciation and
amortization primarily was a result of increases to our store base and
depreciation recorded for our new distribution center and corporate headquarters
facility. The 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 Third Quarter 1999 was $8.7
million, as compared to a $5.9 million provision for income taxes during the
Third Quarter 1998. The increase in our provision for income taxes was
attributable to our increased operating income during the Third Quarter 1999.
We recorded net income of $12.7 million and $8.5 million during the Third
Quarter 1999 and Third Quarter 1998, respectively.
6
<PAGE>
Thirty-Nine Weeks Ended October 30, 1999 Compared to Thirty-Nine Weeks Ended
October 31, 1998
Net sales increased $99.5 million, or 53%, to $286.0 million during the
thirty-nine weeks ended October 30, 1999 from $186.5 million during the
thirty-nine weeks ended October 31, 1998. Net sales for the 73 new stores opened
during the thirty-nine weeks ended October 30, 1999, as well as the other stores
that did not qualify as comparable stores, contributed $64.9 million of the net
sales increase. During the thirty-nine weeks ended October 30, 1999, we entered
several new markets in the western and southeastern United States.
Our comparable store sales increased 21% and contributed $34.6 million of
our net sales increase during the thirty-nine weeks ended October 30, 1999.
Comparable store sales increased 12% during the thirty-nine weeks ended October
31, 1998.
Gross profit increased by $47.1 million to $120.6 million during the
thirty-nine weeks ended October 30, 1999 from $73.5 million during the
thirty-nine weeks ended October 30, 1998. As a percentage of net sales, gross
profit increased to 42.2% during the thirty-nine weeks ended October 30, 1999
from 39.4% during the thirty-nine weeks ended October 31, 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 leveraging of
store occupancy costs over a higher sales base, partially offset by higher
markdowns and costs incurred by our new Hong Kong office.
Selling, general and administrative expenses increased $24.9 million to
$71.8 million during the thirty-nine weeks ended October 30, 1999 from $46.9
million during the thirty-nine weeks ended October 31, 1998. Selling, general
and administrative expenses were 25.1% of net sales during the thirty-nine weeks
ended October 30, 1999 as compared with 25.2% during the thirty-nine weeks ended
October 31, 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.
During the thirty-nine weeks ended October 30, 1999, pre-opening costs
were $3.1 million, or 1.1% of net sales, as compared to $2.5 million, or 1.3% of
net sales, during the thirty-nine weeks ended October 31, 1998. The decrease in
pre-opening costs, as a percentage of net sales, during the thirty-nine weeks
ended October 30, 1999 reflected the leveraging of such costs over a higher
sales base. We opened 73 stores and 48 stores during the thirty-nine weeks ended
October 30, 1999 and the thirty-nine weeks ended October 31, 1998, respectively.
During the thirty-nine weeks ended October 30, 1999, pre-opening costs were
favorably impacted by the timing of pre-opening costs which are expensed as
incurred.
Depreciation and amortization amounted to $9.5 million, or 3.3% of net
sales, during the thirty-nine weeks ended October 30, 1999, as compared with
$5.5 million, or 2.9% of net sales, during the thirty-nine weeks ended October
30, 1998. The increase in depreciation and amortization primarily was a result
of increases in our store base, accelerated depreciation taken in conjunction
with store re-fixturings and renovations, and the commencement of depreciation
for our new distribution center and corporate headquarters facility. During the
thirty-nine weeks ended October 30, 1999, we accelerated depreciation expense by
$1.8 million, or 0.6% of net sales, in conjunction with our store re-fixturing
and renovation 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.
Our provision for income taxes during the thirty-nine weeks ended October
30, 1999 was $14.5 million, as compared to a provision for income taxes of $7.4
million during the thirty-nine weeks ended October 31, 1998. The increase in our
provision for income taxes during the thirty-nine weeks ended October 30, 1999
is due to our increased profitability. During the thirty-nine weeks ended
October 30, 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 thirty-nine weeks ended October 31, 1998, the majority of our
tax provision was not paid in cash due to utilization of our NOLs.
We recorded net income of $21.5 million and $10.7 million during the
thirty-nine weeks ended October 30, 1999 and the thirty-nine weeks ended October
31, 1998, respectively.
7
<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 thirty-nine weeks ended October 30, 1999, we have
also utilized cash to 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.
Our working capital revolving credit facility with Foothill Capital
Corporation currently provides for borrowings up to $50.0 million (including a
sublimit for letters of credit of $40.0 million). We recently amended the
working capital and capital expenditure covenants under our working capital
facility to support our growth strategy.
As of October 30, 1999, we had $15.1 million of borrowings under our
working capital facility and had outstanding letters of credit of $14.9 million.
Availability under our working capital facility as of October 30, 1999 was $17.1
million. During the Third Quarter 1999, the interest rate charged under our
working capital facility for reference rate borrowings was 8.17% per annum and
LIBOR borrowings bore interest at 6.80% per annum. As of October 30, 1999, we
were in compliance with all of our covenants under our working capital facility.
Cash Flows/Capital Expenditures
Cash flows provided by operating activities were $14.7 million during the
thirty-nine weeks ended October 30, 1999 as compared with $9.8 million during
the thirty-nine weeks ended October 31, 1998. During the thirty-nine weeks ended
October 30, 1999, cash flows provided by operating activities increased
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 $46.8 million and $15.1
million in the thirty-nine weeks ended October 30, 1999 and the thirty-nine
weeks ended October 31, 1998, respectively. During the thirty-nine weeks ended
October 30, 1999, cash flows used in investing activities represented capital
expenditures of approximately $31 million for store openings, remodelings and
re-fixturings and approximately $11 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 thirty-nine weeks ended October 30, 1999 and thirty-nine weeks
ended October 31, 1998, we opened 73 and 48 stores and remodeled 9 and 3 stores,
respectively. We anticipate that total capital expenditures during fiscal 1999
will approximate $55 million, the majority of which we plan to fund from cash
flow from operations. During fiscal 1999, we plan to open 84 stores and remodel
11 stores.
During the Second Quarter 1999, we completed our relocation to our new
distribution center and corporate headquarters facility in Secaucus, New Jersey.
We expect to make a total cash outlay of approximately $13 million to renovate
and furnish our facility, of which approximately $11 million has been spent
during the thirty-nine weeks ended October 30, 1999. At the end of July 1999, we
commenced utilization of our new warehouse management system. In adapting to
this highly automated distribution system, we have experienced delays in the
processing of certain merchandise to our stores and continue to make necessary
modifications to improve the performance of the system and to improve the flow
of merchandise. The total cost of this system was approximately $5 million.
Cash flows provided by financing activities were $17.5 million and $5.7
million during the thirty-nine weeks ended October 30, 1999 and the thirty-nine
weeks ended October 31, 1998, respectively. During the thirty-nine weeks ended
October 30, 1999 and the thirty-nine weeks ended October 31, 1998, cash flows
provided by financing activities reflected net borrowings under our working
capital 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 facility will be sufficient to fund our capital and other
cash flow requirements and implement our growth plans for at least the next 12
months. Although we are complying, and believe that we will be able to continue
to comply with the financial covenants under our working capital facility, we
are seeking to provide greater financial flexibility as we implement our growth
strategy. Consequently, we have requested an increase in our credit line under
our working capital facility and additional amendments to the financial
covenants contained in this facility. This request is currently under
consideration by Foothill Capital Corporation.
Our ability to meet our capital requirements will depend on our ability to
generate cash from operations and successfully implement our store expansion
plans.
8
<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.
We completed a test of our applications software and we believe that all
of our systems are currently Year 2000 compliant. We are currently continuing to
test our hardware and software to ensure a smooth transition. During fiscal
1999, we implemented several major systems to support our business, which we
believe are all Year 2000 compliant. We have installed a new automated warehouse
management system in our new facility, a new general ledger system and a new POS
system in approximately 25% of our stores. We plan to install this POS system in
the remainder of our stores during fiscal 2000. We have built and tested bridges
in our existing POS system to accommodate the Year 2000. We believe our
management information systems will be able to provide uninterrupted support for
our business during the Year 2000.
We relied 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
external costs of approximately $0.1 million during the thirty-nine weeks ended
October 30, 1999. We expect to incur a total of $0.2 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 $0.2
million in internal management information systems resources during the
thirty-nine weeks ended October 30, 1999. We expect to utilize a total of $0.3
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 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 ongoing assessment of risk
associated with third party suppliers and service providers.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
(Not applicable)
9
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
Class Action Suits
The Company has reached an agreement in principle to resolve the
federal securities class action litigation which was filed against the Company
and others in the United States District Court for the District of New Jersey
and the securities litigation filed in Superior Court of New Jersey, Essex
County Division. The proposed settlements provide for the payment of $1.7
million in the aggregate and would be funded entirely from insurance proceeds.
The proposed federal action settlement requires Court approval. The proposed
settlements would have no material impact on the Company.
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.
10
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description of Document
--- -----------------------
10.1 Amendment Number Four dated as of October 30, 1999
between the Company and Foothill Capital Corporation.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
11
<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: December 14, 1999 By: /s/ Ezra Dabah
-----------------------------
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: December 14, 1999 By: /s/ Seth L. Udasin
-----------------------------
Vice President and
Chief Financial Officer
(Principal Financial Officer)
12
EXHIBIT 10.1
Amendment Number Four dated as of October 30, 1999
between the Company and Foothill Capital Corporation.
<PAGE>
AMENDMENT NUMBER FOUR TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER FOUR TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT ("Amendment") is entered into as of December 10, 1999, by and between
FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), and THE
CHILDREN'S PLACE RETAIL STORES, INC., a Delaware corporation ("Borrower"), in
light of the following:
A. Borrower and Foothill have previously entered into that certain Amended
and Restated Loan and Security Agreement dated as of July 31, 1997 (as amended,
the "Agreement").
B. Borrower and Foothill desire to further amend the Agreement as provided
for and on the conditions herein.
NOW, THEREFORE, Borrower and Foothill hereby amend and supplement the
Agreement as follows:
1. DEFINITIONS. All initially capitalized terms used in this Amendment
shall have the meanings given to them in the Agreement unless specifically
defined herein.
2. AMENDMENT.
(a) The table set forth in Section 6.13 (c) of the Agreement is
hereby amended by deleting the $20,000,000 Working Capital amount set forth for
the fiscal quarter ending on or about October 31, 1999 and replacing that amount
with $14,000,000.
(b) The table set forth in Section 7.10 of the Agreement is hereby
amended by deleting the $55,000,000 Maximum Capital Expenditure amount set forth
for the fiscal year ending on or about January 31, 2000 and replacing that
amount with $60,000,000.
3. REPRESENTATIONS AND WARRANTIES. Borrower hereby affirms to Foothill
that all of Borrower's representations and warranties set forth in the Agreement
are true, complete and accurate in all respects as of the date hereof.
4. NO DEFAULTS. Borrower hereby affirms to Foothill that no Event of
Default has occurred and is continuing as of the date hereof.
<PAGE>
5. CONDITION PRECEDENT. The effectiveness of this Amendment is expressly
conditioned upon receipt by Foothill of:
(c) an executed copy of this Amendment; and
(d) an amendment fee in the amount of $10,000, which fee will be
credited by Foothill against any amendment fee to be charged by Foothill in
connection with the next amendment of the Agreement, if any is hereafter agreed
to, that deals with an extension of the term of the Agreement or an increase in
the Maximum Amount.
6. COSTS AND EXPENSES. Borrower shall pay to Foothill all of Foothill's
out-of-pocket costs and expenses (including, without limitation, the fees and
expenses of its counsel, which counsel may include any local counsel deemed
necessary, search fees, filing and recording fees, documentation fees, appraisal
fees, travel expenses, and other fees) arising in connection with the
preparation, execution, and delivery of this Amendment and all related
documents.
7. LIMITED EFFECT. In the event of a conflict between the terms and
provisions of this Amendment and the terms and provisions of the Agreement, the
terms and provisions of this Amendment shall govern. In all other respects, the
Agreement, as amended and supplemented hereby, shall remain in full force and
effect.
8. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which when so executed and delivered shall be deemed to be an original. All
such counterparts, taken together, shall constitute but one and the same
Amendment. Upon the execution of counterparts of this Amendment by each of the
parties hereto, the Amendment shall be effective as of October 30, 1999.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first set forth above.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By: /s/ Todd W. Colpitts
--------------------------------------
Title: Vice President
-----------------------------------
THE CHILDREN'S PLACE RETAIL STORES, INC.,
a Delaware corporation
By: /s/ Seth Udasin
--------------------------------------
Title: Vice President & CFO
-----------------------------------
<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> AUG-01-1999
<PERIOD-END> OCT-30-1999
<CASH> 1,836
<SECURITIES> 0
<RECEIVABLES> 6,938
<ALLOWANCES> 0
<INVENTORY> 57,666
<CURRENT-ASSETS> 77,860
<PP&E> 111,871
<DEPRECIATION> 28,169
<TOTAL-ASSETS> 170,367
<CURRENT-LIABILITIES> 61,145
<BONDS> 0
0
0
<COMMON> 2,558
<OTHER-SE> 102,746
<TOTAL-LIABILITY-AND-EQUITY> 170,367
<SALES> 119,442
<TOTAL-REVENUES> 119,442
<CGS> 64,935
<TOTAL-COSTS> 29,484
<OTHER-EXPENSES> 4
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 324
<INCOME-PRETAX> 21,385
<INCOME-TAX> 8,651
<INCOME-CONTINUING> 12,734
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,734
<EPS-BASIC> 0.50
<EPS-DILUTED> 0.48
</TABLE>
