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 May 1, 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)
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 |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 June 7, 1999:
25,204,543 shares.
<PAGE>
THE CHILDREN'S PLACE RETAIL STORES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MAY 1, 1999
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets..................................... 1
Consolidated Statements of Income............................... 2
Consolidated Statements of Cash Flows........................... 3
Consolidated Notes to 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 Risks..... 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. Financial Statements
THE CHILDREN'S PLACE RETAIL STORES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
May 1, 1999 January 30, 1999
----------- ----------------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents ..................................................... $ 26,015 $ 16,370
Accounts receivable ........................................................... 4,910 2,742
Inventories ................................................................... 28,187 35,339
Prepaid expenses and other current assets ..................................... 7,570 5,622
Deferred income taxes ......................................................... 2,814 2,447
--------- ---------
Total current assets ....................................................... 69,496 62,520
Property and equipment, net ................................................... 55,452 42,304
Deferred income taxes ......................................................... 5,144 5,144
Other assets .................................................................. 2,454 793
--------- ---------
Total assets ............................................................... $ 132,546 $ 110,761
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accounts payable .............................................................. $ 19,060 $ 13,345
Accrued expenses, interest and other current liabilities ...................... 21,349 13,644
--------- ---------
Total current liabilities .................................................. 40,409 26,989
Other long-term liabilities ....................................................... 3,334 3,165
--------- ---------
Total liabilities .......................................................... 43,743 30,154
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value; 100,000,000 shares authorized; 25,193,565 shares
and 24,972,001 shares issued and outstanding, at May 1, 1999 and
January 30, 1999, respectively ................................................ 2,519 2,497
Additional paid-in capital ........................................................ 84,822 84,032
Accumulated earnings (deficit) .................................................... 1,462 (5,922)
--------- ---------
Total stockholders' equity ................................................. 88,803 80,607
--------- ---------
Total liabilities and stockholders' equity ................................. $ 132,546 $ 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)
Thirteen Weeks Ended
--------------------
May 1, 1999 May 2, 1998
----------- -----------
Net sales ............................................ $ 92,621 $ 55,999
Cost of sales ........................................ 53,298 34,084
-------- --------
Gross profit ......................................... 39,323 21,915
Selling, general and administrative expenses ......... 22,594 14,460
Pre-opening costs .................................... 1,201 1,110
Depreciation and amortization ........................ 3,296 1,663
-------- --------
Operating income ..................................... 12,232 4,682
Interest expense (income), net ....................... (150) 59
Other expense, net ................................... 5 0
-------- --------
Income before income taxes ........................... 12,377 4,623
Provision for income taxes ........................... 4,994 1,881
-------- --------
Net income ........................................... $ 7,383 $ 2,742
======== ========
Basic net income per common share .................... $ 0.29 $ 0.11
Basic weighted average common shares outstanding ..... 25,114 24,660
Diluted net income per common share .................. $ 0.28 $ 0.11
Diluted weighted average common shares outstanding ... 26,620 25,605
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>
Thirteen Weeks Ended
--------------------
May 1, 1999 May 2, 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 7,383 $ 2,742
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................. 3,296 1,663
Deferred financing fee amortization ....................... 6 6
Loss on disposals of property and equipment ............... 272 216
Deferred taxes ............................................ (367) 1,711
Changes in operating assets and liabilities:
Accounts receivable ....................................... (2,168) (1,036)
Inventories ............................................... 7,152 2,357
Prepaid expenses and other current assets ................. (1,948) (650)
Other assets .............................................. (1,702) (135)
Accounts payable .......................................... 5,715 (285)
Accrued expenses, interest and other current liabilities .. 6,477 1,985
-------- --------
Total adjustments ...................................... 16,733 5,832
-------- --------
Net cash provided by operating activities ........................ 24,116 8,574
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases ................................. (15,283) (5,048)
-------- --------
Net cash used in investing activities ............................ (15,283) (5,048)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and employee stock purchases ........... 814 252
Borrowings under revolving credit facility ....................... 7,864 11,634
Repayments under revolving credit facility ....................... (7,864) (12,723)
Payment of obligations under capital leases ...................... (2) (6)
-------- --------
Net cash provided by (used in) financing activities .............. 812 (843)
-------- --------
Net increase in cash and cash equivalents ................. 9,645 2,683
Cash and cash equivalents, beginning of period ............ 16,370 887
-------- --------
Cash and cash equivalents, end of period ......................... $ 26,015 $ 3,570
======== ========
OTHER CASH FLOW INFORMATION:
Cash paid during the period for interest ......................... $ 31 $ 70
Cash paid during the period for income taxes ..................... 1,280 172
</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.
CONSOLIDATED NOTES TO 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 thirteen weeks ended May 1, 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.
Thirteen Weeks Ended
--------------------
May 1, 1999 May 2, 1998
----------- -----------
Net income ......................... $ 7,383 $ 2,742
=========== ===========
Basic shares ....................... 25,114,287 24,660,493
Dilutive effect of stock options ... 1,505,559 944,322
----------- -----------
Dilutive shares .................... 26,619,846 25,604,815
=========== ===========
Antidilutive options ............... 14,000 534,040
Antidilutive options consist of the weighted average of stock options for
the respective periods ended at May 1, 1999 and May 2, 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.
4
<PAGE>
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. The parties have commenced
discovery.
On October 27, 1997, Bulldog Capital Management, L.P., a limited
partnership that serves as a general partner for a series of investment funds
which allegedly purchased shares of the Company's common stock issued in
connection with the IPO, also filed a lawsuit against the Company and several of
the Company's directors and officers in the Superior Court of New Jersey, Essex
County Division. The complaint also alleges that by making materially false or
misleading statements and/or omissions in connection with the IPO, the Company
and several of the Company's directors and officers violated provisions of
federal and state law. The plaintiff seeks monetary damages of an unspecified
amount, rescission or rescissory damages and fees and costs. This action and the
federal action described above have been coordinated for purposes of discovery.
The Company believes that the allegations made in the complaints described
above are untrue and totally without merit and intends to defend them
vigorously. The Company does not believe that any ultimate liability arising out
of the actions described above will have a material adverse effect on its
business; however, the Company can give no assurance as to the ultimate
resolution of the proceedings or the amount to be paid, if any, in the
disposition of the actions.
Other Litigation
In May 1999, the Company relocated its distribution center operations to
its new distribution center and corporate headquarters facility in Secaucus, New
Jersey. The Company plans to move its corporate headquarters staff to the new
facility in July 1999. The Company's lease for its West Caldwell facility
expired on May 31, 1999. Although the Company believed it had an arrangement
with its West Caldwell landlord to continue to occupy the premises through the
end of July 1999, the landlord has recently disputed the existence of such an
arrangement and has commenced legal proceedings against the Company in the
Superior Court of New Jersey Law Division seeking possession of the premises.
The Company intends to defend this action and the Company is continuing
discussions with its West Caldwell landlord in an effort to resolve the matter.
Under New Jersey law, the Company could not be compelled to vacate the West
Caldwell facility before early July. In the event the Company were to be
compelled to vacate the West Caldwell facility, in early July, the Company
believes that it would be able to continue its operations without significant
disruption in the new facility.
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. ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
During the thirteen weeks ended May 1, 1999, the Company adopted Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," ("SOP 98-1"). In accordance with SOP 98-1, the
Company capitalized approximately $100,000 in payroll and payroll-related costs
of employees and outside consulting expenses related to the development of
internal-use computer software projects during the thirteen weeks ended May 1,
1999.
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:
Thirteen Weeks Ended
--------------------
May 1, 1999 May 2, 1998
----------- -----------
Net sales ..................................... 100.0% 100.0%
Cost of sales ................................. 57.5 60.9
----- -----
Gross profit .................................. 42.5 39.1
Selling, general and administrative expenses .. 24.4 25.8
Pre-opening costs ............................. 1.3 2.0
Depreciation and amortization ................. 3.6 3.0
----- -----
Operating income .............................. 13.2 8.3
Interest expense (income), net ................ (0.2) 0.1
Other expense, net ............................ -- --
----- -----
Income before income taxes .................... 13.4 8.2
Provision for income taxes .................... 5.4 3.3
----- -----
Net income .................................... 8.0% 4.9%
===== =====
Number of stores, end of period ............... 239 178
6
<PAGE>
Thirteen Weeks Ended May 1, 1999 (the "First Quarter 1999") Compared to Thirteen
Weeks Ended May 2, 1998 (the "First Quarter 1998")
Net sales increased by $36.6 million, or 65%, to $92.6 million during the
First Quarter 1999 from $56.0 million during the First Quarter 1998. Net sales
for the 30 new stores opened during the First Quarter 1999, as well as the other
stores that did not qualify as comparable stores, contributed $20.7 million of
the net sales increase. During the First Quarter 1999, we continued our
expansion strategy of opening the majority of new stores in clusters within
existing and contiguous markets. As of May 1, 1999, we operated 239 stores in 28
states, primarily located in regional shopping malls in the eastern half of the
United States, with 17 of these stores in operation west of the Mississippi
River. During the First Quarter 1999, we entered several new markets including
Colorado and Northern Florida.
Our comparable store sales increased 32% and contributed $15.9 million of
our net sales increase during the First Quarter 1999. Comparable store sales
increased 7% during the First Quarter 1998. The First Quarter 1999 comparable
store sales increase was experienced across all merchandise divisions.
Gross profit increased by $17.4 million to $39.3 million during the First
Quarter 1999 from $21.9 million during the First Quarter 1998. As a percentage
of net sales, gross profit increased to 42.5% during the First Quarter 1999 from
39.1% during the First 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 continued strength of the dollar, and
the leveraging of store occupancy costs over a higher sales base, partially
offset by higher markdowns. During the First Quarter 1999, our higher markdowns
were attributable to several planned promotions which the Company did not have
in the prior year.
Selling, general and administrative expenses increased $8.1 million to
$22.6 million during the First Quarter 1999 from $14.5 million during the First
Quarter 1998. Selling, general and administrative expenses were 24.4% of net
sales during the First Quarter 1999 as compared with 25.8% during the First
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 increased advertising and marketing costs associated with
The Children's Place brand development. During the First Quarter 1999, we spent
approximately $1.7 million, or 1.8% of net sales, on these programs.
During the First Quarter 1999, pre-opening costs were $1.2 million, or
1.3% of net sales, as compared to $1.1 million, or 2.0% of net sales, during the
First Quarter 1998. The decrease in pre-opening costs, as a percentage of net
sales, during the First Quarter 1999 reflected the leverage of such costs over a
higher sales base. We opened 30 stores and 23 stores, during the First Quarter
1999 and the First Quarter 1998, respectively.
Depreciation and amortization amounted to $3.3 million, or 3.6% of net
sales, during the First Quarter 1999, as compared to $1.7 million, or 3.0% of
net sales, during the First Quarter 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 First Quarter 1999, we accelerated depreciation
expense by $1.4 million, or 1.5% 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.
Due to our net cash investment position, we recorded net interest income
of $0.2 million, or 0.2% of net sales, during the First Quarter 1999. During the
First Quarter 1998, we recorded net interest expense of $0.1 million, or 0.1% of
net sales, due to borrowings under our working capital revolving credit
facility.
Our provision for income taxes for the First Quarter 1999 was $5.0
million, as compared to $1.9 million during the First Quarter 1998. The increase
in our provision for income taxes during the First Quarter 1999 is due to our
increased operational earnings. During the First Quarter 1999, we utilized our
remaining $0.1 million in Net Operating Loss carryforwards ("NOLs") and expect
to pay the majority of our tax provision in cash. During the First Quarter 1998,
the majority of our tax provision was not paid in cash due to utilization of our
NOLs.
We recorded net income of $7.4 million and $2.7 million during the First
Quarter 1999 and the First Quarter 1998, respectively.
7
<PAGE>
Liquidity and Capital Resources
Debt Service/Liquidity
Our primary uses of cash are to finance new store openings and provide 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. We have been able to meet our cash needs primarily through
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.
As of May 1, 1999, we had no borrowings under our working capital
revolving credit facility and had outstanding letters of credit of $14.3
million. Availability under our working capital revolving credit facility as of
May 1, 1999 was $15.7 million. During the First Quarter 1999, the interest rate
charged under our working capital revolving credit facility for reference rate
borrowings was 7.75% per annum. As of May 1, 1999, we were in compliance with
all of our covenants under our working capital revolving credit facility.
Cash Flows/Capital Expenditures
Cash flows provided by operating activities were $24.1 million during the
First Quarter 1999 as compared with $8.6 million during the First Quarter 1998.
During the First Quarter 1999, cash flows provided by operating activities
increased primarily as a result of our improved operating earnings, a seasonal
decrease in inventory and increases in our current liabilities, partially offset
by increases in our current assets.
Cash flows used in investing activities were $15.3 million and $5.0
million in the First Quarter 1999 and First Quarter 1998, respectively. During
the First Quarter 1999 and First Quarter 1998, cash flows used in investing
activities related primarily to new store openings and store remodelings. In the
First Quarter 1999 and First Quarter 1998, the Company opened 30 and 23 stores
and remodeled 3 and 2 stores, respectively. We anticipate that total capital
expenditures during fiscal 1999 will approximate $50 million, which we plan to
fund principally from cash flow from operations. These expenditures primarily
relate to the opening of 70 stores and 9 store remodelings and capital
expenditures related to the relocation of the distribution center and corporate
headquarters facility, as well as store re-fixturings. Capital expenditures also
include ongoing store capital programs, new point-of-sale ("POS") software and
equipment and a warehouse management system and equipment. During the First
Quarter 1999, our capital expenditures included approximately $10.0 million for
new stores, remodelings and re-fixturings, $4.4 million for renovations to our
new distribution center and corporate headquarters facility and $0.9 million for
our new warehouse management system and equipment.
Cash flows provided by financing activities were $0.8 million in the First
Quarter 1999 and cash flows used in financing activities were $0.8 million in
the First Quarter 1998, respectively. During the First Quarter 1999, cash flows
provided by financing activities reflected funds received from the exercise of
employee stock options and employee stock purchases. During the First Quarter
1998, cash flows used in financing activities reflected the net repayment of
borrowings outstanding under our working capital revolving credit facility,
partially offset by funds received from the exercise of employee stock options
and employee stock purchases.
We have entered into an eight year lease with the option to extend the
lease for a three-year period for a distribution center and corporate
headquarters facility located in Secaucus, New Jersey. The lease also provides
us with an option to terminate the lease at the end of the fifth year. Annual
rent for the 204,000 square foot facility is approximately $1.2 million per
year. We plan to relocate our distribution center and corporate headquarters
facility during the second quarter of fiscal 1999. We believe this distribution
center will support approximately 500 stores. We expect to make a cash outlay of
approximately $11.0 million to renovate the facility, of which approximately
$4.9 million was spent during fiscal 1998 and the First Quarter 1999. We also
plan to install a new warehouse management system at a total cost of
approximately $4.5 million, of which approximately $3.0 million has been spent
to date.
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.
Although we are complying, and believe that we will be able to comply with the
financial covenants under our working capital revolving credit facility, we are
seeking to provide greater financial flexibility as we implement our growth
strategy. Consequently, we have requested an increase in our credit line under
our working capital revolving credit facility and amendments to the financial
covenants contained in this credit facility.
8
<PAGE>
Our ability to meet our capital requirements will depend on our ability to
generate cash from operations and successfully implement our store expansion
plans. As we continue our store expansion program, we will consider additional
sources of financing to fund our long-term growth.
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, the Company began a program to
ensure that its 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 during the third quarter of fiscal 1999. We believe that approximately
70% of our systems are currently Year 2000 compliant. We plan to perform a
systems test of our applications software in our new corporate headquarters
facility in Secaucus, New Jersey. This test will also include a test of our new
warehouse management system. Contingency plans continue to be modified to
provide uninterrupted management information systems support in the event that
we are unable to replace our warehouse management system, POS and general ledger
systems. We are currently testing our new warehouse management system with
implementation scheduled during July 1999. We plan to pilot our new POS system
in June 1999 with chain rollout completed during October 1999. We plan to
replace our general ledger system in June 1999.
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 have incurred no
external costs during the First Quarter 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 have incurred $0.1 million in internal management information
systems resources during the First Quarter 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
9
<PAGE>
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risks (Not
applicable)
10
<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. The parties have commenced discovery.
On October 27, 1997, Bulldog Capital Management, L.P., a limited
partnership that serves as a general partner for a series of investment funds
which allegedly purchased shares of the Company's common stock issued in
connection with the IPO, also filed a lawsuit against the Company and several of
the Company's directors and officers in the Superior Court of New Jersey, Essex
County Division. The complaint also alleges that by making materially false or
misleading statements and/or omissions in connection with the IPO, the Company
and several of the Company's directors and officers violated provisions of
federal and state law. The plaintiff seeks monetary damages of an unspecified
amount, rescission or rescissory damages and fees and costs. This action and the
federal action described above have been coordinated for purposes of discovery.
The Company believes that the allegations made in the complaints described
above are untrue and totally without merit and intends to defend them
vigorously. The Company does not believe that any ultimate liability arising out
of the actions described above will have a material adverse effect on its
business; however, the Company can give no assurance as to the ultimate
resolution of the proceedings or the amount to be paid, if any, in the
disposition of the actions.
Other Litigation
In May 1999, the Company relocated its distribution center operations to
its new distribution center and corporate headquarters facility in Secaucus, New
Jersey. The Company plans to move its corporate headquarters staff to the new
facility in July 1999. The Company's lease for its West Caldwell facility
expired on May 31, 1999. Although the Company believed it had an arrangement
with its West Caldwell landlord to continue to occupy the premises through the
end of July 1999, the landlord has recently disputed the existence of such an
arrangement and has commenced legal proceedings against the Company in the
Superior Court of New Jersey Law Division seeking possession of the premises.
The Company intends to defend this action and the Company is continuing
discussions with its West Caldwell landlord in an effort to resolve the matter.
Under New Jersey law, the Company could not be compelled to vacate the West
Caldwell facility before early July. In the event the Company were to be
compelled to vacate the West Caldwell facility, in early July, the Company
believes that it would be able to continue its operations without significant
disruption in the new facility.
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.
11
<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
12
<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: June 15, 1999
By: /s/ Ezra Dabah
-----------------------------------
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: June 15, 1999 By: /s/ Seth L. Udasin
-----------------------------------
Vice President and
Chief Financial Officer
(Principal Financial Officer)
13
<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> JAN-31-1999
<PERIOD-END> MAY-01-1999
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<RECEIVABLES> 4,910
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<CURRENT-ASSETS> 69,496
<PP&E> 77,488
<DEPRECIATION> 22,036
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0
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<COMMON> 2,519
<OTHER-SE> 86,284
<TOTAL-LIABILITY-AND-EQUITY> 132,546
<SALES> 92,621
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<CGS> 53,298
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