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 August 1, 1998
|_| 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 September 1, 1998:
24,835,869 shares.
THE CHILDREN'S PLACE RETAIL STORES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED AUGUST 1, 1998
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements: Page
----
Balance Sheets ...................................................... 1
Statements of Income ................................................ 2
Statements of Cash Flows ............................................ 3
Notes to Financial Statements ....................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................... 6
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
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE CHILDREN'S PLACE RETAIL STORES, INC.
BALANCE SHEETS
(In thousands, except per share amounts)
January 31,
August 1, 1998 1998
-------------- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ........................ $ 868 $ 887
Accounts receivable .............................. 2,956 1,904
Inventories ...................................... 30,845 20,334
Prepaid expenses and other current assets ........ 6,581 4,612
Deferred income taxes ............................ 10,653 10,653
-------- --------
Total current assets ........................... 51,903 38,390
Property and equipment, net .......................... 38,752 32,121
Deferred income taxes ................................ 6,868 8,244
Other assets ......................................... 785 598
-------- --------
Total assets ................................... $ 98,308 $ 79,353
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Revolving credit facility ........................ $ 12,635 $ 1,089
Accounts payable ................................. 12,497 9,471
Accrued expenses, interest and other current
liabilities .................................... 9,101 7,592
-------- --------
Total current liabilities ..................... 34,233 18,152
Other long-term liabilities .......................... 2,929 2,734
-------- --------
Total liabilities ............................. 37,162 20,886
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value; 100,000,000 shares
authorized; 24,779,746 shares and 24,622,103
shares issued and outstanding, at August 1, 1998
and January 31, 1998, respectively ................. 2,478 2,462
Additional paid-in capital ........................... 83,019 82,589
Accumulated deficit .................................. (24,351) (26,584)
-------- --------
Total stockholders' equity .................... 61,146 58,467
-------- --------
Total liabilities and stockholders' equity .... $ 98,308 $ 79,353
======== ========
The accompanying notes to financial statements are an integral part of these
balance sheets.
1
THE CHILDREN'S PLACE RETAIL STORES, INC.
STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
August 1, 1998 August 2, 1997 August 1, 1998 August 2, 1997
-------------- -------------- -------------- --------------
Net sales ............................. $ 48,014 $ 33,534 $104,013 $ 72,737
Cost of sales ......................... 32,525 23,749 66,608 49,006
-------- -------- -------- --------
Gross profit .......................... 15,489 9,785 37,405 23,731
Selling, general and
administrative expenses .............. 13,793 9,575 28,254 19,198
Pre-opening costs ..................... 552 750 1,663 1,222
Depreciation and amortization ......... 1,808 1,382 3,471 2,615
-------- -------- -------- --------
Operating income (loss) ............... (664) (1,922) 4,017 696
Interest expense, net ................. 100 987 159 1,815
Other expense, net .................... 77 5 77 106
-------- -------- -------- --------
Income (loss) before income taxes ..... (841) (2,914) 3,781 (1,225)
Provision (benefit) for income
taxes ................................ (330) (1,170) 1,550 (492)
-------- -------- -------- --------
Net income (loss) ..................... $ (511) $ (1,744) $ 2,231 $ (733)
======== ======== ======== ========
Basic net income (loss) per common
share ................................ $ (0.02) $ (0.09) $ 0.09 $ (0.04)
Basic weighted average common shares
outstanding .......................... 24,766 20,421 24,713 20,421
Diluted net income (loss) per common
share ................................ $ (0.02) $ (0.07) $ 0.09 $ (0.03)
Diluted weighted average common shares
outstanding .......................... 25,822 23,804 25,716 23,804
The accompanying notes to financial statements are an integral part of these
statements.
2
THE CHILDREN'S PLACE RETAIL STORES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Twenty-Six Weeks Ended
----------------------
August 1, 1998 August 2, 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................... $ 2,231 $ (733)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization .......... 3,471 2,615
Deferred financing fee amortization .... 12 304
Loss on disposals of property and
equipment ............................ 216 25
Deferred taxes ......................... 1,377 (572)
Changes in operating assets and liabilities:
Accounts receivable .................... (1,052) (747)
Inventories ............................ (10,511) (8,020)
Prepaid expenses and other current
assets ............................... (1,969) (1,118)
Other assets ........................... (284) (229)
Accounts payable ....................... 3,026 4,242
Accrued expenses, interest and other
current liabilities .................. 1,835 1,360
-------- --------
Total adjustments .................... (3,879) (2,140)
-------- --------
Net cash used in operating activities ...... (1,648) (2,873)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases ........... (10,351) (10,159)
-------- --------
Net cash used in investing activities ...... (10,351) (10,159)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options and employee
stock purchases .......................... 448 0
Borrowings under revolving credit facility . 34,530 88,557
Repayments under revolving credit facility . (22,984) (76,093)
Repayment of long-term debt ................ 0 (1,360)
Payment of obligations under capital leases (14) (375)
Refund of funds toward common stock
subscription ............................. 0 (488)
-------- --------
Net cash provided by financing activities .. 11,980 10,241
-------- --------
Net decrease in cash and cash equivalents (19) (2,791)
Cash and cash equivalents, beginning of
period ................................. 887 3,422
-------- --------
Cash and cash equivalents, end of period ... $ 868 $ 631
======== =========
OTHER CASH FLOW INFORMATION:
Cash paid during the period for interest ... $ 165 $ 1,498
Cash paid during the period for income
taxes .................................... 616 507
The accompanying notes to financial statements are an integral part of these
statements.
3
THE CHILDREN'S PLACE RETAIL STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Certain information and footnote disclosures required by generally
accepted accounting principles for complete financial statements have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the accompanying unaudited
financial statements contain all material adjustments, consisting of normal
recurring accruals, necessary to present fairly the Company's financial
position, results of operations and cash flow for the periods indicated, and
have been prepared in a manner consistent with the audited financial statements
as of January 31, 1998. These financial statements should be read in conjunction
with the audited financial statements and footnotes for the fiscal year ended
January 31, 1998 included in the Company's Form 10-K filed with the Securities
and Exchange Commission. Due to the seasonal nature of the Company's business,
the results of operations for the thirteen and twenty-six weeks ended August 1,
1998 are not necessarily indicative of operating results for a full fiscal year.
Certain prior period balances have been reclassified to conform to current
period presentation.
2. INITIAL PUBLIC OFFERING
On September 18, 1997, the Company sold 4,000,000 shares of Common Stock
at $14.00 per share in an initial public offering (the "Offering") pursuant to a
registration statement filed on Form S-1 (No. 333-31535) with the Securities and
Exchange Commission and in its prospectus dated September 18, 1997 (the
"Prospectus"). The Company used the net proceeds of $50.7 million, after
deducting the underwriters' discount of $3.9 million and estimated transaction
expenses of $1.4 million from the Offering, to (i) pay the principal amount of,
and accrued interest on, the Senior Subordinated Notes (the "Senior Subordinated
Notes") held by Nomura Holding America Inc., (the "Noteholder") of $20.6
million, (ii) repurchase a warrant held by Nomura Holding America Inc. (the
"Noteholder Warrant") for $20.6 million, (iii) repurchase two-thirds of a
warrant held by Legg Mason Wood Walker Inc. (the "Legg Mason Warrant") for $5.2
million, and (iv) reduce borrowings outstanding under the Company's revolving
credit facility (the "Foothill Credit Facility") with the remainder of the net
proceeds. The Senior Subordinated Notes, the Noteholder Warrant and the Legg
Mason Warrant were issued in conjunction with a 1996 recapitalization of the
Company.
Concurrent with the Offering, the Company effected a 120-for-one stock
split of the Series A Common Stock (the "Stock Split"), converted all
outstanding shares of the Series B Common Stock into 7,659,889 shares of Series
A Common Stock (the "Series B Conversion") and redesignated the Series A Common
Stock as Common Stock (the "Reclassification"). The Company also issued 201,414
shares of Common Stock upon the exercise of one-third of the Legg Mason Warrant.
3. NET INCOME (LOSS) 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 (loss) per common share.
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
August 1, 1998 August 2, 1997 August 1, 1998 August 2, 1997
-------------- -------------- -------------- --------------
Net income (loss) ............. $ (511) $ (1,744) $ 2,231 $ (733)
============ ============ ============ ============
Weighted average common shares
outstanding - Basic ......... 24,765,564 20,420,689 24,713,028 20,420,689
Incremental shares from assumed
conversions of options ...... 1,056,364 3,383,496 1,002,543 3,383,496
------------ ------------ ------------ ------------
Weighted average common shares
outstanding - Diluted ....... 25,821,928 23,804,185 25,715,571 23,804,185
============ ============ ============ ============
4
During the thirteen weeks and twenty-six weeks ended August 1, 1998, there
were 169,660 options and 177,677 options, respectively, excluded from the
calculation of diluted net income (loss) per common share because they were
anti-dilutive.
4. LITIGATION
Class Action Suits
On October 16, 1997, Stephen Brosious and Rudy Pallastrone, who allegedly
purchased shares of the Company's common stock in or after an initial public
offering on or about September 19, 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 for 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, fifteen
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 sixteen putative class actions
were consolidated in the Court and on February 26, 1998, the plaintiffs served
and filed their amended consolidated complaint. No discovery has been taken. The
Company has filed a motion to dismiss this complaint. On September 4, 1998, the
Court entered an Order granting the motion to dismiss as to the claims based
solely on historical statements made in the Prospectus and denied the motion as
to all other claims. The Court also dismissed the case against the underwriters
and granted the plaintiffs 30 days to file a new complaint against the
underwriters. The Company continues to believe that the allegations made in the
complaint are untrue and totally without merit and intends to defend them
vigorously.
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. On November 20,
1997, the plaintiff filed its first request for production of documents from the
defendants. No discovery has been taken. This action had been stayed, pending
resolution of the defendant's motion to dismiss in the federal lawsuit described
above. The Company believes that the allegations made in this complaint are
untrue and totally without merit and intends to defend them vigorously.
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
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 31, 1998. 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 31, 1998 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 Twenty-Six Weeks Ended
-------------------- ----------------------
August 1, 1998 August 2, 1997 August 1, 1998 August 2, 1997
-------------- -------------- -------------- --------------
Net sales ......................... 100.0% 100.0% 100.0% 100%
Cost of sales ..................... 67.7 70.8 64.0 67.4
----- ----- ----- -----
Gross profit ...................... 32.3 29.2 36.0 32.6
Selling, general and administrative
expenses ......................... 28.7 28.6 27.2 26.4
Pre-opening costs ................. 1.2 2.2 1.6 1.7
Depreciation and amortization ..... 3.8 4.1 3.3 3.5
----- ----- ----- -----
Operating income (loss) ........... (1.4) (5.7) 3.9 1.0
Interest expense, net ............. 0.2 3.0 0.2 2.5
Other expense, net ................ 0.2 -- 0.1 0.2
----- ----- ----- -----
Income (loss) before income
taxes ........................... (1.8) (8.7) 3.6 (1.7)
Provision (benefit) for income
taxes ........................... (0.7) (3.5) 1.5 (0.7)
----- ----- ----- -----
Net income (loss) ................. (1.1)% (5.2)% 2.1% (1.0)%
===== ===== ===== =====
Number of stores, end of
period .......................... 189 134 189 134
Thirteen Weeks Ended August 1, 1998 (the "Second Quarter 1998") Compared to
Thirteen Weeks Ended August 2, 1997 (the "Second Quarter 1997")
Net sales increased by $14.5 million, or 43%, to $48.0 million during the
Second Quarter 1998 from $33.5 million during the Second Quarter 1997. Net sales
for the 11 new stores opened during the Second Quarter 1998, and the 23 stores
opened during the thirteen weeks ending May 2, 1998 (the "First Quarter 1998")
as well as the stores opened and remodeled during fiscal 1997 and fiscal 1998
that did not qualify as comparable stores, contributed $12.3 million of the net
sales increase. As of August 1, 1998, the Company operated 189 stores in 25
states, primarily located in regional shopping malls in the eastern half of the
United States. During fiscal 1998, the Company expects that it will have opened
approximately 50 new stores, substantially all in existing and contiguous
markets.
The Company's comparable store sales increased 8% and contributed $2.2
million of the net sales increase during the Second Quarter 1998. Comparable
store sales decreased 1% during the Second Quarter 1997. The Second Quarter 1998
comparable store sales increase was experienced across all merchandise
divisions.
6
Gross profit increased by $5.7 million to $15.5 million during the Second
Quarter 1998 from $9.8 million during the Second Quarter 1997. As a percentage
of net sales, gross profit increased to 32.3% during the Second Quarter 1998
from 29.2% during the Second Quarter 1997. The increase in gross profit as a
percentage of net sales was principally due to higher initial markups achieved
through more effective product sourcing.
Selling, general and administrative expenses increased $4.2 million to
$13.8 million during the Second Quarter 1998 from $9.6 million during the Second
Quarter 1997. Selling, general and administrative expenses were 28.7% of net
sales during the Second Quarter 1998 as compared with 28.6% during the Second
Quarter 1997. The increase as a percentage of net sales was primarily due to an
increase in the executive and store operations management personnel of the
Company and increased marketing expenditures, partially offset by the leveraging
of other corporate administrative functions and lower store remodeling costs.
During the Second Quarter 1998, pre-opening costs were $0.6 million, or
1.2% of net sales, as compared to $0.8 million, or 2.2% of net sales, during the
Second Quarter 1997. The decrease in pre-opening costs, as a percentage of net
sales, during the Second Quarter 1998 reflected the leverage of a higher sales
base and fewer stores opened during the Second Quarter 1998. The Company opened
11 stores and 15 stores during the Second Quarter 1998 and the Second Quarter
1997, respectively.
Depreciation and amortization amounted to $1.8 million, or 3.8% of net
sales, during the Second Quarter 1998 as compared to $1.4 million, or 4.1% of
net sales, during the Second Quarter 1997. The increase in depreciation and
amortization primarily was a result of the increase in the store base.
Interest expense, net, for the Second Quarter 1998 was $0.1 million, or
0.2% of net sales, as compared to $1.0 million, or 3.0% of net sales, during the
Second Quarter 1997. The decrease in interest expense was primarily due to the
elimination of interest expense on the Senior Subordinated Notes which were
repaid with a portion of the proceeds from the Company's initial public offering
in September 1997.
Other expense, net, for the Second Quarter 1998 was $0.1 million, or 0.2%
of net sales, and represented an anniversary fee under the Foothill Credit
Facility. Other expense, net, for the Second Quarter 1997 represented nominal
covenant waiver fees paid under the Foothill Credit Facility.
The Company's benefit from income taxes for the Second Quarter 1998 was
$0.3 million, as compared with a benefit from income taxes for the Second
Quarter 1997 of $1.2 million. The lower benefit from income taxes was due to the
lower operating loss during the Second Quarter 1998. The Company had a net loss
of $0.5 million and a net loss of $1.7 million, in the Second Quarter 1998 and
the Second Quarter 1997, respectively.
Twenty-Six Weeks Ended August 1, 1998 Compared to Twenty-Six Weeks Ended August
2, 1997
Net sales increased by $31.3 million, or 43%, to $104.0 million during the
twenty-six weeks ended August 1, 1998 from $72.7 million during the twenty-six
weeks ended August 2, 1997. Net sales for the 34 stores opened during the
twenty-six weeks ended August 1, 1998, as well as the stores opened and
remodeled during fiscal 1997 and fiscal 1998 that did not qualify as comparable
stores, contributed $26.8 million of the net sales increase. These stores
represent the entrance into several new markets, which include Atlanta, St.
Louis, Kansas City and Iowa.
During the twenty-six weeks ended August 1, 1998, the Company's comparable
store sales increased 7% and contributed $4.5 million of the net sales increase
as compared with a 2% comparable store sales increase for the twenty-six weeks
ended August 2, 1997. During the twenty-six weeks ended August 1, 1998, the
comparable store sales increase was experienced across all merchandise
divisions.
Gross profit increased $13.7 million to $37.4 million during the
twenty-six weeks ended August 1, 1998 from $23.7 million during the twenty-six
weeks ended August 2, 1997. As a percentage of net sales, gross profit increased
to 36.0% during the twenty-six weeks ended August 1, 1998 from 32.6% during the
twenty-six weeks ended August 2, 1997. The increase in gross profit, as a
percentage of net sales, was principally due to higher initial markups achieved
through more effective product sourcing and lower markdowns. As a percentage of
net sales, gross profit was also favorably impacted by the leveraging of buying
and distribution expenses partially offset by increased store occupancy costs
from new stores with higher rents that have not been open long enough to
leverage their rent through an established sales base.
Selling, general and administrative expenses increased $9.1 million to
$28.3 million during the twenty-six weeks ended August 1, 1998 from $19.2
million during the twenty-six weeks ended August 2, 1997. As a percentage of net
sales, selling, general and administrative expenses were 27.2% during the
twenty-six weeks ended August 1, 1998 as compared with 26.4% during the
twenty-six weeks ended August 2, 1997. The increase as a percentage of net sales
was primarily due to an increase in the executive
7
and store operations management personnel of the Company and increased marketing
expenditures and legal fees, partially offset by the leveraging of other
corporate administrative functions and lower store remodeling costs. Store
expenses, as a percentage of net sales, were also unfavorably impacted by higher
private label and bank credit card fees and higher store payroll.
During the twenty-six weeks ended August 1, 1998, pre-opening costs were
$1.7 million, or 1.6% of net sales, as compared with $1.2 million, or 1.7% of
net sales, during the twenty-six weeks ended August 2, 1997. The increase in
pre-opening costs during the twenty-six weeks ended August 1, 1998, reflected
the opening of 34 stores as compared to the opening of 26 stores during the
twenty-six weeks ended August 2, 1997.
Depreciation and amortization amounted to $3.5 million, or 3.3% of net
sales, during the twenty-six weeks ended August 1, 1998, as compared with $2.6
million, or 3.5% of net sales, during the twenty-six weeks ended August 2, 1997.
The increase in depreciation and amortization primarily was a result of the
increase in the store base.
Interest expense, net, for the twenty-six weeks ended August 1, 1998, was
$0.2 million, or 0.2% of net sales, as compared with $1.8 million, or 2.5% of
net sales, during the twenty-six weeks ended August 2, 1997. The decrease in
interest expense, net was primarily due to the elimination of interest expense
on the Senior Subordinated Notes which were repaid with a portion of the
proceeds from the Company's initial public offering in September 1997.
Other expense, net during the twenty-six weeks ended August 1, 1998 was
$0.1 million, or 0.1% of net sales, as compared to $0.1 million, or 0.2% of net
sales during the twenty-six weeks ended August 2, 1997. Other expense, net was
primarily comprised of anniversary fees under the Foothill Credit Facility
during the twenty-six weeks ended August 1, 1998 and the twenty-six weeks ended
August 2, 1997.
As a result of improved operating results, the Company recorded a
provision for income taxes during the twenty-six weeks ended August 1, 1998 of
$1.6 million. During the twenty-six weeks ended August 2, 1997, the Company
recorded a benefit from income taxes of $0.5 million, as a result of the
Company's net loss for the period. Due to the Company's utilization of its NOL
carry forwards, the majority of the Company's 1998 tax provision will not be
paid in cash , but will reduce the deferred tax asset on the balance sheet.
However, the Company expects to make cash tax payments for the federal
alternative minimum tax, state minimum taxes and state taxes in states where the
Company does not have an NOL.
The Company recorded net income of $2.2 million during the twenty-six
weeks ended August 1, 1998, and a net loss of $0.7 million during the twenty-six
weeks ended August 2, 1997.
Liquidity and Capital Resources
Debt Service/Liquidity
The Company's primary uses of cash are to finance new store openings and
provide for working capital, which principally represents the purchase of
inventory. Since the Offering, the Company has had no long-term debt obligations
other than obligations under capital leases. During the twenty-six weeks ended
August 1, 1998, the Company has been able to meet its cash needs primarily
through borrowings under the Foothill Credit Facility and cash flows from
operations.
The Company's 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. As of August 1, 1998, the Company had $12.6 million
in borrowings under the Foothill Credit Facility and had outstanding letters of
credit of $9.0 million. Availability under the Foothill Credit Facility as of
August 1, 1998 was $14.0 million. During the Second Quarter 1998, the interest
rates charged under the Foothill Credit Facility for reference rate borrowings
were 8.5% per annum and LIBOR borrowings bore interest at 7.1563% per annum .
As of August 1, 1998, the Company was in compliance with all of its
covenants under the Foothill Credit Facility. Management believes that the
Company will be able to comply with the financial covenants contained in the
Foothill Credit Facility and does not believe that compliance with these
covenants will interfere with its business or the implementation of its growth
strategy.
Cash Flows/Capital Expenditures
Cash flows used by operating activities were $1.6 million during the
twenty-six weeks ended August 1, 1998 as compared with $2.9 million during the
twenty-six weeks August 2, 1997. During the twenty-six weeks ended August 1,
1998, cash flows used by operating activities decreased as a result of improved
operating earnings, partially offset by an increased investment in inventory and
8
current assets required to support the store expansion program. In addition, the
Company's inventory increase during the twenty-six weeks ended August 1, 1998,
also reflects the earlier receipt of fall seasonal merchandise to better control
the flow of goods to the stores.
Cash flows used in investing activities were $10.4 million and $10.2
million in the twenty-six weeks ended August 1, 1998 and August 2, 1997,
respectively. During the twenty-six weeks ended August 1, 1998 and August 2,
1997, cash flows used in investing activities related primarily to new store
openings and remodelings. In the twenty six-weeks ended August 1, 1998 and
August 2, 1997, the Company opened 34 and 26 stores and remodeled 2 and 6
stores, respectively. Management anticipates that total capital expenditures
during fiscal 1998 will approximate $24 million. These expenditures primarily
relate to the opening of approximately 50 stores and store remodelings and
capital expenditures related to the relocation of the distribution center and
corporate headquarters facility. Also included in these expenditures are ongoing
store maintenance programs, new point of sale software and equipment and a
warehouse management system and equipment. Management plans to fund these
capital expenditures principally from cash flow from operations.
Cash flows provided by financing activities were $12.0 million and $10.2
million in the twenty-six weeks ending August 1, 1998 and August 2, 1997,
respectively. During the twenty-six weeks ended August 1, 1998, cash flows
provided by financing activities reflected net borrowings under the Foothill
Credit Facility, and funds received from the exercise of employee stock options
and employee stock purchases. During the twenty-six weeks ended August 2, 1997,
cash flows provided by financing activities reflected net borrowings under the
Foothill Credit Facility partially offset by the payment of debt obligations.
During June 1998, the Company signed a five year lease with options for an
approximately 204,000 square foot distribution center and corporate headquarters
facility located in Secaucus, New Jersey. Annual rent under this lease is
approximately $1.1 million per year. The Company plans to relocate its
distribution center and corporate headquarters facility during the first quarter
of fiscal 1999 and expects to make a cash outlay of approximately $5.0 million
to renovate the facility. The existing distribution center and corporate
headquarters facility lease expires in March 1999.
The Company believes that its current financing arrangements under the
Foothill Credit Facility and its anticipated level of internally generated funds
will be adequate to fund its capital requirements for at least the next 18
months. Nonetheless, to provide greater financial flexibility, the Company has
requested an increase in its credit line under the Foothill Credit Facility. The
Company's ability to meet its capital requirements, will depend on its ability
to generate cash from operations and successfully implement its store expansion
plans.
Year 2000 Compliance
During fiscal 1997, the Company began a program to ensure that its
operations would not be adversely impacted by software or other system failures
related to the Year 2000. During the Second Quarter 1998, the Company engaged
the services of Arthur Andersen, LLP to help ensure that it has fully assessed
the risks associated with the Year 2000 and to assist in the development of a
comprehensive implementation plan.
As of August 1, 1998, the Company has upgraded certain computer software
for Year 2000 compliance. The Company continues to utilize its existing
management informations systems staff supplemented by certain outside
consultants to modify existing computer systems and applications. Management
expects its computer systems to be Year 2000 compliant by the second quarter of
1999 and does not expect that the costs associated with its Year 2000 efforts to
have a material impact on the results of its operations.
However, no assurances can be given that the Company will be able to
identify and address all Year 2000 compliance issues or that the Company will
not experience significant cost overruns in connection with upgrading its
systems and software. Furthermore, no assurances can be given that the third
parties with which the Company does business will not experience system
failures as a result of Year 2000 issues, nor can the Company fully predict the
consequences of this non-compliance.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
(Not applicable)
9
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 or after an initial public
offering on or about September 19, 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 for 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, fifteen
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 sixteen putative class actions
were consolidated in the Court and on February 26, 1998, the plaintiffs served
and filed their amended consolidated complaint. No discovery has been taken. The
Company has filed a motion to dismiss this complaint. On September 4, 1998, the
Court entered an Order granting the motion to dismiss as to the claims based
solely on historical statements made in the Prospectus and denied the motion as
to all other claims. The Court also dismissed the case against the underwriters
and granted the plaintiffs 30 days to file a new complaint against the
underwriters. The Company continues to believe that the allegations made in the
complaint are untrue and totally without merit and intends to defend them
vigorously.
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. On November 20,
1997, the plaintiff filed its first request for production of documents from the
defendants. No discovery has been taken. This action had been stayed, pending
resolution of the defendant's motion to dismiss in the federal lawsuit described
above. The Company believes that the allegations made in this complaint are
untrue and totally without merit and intends to defend them vigorously.
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
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description of Document
------- ---------------------------------------------------
10.2 Lease for a distribution center and corporate
headquarters facility between the Company and Hartz
Mountain Associates, dated June 30, 1998.
10.3 Software purchase and license agreement between the
Company and Trimax Inc., dated August 14, 1998.
10.4 Sales agreement between the Company and Mannesmann
Dematic Rapistan Corporation, dated August 21, 1998.
27.1 Financial Data Schedule.
- -------
(b) Reports on Form 8-K
None
11
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 15, 1998
By: /s/ Ezra Dabah
----------------------------
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: September 15, 1998 By: /s/ Seth L.Udasin
----------------------------
Vice President & Chief
Financial Officer
(Principal Financial Officer)
12