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 31, 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 December 1,
1998: 24,845,567 shares.
THE CHILDREN'S PLACE RETAIL STORES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED OCTOBER 31, 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....................... 11
Part II - Other Information
Item 1. Legal Proceedings................................................................ 12
Item 6. Exhibits and Reports on Form 8-K ................................................. 13
Signatures................................................................................. 14
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE CHILDREN'S PLACE RETAIL STORES, INC.
BALANCE SHEETS
(In thousands, except per share amounts)
October 31, 1998 January 31, 1998
---------------- ----------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents.................................................... $ 1,209 $ 887
Accounts receivable.................................................... 3,203 1,904
Inventories............................................................ 40,884 20,334
Prepaid expenses and other current assets.............................. 5,448 4,612
Deferred income taxes.................................................. 10,653 10,653
------ ------
Total current assets................................................ 61,397 38,390
Property and equipment, net................................................ 41,885 32,121
Deferred income taxes...................................................... 1,703 8,244
Other assets............................................................... 1,027 598
------ ------
Total assets........................................................ $106,012 $79,353
-------- -------
-------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Revolving credit facility.............................................. $ 6,148 $ 1,089
Accounts payable....................................................... 14,784 9,471
Accrued expenses, interest and other current liabilities............... 12,237 7,592
-------- -------
Total current liabilities........................................... 33,169 18,152
Other long-term liabilities................................................ 3,027 2,734
-------- -------
Total liabilities................................................... 36,196 20,886
-------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value; 100,000,000 shares authorized; 24,839,259 shares
and 24,622,103 shares issued and outstanding, at October 31,
1998 and January 31, 1998, respectively.................................. 2,484 2,462
Additional paid-in capital................................................. 83,198 82,589
Accumulated deficit........................................................ (15,866) (26,584)
-------- -------
Total stockholders' equity.......................................... 69,816 58,467
-------- -------
Total liabilities and stockholders' equity.......................... $106,012 $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 Thirty-Nine Weeks Ended
October 31, 1998 November 1, 1997 October 31, 1998 November 1, 1997
---------------- ---------------- ---------------- ----------------
Net sales ..................................................... $ 82,496 $ 54,489 $186,509 $127,226
Cost of sales ................................................. 46,370 33,081 112,978 82,087
-------- -------- -------- --------
Gross profit .................................................. 36,126 21,408 73,531 45,139
Selling, general and administrative expenses .................. 18,664 12,411 46,917 31,609
Pre-opening costs ............................................. 837 740 2,500 1,962
Depreciation and amortization ................................. 2,006 1,601 5,477 4,216
-------- -------- -------- --------
Operating income .............................................. 14,619 6,656 18,637 7,352
Interest expense, net ......................................... 222 708 381 2,523
Other expense, net ............................................ 15 18 92 124
-------- -------- -------- --------
Income before income taxes and extraordinary
item ........................................................ 14,382 5,930 18,164 4,705
Provision for income taxes ................................... 5,897 2,433 7,447 1,940
-------- -------- -------- --------
Income before extraordinary item .............................. 8,485 3,497 10,717 2,765
Extraordinary loss on extinguishment of debt .................. 0 1,743 0 1,743
-------- -------- -------- --------
Net income .................................................... $ 8,485 $ 1,754 $ 10,717 $ 1,022
-------- -------- -------- --------
-------- -------- -------- --------
Basic income per common share before extraordinary
item ........................................................ $ 0.34 $0.16 $ 0.43 $ 0.13
Extraordinary item ............................................ -- (0.08) -- (0.08)
-------- -------- -------- --------
Basic net income per common share ............................. $ 0.34 $0.08 $ 0.43 $ 0.05
-------- -------- -------- --------
-------- -------- -------- --------
Basic weighted average common shares
outstanding ................................................. 24,830 21,821 24,752 20,888
Diluted income per common share before
extraordinary item .......................................... $ 0.33 $0.14 $ 0.42 $ 0.11
Extraordinary item ............................................ -- (0.07) -- (0.07)
-------- -------- -------- --------
Diluted net income per common share ........................... $ 0.33 $0.07 $ 0.42 $ 0.04
-------- -------- -------- --------
-------- -------- -------- --------
Diluted weighted average common shares
outstanding ................................................. 25,798 24,439 25,742 24,016
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)
Thirty-Nine Weeks Ended
October 31, 1998 November 1, 1997
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $10,717 $1,022
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization........................... 5,477 4,216
Extraordinary loss on extinguishment of debt............ 0 1,743
Deferred financing fee amortization..................... 18 398
Loss on disposals of property and equipment............. 338 30
Deferred taxes.......................................... 6,542 1,401
Changes in operating assets and liabilities:
Accounts receivable..................................... (1,299) (1,335)
Inventories............................................. (20,550) (12,540)
Prepaid expenses and other current assets............... (836) (1,268)
Other assets............................................ (583) (307)
Accounts payable......................................... 5,313 4,919
Accrued expenses, interest and other current liabilities 4,279 1,688
Other long-term liabilities............................. 341 455
-------- --------
Total adjustments..................................... (960) (600)
-------- --------
Net cash provided by operating activities..................... 9,757 422
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases.............................. (15,106) (15,316)
-------- --------
Net cash used in investing activities......................... (15,106) (15,316)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of Common Stock........................ 0 50,730
Repurchase of Noteholder and Legg Mason Warrants.............. 0 (25,757)
Exercise of stock options and employee stock purchases........ 632 0
Borrowings under revolving credit facility.................... 90,243 141,642
Repayments under revolving credit facility.................... (85,184) (131,860)
Repayment of long-term debt................................... 0 (21,360)
Payment of obligations under capital leases................... (20) (571)
Refund of funds towards common stock subscription............. 0 (488)
Deferred financing costs...................................... 0 (75)
-------- --------
Net cash provided by financing activities..................... 5,671 12,261
-------- --------
Net increase (decrease) in cash and cash equivalents....... 322 (2,633)
Cash and cash equivalents beginning of period.............. 887 3,422
-------- --------
Cash and cash equivalents end of period.................... $1,209 $789
-------- --------
-------- --------
OTHER CASH FLOW INFORMATION:
Cash paid during the period for interest..................... $339 $2,149
Cash paid during the period for income taxes................. $756 $538
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 thirty-nine weeks ended October
31, 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 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 cashless exercise of one-third of the Legg Mason
Warrant. The re-purchase in cash of two-thirds of the Legg Mason Warrant and the
cashless exercise of one-third of the Legg Mason Warrant was recorded net of
deferred tax benefits of $0.9 million and $0.6 million, respectively.
3. 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 Thirty-Nine Weeks Ended
-------------------- -----------------------
October 31, 1998 November 1, 1997 October 31, 1998 November 1, 1997
---------------- ---------------- ---------------- ----------------
Net income (in thousands) ............... $ 8,485 $ 1,754 $ 10,717 $ 1,022
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic shares ............................ 24,830,397 21,821,160 24,752,151 20,887,513
Dilutive effect of stock options ........ 967,489 2,618,150 989,392 3,128,381
----------- ----------- ----------- -----------
Dilutive shares ......................... 25,797,886 24,439,310 25,741,543 24,015,894
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Antidilutive options .................... 182,993 183,753 295,564 61,251
4
Antidilutive options consist of the weighted average of stock options
for the respective periods ended at October 31, 1998 and November 1, 1997 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.
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. 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. The
Company continues to believe that the allegations made in this 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. This action and the
federal action described above have been coordinated for purposes of discovery.
The Company believes that the allegations made in this complaint are untrue and
totally without merit and intends to defend them vigorously.
In the opinion of management, any ultimate liability arising out of the
class action suits will not have a material adverse effect on the Company's
financial position or results of operations.
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. STOCK OPTION RE-PRICING
On March 26, 1998, the Board of Directors authorized the re-pricing of
certain stock options granted in conjunction with the Offering under its 1996
Stock Option Plan (the "1996 Plan") and its 1997 Stock Option Plan (the "1997
Plan") from an exercise price of $14.00 per share to the average market price on
March 27, 1998 of $8.70 per share. The re-pricing re-established the options
granted to employees as an incentive to improve the overall performance of the
Company. Options granted to officers were not re-priced. As required under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Issued to Employees," the estimated incremental impact of the stock option
re-pricing on proforma compensation expense disclosures creates an additional
expense of approximately $120,000, net of taxes, for the fifty-two weeks
ending January 30, 1999.
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 Thirty-Nine Weeks Ended
-------------------- -----------------------
October 31, 1998 November 1, 1997 October 31, 1998 November 1, 1997
---------------- ---------------- ---------------- ----------------
Net sales.................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 56.2 60.7 60.6 64.5
------ ------ ----- -----
Gross profit.............................. 43.8 39.3 39.4 35.5
Selling, general and administrative
expenses................................ 22.6 22.8 25.2 24.9
Pre-opening costs....................... 1.0 1.4 1.3 1.5
Depreciation and amortization........ 2.5 2.9 2.9 3.3
------ ------ ----- -----
Operating income....................... 17.7 12.2 10.0 5.8
Interest expense, net.................... 0.3 1.3 0.2 2.0
Other expense, net...................... -- -- 0.1 0.1
------ ------ ----- -----
Income before income taxes and
extraordinary item.................... 17.4 10.9 9.7 3.7
Provision for income taxes............. 7.1 4.5 4.0 1.5
Extraordinary item...................... -- 3.2 -- 1.4
------ ------ ----- -----
Net income............................... 10.3% 3.2% 5.7% 0.8%
------ ------ ----- -----
------ ------ ----- -----
Number of stores, end of period....... 203 151 203 151
6
Thirteen Weeks Ended October 31, 1998 (the "Third Quarter 1998") Compared to
Thirteen Weeks Ended November 1, 1997 (the "Third Quarter 1997")
Net sales increased by $28.0 million, or 51.4%, to $82.5 million during
the Third Quarter 1998 from $54.5 million during the Third Quarter 1997. Net
sales for the 14 new stores opened during the Third Quarter 1998, and the 34
stores opened during the twenty-six weeks ending August 1, 1998 as well as the
other stores that did not qualify as comparable stores, contributed $19.3
million of the net sales increase. As of October 31, 1998, the Company operated
203 stores in 26 states, primarily located in regional shopping malls in the
eastern half of the United States. During fiscal 1998, the Company opened 54 new
stores, substantially all in existing and contiguous markets. No additional
store openings are planned for fiscal 1998.
The Company's comparable store sales increased 18% and contributed $8.7
million of the net sales increase during the Third Quarter 1998. Comparable
store sales were flat during the Third Quarter 1997. The Third Quarter 1998
comparable store sales increase was experienced across all merchandise
divisions.
Gross profit increased by $14.7 million to $36.1 million during the
Third Quarter 1998 from $21.4 million during the Third Quarter 1997. As a
percentage of net sales, gross profit increased to 43.8% during the Third
Quarter 1998 from 39.3% during the Third 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, the leveraging of
store occupancy, distribution, production and design costs, and lower markdowns.
Selling, general and administrative expenses increased $6.3 million to
$18.7 million during the Third Quarter 1998 from $12.4 million during the Third
Quarter 1997. Selling, general and administrative expenses were 22.6% of net
sales during the Third Quarter 1998 as compared with 22.8% during the Third
Quarter 1997. The small decrease as a percentage of net sales was primarily due
to the leveraging of store expenses over a higher sales base partially offset by
increases in the administrative infrastructure to support the Company's growth.
During the Third Quarter 1998, pre-opening costs were $0.8 million, or
1.0% of net sales, as compared to $0.7 million, or 1.4% of net sales, during the
Third Quarter 1997. The decrease in pre-opening costs, as a percentage of net
sales, during the Third Quarter 1998 reflected the leverage over a higher sales
base and fewer stores opened during the Third Quarter 1998. The Company opened
14 stores and 17 stores, during the Third Quarter 1998 and the Third Quarter
1997, respectively.
Depreciation and amortization amounted to $2.0 million, or 2.5% of net
sales, during the Third Quarter 1998 as compared to $1.6 million, or 2.9% of net
sales, during the Third Quarter 1997. The increase in depreciation and
amortization primarily was a result of the increase in the store base. The
decrease in depreciation and amortization as a percentage of net sales during
the Third Quarter 1998 reflects the leverage over a higher sales base.
Interest expense, net, for the Third Quarter 1998 was $0.2 million, or
0.3% of net sales, as compared to $0.7 million, or 1.3% of net sales, during the
Third 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.
Due to the Company's improved operating performance, the Company's
provision for income taxes for the Third Quarter 1998 was $5.9 million, as
compared to $2.4 million during the Third Quarter 1997. Due to the Company's
utilization of its net operating loss ("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.
In the Third Quarter 1997, as a result of the repayment of the Senior
Subordinated Notes with a portion of the net proceeds from the Offering, the
Company recorded a non-cash extraordinary item of $1.7 million, net of taxes,
that represented the write-off of unamortized deferred financing costs and
unamortized debt discount.
The Company recorded net income of $8.5 million and $1.8 million during
the Third Quarter 1998 and the Third Quarter 1997, respectively.
7
Thirty-Nine Weeks Ended October 31, 1998 Compared to Thirty-Nine Weeks Ended
November 1, 1997
Net sales increased by $59.3 million, or 46.6%, to $186.5 million
during the thirty-nine weeks ended October 31, 1998 from $127.2 million during
the thirty-nine weeks ended November 1, 1997. Net sales for the 48 stores opened
during the thirty-nine weeks ended October 31, 1998, as well as the other stores
that did not qualify as comparable stores, contributed $46.1 million of the net
sales increase. These stores represent the entrance into several new markets,
which include Atlanta, St. Louis, Kansas City and further penetration into the
Midwest.
During the thirty-nine weeks ended October 31, 1998, the Company's
comparable store sales increased 12% and contributed $13.2 million of the net
sales increase as compared with a 1% comparable store sales increase for the
thirty-nine weeks ended November 1, 1997. During the thirty-nine weeks ended
October 31, 1998, the comparable store sales increase was experienced across all
merchandise divisions.
Gross profit increased $28.4 million to $73.5 million during the
thirty-nine weeks ended October 31, 1998 from $45.1 million during the
thirty-nine weeks ended October 31, 1997. As a percentage of net sales, gross
profit increased to 39.4% during the thirty-nine weeks ended October 31, 1998
from 35.5% during the thirty-nine weeks ended November 1, 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 store occupancy and production, design and
distribution expenses.
Selling, general and administrative expenses increased $15.3 million to
$46.9 million during the thirty-nine weeks ended October 31, 1998 from $31.6
million during the thirty-nine weeks ended November 1, 1997. As a percentage of
net sales, selling, general and administrative expenses were 25.2% during the
thirty-nine weeks ended October 31, 1998 as compared with 24.9% during the
thirty-nine weeks ended November 1, 1997. The increase as a percentage of net
sales was primarily due to an increase in the administrative infrastructure
required to support the Company's growth, partially offset by the leveraging of
store expenses over the higher sales base.
During the thirty-nine weeks ended October 31, 1998, pre-opening costs
were $2.5 million, or 1.3% of net sales, as compared with $2.0 million, or 1.5%
of net sales, during the thirty-nine weeks ended October 31, 1997. The increase
in pre-opening costs during the thirty-nine weeks ended October 31, 1998,
reflected the opening of 48 stores as compared to the opening of 43 stores
during the thirty-nine weeks ended November 1, 1997.
Depreciation and amortization amounted to $5.5 million, or 2.9% of net
sales, during the thirty-nine weeks ended October 31, 1998, as compared with
$4.2 million, or 3.3% of net sales, during the thirty-nine weeks ended November
1, 1997. The increase in depreciation and amortization primarily was a result of
the increase in the store base. The decrease in depreciation and amortization as
a percentage of net sales during the thirty-nine weeks ended October 31, 1998
reflects the leverage over a higher sales base.
Interest expense, net, for the thirty-nine weeks ended October 31,
1998, was $0.4 million, or 0.2% of net sales, as compared with $2.5 million, or
2.0% of net sales, during the thirty-nine weeks ended November 1, 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 and lower utilization of the Foothill Credit Facility.
Other expense, net during the thirty-nine weeks ended October 31, 1998
was $0.1 million, or 0.1% of net sales, as compared to $0.1 million, or 0.1% of
net sales during the thirty-nine weeks ended November 1, 1997. Other expense,
net was comprised primarily of anniversary fees under the Foothill Credit
Facility in both periods.
Due to the Company's improved operating performance during the
thirty-nine weeks ended October 31, 1998, a provision for income taxes was
recorded of $7.4 million as compared to $1.9 million during the thirty-nine
weeks ended November 1, 1997. 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 where the Company does not have an NOL.
In the Third Quarter 1997, as a result of the repayment of the Senior
Subordinated Notes with a portion of the net proceeds from the Offering, the
Company recorded a non-cash extraordinary item of $1.7 million, net of taxes,
that represented the write-off of unamortized deferred financing costs and
unamortized debt discount.
8
The Company recorded net income of $10.7 million and $1.0 million
during the thirty-nine weeks ended October 31, 1998, and November 1, 1997,
respectively.
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 thirty-nine weeks ended
October 31, 1998, the Company has been able to meet its cash needs primarily
through cash flows from operations and borrowings under the Foothill Credit
Facility.
The Company's 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. As of October 31, 1998, the Company had
$6.1 million in borrowings under the Foothill Credit Facility and had
outstanding letters of credit of $9.3 million. Availability under the Foothill
Credit Facility as of October 31, 1998 was $14.5 million. During the Third
Quarter 1998, the interest rates charged under the Foothill Credit Facility for
reference rate borrowings were 8.37% per annum and LIBOR borrowings bore
interest at 7.10% per annum.
As of October 31, 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 provided by operating activities were $9.8 million during
the thirty-nine weeks ended October 31, 1998 as compared with $0.4 million
during the thirty-nine weeks November 1, 1997. During the thirty-nine weeks
ended October 31, 1998, cash flows provided by operating activities increased as
a result of improved operating earnings, the utilization of the Company's NOL
carry forwards and increases in current liabilities, partially offset by an
increased investment in inventory to support the store expansion program. In
addition, the Company's inventory increase during the thirty-nine weeks ended
October 31, 1998 also reflected the planned earlier receipt of holiday seasonal
merchandise to better control the flow of goods to the stores and to support the
Company's fourth quarter sales plans.
Cash flows used in investing activities were $15.1 million and $15.3
million in the thirty-nine weeks ended October 31, 1998 and November 1, 1997,
respectively. During the thirty-nine weeks ended October 31, 1998 and November
1, 1997, cash flows used in investing activities related primarily to new store
openings and store remodelings. In the thirty-nine-weeks ended October 31, 1998
and November 1, 1997, the Company opened 48 and 43 stores and remodeled 3 and 7
stores, respectively. Management anticipates that total capital expenditures
during fiscal 1998 will approximate $25 million. These expenditures primarily
relate to the opening of 54 stores and 3 store remodelings and capital
expenditures related to the relocation of the distribution center and corporate
headquarters facility. Capital expenditures also include ongoing store capital
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 $5.7 million and $12.3
million in the thirty-nine weeks ending October 31, 1998 and November 1, 1997,
respectively. During the thirty-nine weeks ended October 31, 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 thirty-nine weeks ended November 1,
1997, cash flows provided by financing activities reflected the proceeds
received from the Offering and net borrowings under the Foothill Credit Facility
partially offset by the re-purchase of the Noteholder and Legg Mason Warrants
and the payment of the principal and accrued interest on the Senior Subordinated
Notes and other debt obligations.
The Company has entered into an eight year lease with a three-year
option period for a distribution center and corporate headquarters facility
located in Secaucus, New Jersey. The lease also provides the Company 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. The Company
plans to relocate its distribution center during the first quarter of fiscal
1999 and its corporate headquarters facility during the second quarter of fiscal
1999. The Company expects to make a cash outlay of approximately $7.6 million to
renovate the facility, of which approximately $3.4 million will be spent in
fiscal 1998. The Company also plans to install a new warehouse management system
at a
9
total cost of approximately $4.4 million, of which approximately $3.6 million
will be spent in fiscal 1998. The existing distribution center and corporate
headquarters facility lease expires in March 1999. The Company intends to extend
its lease arrangement for its existing distribution center and corporate
headquarters facility to cover the period until its operations are relocated to
the new facility.
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. This request is currently under consideration by Foothill Capital
Corporation.
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 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. Concurrent with the engagement of Arthur
Andersen, the Company established a project team to coordinate and address the
Year 2000 issue. The Year 2000 project has been divided into four phases: (i)
inventory and risk assessment; (ii) remediation of non-compliant systems,
equipment and suppliers; (iii) implementation and testing; and (iv) contingency
planning.
The inventory and risk assessment phase of the Year 2000 project is
substantially complete. During this phase, the Company assessed the Company's
information systems hardware and software, equipment containing date-sensitive
embedded chips, electronic data interchange and the Year 2000 preparedness of
its key suppliers and service providers.
The Company's plans call for its critical information systems to be
Year 2000 compliant by the end of the second quarter of 1999. The Company
believes that approximately 55% of its systems are currently Year 2000
compliant. The Company plans to rely primarily on existing management
information systems staff supplemented by outside consultants to modify, replace
and test systems for Year 2000 compliance. The total cost of modifying the
Company's current systems is not expected to exceed $0.5 million. These costs
are not expected to have a material adverse impact on the Company's financial
position, results of operation or cash flows in future periods.
The Company is in the process of assessing the Year 2000 preparedness
of its service providers and key suppliers through written communications, oral
communications and visual inspection. Despite these efforts, the Company 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 the Company procures most of its merchandise from
foreign sources, it is also at risk to the extent foreign infrastructures are
not properly prepared to handle the Year 2000.
Although the Company is working to minimize any business disruption
caused by the Year 2000, there can be no assurances that the Company will not be
adversely impacted by a failure caused by the Year 2000. These risks include,
but are not limited to, power and communications disruptions, failures of the
Company's information technology systems, the inability of a significant
supplier or service provider to become Year 2000 compliant and disruptions in
the distribution channels to include ports, customs, and transportation vendors.
The Company has commenced its contingency planning which will allow for
the continuation of business operations in the event that the Company or any of
its significant suppliers or service providers do not properly address Year 2000
issues. The Company expects to have a completed plan by the end of the second
quarter of 1999. Where needed, the Company will modify its contingency plans
based on test results and the 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 management's estimates and may be updated as
additional information becomes available.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
(Not applicable)
10
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. 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. The
Company continues to believe that the allegations made in this 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. This action and the
federal action described above have been coordinated for purposes of discovery.
The Company believes that the allegations made in this complaint are untrue and
totally without merit and intends to defend them vigorously.
In the opinion of management, any ultimate liability arising out of the
class action suits will not have a material adverse effect on the Company's
financial position or results of operations.
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.
11
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description of Document
------- -----------------------
10.5 Amendment to a lease for a distribution center and
corporate headquarters facility between the Company
and Hartz Mountain Associates, dated November 20,
1998.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE CHILDREN'S PLACE
RETAIL STORES, INC.
Date: December 11, 1998
By: /s/ Ezra Dabah
--------------
Ezra Dabah
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: December 11, 1998 By: /s/ Seth L. Udasin
------------------
Seth L. Udasin
Vice President &
Chief Financial Officer
(Principal Financial Officer)
13
EXHIBIT 10.5
AMENDMENT TO A LEASE FOR A DISTRIBUTION CENTER AND CORPORATE
HEADQUARTERS FACILITY BETWEEN THE COMPANY AND HARTZ MOUNTAIN ASSOCIATES,
DATED NOVEMBER 20, 1998.
LEASE MODIFICATION AGREEMENT
THIS LEASE MODIFICATION AGREEMENT, made this 20th day of November, 1998
by and between HARTZ MOUNTAIN ASSOCIATES, a New Jersey partnership, having an
office at 400 Plaza Drive, Secaucus, New Jersey 07094 (hereinafter referred to
as "Landlord") and THE CHILDREN'S PLACE RETAIL STORES, INC., a Delaware
corporation having an office at One Dodge Drive, West Caldwell, New Jersey 07006
(hereinafter referred to as "Tenant").
WITNESSETH:
WHEREAS, by Agreement of Lease dated June 30, 1998 (the "Lease")
Landlord leased to Tenant and Tenant hired from Landlord the building and
premises known as 915 Secaucus Road, Secaucus, New Jersey (hereinafter the
"Demised Premises"); and
WHEREAS, Landlord and Tenant wish to modify the Lease to extend the
term thereof and amend the Lease accordingly;
NOW, THEREFORE, for and in consideration of the Lease, the mutual
covenants herein contained and the consideration set forth herein, the parties
agree as follows:
1. This shall confirm that the "Commencement Date" as defined in
Section 1.01J of the Lease occurred on October 1, 1998.
2. The Term of the Lease is hereby extended from January 31, 2004
through and including January 31, 2007. Accordingly, the date "January 31, 2004"
appearing in the definition of "Expiration Date" under Section 1.01N is hereby
deleted and "January 31, 2007" substituted therefor.
3. Section 1.01O Fixed Rent is hereby amended and restated as follows:
O. Fixed Rent: Commencing on the Commencement Date through the date
which is the day before the second anniversary of the Commencement
Date, an amount at the annual rate of Five and 25/100 Dollars ($5.25)
multiplied by the number of square feet of Floor Space; from the second
anniversary of the Commencement Date through January 31, 2004, an
amount at the annual rate of Five and 50/100 Dollars ($5.50) multiplied
by the number of square feet of Floor Space of the Demised Premises;
and from and including February 1, 2004 through the January 31, 2007,
an amount at the annual rate of Six and 25/100 Dollars ($6.25)
multiplied by the number of square feet of Floor Space of the Demised
Premises
1
4. Section R2 of the Lease is hereby amended and restated as follows:
R2. Provided Tenant is in not in default under this Lease beyond any
applicable notice and/or cure periods, if any, and provided Tenant has
not assigned (other than to a permitted assignee under Section R6) this
Lease or sublet all or any portion of the Demised Premises and is
itself (or its permitted assignee as contemplated in Section R6) in
occupation and conducting business in the whole of the Demised Premises
in accordance with the terms of this Lease, Tenant expressly
acknowledging and agreeing that the option right contained herein is
personal to the original named Tenant (or its permitted assignee as
contemplated in Section R6), Tenant shall have one (1) option to extend
the Term of its lease of the Demised Premises, from the date upon which
this Lease would otherwise expire for one extended period of three (3)
years (herein referred to as an "Extended Period"), upon the following
terms and conditions:
1. If Tenant elects to exercise said option, it shall do so by
giving notice of such election to Landlord on or before the
date which is nine (9) months before the beginning of the
Extended Period. Tenant agrees that it shall have forever
waived its right to exercise any such option if it shall fail
for any reason whatsoever to give such notice to Landlord by
the time provided herein for the giving of such notice,
whether such failure is inadvertent or intentional, time being
of the essence as to the exercise of such option.
2. If Tenant elects to exercise said option, the Term shall be
automatically extended for the Extended Period without
execution of an extension or renewal lease. Within ten (10)
days after request of either party following the effective
exercise of such option, however, Landlord and Tenant shall
execute, acknowledge and deliver to each other duplicate
originals of an instrument in recordable form confirming that
such option was effectively exercised.
3. The Extended Period shall be upon the same terms and
conditions as are in effect immediately preceding the
commencement of such Extended Period; provided, however, that
Tenant shall have no right or option to extend the Term for
any period of time beyond the expiration of the Extended
Period and, provided further, that in the Extended Period the
Fixed Rent during the Extended Period shall be at ninety-five
percent (95%) of Fair Market Value ("FMV"). FMV shall be
determined by mutual agreement of the parties. If the parties
are unable to agree on the FMV within thirty (30) days of
Tenant's exercise of its option, the parties shall choose a
licensed Real Estate Appraiser who shall determine the FMV.
The cost of said Real Estate Appraiser shall be borne equally
by the parties. If the parties are unable to agree on a
licensed Real Estate Appraiser within forty-five (45) days of
Tenant's exercise of its option, each party shall select one
Appraiser to appraise the FMV. All appraisals shall be
rendered within thirty (30) days of appointment of the
respective Appraiser appointed under this paragraph. If the
difference between the two appraisals is 20% or less of the
lower appraisal, then the FMV shall be the average of the two
appraisals. If the difference between the two appraisals is
greater than 20% of the lower appraisal, the two Appraisers
shall select a third licensed Real Estate Appraiser to
appraise the FMV. The FMV shall in such case be the average of
the three appraisals. The cost of the third appraisal shall be
borne equally by the parties.
Anything to the contrary contained herein notwithstanding, the
Fixed Rent for the Extended Period shall not be less than the
Fixed Rent for the period immediately preceding the Extended
Period for which the Fixed Rent is being calculated.
4. Any termination, expiration, cancellation or surrender of
this Lease shall terminate any right or option for the
Extended Period not yet exercised.
5. Landlord shall have the right, for thirty (30) days after
receipt of notice of Tenant's election to exercise the option
to extend the Term, to reject Tenant's election if Tenant gave
such notice while Tenant was in default beyond any applicable
notice and/or cure periods, if any, in the performance of any
of its obligations under the Lease, and such rejection shall
automatically render Tenant's election to exercise such option
null and void and of no effect.
6. The option provided herein to extend the Term of the Lease
may not be severed from the Lease or separately sold, assigned
or otherwise transferred.
5. Provided Tenant is in not in default under the Lease beyond any
applicable notice and/or cure periods, if any, and provided Tenant has not
assigned (other than to a permitted assignee under Section R6) the Lease or
sublet all or any portion of the Demised Premises and is itself (or its
permitted assignee as contemplated in Section R6) in occupation and conducting
business in the whole of the Demised Premises in accordance with the terms of
this Lease, Tenant expressly acknowledging and
2
agreeing that the termination right contained herein is personal to the original
named Tenant (or its permitted assignee as contemplated in Section R6), Tenant
shall have the right to terminate the Lease effective as of January 31, 2004, by
giving written notice to Landlord to such effect not later than May 1, 2003.
Tenant's right to terminate as aforesaid and the effectiveness of Tenant's
termination notice, at Landlord's sole option, shall be conditioned upon (i)
there occurring on and after the exercise of the termination right herein
contained through and including January 31, 2004 no default by Tenant beyond any
applicable notice and/or cure period in the payment to Landlord of Fixed Rent
and/or Additional Charges accruing and due and payable during such period; and
(ii) payment by Tenant to Landlord of all Rent due to the date of termination.
Subject to the terms of the immediately preceding sentence, upon termination,
(i.e. January 31, 2004) the Lease shall be deemed terminated with the same
effect as if the effective date of such termination were the expiration date of
the Term. Tenant agrees that it shall have forever waived its right to exercise
the termination right herein contained if it shall fail for any reason
whatsoever to give such notice to Landlord by May 1, 2003, whether such failure
is inadvertent or intentional, time being of the essence as to the exercise of
such termination right.
6. Except as provided herein, all of the terms and conditions of the
Lease as amended above are in full force and effect and are confirmed as if
fully set forth herein.
IN WITNESS WHEREOF, the parties hereto have caused this Lease
Modification Agreement to be duly executed as of the day and year first above
written.
HARTZ MOUNTAIN ASSOCIATES
BY: HARTZ MOUNTAIN INDUSTRIES, INC.
(Landlord)
By: /s/ Irwin A. Horowitz
----------------------
Irwin A. Horowitz
Executive Vice President
THE CHILDREN'S PLACE RETAIL STORES,
INC.,
(Tenant)
By: /s/ Stanley Silver
-------------------
Stanley Silver
President/Chief Operating
Officer
3
5
3-MOS
JAN-30-1999
FEB-01-1998
OCT-31-1998
1,209
0
3,203
0
40,884
61,397
59,561
17,676
106,012
33,169
0
0
0
2,484
67,332
106,012
82,496
82,496
46,370
19,501
15
0
222
14,382
5,897
8,485
0
0
0
8,485
0.34
0.33
