<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-7258
CHARMING SHOPPES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1721355
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 WINKS LANE BENSALEM, PA 19020
(Address of principal executive offices) (Zip Code)
(215) 245-9100
(Registrant's telephone number, including Area Code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
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 ( )
The number of shares outstanding of the issuer's Common Stock, as of
November 2, 1996, was 105,393,924 shares.
<PAGE> 2
CHARMING SHOPPES, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
November 2, 1996 and February 3, 1996......................... 1-2
Condensed Consolidated Statements of Income (Unaudited)
Thirteen weeks ended November 2, 1996 and October 28, 1995.... 3
Condensed Consolidated Statements of Income (Unaudited)
Thirty-nine weeks ended November 2, 1996 and October 28, 1995. 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Thirty-nine weeks ended November 2, 1996 and October 28, 1995. 5
Notes to Condensed Consolidated Financial Statements (Unaudited). 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8-14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 15
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
November 2, February 3,
(In thousands) 1996 1996
---- ----
ASSETS
Current assets
Cash and cash equivalents.........................$ 65,118 $ 25,117
Restricted cash................................... 0 7,000
Available-for-sale securities..................... 40,954 34,054
Income tax refund receivable...................... 4,036 56,953
Merchandise inventories........................... 248,158 220,850
Deferred taxes.................................... 13,409 13,409
Prepayments and other............................. 35,242 48,178
-------- --------
Total current assets.............................. 406,917 405,561
Property, equipment and leasehold improvements.... 437,249 435,531
Less: accumulated depreciation and amortization... 225,944 200,943
-------- --------
Net property, equipment and leasehold improvements 211,305 234,588
Available-for-sale securities (including fair
value adjustments of $564 and $22, respectively) 79,524 7,309
Other assets...................................... 30,284 34,288
-------- --------
Total assets......................................$728,030 $681,746
======== ========
See Notes to Condensed Consolidated Financial Statements
(1)
<PAGE> 4
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
November 2, February 3,
(In thousands except shares) 1996 1996
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable..................................$ 60,662 $ 40,471
Accrued expenses.................................. 89,252 87,959
Accrued restructuring expenses.................... 2,546 19,983
Current portion -- long-term debt................. 15 57,691
-------- --------
Total current liabilities......................... 152,475 206,104
Deferred taxes.................................... 18,511 18,511
Long-term debt.................................... 138,132 38,102
Stockholders' equity
Common Stock $.10 par value
Authorized 300,000,000 shares
Issued and outstanding 105,393,924 and
103,252,650 shares............................. 10,540 10,325
Additional paid-in capital........................ 63,412 54,913
Deferred employee compensation.................... (2,186) (2,414)
Unrealized gains on available-for-sale
securities (net of income tax expense of
$152 and $9, respectively)..................... 412 13
Retained earnings................................. 346,734 356,192
-------- --------
Total stockholders' equity........................ 418,912 419,029
-------- --------
Total liabilities and stockholders' equity........$728,030 $681,746
======== ========
See Notes to Condensed Consolidated Financial Statements
(2)
<PAGE> 5
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Thirteen Weeks Ended
(In thousands except share and November 2, October 28,
per-share amounts) 1996 1995
---- ----
Net sales.........................................$242,368 $267,772
Other income...................................... 2,443 969
-------- --------
Total revenue..................................... 244,811 268,741
-------- --------
Cost of goods sold, buying and occupancy expenses. 188,181 227,481
Selling, general and administrative expenses...... 58,921 79,423
Interest expense.................................. 2,646 435
-------- --------
Total expenses.................................... 249,748 307,339
-------- --------
Loss before income taxes.......................... (4,937) (38,598)
Income tax benefit................................ (1,333) (13,892)
-------- --------
Net loss..........................................$ (3,604) $(24,706)
======== ========
Per-share data
Net loss.......................................... $ (.03) $ (.24)
====== ======
Weighted average number of common shares
outstanding.................................105,312,121 103,066,745
=========== ===========
See Notes to Condensed Consolidated Financial Statements
(3)
<PAGE> 6
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Thirty-nine Weeks Ended
(In thousands except share and November 2, October 28,
per-share amounts) 1996 1995
---- ----
Net sales.........................................$746,500 $780,562
Other income...................................... 4,533 4,796
-------- --------
Total revenue..................................... 751,033 785,358
-------- --------
Cost of goods sold, buying and occupancy expenses. 576,904 621,989
Selling, general and administrative expenses...... 179,945 213,448
Interest expense.................................. 7,140 1,455
-------- --------
Total expenses.................................... 763,989 836,892
-------- --------
Loss before income taxes.......................... (12,956) (51,534)
Income tax benefit................................ (3,498) (19,325)
-------- --------
Net loss..........................................$ (9,458) $(32,209)
======== ========
Per-share data
Net loss.......................................... $ (.09) $ (.31)
====== ======
Cash dividends.................................... $ -- $ .045
====== ======
Weighted average number of common shares
outstanding.................................105,280,068 102,996,909
=========== ===========
See Notes to Condensed Consolidated Financial Statements
(4)
<PAGE> 7
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-nine Weeks Ended
November 2, October 28,
(In thousands) 1996 1995
---- ----
Operating activities
Net loss...........................................$ (9,458) $(32,209)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................... 32,015 37,020
Amortization of deferred compensation expense... 2,567 1,478
Gain on sale of available-for-sale securities... 0 (91)
Changes in operating assets and liabilities:
Income tax refund receivable................. 52,917 0
Prepayments and other........................ 13,388 6,499
Merchandise inventories...................... (27,308) (100,792)
Accounts payable............................. 20,191 57,277
Accrued expenses............................. 2,335 (14,737)
Accrued restructuring expenses............... (17,437) 0
-------- --------
Net cash provided by (used in) operating activities 69,210 (45,555)
-------- --------
Investing activities
Investment in capital assets....................... (7,699) (24,926)
Proceeds from sales of capital assets.............. 1,411 0
Proceeds from sales of
available-for-sale securities................... 30,329 105,213
Gross purchases of available-for-sale securities...(109,264) (20,001)
Decrease (Increase) in other assets................ 4,478 (7,722)
-------- --------
Net cash provided by (used in) investing activities (80,745) 52,564
-------- --------
Financing activities
Proceeds from short-term borrowings................ 698,144 0
Reduction of short-term borrowings.................(698,144) 0
Proceeds from long-term borrowings................. 133,860 0
Reduction of long-term borrowings.................. (95,645) (5,822)
Reduction of restricted cash....................... 7,000 0
Proceeds from exercise of stock options............ 6,321 456
Dividends paid..................................... 0 (4,634)
-------- --------
Net cash provided by (used in) financing activities 51,536 (10,000)
-------- --------
Increase (decrease) in cash and cash equivalents... 40,001 (2,991)
Cash and cash equivalents, beginning of period..... 25,117 43,923
-------- --------
Cash and cash equivalents, end of period...........$ 65,118 $ 40,932
======== ========
See Notes to Condensed Consolidated Financial Statements
(5)
<PAGE> 8
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of November 2, 1996,
the condensed consolidated statements of income for the thirteen and
thirty-nine week periods ended November 2, 1996 and October 28, 1995,
and the condensed consolidated statements of cash flows for the thirty-
nine week periods ended November 2, 1996 and October 28, 1995 have been
prepared by the Company without audit. In the opinion of management,
all adjustments (which include only normal recurring adjustments) neces-
sary to present fairly the financial position at November 2, 1996 and
the results of operations and cash flows for the thirteen and thirty-
nine week periods ended November 2, 1996 and October 28, 1995 have been
made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted ac-
counting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Feb-
ruary 3, 1996 annual report on Form 10-K. The results of operations for
the thirteen and thirty-nine week periods ended November 2, 1996 and
October 28, 1995 are not necessarily indicative of operating results for
the full fiscal year.
2. Stockholders' Equity
During the thirty-nine week period ended November 2, 1996, stock-
holders' equity changed to reflect the following items: a net loss of
$9,458,000; an increase in common stock and additional paid-in capital
of $6,375,000 from the exercise of options for Common Stock; amortiza-
tion of deferred compensation expense of $2,567,000; and unrealized
gains on available-for-sale securities of $399,000 (net of income tax
expense of $143,000).
3. Net Loss Per Share
Common Stock equivalents are not included in the weighted average
shares outstanding for determining net loss per share for the thirteen
and thirty-nine week periods ended November 2, 1996 and October 28, 1995
as the result would be anti-dilutive, except for the thirteen week
period ended August 3, 1996, during which common stock equivalents were
used to determine the net income per share.
(6)
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Income Tax Refund
During the thirty-nine week period ended November 2, 1996, the
Company received a $56,726,000 income tax refund as a result of net
operating loss carrybacks for taxes paid in prior years. In accordance
with the terms of the Company's $82,862,000 term loan entered into in
November 1995, the tax refund was used to reduce the amount of such term
loan to $26,136,000. The average interest rate on the repaid debt at
the time of repayment was approximately 11.2%. As a result of such pay-
ment, a letter of credit in the amount of $22,000,000 issued under the
Company's revolving credit facility as security for the payment of such
refund was canceled and a $7,000,000 cash deposit in support of such
letter of credit was released. As a result of the release of such cash
deposit, the maximum availability under the revolving credit facility
has been reduced from $157,000,000 to $150,000,000, subject to limita-
tions based upon eligible inventory.
5. Long-Term Debt
On July 22, 1996, the Company completed a public offering of
$138,000,000 aggregate principal amount of 7.5% Convertible Subordinated
Notes due 2006 (the "Notes"). The net proceeds of the offering to the
Company, after underwriting discounts and commissions, were
$133,860,000. The Notes are convertible at any time prior to maturity
into shares of Common Stock of the Company at a conversion price of
$7.46 per share. The Notes are redeemable at the Company's option, in
whole or in part, on or after July 15, 1999. Under certain circum-
stances involving a change of control of the Company, holders of the
Notes may require the Company to repurchase all or a portion of the
Notes at 100% of the principal amount plus accrued and unpaid interest,
if any. There is no sinking fund for the Notes. Of the net proceeds
received, $26,136,000 were used to repay the remainder of the Company's
outstanding term loan entered into in November 1995 (see Note 4 above)
and $9,488,000 were used to repay additional outstanding term loans.
The remaining net proceeds have been invested in cash-equivalent and
available-for-sale securities.
(7)
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RECENT DEVELOPMENTS
During the current thirty-nine week period, the Company received a
$56,726,000 income tax refund as a result of net operating loss carry-
backs for taxes paid in prior years. The tax refund was used to reduce
the Company's $82,862,000 term loan, entered into in November 1995, to
$26,136,000. As a result of such payment, a $22,000,000 letter of cred-
it issued under the Company's revolving credit facility as security for
payment of the refund was canceled and a $7,000,000 cash deposit in sup-
port of the letter of credit was released. As a result of the release
of such cash deposit, the maximum availability under the revolving
credit facility was reduced from $157,000,000 to $150,000,000, subject
to limitations based upon eligible inventory.
In July 1996, the Company completed a $138,000,000 public offering
of 7.5% Convertible Subordinated Notes due 2006 (the "Notes"). The net
proceeds of the offering to the Company, after underwriting discounts
and commissions, were $133,860,000. The Notes are convertible at any
time prior to maturity into shares of the Company's Common Stock at
$7.46 per share. The Notes are redeemable at the Company's option, on
or after July 15, 1999. Under certain circumstances involving a change
of control of the Company, holders of the Notes may require the Company
to repurchase all or a portion of the Notes at 100% of the principal
amount plus accrued and unpaid interest. There is no sinking fund for
the Notes. Of the net proceeds received, $26,136,000 were used to repay
the remainder of the Company's outstanding term loan entered into in
November 1995 (see above) and $9,488,000 were used to repay additional
outstanding term loans. The remaining net proceeds have been invested
in cash-equivalent and available-for-sale securities.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, cer-
tain items appearing in the Condensed Consolidated Statements of Income:
Thirteen Weeks Ended Thirty-nine Weeks Ended
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
---- ---- ---- ----
Net sales................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold, buying
and occupancy expenses. 77.6 85.0 77.3 79.7
Selling, general and
administrative expenses 24.3 29.7 24.1 27.3
Interest expense.......... 1.1 .2 1.0 .2
Income tax benefit........ (.5) (5.2) (.5) (2.5)
Net loss.................. (1.5) (9.2) (1.3) (4.1)
(8)
<PAGE> 11
Implementation of New Business Strategy and Recent Restructuring
Dorrit J. Bern joined the Company as President and Chief Executive
Officer in September 1995. During the fourth quarter of the fiscal year
ended February 3, 1996 ("Fiscal 1996"), Ms. Bern and her new management
team began implementing a new business strategy in response to the Com-
pany's declining sales productivity and profit performance. This
strategy is aimed at enhancing sales productivity and improving finan-
cial performance beginning in the fiscal year ending February 1, 1997
("Fiscal 1997") through expansion of the variety of choices in its
merchandise assortment, improvement in merchandise quality and implemen-
tation of a more realistic value pricing strategy. In addition, the
Company is expanding its merchandise assortment in previously underde-
veloped products, such as career wear and dresses, and petite sizes are
being offered for the first time. As part of this new business strat-
egy, management has placed increased focus on meeting the demands of its
primary customers. Such customers are generally in the 20 to 45 year
old age group, and in the lower-middle to middle income range, and tend
to follow, rather than set, fashion trends. Therefore, the Company,
which had previously placed heavy reliance on internally developed
product sourced overseas, has shifted a significant portion of its pur-
chases to the domestic market, allowing management to decrease lead
times and respond more quickly to current fashion trends. The Company
continues to use its overseas sourcing operation, which has been reor-
ganized to support this strategic change, to procure basic low-risk
commodity merchandise. This strategy has resulted in lower initial unit
sales prices and higher unit costs of merchandise product. However,
such effects have been offset by (i) a reduced need for aggressive price
promotions, resulting in improved gross margins, (ii) increased sales
productivity and (iii) enhanced inventory management flexibility, re-
sulting in reduced inventory investment, in each case as compared to
Fiscal 1996.
During the fourth quarter of Fiscal 1996, the Company's Board of
Directors approved a restructuring plan (the "Restructuring Plan") to
support the Company's new business strategy. The Restructuring Plan
resulted in a fourth quarter pre-tax charge of $103,000,000. The pri-
mary components of the Restructuring Plan are (i) the planned closing
through Fiscal 1997 of 290 under-performing "Fashion Bug" and "Fashion
Bug Plus" stores, (ii) the reorganization and reduction of foreign mer-
chandise sourcing operations discussed above and (iii) reductions in
corporate support operations which were not necessary to support the
Company's new business strategy. The pre-tax operating loss for Fiscal
1996 for these 290 stores, exclusive of the restructuring charge and be-
fore allocation of fixed overhead, was approximately $34,000,000. Given
the Company's disappointing performance in Fiscal 1996 and the implemen-
tation of its new business strategy, however, such operating loss is not
indicative of future savings resulting from the closing of such stores.
The Company has also implemented an expense reduction initiative to
further reduce operating costs. The primary components of this initia-
tive are (i) the further reduction of distribution, merchandising and
administrative personnel, (ii) the renegotiation of store lease obliga-
tions and (iii) the reduction of various other overhead costs. The
Restructuring Plan and the further expense reduction initiative are
expected to result in a workforce reduction of approximately 2,300 store
employees and 800 non-store employees.
(9)
<PAGE> 12
As of November 2, 1996 the Company had closed 258 stores as part of
the Restructuring Plan discussed above. The remaining stores are ex-
pected to be closed during the remainder of Fiscal 1997. As of November
2, 1996 approximately 2,050 store employees and 600 non-store employees
have been terminated as a result of the Restructuring Plan, and approxi-
mately 200 positions have been eliminated as a result of the Company's
expense reduction initiative.
Thirteen Weeks Ended November 2, 1996 and October 28, 1995
Net sales for the third quarter of Fiscal 1997 were $242,368,000, a
9.5% decrease from $267,772,000 for the corresponding period of Fiscal
1996. The decrease was primarily due to a reduction in the number of
retail stores from 1,417 on October 28, 1995 to 1,168 on November 2,
1996 as a result of implementation of the Company's Restructuring Plan.
Sales of stores closed since the third quarter of Fiscal 1996 equaled
15.5% of sales for the third quarter of Fiscal 1996. The Company, how-
ever, experienced a 3.0% increase in the third quarter of Fiscal 1997 in
comparable store sales (sales generated by stores in operation during
the same weeks of each period) as compared to Fiscal 1996. The increase
in comparable store sales was primarily attributable to increased sales
of sportswear and dresses. In addition, Fiscal 1997 third quarter sales
from new stores opened less than a full year equaled 2.3% of Fiscal 1996
third quarter sales.
Cost of goods sold, buying and occupancy expenses expressed as a
percentage of sales decreased 7.4% in the third quarter of Fiscal 1997
as compared to the corresponding period of Fiscal 1996. Cost of goods
sold as a percentage of sales decreased 4.6% as compared to the cor-
responding period of Fiscal 1996. The Company continued to benefit from
its value pricing strategy and improved merchandise assortment, as
markdowns were significantly lower during the current quarter and a lar-
ger percentage of sales were at the original selling price as compared
to the corresponding period of Fiscal 1996. The benefit of the reduced
markdowns was partially offset by higher average unit merchandise costs
as a result of the shift of a portion of the Company's purchases to the
domestic market (see "Implementation of New Business Strategy and Recent
Restructuring" above). Results for the third quarter of Fiscal 1996
were negatively impacted by markdowns in connection with an inventory
liquidation sale undertaken to stimulate sales. Buying and occupancy
expenses expressed as a percentage of sales decreased 2.8% in the third
quarter of Fiscal 1997 as compared to the corresponding period of Fiscal
1996. The decrease in buying and occupancy expenses was due to (i) the
elimination of occupancy expenses in the 258 stores closed as part of
the Restructuring Plan and (ii) savings achieved as part of the Com-
pany's expense reduction initiative.
Selling, general and administrative expenses expressed as a per-
centage of sales decreased 5.4% in the third quarter of Fiscal 1997 as
compared to the corresponding period of Fiscal 1996. This was primarily
attributable to a reduction in personnel resulting from (i) the closing
of 258 under-performing stores as part of the Company's Restructuring
Plan and (ii) other reductions of sales and administrative personnel as
(10)
<PAGE> 13
part of the Company's expense reduction initiative. Marketing expenses
for the current quarter benefited from reduced promotional expenses as
compared to the same quarter of the prior year. Promotional expenses
for the current quarter were focused on media and direct mail adver-
tising to the Company's core customer base. During the comparable
quarter of Fiscal 1996, higher expenses were incurred to promote the
Company's inventory liquidation sale. Selling expenses for the current
quarter were adversely impacted by higher levels of delinquencies within
the Company's securitized proprietary credit card receivables portfolio.
Interest expense for the third quarter of Fiscal 1997 increased
from the corresponding period of Fiscal 1996 as a result of the
Company's issuance in July 1996 of $138,000,000 of 7.5% Convertible Sub-
ordinated Notes in a public offering (see "Recent Developments" above).
The income tax benefit for the third quarter of Fiscal 1997 was 27%
of the Company's pre-tax loss, as compared to a benefit of 36% of the
pre-tax loss for the third quarter of Fiscal 1996.
Thirty-nine Weeks Ended November 2, 1996 and October 28, 1995
Net sales for the first three quarters of Fiscal 1997 were
$746,500,000, a 4.4% decrease from $780,562,000 for the corresponding
period of Fiscal 1996. The decrease was primarily due to the reduction
in the number of retail stores as a result of implementation of the
Company's Restructuring Plan. Sales of stores closed since the third
quarter of Fiscal 1996 equaled 12.7% of sales for the first three quar-
ters of Fiscal 1996. Comparable store sales, however, increased 5.2% in
the first three quarters of Fiscal 1997 as compared to Fiscal 1996. In
addition, sales for the first three quarters of Fiscal 1997 from new
stores opened since the third quarter of Fiscal 1996 equaled 2.9% of
sales for the first three quarters of Fiscal 1996.
Cost of goods sold, buying and occupancy expenses expressed as a
percentage of sales decreased 2.4% in the first three quarters of Fiscal
1997 as compared to the corresponding period of Fiscal 1996. Cost of
goods sold expressed as a percentage of sales increased 0.3% in the
first three quarters of Fiscal 1997 as compared to the same period of
Fiscal 1996. The increase in cost of goods sold was due to (i) higher
retail markdowns on merchandise purchased prior to implementation of the
Company's new merchandise strategy and (ii) higher merchandise costs as
a result of the shift of a portion of the Company's purchases to the
domestic market (see "Implementation of New Business Strategy and Recent
Restructuring" above). This increase in costs was partially offset by
the Company's change to a realistic value pricing strategy, which re-
sulted in a reduction in retail markdowns on merchandise purchased under
the new merchandise strategy. Results for the first three quarters of
Fiscal 1996 were negatively impacted by markdowns in connection with the
inventory liquidation sale undertaken during the third quarter of Fiscal
1996. Buying and occupancy expenses for the first three quarters of
Fiscal 1997 decreased 2.7% as a percentage of sales as compared to the
first three quarters of Fiscal 1996 as a result of (i) the elimination
of occupancy expenses in the 258 stores closed as part of the Restruc-
turing Plan and (ii) savings achieved as part of the Company's expense
reduction initiative.
(11)
<PAGE> 14
Selling, general and administrative expenses expressed as a per-
centage of sales decreased 3.2% in the first three quarters of Fiscal
1997 as compared to the corresponding period of Fiscal 1996. This
decrease was primarily attributable to a reduction in personnel result-
ing from (i) the closing of 258 under-performing stores as part of the
Company's Restructuring Plan and (ii) other reductions of sales and
administrative personnel as part of the Company's expense reduction ini-
tiative. Selling expenses for the first three quarters of Fiscal 1997
were adversely impacted by higher levels of delinquencies within the
Company's securitized proprietary credit card receivables portfolio.
Marketing expenses for the first three quarters of Fiscal 1996 were
negatively affected by expenses incurred during the third quarter to
promote the Company's inventory liquidation sale.
Interest expense increased in the first three quarters of Fiscal
1997 as compared to the corresponding period of Fiscal 1996. The in-
crease resulted from (i) renegotiation of the terms of certain of the
Company's outstanding liabilities and the resulting increase in long-
term debt in the fourth quarter of Fiscal 1996 and (ii) the Company's
issuance in July 1996 of $138,000,000 of 7.5% Convertible Subordinated
Notes in a public offering.
The income tax benefit for the first three quarters of Fiscal 1997
was 27% of the Company's pre-tax loss, as compared to a benefit of 37.5%
of the pre-tax loss for the first three quarters of Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are (i) cash flow
from operations, (ii) proprietary credit card receivables securitization
agreements and (iii) a revolving credit facility. In addition, during
the current year the company completed a public offering of $138,000,000
of 7.5% Convertible Subordinated Notes due 2006. The net proceeds of
the offering to the Company, after underwriting discounts and commis-
sions, were $133,860,000. The Notes are convertible at any time prior
to maturity into shares of the Company's Common Stock at $7.46 per
share. The Notes are redeemable at the Company's option, on or after
July 15, 1999. Under certain circumstances involving a change of con-
trol of the Company, holders of the Notes may require the Company to
repurchase all or a portion of the Notes at 100% of the principal amount
plus accrued and unpaid interest. There is no sinking fund for the
Notes. Of the net proceeds received, $35,624,000 were used to repay
outstanding term loans. The remaining proceeds have been invested in
cash-equivalent and available-for-sale securities. At November 2, 1996,
the Company had working capital of $254,442,000 as compared to
$199,457,000 at February 3, 1996. Working capital at November 2, 1996
includes $65,118,000 of cash and cash equivalents, compared to cash and
cash equivalents of $25,117,000 at February 3, 1996. The ratio of cur-
rent assets to current liabilities was 2.7 to 1 at November 2, 1996 and
2.0 to 1 at February 3, 1996.
(12)
<PAGE> 15
Net cash provided by operating activities was $69,210,000 for the
first three quarters of Fiscal 1997 as compared to net cash used in
operating activities of $45,555,000 for the corresponding period of Fis-
cal 1996. The primary reasons for the $114,765,000 increase in cash
provided from operations were (i) receipt of an income tax refund of
$56,726,000 (see "Recent Developments" above), (ii) a decrease of
$36,398,000 in the Company's investment in merchandise inventories, net
of accounts payable, (iii) a decrease of $22,751,000 in the Company's
net loss, (iv) an increase of $17,072,000 in accrued expenses and (v) a
decrease of $6,889,000 in prepayments and other current assets. These
increases in cash provided from operations were partially offset by (i)
a decrease of $17,437,000 in accrued restructuring expenses, (ii) a
decrease of $5,005,000 in depreciation and amortization and (iii) other
net decreases of $2,629,000.
In November 1995, the Company entered into an agreement with a com-
mercial finance company to provide a revolving credit facility with a
maximum availability of $157,000,000, subject to limitations based upon
eligible inventory. As described above under "Recent Developments," the
maximum availability under such facility, following receipt of the Com-
pany's $56,726,000 tax refund and release of a $7,000,000 cash deposit
with the commercial finance company in May 1996, was reduced to
$150,000,000. The primary purpose of this facility, which expires on
June 1, 1998, is to enable the Company to issue letters of credit for
overseas purchases of merchandise as well as to provide for seasonal
cash borrowings. This facility is secured by merchandise inventory,
cash, mortgages on the Company's Bensalem, Pennsylvania and Greencastle,
Indiana corporate and distribution facilities, rights to mortgages on
certain retail store properties, liens on the cash surrender value of
Company-owned life insurance policies and certain other Company assets.
As of November 2, 1996 the availability under this facility was approxi-
mately $119,928,000, against which the Company had outstanding letters
of credit of $34,856,000. There were no cash borrowings outstanding
under this agreement as of November 2, 1996. This agreement requires
that, among other things, the Company maintain a minimum net worth of
$350,000,000 and not pay dividends on its Common Stock.
In November 1995, the Company renegotiated portions of existing
trade obligations. As a result, $82,862,000 of trade acceptances which
had been recorded as accounts payable were converted into a term loan.
The loan was scheduled to mature on June 1, 1998. The Company's
$56,726,000 tax refund received in May 1996 and a portion of the net
proceeds of the public offering of Subordinated Convertible Notes re-
ceived in July 1996 were used to repay this term loan. Additionally, in
November 1995 the Company renegotiated an outstanding $9,488,000 term
loan which carried an interest rate of 11.8%. This loan was also repaid
in July 1996 from a portion of the net proceeds of the public offering.
Capital expenditures of $7,699,000 during the first three quarters
of Fiscal 1997 were primarily for the fixturing of existing retail
stores. The capital required for these expenditures was partially
provided through short-term borrowings.
As of November 2, 1996 the Company had approximately $2,546,000 of
accrued, unpaid restructuring costs, of which $1,376,000 relate to sev-
erance benefits. These costs are included in current liabilities.
(13)
<PAGE> 16
The Company paid no dividends during the first three quarters of
Fiscal 1997 as compared to $4,634,000 during the corresponding period of
Fiscal 1996. On October 2, 1995, the Company's Board of Directors
announced an indefinite suspension of dividends on the Company's Common
Stock. In addition, the Company's revolving credit facility requires
the Company to refrain from paying dividends on its Common Stock during
the term of such agreements.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company has made in this report, and from time to time may
otherwise make, "forward-looking statements" (as that term is defined
under Federal Securities Laws) concerning the Company's future oper-
ations, performance, profitability, revenues, expenses and financial
condition. This report includes, in particular, forward-looking state-
ments regarding the Company's expectations of future performance
following implementation of its new business strategy, recent restruc-
turing and expense reduction initiative and the expected benefits
thereof. In addition, the information contained herein includes certain
forward-looking statements regarding store openings and closings, for-
eign sourcing operations, capital requirements, and other matters. Such
forward-looking statements are subject to various risks and uncertain-
ties. Actual results could differ materially from those currently
anticipated due to a number of factors. Such factors may include, but
are not limited to, the Company's ability to implement its new business
strategy, the success of the Company's Restructuring Plan and expense
reduction initiative and the Company's ability to retain key management
personnel. Such factors may also include other risks and uncertainties
detailed in the Company's filings with the Securities and Exchange Com-
mission, including the Company's Annual Report on Form 10-K for the
fiscal year ended February 3, 1996.
(14)
<PAGE> 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of Exhibits filed as part of this Quarterly
Report on Form 10-Q. Where so indicated by footnote, Exhibits which
were previously filed are incorporated by reference. For Exhibits in-
corporated by reference, the location of the Exhibit in the previous
filing is indicated in parenthesis.
3.1 Restated Articles of Incorporation, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended January 29,
1994. (Exhibit 3.1)
3.2 Bylaws, as Amended and Restated, incorporated by reference to Form
10-K of the Registrant for the fiscal year ended January 29, 1994.
(Exhibit 3.2)
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter end-
ed November 2, 1996.
(15)
PAGE <18>
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.
CHARMING SHOPPES, INC.
----------------------------------
(Registrant)
Date: December 12, 1996 /S/ DORRIT J. BERN
----------------- ----------------------------------
Dorrit J. Bern -- President
(Chief Executive Officer)
Date: December 12, 1996 /S/ ERIC M. SPECTER
----------------- ----------------------------------
Eric M. Specter -- Vice President
(Chief Financial Officer)
(16)
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