<PAGE>
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 May 1, 1999
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 re-
quired 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 May 1,
1999, was 98,230,332 shares.
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
May 1, 1999 and January 30, 1999................................... 1-2
Condensed Consolidated Statements of Operations
Thirteen weeks ended May 1, 1999 and May 2, 1998................... 3
Condensed Consolidated Statements of Comprehensive Income (Loss)
Thirteen weeks ended May 1, 1999 and May 2, 1998................... 4
Condensed Consolidated Statements of Cash Flows
Thirteen weeks ended May 1, 1999 and May 2, 1998................... 5
Notes to Condensed Consolidated Financial Statements.................. 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................10-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 19
PART II. OTHER INFORMATION
Item 2. Changes in Securities........................................ 20
Item 6. Exhibits and Reports on Form 8-K.............................20-21
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
May 1, January 30,
(In thousands) 1999 1999
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................$ 22,002 $ 43,789
Available-for-sale securities (including fair
value adjustments of $25 and $19, respectively).... 68,202 100,743
Merchandise inventories.............................. 204,396 171,327
Deferred taxes....................................... 15,194 15,194
Prepayments and other................................ 31,345 30,487
-------- --------
Total current assets................................. 341,139 361,540
-------- --------
Property, equipment, and leasehold improvements...... 393,307 391,152
Less: accumulated depreciation and amortization...... 243,707 236,569
-------- --------
Net property, equipment, and leasehold improvements.. 149,600 154,583
-------- --------
Available-for-sale securities (including fair
value adjustments of $(954) and $389, respectively) 170,057 145,882
Other assets......................................... 22,803 22,644
-------- --------
Total assets.........................................$683,599 $684,649
======== ========
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
</FN>
(1)
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
May 1, January 30,
(In thousands) 1999 1999
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.....................................$ 84,288 $ 61,806
Accrued expenses..................................... 85,585 84,444
Income taxes payable................................. 2,196 4,552
Accrued restructuring expenses....................... 14,146 18,448
Current portion -- long-term debt.................... 16 16
-------- --------
Total current liabilities............................ 186,231 169,266
-------- --------
Deferred taxes....................................... 12,336 12,336
Long-term debt....................................... 96,140 119,475
Stockholders' equity
Common Stock $.10 par value
Authorized -- 300,000,000 shares
Issued -- 106,950,332 shares and
106,830,596 shares, respectively.................. 10,695 10,683
Additional paid-in capital........................... 65,312 64,924
Treasury stock at cost -- 8,720,000 shares and
8,710,000 shares, respectively.................... (39,444) (39,405)
Deferred employee compensation....................... (1,225) (1,051)
Accumulated other comprehensive income............... (602) 267
Retained earnings.................................... 354,156 348,154
-------- --------
Total stockholders' equity........................... 388,892 383,572
-------- --------
Total liabilities and stockholders' equity...........$683,599 $684,649
======== ========
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
</FN>
(2)
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
May 1, May 2,
(In thousands except per-share amounts) 1999 1998
---- ----
<S> <C> <C>
Net sales...........................................$258,975 $244,031
Other income........................................ 3,023 4,529
-------- --------
Total revenue....................................... 261,998 248,560
-------- --------
Cost of goods sold, buying, and occupancy expenses.. 190,062 182,452
Selling, general, and administrative expenses....... 62,625 60,105
Restructuring charge................................ 0 34,000
Interest expense.................................... 1,973 2,621
-------- --------
Total expenses...................................... 254,660 279,178
-------- --------
Income (loss) before income taxes and
extraordinary item............................... 7,338 (30,618)
Income tax provision (benefit)...................... 2,568 (10,716)
-------- --------
Income (loss) before extraordinary item............. 4,770 (19,902)
Extraordinary item -- Gain on early retirement of
debt, net of income taxes of $664................ 1,232 0
-------- --------
Net income (loss)...................................$ 6,002 $(19,902)
======== ========
Income (loss) per share:
Income (loss) before extraordinary item............. $ .05 $(.20)
Extraordinary item.................................. .01 .00
----- -----
Net income (loss)................................... $ .06 $(.20)
===== =====
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
</FN>
(3)
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
May 1, May 2,
(In thousands) 1999 1998
---- ----
<S> <C> <C>
Net income (loss)................................... $6,002 $(19,902)
------ --------
Other comprehensive loss:
Unrealized losses on available-for-sale
securities, net of income tax benefit
of $445 and $245, respectively................... (825) (455)
Reclassification of realized gains on
available-for-sale securities, net of income
tax expense of $23 and $88, respectively......... (44) (162)
------ --------
Total other comprehensive loss, net of taxes..... (869) (617)
------ --------
Comprehensive income (loss)......................... $5,133 $(20,519)
====== ========
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
</FN>
(4)
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
May 1, May 2,
(In thousands) 1999 1998
---- ----
<S> <C> <C>
Operating activities
Net income (loss)....................................$ 6,002 $(19,902)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization..................... 7,718 8,914
Deferred income taxes............................. 468 (9,836)
Write-down of capital assets due to restructuring. 0 10,000
Gain on early retirement of debt.................. (1,896) 0
Gain on sale of available-for-sale securities..... (67) (250)
Changes in operating assets and liabilities:
Merchandise inventories........................ (33,069) (30,769)
Accounts payable............................... 22,482 29,476
Prepayments and other.......................... (976) (989)
Accrued expenses............................... (954) 2,819
Income taxes payable........................... (2,356) (5,790)
Accrued restructuring expenses................. (4,302) 24,000
-------- --------
Net cash (used in) provided by operating activities.. (6,950) 7,673
-------- --------
Investing activities
Investment in capital assets......................... (7,311) (7,479)
Proceeds from sales of capital assets................ 7,252 5
Proceeds from sales of available-for-sale securities. 160,523 118,486
Gross purchases of available-for-sale securities.....(153,516) (74,777)
Increase in other assets............................. (869) (5,707)
-------- --------
Net cash provided by investing activities............ 6,079 30,528
-------- --------
Financing activities
Reduction of long-term borrowings.................... (21,051) (4)
Purchases of treasury stock.......................... (39) (1,800)
Proceeds from exercise of stock options.............. 174 184
-------- --------
Net cash used in financing activities................ (20,916) (1,620)
-------- --------
(Decrease) Increase in cash and cash equivalents..... (21,787) 36,581
Cash and cash equivalents, beginning of period....... 43,789 12,349
-------- --------
Cash and cash equivalents, end of period.............$ 22,002 $ 48,930
======== ========
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
</FN>
(5)
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of May 1, 1999 and the con-
densed consolidated statements of operations, comprehensive income (loss),
and cash flows for the thirteen weeks ended May 1, 1999 and May 2, 1998
have been prepared by the Company without audit. In the opinion of man-
agement, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position at May 1, 1999 and the
results of operations and cash flows for the thirteen weeks ended May 1,
1999 and May 2, 1998 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
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 January 30, 1999
Annual Report on Form 10-K. The results of operations for the thirteen
weeks ended May 1, 1999 and May 2, 1998 are not necessarily indicative of
operating results for the full fiscal year.
2. Stockholders' Equity
During the thirteen weeks ended May 1, 1999, stockholders' equity increased
$5,320,000 as a result of net income of $6,002,000, an increase in common
stock and additional paid-in capital from exercises of stock options of
$56,000, and amortization of deferred compensation expense of $170,000,
partially offset by net unrealized losses on available-for-sale securities
of $869,000 (net of an income tax benefit of $468,000) and purchases of
treasury stock of $39,000.
3. Restructuring Charge
On March 5, 1998, the Company's Board of Directors approved a restructuring
plan ("the Plan") that resulted in a pre-tax charge of $34,000,000 during
the thirteen weeks ended May 2, 1998. The Plan was approved in conjunction
with the decision to eliminate men's merchandise from the Company's stores.
During the thirteen weeks ended May 1, 1999, the Company closed 2 stores
and completed the downsizing of 16 stores in connection with the Plan. To-
date, 54 stores have been closed, and an additional 17 stores are scheduled
for closing during the fiscal year ending January 29, 2000 ("Fiscal 2000")
in connection with the Plan. In addition, 46 stores have been downsized
to-date, 25 stores are scheduled for downsizing in Fiscal 2000, and approx-
imately 30 stores are scheduled for downsizing thereafter.
(6)
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes accrued restructuring charges related to the
Plan as of January 30, 1999 and payments charged against the accrual during
the thirteen weeks ended May 1, 1999:
<TABLE>
<CAPTION>
Accrued at Accrued At
January 30, May 1,
(in thousands) 1999 Payments 1999
---- -------- ----
<S> <C> <C> <C>
Termination/amendment of store leases $ 8,095 $ (800) $ 7,295
Renovation of vacated store space.... 5,534 (2,888) 2,646
Severance............................ 120 (20) 100
Other costs.......................... 3,429 (1) 3,428
------- ------- -------
$17,178 $(3,709) $13,469
======= ======= =======
</TABLE>
During the thirteen weeks ended May 1, 1999, the Company also charged
$593,000 of costs related to the closing of the Company's Bensalem, Penn-
sylvania distribution center against the restructuring accrual. As of May
1, 1999, the Company had accrued restructuring charges related to the clos-
ing of the Bensalem facility of $677,000, which consisted primarily of
severance costs.
4. Gain on Early Retirement of Debt
During the thirteen weeks ended May 1, 1999, the Company repurchased
$23,316,000 aggregate principal amount of its 7.5% Convertible Subordinated
Notes due 2006 at a total cost of $21,031,000. The repurchases resulted in
an extraordinary gain of $1,232,000, net of income taxes of $664,000.
5. Net Income (Loss) Per Share
<TABLE>
<CAPTION>
Thirteen Weeks Ended
May 1, May 2,
(In thousands) 1999 1998
---- ----
<S> <C> <C>
Basic weighted average common shares outstanding..... 98,164 100,606
Dilutive effect of stock options..................... 370 0
------ -------
Diluted weighted average common shares and
equivalents outstanding........................... 98,534 100,606
====== =======
</TABLE>
(7)
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Options to purchase 9.5 million shares and 4.6 million shares of Common
Stock at May 1, 1999 and May 2, 1998, respectively, with exercise prices in
excess of the average market price of the Company's Common Stock, were
excluded from the computation of diluted net income (loss) per share
because the effect would have been antidilutive. Options with exercise
prices below the average market price, having a dilutive effect of 0.7
million shares, were excluded from the computation of net loss per share
for the thirteen weeks ended May 2, 1998 because the effect would have been
antidilutive. The assumed conversion of the 7.5% Convertible Subordinated
Notes due 2006 was excluded from the computation of diluted net income
(loss) per share because the effect would have been antidilutive.
6. Shareholder Rights Plan
In February 1999, the Company's Board of Directors adopted a Shareholder
Rights Plan to replace the existing Shareholder Rights Plan with effect
from April 26, 1999, when the existing Shareholder Rights Plan expired.
The Board of Directors also increased the authorized shares of Partici-
pating Series A Junior Preferred Stock, $1.00 par value, from 300,000
shares to 500,000 shares, and declared a dividend of one Right for each
outstanding share of Common Stock, payable as of the close of business on
April 26, 1999 to shareholders of record as of the close of business on
April 12, 1999. Such Rights only become exercisable or transferable apart
from the Common Stock ten days after a person or group (Acquiring Person)
acquires, or obtains the right to acquire, beneficial ownership of twenty
percent (20%) or more of the Company's outstanding common shares. Each
Right then may be exercised to acquire one three-hundredth of a share of
newly created Series A Junior Participating Preferred Stock or a combina-
tion of securities and assets of equivalent value at a purchase price of
$20, subject to adjustment.
Upon the occurrence of certain events (for example, if the Company is a
surviving corporation in a merger with an Acquiring Person), the Rights
entitle holders other than the Acquiring Person to acquire Common Stock
having a value of twice the exercise price of the Rights. Upon the
occurrence of certain other events (for example, if the Company is acquired
in a merger or other business combination transaction in which the Company
is not the surviving corporation), the rights entitle holders other than
the Acquiring Person to acquire Common Stock of the Acquiring Person having
a value twice the exercise price of the Rights. The Rights may be redeemed
by the Company at $.01 per Right at any time until the tenth day following
public announcement that a twenty percent (20%) position has been acquired.
The Rights will expire on April 25, 2009.
(8)
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Impact of Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company is required to adopt this
statement as of the beginning of the fiscal year ending February 2, 2002.
SFAS No. 133 requires the recognition of all derivative instruments as
either assets or liabilities in the statement of financial position, and
the measurement of those instruments at fair value. The statement also
specifies the conditions under which derivative instruments qualify as
hedging activities, and the accounting for changes in the fair value of
derivatives designated as hedges. The Company currently manages a portion
of its interest rate risk through the use of derivative instruments that
cap a portion of the Company's interest rate risk. Management has not
completed its determination of the effect that SFAS 133 will have on the
Company's financial statements or financial statement disclosures.
(9)
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements con-
cerning the Company's operations, performance and financial condition. In
particular, it includes forward-looking statements regarding sales perfor-
mance, store openings and closings, cost savings, capital requirements,
management's expectations for Year 2000 compliance, and other matters.
Such forward-looking statements are subject to various risks and uncer-
tainties that could cause actual results to differ materially from those
indicated in the forward-looking statements. Such risks and uncertainties
may include, but are not limited to, rapid changes in or miscalculation of
fashion trends, extreme or unseasonable weather conditions, economic down-
turns, a weakness in overall consumer demand, and competitive pressures.
These, and other risks and uncertainties, are detailed further in this Item
2, in "Part I, Item 1 -- Business: Cautionary Statement for Purposes of the
Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995" of the Company's Annual Report on Form 10-K for the fiscal year ended
January 30, 1999, and in the Company's reports filed with the Securities
and Exchange Commission from time to time.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain items
appearing in the Condensed Consolidated Statements of Operations:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
May 1, May 2,
1999 1998
---- ----
<S> <C> <C>
Net sales........................................... 100.0% 100.0%
Cost of goods sold, buying, and occupancy expenses.. 73.4 74.8
Selling, general, and administrative expenses....... 24.2 24.6
Restructuring charge................................ -- 13.9
Interest expense.................................... 0.8 1.1
Income (loss) before income taxes and
extraordinary item............................... 2.8 (12.5)
Income tax provision (benefit)...................... 1.0 (4.4)
Gain on early retirement of debt, net of taxes...... 0.5 --
Net income (loss)................................... 2.3 (8.1)
</TABLE>
(10)
<PAGE>
Thirteen Weeks Ended May 1, 1999 and May 2, 1998
Net sales for the quarter ended May 1, 1999 ("Fiscal 2000 First Quarter")
were $259.0 million, a 6.1% increase from net sales of $244.0 million for
the quarter ended May 2, 1998 ("Fiscal 1999 First Quarter"). The Company
experienced a 5.7% increase in comparable store sales (sales generated by
stores in operation during the same weeks of each period) in the Fiscal
2000 First Quarter as compared to the Fiscal 1999 First Quarter. In
addition, sales from new stores (sales generated by stores in operation
during the Fiscal 2000 First Quarter that were not in operation during the
corresponding weeks of the Fiscal 1999 First Quarter) in the Fiscal 2000
First Quarter equaled 4.6% of Fiscal 1999 First Quarter sales. Sales for
the Fiscal 1999 First Quarter which were not comparable with sales for the
Fiscal 2000 First Quarter as a result of the closing of stores in Fiscal
1999 and Fiscal 2000 equaled 3.9% of Fiscal 1999 First Quarter sales. The
number of retail stores decreased from 1,161 at May 2, 1998 to 1,143 at May
1, 1999. Excluding the decrease in comparable store sales of men's
merchandise, comparable store sales for the Fiscal 2000 First Quarter
increased 8.6% as compared to the Fiscal 1999 First Quarter. Increases in
comparable store sales were achieved in sportswear, intimate apparel,
accessories, girls, and coats, reflecting favorable customer response to
the Company's spring merchandise offerings. During Fiscal 1999, the
Company eliminated sales of men's merchandise and re-merchandised the
selling space used for men's merchandise.
Cost of goods sold, buying, and occupancy expenses expressed as a percent-
age of sales decreased 1.4% in the Fiscal 2000 First Quarter as compared to
the Fiscal 1999 First Quarter. Cost of goods sold as a percentage of sales
in the Fiscal 2000 First Quarter was comparable to the Fiscal 1999 First
Quarter. Buying and occupancy expenses expressed as a percentage of sales
decreased 1.6% in the Fiscal 2000 First Quarter as compared to the Fiscal
1999 First Quarter. The decrease in buying and occupancy expenses was due
primarily to cost savings from consolidation of the Company's distribution
centers and a reduction in store occupancy expenses.
Selling, general, and administrative expenses expressed as a percentage of
sales decreased 0.4% in the Fiscal 2000 First Quarter as compared to the
Fiscal 1999 First Quarter. Selling expenses increased in amount as a re-
sult of payroll costs for new stores, but were constant as a percentage of
sales. General and administrative expenses were flat in amount as compared
to the prior-year period. General and administrative expenses decreased as
a percentage of sales in the Fiscal 2000 First Quarter as compared to the
Fiscal 1999 First Quarter as a result of the leveraging effect of the in-
crease in sales volume.
(11)
<PAGE>
On March 5, 1998, the Company's Board of Directors approved a restructuring
plan that resulted in a pre-tax charge of $34 million during the Fiscal
1999 First Quarter. The plan was approved in conjunction with the decision
to eliminate men's merchandise from the Company's stores. During the
Fiscal 2000 First Quarter, the Company closed 2 stores and completed the
downsizing of 16 stores in connection with the plan. To-date, 54 stores
have been closed, and an additional 17 stores are scheduled for closing
during Fiscal 2000 in connection with the plan. In addition, 46 stores
have been downsized to-date, 25 stores are scheduled for downsizing in
Fiscal 2000, and approximately 30 stores are scheduled for downsizing
thereafter.
Interest expense expressed as a percentage of sales decreased 0.3% in the
Fiscal 2000 First Quarter as compared to the Fiscal 1999 First Quarter.
The decrease in interest expense is a result of the Company's repurchase of
$18.6 million aggregate principal amount of its 7.5% Convertible Subordi-
nated Notes due 2006 during the fiscal year ended January 30, 1999 ("Fiscal
1999") and the repurchase of an additional $23.3 million aggregate prin-
cipal amount of Notes during the Fiscal 2000 First Quarter.
Other income expressed as a percentage of sales decreased 0.7% in the
Fiscal 2000 First Quarter as compared to the Fiscal 1999 First Quarter.
The decrease was primarily a result of a decrease in interest income from
the Company's available-for-sale securities. The Company utilized a
portion of its available-for-sale securities during Fiscal 1999 and the
Fiscal 2000 First Quarter to repurchase portions of the Company's conver-
tible notes and common stock. In addition, average interest rates on the
securities declined during the period. The decrease in other income was
partially offset by the decrease in interest expense that resulted from the
repurchases of the convertible notes.
The income tax provision for the Fiscal 2000 First Quarter was 35% of the
Company's pre-tax income before extraordinary item, as compared to an
income tax benefit of 35% of the pre-tax loss for the Fiscal 1999 First
Quarter.
During the Fiscal 2000 First Quarter, the Company repurchased $23.3 million
aggregate principal amount of its 7.5% Convertible Subordinated Notes due
2006 at a total cost of $21.0 million. The repurchases resulted in an
extraordinary gain of $1.2 million, net of income taxes of $0.7 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are (i) cash flow from
operations, (ii) proprietary credit card receivables securitization agree-
ments, (iii) its long-term investment portfolio and (iv) its $150 million
revolving credit facility. As of May 1, 1999, the Company had working
capital of $154.9 million as compared to $192.3 million at January 30,
1999. Working capital at May 1, 1999 included $22.0 million of cash and
cash equivalents, compared to cash and cash equivalents of $43.8 million at
(12)
<PAGE>
January 30, 1999. The ratio of current assets to current liabilities was
1.8 to 1 at May 1, 1999 and 2.1 to 1 at January 30, 1999.
Net cash used in operating activities was $7.0 million for the Fiscal 2000
First Quarter, as compared to net cash provided by operating activities of
$7.7 million for the Fiscal 1999 First Quarter. The $14.7 million decrease
in cash provided by operations was primarily the result of a $9.3 million
increase in the Company's investment in merchandise inventories net of
accounts payable and payments of $4.3 million for accrued restructuring
expenses.
The Company has an agreement with a commercial finance company to provide a
revolving credit facility with a maximum availability of $150 million,
subject to limitations based upon eligible inventory. The facility, which
expires June 1, 2000, enables the Company to issue letters of credit for
overseas purchases of merchandise and provides for seasonal cash borrow-
ings, if necessary. The facility is secured by merchandise inventory,
furniture and fixtures at the retail stores, and certain other Company
assets. As of May 1, 1999, the availability under this facility was
approximately $111.6 million, against which the Company had outstanding
letters of credit of $33.0 million. There were no cash borrowings out-
standing under this agreement as of May 1, 1999. The agreement requires,
among other things, that the Company maintain a minimum net worth of $300
million and not pay dividends on its Common Stock.
Capital expenditures of $7.3 million during the Fiscal 2000 First Quarter
were primarily for the construction and fixturing of new retail stores and
investments in loss-prevention equipment and systems technology. During
Fiscal 2000, the Company anticipates incurring capital expenditures of
approximately $37 million, which are intended primarily for construction
and fixturing of new stores, remodeling and fixturing of existing retail
stores, investment in management information systems technology, and
expansion of the Company's Greencastle, Indiana distribution center. The
Company anticipates that these capital expenditures will be financed
principally through internally generated funds. The Company plans to open
approximately 90 to 100 new stores during Fiscal 2000. The majority of
these new store openings are expected to be in the West, Southwest, and
Southeast regions of the United States. During the Fiscal 2000 First Quar-
ter, the Company opened 10 new stores, relocated 5 stores, and closed 2
stores.
In connection with the Company's store restructuring plan, which was adop-
ted in conjunction with the decision to eliminate men's merchandise from
the Company's stores, and the consolidation of the Company's distribution
centers, the Company had approximately $14.1 million of accrued, unpaid
restructuring costs as of May 1, 1999. The Company expects to pay the
majority of these costs within twelve months, and has included them in
current liabilities. The Company anticipates that these restructuring
costs will be financed principally through internally generated funds.
During the Fiscal 2000 First Quarter, the Company sold one of the two
buildings comprising the Bensalem, Pennsylvania distribution center, which
(13)
<PAGE>
was closed in December 1998 as part of the consolidation. In addition,
sale of the remainder of the Bensalem facility is under agreement. At the
present time, management does not expect any change in the estimated costs
for the restructuring plans.
During the Fiscal 2000 First Quarter, the Company repurchased $23.3 million
aggregate principal amount of its 7.5% Convertible Subordinated Notes due
2006 at a total cost of $21.0 million. The repurchases resulted in an
extraordinary gain of $1.2 million, net of income taxes of $0.7 million.
The Company also repurchased 10,000 shares of its Common Stock at a cost of
$39 thousand. The Company will continue to evaluate market conditions to
determine if additional Notes or shares of Common Stock will be repurchased
during Fiscal 2000.
The Company believes that cash flow from operations, its proprietary credit
card receivables securitization agreements, its long-term investment port-
folio, and its $150 million revolving credit facility are sufficient to
support current operations.
IMPACT OF YEAR 2000
For many years, dates have been stored in computer systems with two digit
rather than four digit years. The Year 2000 computer problem occurs when a
computer system cannot properly recognize dates stored with two digit years
beyond 1999. Calculations may inaccurately interpret a date stored in a
format of "00" as the year 1900 rather than 2000, resulting in improper
computations, execution of faulty logic, or outright computer system fail-
ure. Systems must be remediated and tested in order to minimize the poten-
tial for failure caused by the Year 2000 computer calculation.
The Company uses computer equipment and software in its retailing opera-
tions to supply stores with products for sale, process customer trans-
actions, including credit transactions, and to record and report their
financial condition and results of operations. Since 1997, the Company has
been implementing a comprehensive program to correct its computer systems,
equipment, and facilities so that they will be Year 2000 compliant. The
Company has also communicated with its important suppliers of merchandise
and services to ensure that they are addressing their Year 2000 issues.
An Executive Oversight Committee, made up of the Company's General Counsel,
Corporate Director of Human Resources, and Chief Financial Officer, over-
sees the Company's overall Year 2000 initiatives. The committee is imple-
menting a comprehensive Year 2000 readiness program, which has been adopted
by all business units of the Company. Individual department heads have
assigned resources to this program to coordinate and manage Year 2000
readiness within and among the Company's departments and to evaluate the
state of Year 2000 readiness of outside vendors and suppliers. The Com-
pany's Corporate Audit Department facilitates the implementation of the
Year 2000 readiness program by identifying and reporting outstanding issues
(14)
<PAGE>
to the committee for resolution, administering vendor compliance programs,
and monitoring the progress of each business unit. The Company's Year 2000
readiness program is currently on schedule. Internal resources and outside
consultants are being used to implement the Year 2000 readiness program.
The Year 2000 readiness program consists of five phases:
(a) Standardization: The development of a set of policies, guidelines, and
standards to be used during the Year 2000 readiness program. Examples of
these include standard date routines to be used in computer programs, stan-
dard test plans to be used for testing all systems, and guidelines for
migrating a tested system into the production environment. These policies,
guidelines, and standards are designed to ensure that all personnel follow
a consistent approach in implementing the Year 2000 readiness program.
(b) Evaluation: The identification and evaluation of the Company's busi-
ness systems so as to determine the method by which the systems will be
made Year 2000 compliant. All of these systems are prioritized for atten-
tion based on usage of dates, the extent to which they are critical to the
Company's business, and the likelihood of failure.
(c) Remediation: The development of a remediation strategy for each sys-
tem. Strategies include system replacement, remediation of existing sys-
tems, and coordination with the supplying vendor to provide a version that
is Year 2000 compliant.
(d) End-to-End Testing: The development and implementation of a testing
strategy and test plan for each system. Testing is designed to cover all
significant transition dates, and includes testing within and among sys-
tems, as well as data communications with critical vendors.
(e) Contingency Planning: The development of contingency plans if the Com-
pany does not successfully complete significant portions of its Year 2000
readiness program or if the critical vendors are not Year 2000 compliant.
Corporate Business Systems
The Company has been implementing its Year 2000 readiness program for
corporate business systems since 1997. These systems include all mainframe
and non-mainframe systems and software, the corporate computing infrastruc-
ture and network of hardware and software, desktop equipment and software,
and external and internal communication software and equipment. Third-
party software, along with in-house developed systems, is included within
the scope of the Company's Year 2000 readiness program. These corporate
business systems are located at the Company's headquarters in Bensalem,
Pennsylvania, its distribution center in Greencastle, Indiana, and its
private label credit card operations in Milford, Ohio. They are also
located in the Company's 1,143 stores located in 44 states, its factory
operations in the Dominican Republic, and its international operations in
Hong Kong, Singapore, and Shanghai.
(15)
<PAGE>
The standardization and evaluation phases covering these corporate business
systems have been completed. The remediation and end-to-end testing phases
are currently being implemented. The remediation phase for the Company's
mainframe systems is complete. The remediation phase for the Company's
non-mainframe systems is approximately 95% complete and is also scheduled
for completion during the second quarter of Fiscal 2000. The remediation
phase of the Company's in-store systems has been completed. Comprehensive
test plans have been established for each corporate business system. The
end-to-end testing phase commenced during the fourth quarter of Fiscal 1999
and is scheduled for completion during the second quarter of Fiscal 2000.
The Company's private label credit card organization is monitored and reg-
ulated by the office of the Comptroller of the Currency. The Comptroller
has performed quarterly Year 2000 reviews of this organization since the
first quarter of Fiscal 1999 and is scheduled to do so through Fiscal 2000.
This organization has two separate system components, namely, internal
credit systems and a third-party credit card processing system used for all
primary functions of the private label credit card program. The stan-
dardization, evaluation, and remediation phases have been completed for the
internal credit systems.
The end-to-end testing phase commenced during the first quarter of Fiscal
2000 and is scheduled for completion during the second quarter of Fiscal
2000. The Company is regularly monitoring the progress of its third-party
credit processor in achieving Year 2000 compliance. Based on information
provided to the Company by that third-party processor, the standardization,
evaluation, and remediation phases for the third-party credit card process-
ing system have been completed. Testing of the third-party credit card
processing system has commenced and is scheduled for completion during the
second quarter of Fiscal 2000.
Embedded Technologies
Embedded technologies refers to any equipment or machinery that relies on a
computer chip or microprocessor in order to operate. Examples include
office systems, such as fax machines and photocopiers; building systems,
such as elevators, lighting, security systems, and environmental control
units; and business communication systems, such as data switching equipment
and telephone exchange equipment. Certain microprocessors within such
equipment may fail if they cannot properly recognize dates into the Year
2000.
The Company uses various technologies and computer controlled equipment in
the operation of its corporate and store facilities. This equipment
includes security monitoring systems; primary and back-up power supply
systems; energy management systems; elevators; and office equipment. Some
of this equipment may contain embedded chip technology that may be affected
(16)
<PAGE>
by the Year 2000 issue. The Company has taken an inventory of all such
equipment and has begun discussions with vendors who supply and/or support
such technology and equipment to assess the sensitivity of these systems
and equipment to the Year 2000 issue. In conjunction with the Corporate
Audit Department's program of auditing vendor preparedness for Year 2000,
the Company will be obtaining assurances from these vendors and, to the
extent possible, testing these systems to ensure Year 2000 compliance.
Private branch exchanges at the Company's Bensalem, Pennsylvania corporate
facilities are Year 2000 compliant. Telecommunication software at the
Company's corporate headquarters is in the process of being upgraded, with
completion scheduled for the second quarter of Fiscal 2000.
Distribution Center Computer Systems
The Company's distribution center, located in Greencastle, Indiana, uses a
variety of computer systems and embedded technology equipment for its day-
to-day operations. Shop floor machinery, interacting with complex computer
systems, monitors, processes, and controls plant processes and material
movement. Automated equipment includes conveyor systems, palletizers, sor-
ters, scales, and radio frequency devices. Vendors have supplied software
and equipment, which have been heavily customized for the Company's distri-
bution center configuration. The Company is working with appropriate
distribution center system vendors to perform all necessary Year 2000
remediation and testing services. The standardization and evaluation
phases covering the distribution center systems have been completed. The
remediation phase is currently being implemented, and it is anticipated
that the Company's vendors will deliver Year 2000 compliant systems to the
Company in several stages between the first quarter of Fiscal 2000 and the
third quarter of Fiscal 2000.
Vendors and Suppliers
The Company has initiated a formal communication program with significant
vendors to evaluate their Year 2000 compliance, and will be assessing their
responses to the Company's Year 2000 readiness questionnaire. Comprehen-
sive mailings were made during the fourth quarter of Fiscal 1999.
Questionnaires may be followed up with telephone interviews, and where
necessary, audits are being performed by the Company's Corporate Audit
Department. The Company cannot assure timely compliance of vendors and may
be adversely affected by the failure of a significant vendor to supply
merchandise or services due to Year 2000 compliance failures. Although the
Company values its relationship with significant vendors, it may use an
alternative vendor if it determines that a particular vendor is unlikely to
be Year 2000 compliant.
(17)
<PAGE>
Costs
The total cost of the Company's Year 2000 readiness program is estimated at
$6.6 million, of which approximately $1.3 million is for replacement
systems and the remainder is for remediation and upgrade costs. To-date,
$2.9 million of Year 2000 costs have been incurred, of which $2.4 million
were incurred through the end of Fiscal 1999. The Company expects to fund
the estimated balance of $3.7 million for its Year 2000 readiness program
from operating cash flows. The Company does not anticipate delaying any
significant information technology projects as a result of the Company's
Year 2000 compliance effort. Estimated future expenditures are not
expected to have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
Year 2000 Risk Assessment and Year 2000 Contingency Planning
The Company is a retailer of women's apparel, and does not rely on a single
customer for any significant amount of sales. The Company does not sell
products which use computer systems, embedded chip technology, or other
devices that may be sensitive to dates.
If the Company does not complete a significant portion of its Year 2000
readiness program in a timely fashion, its financial condition could be
materially adversely impacted. However, management does not consider the
possibility of such an occurrence to be likely at the present time. The
Company anticipates that the most reasonably likely worst case scenarios
include, but are not limited to, loss of communications to the stores, loss
of utilities, and the inability to process customer transactions or engage
in normal business activity. The Company is in the process of developing a
Year 2000 contingency plan, which is scheduled for completion during the
third quarter of Fiscal 2000. Despite such contingency plans, the Company
may be adversely affected by the failure of significant third-party vendors
to become Year 2000 compliant.
Projected completion dates and the estimated costs of the Company's Year
2000 readiness program are based on management's best estimates for future
events and are forward-looking statements that may be updated as additional
information becomes available. Such forward-looking statements are subject
to various risks and uncertainties that could cause actual results to
differ materially from those indicated. Such risks and uncertainties may
include, but are not limited to, the ability of the Company, its critical
vendors, and service providers to complete Year 2000 compliance remediation
in a timely fashion, the ability to identify and correct all relevant com-
puter codes and embedded chips, delay in the rendition of remediation
services provided by third parties, and disruptions to operations as a
result of Year 2000 compliance issues. Readers are cautioned that forward-
looking statements contained herein should be read in conjunction with the
disclosures in "Part I, Item 1 -- Business: Cautionary Statements for
Purposes of the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995" of the Company's Annual Report on Form 10-K for the
fiscal year ended January 30, 1999.
(18)
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company may be exposed to fluctuations in interest rates to the extent
that a portion of the investor certificates sold under its credit card
securitization program are floating-rate instruments. The Company regu-
larly monitors interest rate fluctuations and business implications sur-
rounding interest rate changes, and manages interest rate risk through the
use of derivative instruments.
As of May 1, 1999, the Company had rate exposure to floating-rate instru-
ments representing approximately $214 million, or 81% of all securitized
assets under the program. The Company has entered into certain interest
rate cap agreements that protect the Company's securitization master trust
if interest rates were to exceed 9% and 11%. The effect on the Company's
results of operations of a one percentage point change in short-term inter-
est rates by the end of Fiscal 2000 would not be material.
(19)
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
(a) and (b)
The information included under the caption "6. Shareholder Rights Plan,"
included in "PART I. FINANCIAL INFORMATION: Notes to Condensed Consoli-
dated Financial Statements (Unaudited)" on page 6 of this report is
incorporated herein by reference.
(c) Recent Sales of Unregistered Securities
During the quarter ended May 1, 1999, the Company issued 5,500 shares of
its Common Stock, $.10 par value. The shares were issued on February 10,
1999 to employees of the Company under the terms of the Company's Restrict-
ed Stock Award Plan for Associates. No cash consideration was received for
the shares, which were issued as bonus awards to the employees. The aggre-
gate fair market value of the shares on the dates of issue was $19,937.50.
The issuance and delivery of the 5,500 shares of Common Stock under the
Restricted Stock Award Plan for Associates need not be registered under the
Securities Act of 1933, as amended (the "1933 Act"), because they were
bonus grants of Restricted Stock under an employee benefit plan. There-
fore, the issuance of the shares did not involve an "offer" or "sale" of
securities under Section 2(3) of the 1933 Act.
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, Exhibits that were previously filed are
incorporated by reference. For Exhibits incorporated 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 30, 1999.
(Exhibit 3.2)
4 Rights Agreement, dated as of April 26, 1999, between Charming
Shoppes, Inc. and American Stock Transfer & Trust Company, as Rights
Agent, incorporated by reference to Form 8-K of the Registrant, filed
April 28, 1999. (Exhibit 4)
(20)
<PAGE>
(a) Exhibits (continued)
27 Financial Data Schedule.
(b) Reports on Form 8-K
On April 28, 1999, the Company filed a report on Form 8-K dated April 26,
1999. The 8-K was filed to report the adoption of a Shareholder Rights
Plan (which replaced the existing Shareholder Rights Plan expiring on April
26, 1999) and the declaration by the Company's Board of Directors of a
dividend distribution of one Right for each outstanding share of the
Company's Common Stock, payable April 26, 1999 to shareholders of record as
of April 12, 1999 pursuant to that Shareholder Rights Plan. The infor-
mation included under the caption "6. Shareholder Rights Plan," included
in "PART I. FINANCIAL INFORMATION: Notes to Condensed Consolidated Finan-
cial Statements (Unaudited)" on page 6 of this report is incorporated
herein by reference.
(21)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
<TABLE>
<S> <C>
CHARMING SHOPPES, INC.
-------------------------------------
(Registrant)
Date: June 11, 1999 DORRIT J. BERN
------------- -------------------------------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: June 11, 1999 ERIC M. SPECTER
------------- -------------------------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer
</TABLE>
(22)
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<PERIOD-END> MAY-01-1999
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0
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