<PAGE> 01
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 October 28, 2000
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 Octo-
ber 28, 2000, was 101,211,415 shares.
<PAGE> 02
CHARMING SHOPPES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
October 28, 2000 and January 29, 2000.......................... 2 - 3
Condensed Consolidated Statements of Operations and
Comprehensive Income
Thirteen weeks ended October 28, 2000 and October 30, 1999.... 4
Thirty-nine weeks ended October 28, 2000 and October 30, 1999. 5
Condensed Consolidated Statements of Cash Flows
Thirty-nine weeks ended October 28, 2000 and October 30, 1999. 6
Notes to Condensed Consolidated Financial Statements............. 7 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking Statements....................................... 13
Results of Operations............................................ 13 - 19
Liquidity and Capital Resources.................................. 19 - 23
Impact of Year 2000.............................................. 23
Market Risk...................................................... 23 - 24
Item 3. Quantitative and Qualitative Disclosures About Market
Risk............................................................. 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................ 25
</TABLE>
1
<PAGE> 03
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 28, January 29,
(In thousands) 2000 2000
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................ $ 58,259 $ 34,299
Available-for-sale securities (including fair
value adjustments of ($3) and $0,
respectively)................................... 42,354 41,339
Merchandise inventories.......................... 306,064 260,792
Deferred taxes................................... 10,801 10,801
Prepayments and other............................ 39,377 47,090
-------- --------
Total current assets............................ 456,855 394,321
-------- --------
Property, equipment, and leasehold improvements.. 505,566 450,401
Less: accumulated depreciation and amortization.. 284,313 259,477
-------- --------
Net property, equipment, and leasehold
improvements.................................... 221,253 190,924
-------- --------
Available-for-sale securities (including fair
value adjustments of ($836) and ($2,222),
respectively)................................... 75,606 74,490
Goodwill......................................... 93,810 97,405
Other assets..................................... 28,031 27,656
-------- --------
Total assets..................................... $875,555 $784,796
======== ========
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
</FN>
2
<PAGE> 04
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
October 28, January 29,
(In thousands except share amounts) 2000 2000
---- ----
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................. $136,085 $ 88,721
Accrued expenses................................. 119,264 142,304
Income taxes payable............................. 8,116 0
Current portion -- long-term debt................ 5,221 1,920
-------- --------
Total current liabilities....................... 268,686 232,945
-------- --------
Deferred taxes................................... 10,375 10,375
Long-term debt................................... 113,741 105,213
Stockholders' equity
Common Stock $.10 par value
Authorized -- 300,000,000 shares
Issued -- 110,316,415 shares and
109,639,425 shares, respectively.............. 11,032 10,964
Additional paid-in capital....................... 79,190 76,125
Treasury stock at cost -- 9,105,000 shares
and 8,955,000 shares, respectively.............. (41,537) (40,824)
Deferred employee compensation................... (1,908) (1,792)
Accumulated other comprehensive loss............. (523) (1,423)
Retained earnings................................ 436,499 393,213
-------- --------
Total stockholders' equity...................... 482,753 436,263
-------- --------
Total liabilities and stockholders' equity....... $875,555 $784,796
======== ========
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
</FN>
3
<PAGE> 05
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
October 28, October 30,
(In thousands except per-share amounts) 2000 1999
---- ----
<S> <C> <C>
Net sales......................................... $365,690 $277,441
Other income...................................... 2,912 3,702
-------- --------
Total revenue..................................... 368,602 281,143
-------- --------
Cost of goods sold, buying, and occupancy expenses 256,609 199,177
Selling, general, and administrative expenses..... 95,619 71,128
Non-recurring gain from demutualization of
insurance company................................ 0 (6,700)
Amortization of goodwill.......................... 1,199 0
Interest expense.................................. 2,393 1,729
-------- --------
Total expenses.................................... 355,820 265,334
-------- --------
Income before income taxes........................ 12,782 15,809
Income tax provision.............................. 4,883 7,533
-------- --------
Net income........................................ 7,899 8,276
-------- --------
Unrealized gains on available-for-sale securities,
net of income tax expense of $243 and $2,321,
respectively..................................... 456 4,253
Reclassification of realized (gains) losses on
available-for-sale securities, net of income
tax expense (benefit) of ($57) and $2,209,
respectively..................................... 104 (4,103)
-------- --------
Total other comprehensive gain (loss),
net of taxes..................................... 560 150
-------- --------
Comprehensive income.............................. $ 8,459 $ 8,426
======== ========
Basic net income per share........................ $ .08 $ .08
===== =====
Diluted net income per share...................... $ .08 $ .08
===== =====
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
</FN>
4
<PAGE> 06
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
October 28, October 30,
(In thousands except per-share amounts) 2000 1999
---- ----
<S> <C> <C>
Net sales......................................... $1,175,253 $848,159
Other income...................................... 7,607 9,299
---------- --------
Total revenue..................................... 1,182,860 857,458
---------- --------
Cost of goods sold, buying, and occupancy expenses 825,194 604,011
Selling, general, and administrative expenses..... 277,434 200,115
Non-recurring gain from demutualization of
insurance company................................ 0 (6,700)
Restructuring credit.............................. 0 (2,834)
Amortization of goodwill.......................... 3,595 0
Interest expense.................................. 6,595 5,526
---------- --------
Total expenses.................................... 1,112,818 800,118
---------- --------
Income before income taxes and extraordinary item. 70,042 57,340
Income tax provision.............................. 26,756 22,069
---------- --------
Income before extraordinary item.................. 43,286 35,271
Extraordinary item -- Gain on early retirement
of debt, net of income taxes of $664............. 0 1,232
---------- --------
Net income........................................ 43,286 36,503
---------- --------
Unrealized gains on available-for-sale securities,
net of income tax expense of $393 and $523,
respectively..................................... 734 971
Reclassification of realized (gains) losses on
available-for-sale securities, net of income tax
expense (benefit) of ($90) and $1,846,
respectively..................................... 166 (3,429)
---------- --------
Total other comprehensive gain (loss), net of
taxes............................................. 900 (2,458)
---------- --------
Comprehensive income.............................. $ 44,186 $ 34,045
========== ========
Basic income per share before extraordinary item.. $ .43 $ .36
Extraordinary item................................ .00 .01
----- -----
Basic net income per share........................ $ .43 $ .37
===== =====
Diluted income per share before extraordinary item $ .41 $ .34
Extraordinary item................................ .00 .01
----- -----
Diluted net income per share...................... $ .41 $ .35
===== =====
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
</FN>
5
<PAGE> 07
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
October 28, October 30,
(In thousands) 2000 1999
---- ----
<S> <C> <C>
Operating activities
Net income........................................... $ 43,286 $ 36,503
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 35,964 23,661
Loss (gain) on sale of available-for-sale securities 256 (5,276)
Loss (gain) from disposition of capital assets...... 557 (3,147)
Gain on early retirement of debt.................... 0 (1,896)
Other, net.......................................... (484) 1,323
Changes in operating assets and liabilities:
Merchandise inventories........................... (45,272) (80,206)
Accounts payable.................................. 47,364 34,718
Prepayments and other............................. 7,351 (5,726)
Accrued expenses.................................. (23,036) 10,624
Income taxes payable.............................. 8,116 7,501
-------- --------
Net cash provided by operating activities............ 74,102 18,079
-------- --------
Investing activities
Investment in capital assets......................... (45,250) (26,053)
Proceeds from sales of capital assets................ 833 10,329
Proceeds from sales of available-for-sale securities. 54,285 361,285
Gross purchases of available-for-sale securities..... (55,281) (355,704)
Acquisition of Modern Woman, net of cash acquired.... 0 (6,435)
Increase in other assets............................. (4,169) (7,047)
-------- --------
Net cash used in investing activities................ (49,582) (23,625)
-------- --------
Financing activities
Reduction of long-term borrowings.................... (2,503) (21,055)
Reduction of short-term borrowings................... 0 (3,793)
Purchases of treasury stock.......................... (713) (1,419)
Proceeds from exercise of stock options.............. 2,656 866
-------- --------
Net cash used in financing activities................ (560) (25,401)
-------- --------
Increase (Decrease) in cash and cash equivalents..... 23,960 (30,947)
Cash and cash equivalents, beginning of period....... 34,299 43,789
-------- --------
Cash and cash equivalents, end of period............. $ 58,259 $ 12,842
======== ========
Non-cash financing and investing activities
Equipment acquired through capital leases............ $ 14,331 $ 0
======== ========
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
</FN>
6
<PAGE> 08
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of October 28, 2000 and
the condensed consolidated statements of operations and comprehensive in-
come and of cash flows for the thirteen and thirty-nine weeks ended October
28, 2000 and October 30, 1999 have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position at October 28, 2000 and the results of operations and cash flows
for the thirteen and thirty-nine weeks ended October 28, 2000 and October
30, 1999 have been made. Certain prior-period amounts in the condensed
consolidated balance sheet and condensed consolidated statements of cash
flows have been reclassified to conform to the current-period presentation.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted.
These condensed consolidated financial statements should be read in con-
junction with the financial statements and notes thereto included in the
Company's January 29, 2000 Annual Report on Form 10-K. The results of
operations for the thirteen and thirty-nine weeks ended October 28, 2000
and October 30, 1999 are not necessarily indicative of operating results
for the full fiscal year.
On August 2, 1999, the Company acquired Modern Woman Holdings, Inc.
and on January 7, 2000 the Company acquired Catherine's Stores Corporation.
The acquisitions were accounted for under the purchase method of account-
ing, and the results of operations of the acquired companies are included
in the Company's results of operations as of the dates of their respective
acquisitions. Prior-period results have not been restated.
2. Stockholders' Equity
<TABLE>
<CAPTION>
Thirty-nine
Weeks Ended
(In thousands) October 28, 2000
----------------
<S> <C>
Total stockholders' equity, beginning of period............ $436,263
Net income................................................. 43,286
Exercises of stock options................................. 2,293
Amortization of deferred compensation expense.............. 724
Net unrealized gains on available-for-sale securities,
net of income tax expense of $483........................ 900
Purchases of treasury stock................................ (713)
--------
Total stockholders' equity, end of period.................. $482,753
========
</TABLE>
7
<PAGE> 09
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Accrued Restructuring Expenses and Restructuring Credit
On March 5, 1998, the Company's Board of Directors approved a restruc-
turing plan (the "Plan") that resulted in a pre-tax charge of $34,000,000.
The Plan was approved in conjunction with the decision to eliminate men's
merchandise from the Company's Fashion Bug stores. To-date, 72 stores have
been closed and 100 stores have been downsized. Accrued restructuring ex-
penses are included in accrued expenses in the accompanying condensed
consolidated balance sheets. Management anticipates that the current
reserve is adequate to cover expected future expenditures related to this
plan. The following table summarizes accrued restructuring charges related
to this Plan as of January 29, 2000 and payments charged against the
accrual during the thirty-nine weeks ended October 28, 2000:
<TABLE>
<CAPTION>
Accrued At Accrued At
January 29, October 28,
(in thousands) 2000 Payments 2000
---- -------- ----
<S> <C> <C> <C>
Lease terminations/amendments and
renovations of vacated store space..... $4,890 $(4,474) $ 416
Other costs.............................. 1,807 (815) 992
------ ------- ------
$6,697 $(5,289) $1,408
====== ======= ======
</TABLE>
During the fourth quarter of the fiscal year ended January 29, 2000,
the Company recorded a restructuring charge of $1,459,000 in connection
with the Company's plan to consolidate its Modern Woman stores into its
Catherine's stores. The restructuring charge was primarily for lease term-
ination costs related to the closing of 11 Modern Woman stores that geo-
graphically overlap Catherine's stores. The majority of these stores will
be closed during the fiscal year ending February 3, 2001. As of October
28, 2000, $136,000 has been charged against this accrual. Management
anticipates that the current reserve is adequate to cover expected future
expenditures related to this plan.
In December 1998, the Company consolidated its Fashion Bug distribu-
tion center operations in its Greencastle, Indiana facility, and closed its
Bensalem, Pennsylvania distribution center. As a result, the Company
recognized a pre-tax restructuring charge of $20,246,000 during the fourth
quarter of the fiscal year ended January 30, 1999. During the thirty-nine
weeks ended October 30, 1999, the Company completed the sale of the Ben-
salem facility and revised its estimate of costs relating to the distri-
bution center restructuring. As a result, the Company recognized a pre-tax
restructuring credit of $2,834,000 during the thirty-nine weeks ended Octo-
ber 30, 1999. The credit primarily represents sales proceeds in excess of
the estimated net realizable value of the Bensalem facility.
8
<PAGE> 10
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Long-term Debt
<TABLE>
<CAPTION>
October 28, January 29,
(In thousands) 2000 2000
---- ----
<S> <C> <C>
7.5% Convertible subordinated notes due 2006....... $ 96,047 $ 96,047
Capital lease obligations.......................... 16,299 4,332
7.5% mortgage note................................. 6,494 6,652
Other.............................................. 122 102
Total long-term debt.............................. 118,962 107,133
Less current portion............................... 5,221 1,920
-------- --------
$113,741 $105,213
======== ========
</TABLE>
5. Repurchases of Common Stock and Convertible Notes
The Company's Board of Directors has approved the repurchase of up to
20,000,000 shares of the Company's Common Stock. During the thirty-nine
weeks ended October 28, 2000, the Company repurchased 150,000 shares of its
Common Stock at an aggregate cost of $713,000. During the thirty-nine
weeks ended October 30, 1999, the Company repurchased 245,000 shares of its
Common Stock at an aggregate cost of $1,419,000. To-date, the Company has
repurchased an aggregate total of 9,105,000 shares of its Common Stock at
an aggregate cost of $41,537,000.
During the thirty-nine weeks ended October 30, 1999, the Company re-
purchased $23,316,000 aggregate principal amount of its 7.5% Convertible
Subordinated Notes due 2006 (the "Notes") at a total cost of $21,031,000.
The Notes had an aggregate carrying value of $22,927,000 as of the re-
purchase dates. The repurchases resulted in an extraordinary gain of
$1,232,000, net of income taxes of $664,000. The Company did not repur-
chase any Notes during the thirty-nine weeks ended October 28, 2000.
6. Non-recurring Gain from Demutualization of Insurance Company
During the thirteen weeks ended October 30, 1999, the Company received
a stock distribution from one of its mutual insurance carriers in connec-
tion with the carrier's conversion to a publicly-held corporation (demu-
tualization). In accordance with the consensus reached in Emerging Issues
Task Force Issue No. 99-4, "Accounting for Stock Received from the Demu-
tualization of A Mutual Insurance Company," the Company recorded the
distribution at its fair value and recognized the resulting non-recurring
gain in income from continuing operations.
9
<PAGE> 11
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Net Income (Loss) Per Share
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 28, October 30, October 28, October 30,
(In thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic weighted average
common shares outstanding.... 101,155 98,386 101,042 98,286
Dilutive effect of
assumed conversion of
convertible notes............ 0 0 12,875 16,000
Dilutive effect of
stock options................ 827 1,430 1,019 1,100
------- ------ ------- -------
Diluted weighted average
common shares and
equivalents outstanding...... 101,982 99,816 114,936 115,386
------- ------ ------- -------
Net income.................... $7,899 $8,276 $43,286 $36,503
Decrease in interest expense
from assumed conversion of
notes, net of income taxes... 0 0 3,376 3,524
------ ------ ------- -------
Net income used to determine
diluted earnings per share... $7,899 $8,276 $46,662 $40,027
====== ====== ======= =======
</TABLE>
Options to purchase 4.6 million and 3.0 million shares of Common Stock
at October 28, 2000 and October 30, 1999, 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 per share because
the effect would have been antidilutive.
8. Impact of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 requires
the recognition of all derivative instruments as either assets or liabili-
ties in the statement of financial position, and the measurement of those
instruments at fair value. SFAS No. 133 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. In June 1999, the FASB issued SFAS No. 137, "Accounting for Deriv-
ative Instruments and Hedging Activities -- Deferral of the Effective Date
10
<PAGE> 12
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. Impact of Recent Accounting Pronouncements (Continued)
of FASB Statement No. 133." SFAS No. 137 defers the effective date of SFAS
No. 133 to all fiscal quarters of fiscal years beginning after June 15,
2000. The Company will adopt the provisions of SFAS No. 133 as of the
beginning of the fiscal year ending February 2, 2002.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." This statement
amends the accounting and reporting standards of SFAS No. 133 for certain
derivative instruments and hedging activities as the result of a limited
number of issues causing implementation difficulties for entities applying
SFAS 133.
Under SFAS 133, changes in the fair value of derivatives are included
in current income or in other comprehensive income, depending on whether
the derivative is designated as a hedge, and if so, the type of hedge.
Changes in the fair value of a derivative designated as a fair-value hedge
will generally be offset through income by changes in the fair value of the
related hedged item. Changes in the fair value of a derivative designated
as a cash-flow hedge will be reported in other comprehensive income and
reclassified to current income in the periods affected by the variable cash
flows of the hedged item. Changes in the value of a portion of a deriva-
tive that is ineffective as a hedge will be recognized in current income.
The Company uses an interest rate swap agreement to limit its interest
rate risk on assets related to the management of its proprietary credit
card program. This derivative will be designated as a cash flow hedge.
Based on interest rates effective as of October 28, 2000, the estimated
fair value of the swap agreement would not have had a material effect on
the Company's financial position, results of operations, or comprehensive
income.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition
in Financial Statements." SAB 101 summarizes certain of the SEC's views
regarding the application of generally accepted accounting principles to
revenue recognition in financial statements. In March 2000, the SEC
amended SAB 101 to require companies with fiscal years beginning between
December 16, 1999 and March 15, 2000 to implement the provisions of SAB 101
no later than June 30, 2000. In June 2000, the SEC further amended SAB 101
11
<PAGE> 13
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. Impact of Recent Accounting Pronouncements (Continued)
to permit companies to delay the implementation date of SAB 101 until no
later than the fourth fiscal quarter of fiscal years beginning after Decem-
ber 15, 1999. The Company will adopt the provisions of SAB 101 as of the
fiscal quarter ending February 3, 2001. Management does not expect that
adoption of SAB 101 will have a material effect on the Company's full-year
results of operations or financial position. However, the seasonal nature
of the Company's business may result in a marginal impact on interim
results of operations as a result of the adoption of the provisions of SAB
101.
In September 2000, The FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabili-
ties," a replacement of SFAS No. 125. SFAS No. 140 carries over most of
the provisions of SFAS No. 125, but revises the standards for accounting
for securitizations and other transfers of financial assets and collateral
and requires certain disclosures. Under SFAS No. 140, the accounting and
reporting standards are based on application of a financial-components
approach that focuses on control. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets
it controls and the liabilities it has incurred, de-recognizes financial
assets when control has been surrendered, and de-recognizes liabilities
when extinguished. SFAS No. 140 also requires disclosures about securiti-
zations entered into during the period and retained interests in securi-
tized financial assets at the balance sheet date, accounting policies,
sensitivity information relating to retained interests, and cash flows dis-
tributed to the transferor.
SFAS No. 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001.
SFAS No. 140 is effective for recognition and reclassification of collat-
eral and for disclosures relating to securitization transactions and col-
lateral for fiscal years ending after December 15, 2000. The Company will
adopt the disclosure provisions of SFAS No. 140 as of the fiscal year
ending February 3, 2000, and will adopt the accounting requirements of SFAS
No. 140 for transfers of assets occurring after march 31, 2001. Management
is currently assessing the effect that SFAS No. 140 will have on the Com-
pany's results of operations, financial position, and financial statement
disclosures.
12
<PAGE> 14
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 concern-
ing the Company's operations, performance and financial condition. In
particular, it includes forward-looking statements regarding earnings,
sales performance, store openings and closings, capital requirements,
management's expectations for Year 2000 compliance, the Company's exposure
to fluctuations in interest rates, future performance following the Com-
pany's acquisitions, joint ventures, restructurings, and expense reduction
initiatives, and other matters. Such forward-looking statements are sub-
ject to various risks and uncertainties 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, (i) rapid
changes in or miscalculation of fashion trends, (ii) extreme or unseason-
able weather conditions, (iii) economic downturns, a weakness in overall
consumer demand, inflation, and cyclical variations in the retail market
for women's fashion apparel, (iv) the risks attendant to the sourcing of
the Company's merchandise needs abroad, including exchange rate fluctua-
tions, political instability, trade sanctions or restrictions, changes in
quota and duty regulations, delays in shipping, or increased costs of
transportation, (v) the interruption of merchandise flow to the Company's
retail stores from its centralized distribution facilities, (vi) competi-
tive pressures, (vii) failure to realize merger-related synergies, (viii)
fluctuations in interest rates, (ix) the ability to hire and train
associates, (x) the availability of suitable store locations on appropriate
terms, and (xi) disruptions to operations as a result of Year 2000
compliance issues. 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 29, 2000, and in the Company's
reports filed with the Securities and Exchange Commission from time to
time.
RESULTS OF OPERATIONS
In August 1999, the Company acquired Modern Woman Holdings, Inc.
("Modern Woman"). Modern Woman operated 136 retail apparel stores in 24
states, specializing in large-size women's apparel. In January 2000, the
Company acquired Catherines Stores Corporation ("Catherine's Stores").
Catherine's Stores operated 436 retail apparel stores in 40 states and the
District of Columbia, specializing in large-size women's apparel. The Com-
pany has consolidated the Modern Woman stores into Catherine's Stores. The
13
<PAGE> 15
acquisitions have been accounted for under the purchase method of account-
ing, and the results of operations of the acquired companies are included
in the Company's results of operations from their dates of acquisition.
Prior-period results have not been restated.
Assets acquired and liabilities assumed have been recorded at their
estimated fair values, and are subject to adjustment pending final deter-
mination of their acquisition values. The final allocation of the purchase
price is not expected to differ materially from the allocations used to
prepare these financial statements. In connection with the Catherine's
Stores acquisition, the purchase price exceeded the fair value of identifi-
able net assets acquired. The excess purchase price, approximately $97.7
million, has been accounted for as goodwill, and is being amortized over a
20-year period. The results of operations for the thirteen and thirty-nine
weeks ended October 28, 2000 include $1.2 million and $3.6 million, respec-
tively, of goodwill amortization.
The following table sets forth, as a percentage of net sales, items
appearing in the Condensed Consolidated Statements of Operations and
Comprehensive Income:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales........................ 100.0% 100.0% 100.0% 100.0%
Other income..................... 0.8 1.3 0.6 1.1
Cost of goods sold, buying, and
occupancy expenses.............. 70.2 71.8 70.2 71.2
Selling, general, and
administrative expenses......... 26.1 25.6 23.6 23.6
Non-recurring gain from demutual-
ization of insurance company.... -- (2.4) -- (0.8)
Restructuring credit............. -- -- -- (0.3)
Amortization of goodwill......... 0.3 -- 0.3 --
Interest expense................. 0.7 0.6 0.5 0.6
Income before income taxes and
extraordinary item.............. 3.5 5.7 6.0 6.8
Income tax provision............. 1.3 2.7 2.3 2.6
Income before extraordinary item. 2.2 3.0 3.7 4.2
Gain on early retirement of
debt, net of taxes.............. -- -- -- 0.1
Net income....................... 2.2 3.0 3.7 4.3
Excluding restructuring credit
and non-recurring items:
Income before income taxes and
extraordinary item.............. 3.5 3.3 6.0 6.0
Income before extraordinary item. 2.2 2.1 3.7 3.7
</TABLE>
14
<PAGE> 16
The following table sets forth certain information related to the Company's
net sales:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Increase in comparable Fashion
Bug store sales(1)............. 1.2% 6.0% 1.0% 7.9%
Sales from new Fashion Bug
stores as a percentage of
total prior-period sales....... 8.0 4.7 7.8 4.4
Increase in sales from
Catherine's and Modern Woman
stores as a percentage of
total prior-period sales(2).... 26.1 8.6 33.0 2.7
Prior-period sales from closed
Fashion Bug stores as a
percentage of total
prior-period sales............. (3.3) (3.3) (3.2) (3.6)
Increase in total sales......... 31.8 15.7 38.6 11.2
--------------------
</TABLE>
[FN]
(1) Sales from stores in operation during both periods. Stores are added
to the comparable store base after 13 full months of operation.
(2) Sales from Catherine's stores acquired in January 2000 and Modern
Woman stores acquired in August 1999.
</FN>
Thirteen Weeks Ended October 28, 2000 and October 30, 1999
Net sales for the quarter ended October 28, 2000 ("Fiscal 2001 Third
Quarter") totaled $365.7 million as compared to net sales of $277.4 million
for the quarter ended October 30, 1999 ("Fiscal 2000 Third Quarter"). Net
sales for the Fiscal 2001 Third Quarter include $93.0 million in sales from
Catherine's Stores, including Modern Woman, which has been integrated into
Catherine's Stores. Net sales for the Fiscal 2000 Third Quarter include
$20.7 million in sales from Modern Woman. For Fashion Bug comparable store
sales, increases in junior and plus-size sportswear and intimate apparel
were partially offset by decreases in missy sportswear, dresses, access-
ories, and girls, resulting in an overall increase of 1.2% in comparable
store sales. As of October 28, 2000, the Company operated 1,237 Fashion
Bug stores and 535 Catherine's stores, as compared to 1,168 Fashion Bug
stores and 135 Modern Woman stores as of October 30, 1999.
Other income expressed as a percentage of sales decreased 0.5% in the
Fiscal 2001 Third Quarter as compared to the Fiscal 2000 Third Quarter,
primarily as a result of a decrease in interest income. Interest income
decreased as a result of reduced levels of available-for-sale securities
during the Fiscal 2001 Third Quarter as compared to the Fiscal 2000 Third
Quarter. During the latter half of the fiscal year ended January 29, 2000
("Fiscal 2000") the Company sold available-for-sale securities to finance
the Catherine's Stores and Modern Woman acquisitions.
15
<PAGE> 17
Cost of goods sold, buying, and occupancy expenses expressed as a
percentage of sales decreased 1.6% in the Fiscal 2001 Third Quarter as com-
pared to the Fiscal 2000 Third Quarter. Cost of goods sold as a percentage
of sales decreased 1.5% in the Fiscal 2001 Third Quarter as compared to the
Fiscal 2000 Third Quarter. The improvement in merchandise margins was
primarily a result of the effect of relatively higher gross margins at the
Company's Catherine's stores and an improvement in gross margins at the
Company's Fashion Bug stores. Cost of goods sold as a percentage of sales
for the Company's Fashion Bug stores decreased 0.5% in the Fiscal 2001
Third Quarter as compared to the Fiscal 2000 Third Quarter. Buying and
occupancy expenses expressed as a percentage of sales decreased 0.1% in the
Fiscal 2001 Third Quarter as compared to the Fiscal 2000 Third Quarter.
Selling, general, and administrative expenses expressed as a percent-
age of sales increased 0.5% in the Fiscal 2001 Third Quarter as compared to
the Fiscal 2000 Third Quarter. Selling expenses increased 0.4% as a per-
centage of sales, primarily as a result of increases in wages at the
Company's Fashion Bug stores and the impact of relatively higher costs at
the Company's Catherine's Stores. General and administrative expenses in-
creased 0.1% as a percentage of sales. Selling, general, and administra-
tive expenses exclude goodwill amortization related to the acquisition of
the Catherine's stores.
During the Fiscal 2000 Third Quarter, the Company received a stock
distribution from one of its mutual insurance carriers in connection with
the carrier's conversion to a publicly-held corporation (demutualization).
In accordance with the consensus reached by the Emerging Issues Task Force
of the Financial Accounting Standards Board in Issue No. 99-4, "Accounting
for Stock Received from the Demutualization of A Mutual Insurance Company,"
the Company recorded the distribution at its fair value and recognized the
resulting non-recurring gain in income from continuing operations.
Interest expense expressed as a percentage of sales increased 0.1% in
the Fiscal 2001 Third Quarter as compared to the Fiscal 2000 Third Quarter.
Interest expense increased as a result of long-term debt and capital lease
obligations totaling $11.2 million that were assumed by the Company in
connection with the Catherine's Stores acquisition and $9.7 million of
capital lease obligations incurred in the Fiscal 2001 Third Quarter.
The income tax provision for the Fiscal 2001 Third Quarter was 38.2%
of the Company's pre-tax income, as compared to 47.7% for the Fiscal 2000
Third Quarter. The tax provision for the Fiscal 2000 Third Quarter in-
cludes an additional non-recurring provision of $2.0 million related to one
of the Company's employee insurance programs. Excluding the non-recurring
provision, the effective tax rate for the Fiscal 2000 Third Quarter was
35.0% of the Company's pre-tax income. The increase in the estimated
effective tax rate, excluding the non-recurring provision, is primarily a
result of the non-deductibility for tax purposes of goodwill amortization
related to the Catherine's Stores acquisition and a higher effective tax
rate for Catherine's Stores.
16
<PAGE> 18
Net income per share, assuming dilution, for the Fiscal 2001 Third
Quarter was $.08 as compared to $.08 for the Fiscal 2000 Third Quarter.
Net income for the Fiscal 2000 Third Quarter includes a pre-tax non-
recurring gain of $6.7 million and a non-recurring tax provision of $2.0
million. Excluding the non-recurring gain and tax provision, net income
per share, assuming dilution, for the Fiscal 2000 Third Quarter was $.06.
Diluted net income per share excluding goodwill amortization (cash earnings
per share) for the Fiscal 2001 Third Quarter was $.09.
Thirty-nine Weeks Ended October 28, 2000 and October 30, 1999
Net sales for the first three quarters of the fiscal year ending
February 3, 2001 ("Fiscal 2001") totaled $1,175.3 million as compared to
net sales of $848.2 million for the first three quarters of Fiscal 2000.
Net sales for the first three quarters of Fiscal 2001 include $300.9
million of sales from Catherine's Stores, including Modern Woman, which has
been integrated into Catherine's Stores. Net sales for the first three
quarters of Fiscal 2000 include $20.7 million of sales from Modern Woman.
For Fashion Bug comparable store sales, increases in junior and plus-size
sportswear, coats, intimate apparel, and footwear were partially offset by
decreases in dresses and accessories, resulting in an overall increase of
1.0% in comparable store sales.
Other income expressed as a percentage of sales decreased 0.5% in the
first three quarters of Fiscal 2001 as compared to the first three quarters
of Fiscal 2000. The decrease was primarily a result of lower interest
income from reduced levels of available-for-sale securities during Fiscal
2001 as compared to Fiscal 2000. The Company sold a portion of its
available-for-sale securities during the latter half of Fiscal 2000 to
finance the Catherine's Stores and Modern Woman acquisitions. The decrease
in interest income was partially offset by a decrease in realized losses
from the sale of available-for-sale securities. During the first three
quarters of Fiscal 2000, the Company realized losses from sales of
available-for-sale securities in connection with a realignment of the
Company's portfolio.
Cost of goods sold, buying, and occupancy expenses expressed as a
percentage of sales decreased 1.0% in the first three quarters of Fiscal
2001 as compared to the first three quarters of Fiscal 2000. Cost of goods
sold as a percentage of sales decreased 1.0% in the first three quarters of
Fiscal 2001 as compared to the first three quarters of Fiscal 2000. The
improvement in merchandise margins was primarily a result of the effect of
relatively higher gross margins at the Company's Catherine's stores. Cost
of goods sold as a percentage of sales for the Company's Fashion Bug stores
decreased 0.1% in the first three quarters of Fiscal 2001 as compared to
the first three quarters of Fiscal 2000. Buying and occupancy expenses ex-
pressed as a percentage of sales were unchanged in the first three quarters
of Fiscal 2001 as compared to the first three quarters of Fiscal 2000.
17
<PAGE> 19
Selling, general, and administrative expenses expressed as a percent-
age of sales were unchanged in the first three quarters of Fiscal 2001 as
compared to the first three quarters of Fiscal 2000. Selling expenses
increased 0.2% as a percentage of sales, primarily as a result of higher
wage costs. General and administrative expenses decreased 0.2% as a
percentage of sales, primarily as a result of the achievement of cost
synergies related to the Catherine's Stores and Modern Woman acquisitions.
Selling, general, and administrative expenses exclude goodwill amortization
related to the acquisition of the Catherine's stores.
During the first three quarters of Fiscal 2000, the Company received a
stock distribution from one of its mutual insurance carriers in connection
with the carrier's conversion to a publicly-held corporation (demutual-
ization). In accordance with the consensus reached by the Emerging Issues
Task Force of the Financial Accounting Standards Board in Issue No. 99-4,
"Accounting for Stock Received from the Demutualization of A Mutual
Insurance Company," the Company recorded the distribution at its fair value
and recognized the resulting non-recurring gain in income from continuing
operations.
In December 1998, the Company consolidated its Fashion Bug distribu-
tion center operations in its Greencastle, Indiana facility and closed its
Bensalem, Pennsylvania distribution center. As a result, the Company re-
cognized a pre-tax restructuring charge of $20.2 million during the fourth
quarter of Fiscal 1999. During the first three quarters of Fiscal 2000,
the Company completed the sale of the Bensalem facility and revised its
estimate of costs relating to the distribution center restructuring. As a
result, the Company recognized a pre-tax restructuring credit of $2.8
million. The credit primarily represents sales proceeds in excess of the
estimated net realizable value of the Bensalem facility.
Interest expense expressed as a percentage of sales decreased 0.1% in
the first three quarters of Fiscal 2001 as compared to the first three
quarters of Fiscal 2000 as the result of the leveraging effect of an
increase in sales, but increased in amount. Interest expense increased as
a result of long-term debt and capital lease obligations totaling $11.2
million that were assumed by the Company in connection with the Catherine's
Stores acquisition and $14.3 million of capital lease obligations incurred
in the first three quarters of Fiscal 2001. This increase was partially
offset by reduced interest expense resulting from the Company's repurchase
of $23.3 million aggregate principal amount of its 7.5% Convertible
Subordinated Notes due 2006 during the Fiscal 2000 First Quarter.
The income tax provision for the first three quarters of Fiscal 2001
was 38.2% of the Company's pre-tax income, as compared to 38.5% for the
first three quarters of Fiscal 2000. The tax provision for the first three
quarters of Fiscal 2000 includes an additional non-recurring provision of
$2.0 million related to one of the Company's employee insurance programs.
Excluding the non-recurring provision, the effective tax rate for the first
18
<PAGE> 20
three quarters of Fiscal 2000 was 35.0% of the Company's pre-tax income.
The increase in the estimated effective tax rate is primarily a result of
the non-deductibility for tax purposes of goodwill amortization related to
the Catherine's Stores acquisition and a higher effective tax rate for
Catherine's Stores.
During the first quarter of Fiscal 2000, 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 convertible notes had
an aggregate carrying value of $22.9 million as of the repurchase dates.
The repurchases resulted in an extraordinary gain of $1.2 million, net of
income taxes of $0.7 million.
Net income per share, assuming dilution, for the first three quarters
of Fiscal 2001 was $.41 as compared to $.35 for the first three quarters of
Fiscal 2000. Net income for the first three quarters of Fiscal 2000
includes a pre-tax non-recurring gain of $6.7 million, a pre-tax restruc-
turing credit of $2.8 million, and a non-recurring tax provision of $2.0
million. Net income per share for the first three quarters of Fiscal 2000
also includes $.01 from the extraordinary gain on the repurchase of the
notes. Excluding the non-recurring items, restructuring credit, and extra-
ordinary gain, net income per share, assuming dilution, for the first three
quarters of Fiscal 2000 was $.30. Diluted net income per share excluding
goodwill amortization (cash earnings per share) for the Fiscal 2001 Third
Quarter was $.44.
Based on current sales trends, the Company anticipates that comparable
stores sales for the Fashion Bug stores will be flat to down slightly
during the fourth quarter, as compared to an 11% increase last year. On
the basis of these sales projections for the fourth quarter, the Company
estimates that it will meet analysts' consensus earnings estimates for the
fourth quarter of Fiscal 2001 of $0.10 per share, assuming the continuation
of strong sales performance at Catherines, merger-related synergies, and
cost reductions at Fashion Bug.
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, (iii) its investment portfolio and (iv) its credit facilities.
As of October 28, 2000, the Company had working capital of $188.2 million
as compared to $161.4 million at January 29, 2000. Working capital at
October 28, 2000 included $58.3 million of cash and cash equivalents,
compared to cash and cash equivalents of $34.3 million at January 29, 2000.
The ratio of current assets to current liabilities was 1.7 to 1 at October
28, 2000 and January 29, 2000. Investments in long-term available-for-sale
securities were $75.6 million as of October 28, 2000, as compared to $74.5
million as of January 29, 2000.
19
<PAGE> 21
Net cash provided by operating activities was $74.1 million for the
first three quarters of Fiscal 2001, as compared to $18.1 million for the
first three quarters of Fiscal 2000. The increase in cash provided by
operations was primarily a result of an increase in trade accounts payable
net of the change in inventories as a result of reduced inventory levels in
the Company's Fashion Bug stores and improved credit terms for the Com-
pany's Catherine's stores. Cash provided by operations also increased as a
result of higher operating earnings before depreciation and amortization
for the first three quarters of Fiscal 2001. These increases were par-
tially offset by an increase in net payments of prepaid and accrued
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 facil-
ity, which expires June 30, 2001, enables the Company to issue letters of
credit for overseas purchases of merchandise and provides for seasonal cash
borrowings, if necessary. The facility is secured by merchandise inven-
tory, furniture and fixtures at the Fashion Bug retail stores, and certain
other Company assets. As of October 28, 2000, the availability under this
facility was approximately $150.0 million, against which the Company had
outstanding letters of credit of $49.0 million. There were no cash borrow-
ings outstanding under this agreement as of October 28, 2000. 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. The
Company anticipates that the agreement will be renewed as of its expiration
date.
As a result of the Catherine's Stores acquisition, the Company has
access to a credit facility with a maximum availability of $20 million.
The facility, which expires June 29, 2001, enables the Company to issue
letters of credit for overseas purchases of merchandise and provides for
seasonal cash borrowings, if necessary, by utilizing a $5 million swingline
credit facility. The agreement is secured by inventory, general intan-
gibles, patents, trademarks, and proceeds of the foregoing. At October 28,
2000, the combined availability under the working capital and swingline
facilities was $20.0 million, against which the Company had outstanding
letters of credit of $4.2 million.
As a result of the acquisition of Modern Woman, the Company also has
access to a line of credit with a maximum availability of $10 million. As
of October 28, 2000, $5.0 million was available under this agreement,
against which the Company had outstanding letters of credit of $0.2 mil-
lion. In exchange for the bank's release of its security interest in all
of the assets of Modern Woman, the Company pledged $5 million of available-
for-sale securities as security for the line of credit.
In connection with the acquisition of Catherine's Stores, the Company
assumed a 7.5% Mortgage Note and certain capital lease obligations. The
mortgage financing agreement provides for a $6.9 million mortgage facility
with a seven-year term and a 20-year amortization period, and is secured by
20
<PAGE> 22
land and buildings at the Memphis, Tennessee office of Catherine's Stores.
The capital leases are for data processing and point-of-sale ("POS")
equipment. At the end of the initial lease term, the Company has the
option of purchasing the equipment at fair market value (or at $1 in the
case of the POS equipment), renewing the leases, or returning the equipment
to the lessor.
During the second and third quarters of Fiscal 2001, pursuant to its
program to replace its existing POS equipment, the Company acquired $14.3
million of POS equipment for its Fashion Bug and Catherine's Stores under
capital leases. These leases generally have an initial lease term of 60
months and contain a bargain purchase option. The Company anticipates
acquiring additional POS equipment at a total cost of approximately $16.0
million over the next 24 months. The POS equipment will be financed
primarily through the use of capital leases. As of October 28, 2000, the
Company has current debt maturity payments of $5.2 million, which are pri-
marily for amounts due under the 7.5% Mortgage Note and the capital lease
obligations.
Capital expenditures were $45.3 million during the first three quar-
ters of Fiscal 2001. During Fiscal 2001, the Company anticipates incurring
capital expenditures of approximately $65 million excluding capital lease
payments, which will primarily be for the construction, remodeling, and
fixturing of new and existing retail stores and the purchase of loss-
prevention equipment. The Company expects to finance these capital expend-
itures principally through internally-generated funds.
The Company plans to open approximately 105 new stores, remodel
approximately 85 stores, and relocate approximately 25 stores during Fiscal
2001. The following table sets forth information with respect to store
activity for the first three quarters of Fiscal 2001:
<TABLE>
<CAPTION>
Fashion Catherine's Modern
Bug Stores Woman Total
--- ------ ----- -----
<S> <C> <C> <C> <C>
Stores at January 29, 2000......... 1,185 433 122 1,740
----- --- --- -----
Stores opened...................... 71 10 0 81
Stores converted................... 0 85 (85) 0
Stores closed...................... (19) (3) (27) (49)
----- --- --- -----
Net change in stores............... 52 92 (112) 32
----- --- --- -----
Stores at October 28, 2000......... 1,237 525 10 1,772
===== === === =====
Stores relocated during period..... 14 6 0 20
Stores remodeled during period..... 62 11 0 73
</TABLE>
21
<PAGE> 23
On October 26, 2000, the Company announced the signing of a joint
venture agreement with Monsoon Plc. Monsoon Plc operates approximately 300
stores, primarily in the United Kingdom, offering women's clothing and
accessories under the "MONSOON" and "ACCESSORIZE" brand names. The joint
venture will be a separate operating unit of the Company. During the first
full year of operation, the joint venture plans to open as many as 20
"MONSOON" and/or "ACCESSORIZE" stores in the United States. The Company
plans to invest up to $4.0 million, or 80% of the initial capital in the
joint venture, during Fiscal 2001, and an additional $4.0 million over the
following three years. The joint venture is not expected to have a mater-
ial impact on the Company's earnings for Fiscal 2001 or for the fiscal year
ending February 2, 2002 ("Fiscal 2002").
In connection with the Company's store restructuring plan, which was
adopted in conjunction with the decision to eliminate men's merchandise
from the Company's stores, the Company had approximately $1.4 million of
accrued, unpaid restructuring costs as of October 28, 2000. In connection
with the Company's plan to consolidate its Modern Woman stores into its
Catherine's stores, the Company had approximately $1.3 million of accrued,
unpaid restructuring costs as of October 28, 2000. These accrued, unpaid
restructuring costs are included in accrued expenses on the accompanying
condensed consolidated balance sheet. The Company expects to pay the
majority of these costs by the end of Fiscal 2001. Management does not
expect a significant change in the estimated costs for these restructuring
plans.
The Company maintains a trust to which it transfers, at face value,
its interest in receivables created under the Company's proprietary credit
card program. The Company, together with the trust, has entered into vari-
ous securitization agreements whereby it can sell, on a revolving basis,
interests in these receivables for a specified term. When the revolving
period terminates, an amortization period begins during which principal
payments are made to the party with whom the trust has entered into the
securitization agreement.
Charming Shoppes Receivables Corp. and Charming Shoppes, Street, Inc.,
wholly-owned indirect subsidiaries of the Company, are separate special-
purpose corporations. At October 28, 2000, Charming Shoppes Receivables
Corp. had $32.6 million of Charming Shoppes Master Trust Certificates, and
Charming Shoppes Street, Inc. had $1.1 million of cash and other receiv-
ables interests. These assets will be available first and foremost to sat-
isfy the claims of the respective creditors of these separate corporate
entities, including certain claims of investors in the Charming Shoppes
Master Trust. The providers of the credit enhancements and trust investors
have no other recourse to the Company. The Company does not receive
collateral from any party to the securitization, and the Company does not
have any risk of counterparty non-performance.
22
<PAGE> 24
The Company also has a non-recourse agreement pursuant to which a
third party provides an accounts receivable proprietary credit card sales
funding program for the Company's Catherine's Stores. This funding program
expires in January 2005. Under this agreement, the third party reimburses
the Company daily with respect to the proprietary credit card sales gener-
ated by the Catherine's Stores credit card accounts.
The securitization and funding agreements improve the overall liquid-
ity of the Company and lessen the effect of interest rate volatility by
providing short-term sources of funding. Additional information regarding
these programs is included in "Part II, Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations: FINANCIAL
CONDITION -- Liquidity and Capital Resources" of the Company's Annual
Report on Form 10-K for the fiscal year ended January 29, 2000.
The Company believes that cash flow from operations, its proprietary
credit card receivables securitization and funding agreements, its invest-
ment portfolio, and its credit facilities are sufficient to support current
operations.
IMPACT OF YEAR 2000
The Company has not experienced any significant adverse consequences
to-date as a result of the Year 2000 problem, and does not anticipate any
significant impact on future operations. The Company does not sell prod-
ucts which use computer systems, embedded chip technology, or other devices
that may be sensitive to dates. The Company is a retailer of women's
apparel, and does not rely on a single customer for any significant amount
of sales. However, it is possible that the full impact of the Year 2000
problem has not yet been fully recognized. Issues related to the Year 2000
problem could still occur during quarterly or annual financial closings.
In addition, the Company's vendors or suppliers could still be adversely
affected by Year 2000 problems. The Company's management believes that any
such problems would most likely be minor and correctable. The Company is
not currently aware of any Year 2000 problems affecting its vendors or
suppliers.
MARKET RISK
The Company manages its Fashion Bug proprietary credit card program
through various operating entities that are wholly owned by the Company.
The primary activity of these entities is to service the proprietary credit
card portfolio, the balances of which are sold under a credit card securi-
tization program. Under the securitization program, the Company may be
exposed to fluctuations in interest rates to the extent that a portion of
the investor certificates are floating-rate instruments.
23
<PAGE> 25
The Company uses derivative instruments to manage its interest rate
risk. The Company regularly monitors interest rate fluctuations and busi-
ness implications surrounding interest rate changes, especially related to
the management of its Fashion Bug proprietary credit card program, which is
securitized. As of October 28, 2000, the Company had floating-rate instru-
ments representing approximately $207.8 million, or approximately 74% of
all securitized assets under the program, which were subject to rate expo-
sure.
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%. In addition, the Company has entered into an interest
rate swap that limits the Company's exposure to rising interest rates
should interest rates increase to a rate above the agreement's specified
rate. Additional information regarding these agreements is included in
"Part II, Item 7. Management's Discussion and Analysis of Financial Con-
dition and Results of Operations: FINANCIAL CONDITION -- Liquidity and
Capital Resources " of the Company's Annual Report on Form 10-K for the
fiscal year ended January 29, 2000.
The interest rate swap may subject the Company to market risk associa-
ted with changes in interest rates, as well as the risk of default by a
counter-party to the agreement. Under the terms of the swap agreement, the
Company may be required to pledge certain assets if the market value of the
interest rate swap falls below an amount set forth in the agreement. As of
October 28, 2000, there were $0.3 million of assets pledged under the terms
of the agreement.
The Company is not subject to material foreign exchange risk, as the
Company's foreign transactions are primarily U. S. Dollar-denominated and
the Company's foreign operations do not constitute a material part of its
business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Item 2. Management's Discussion and Analysis of Financial Condi-
tion and Results of Operations -- MARKET RISK," above.
24
<PAGE> 26
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, Exhibits that were previously
filed are incorporated by reference. For Exhibits incorporated by refer-
ence, 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-Q of the Registrant for the quarter ended October 30, 1999. (Exhi-
bit 3.2)
10.1 Credit Agreement, Dated July 31, 2000, by and between Catherines,
Inc., Catherines Stores Corporation, and their subsidiaries, as Bor-
rowers, and Amsouth Bank and Hibernia National Bank, as Banks, and
Amsouth Bank, as Agent.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended October 28, 2000.
25
<PAGE> 27
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 11, 2000 /S/ DORRIT J. BERN
------------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: December 11, 2000 /S/ ERIC M. SPECTER
-------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer
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