<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 April 29, 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 April
29, 2000, was 101,031,591 shares.
<PAGE>
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
April 29, 2000 and January 29, 2000............................ 2 - 3
Condensed Consolidated Statements of Operations and
Comprehensive Income
Thirteen weeks ended April 29, 2000 and May 1, 1999............ 4
Condensed Consolidated Statements of Cash Flows
Thirteen weeks ended April 29, 2000 and May 1, 1999............ 5
Notes to Condensed Consolidated Financial Statements.............. 6 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking Statements........................................ 10
Results of Operations............................................. 10 - 13
Liquidity and Capital Resources................................... 13 - 16
Impact of Year 2000............................................... 16
Market Risk....................................................... 17
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.............................................................. 18
PART II. OTHER INFORMATION
Item 2. Changes in Securities.................................... 19
Item 6. Exhibits and Reports on Form 8-K......................... 19 - 20
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
April 29, January 29,
(In thousands) 2000 2000
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................ $ 62,635 $ 34,299
Available-for-sale securities (including fair
value adjustments of ($10) and $0,
respectively)................................... 39,816 41,339
Merchandise inventories.......................... 292,208 260,792
Deferred taxes................................... 10,801 10,801
Prepayments and other............................ 48,518 47,090
-------- --------
Total current assets............................ 453,978 394,321
-------- --------
Property, equipment, and leasehold improvements.. 459,802 450,401
Less: accumulated depreciation and amortization.. 268,354 259,477
-------- --------
Net property, equipment, and leasehold
improvements.................................... 191,448 190,924
-------- --------
Available-for-sale securities (including fair
value adjustments of ($2,265) and ($2,222),
respectively)................................... 73,795 74,490
Goodwill......................................... 96,206 97,405
Other assets..................................... 26,056 27,656
--------- --------
Total assets $841,483 $784,796
======== ========
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
</FN>
2
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
April 29, January 29,
(In thousands except share amounts) 2000 2000
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................. $147,758 $ 88,721
Accrued expenses................................. 127,382 142,304
Income taxes payable............................. 2,874 0
Current portion -- long-term debt................ 1,939 1,920
-------- --------
Total current liabilities....................... 279,953 232,945
-------- --------
Deferred taxes................................... 10,375 10,375
Long-term debt................................... 104,819 105,213
Stockholders' equity
Common Stock $.10 par value
Authorized -- 300,000,000 shares
Issued -- 109,986,591 shares and
109,639,425 shares, respectively.............. 10,999 10,964
Additional paid-in capital....................... 77,831 76,125
Treasury stock at cost -- 8,955,000 shares....... (40,824) (40,824)
Deferred employee compensation................... (2,369) (1,792)
Accumulated other comprehensive loss............. (1,457) (1,423)
Retained earnings................................ 402,156 393,213
-------- --------
Total stockholders' equity...................... 446,336 436,263
-------- --------
Total liabilities and stockholders' equity....... $841,483 $784,796
======== ========
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
Certain prior-period amounts have been reclassified to conform to current-
period presentation
</FN>
3
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
April 29, May 1,
(In thousands except per-share amounts) 2000 1999
<S> <C> <C>
Net sales......................................... $381,334 $258,975
Other income...................................... 2,058 3,023
-------- --------
Total revenue..................................... 383,392 261,998
-------- --------
Cost of goods sold, buying, and occupancy expenses 272,841 190,062
Selling, general, and administrative expenses..... 92,771 62,625
Amortization of goodwill.......................... 1,200 0
Interest expense.................................. 2,109 1,973
-------- --------
Total expenses.................................... 368,921 254,660
-------- --------
Income before income taxes and extraordinary item. 14,471 7,338
Income tax provision.............................. 5,528 2,568
-------- --------
Income before extraordinary item.................. 8,943 4,770
Extraordinary item -- Gain on early retirement
of debt, net of income taxes of $664............. 0 1,232
-------- --------
Net income........................................ 8,943 6,002
-------- --------
Unrealized losses on available-for-sale
securities, net of income tax benefit of $34
and $445, respectively........................... (63) (825)
Reclassification of realized losses (gains)
on available-for-sale securities, net of
income tax (benefit) expense of ($15)
and $23, respectively............................ 29 (44)
-------- --------
Total other comprehensive loss, net of taxes...... (34) (869)
-------- --------
Comprehensive income.............................. $ 8,909 $ 5,133
======== ========
Net income per share:
Before extraordinary item......................... $ .09 $ .05
Extraordinary item................................ .00 .01
----- -----
Net income........................................ $ .09 $ .06
===== =====
</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
April 29, May 1,
(In thousands) 2000 1999
<S> <C> <C>
Operating activities
Net income.......................................... $ 8,943 $ 6,002
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 11,183 7,718
Gain on early retirement of debt................... 0 (1,896)
Other, net......................................... 232 401
Changes in operating assets and liabilities:
Merchandise inventories.......................... (31,416) (33,069)
Accounts payable................................. 59,037 22,482
Prepayments and other............................ (1,628) (976)
Accrued expenses................................. (14,922) (5,256)
Income taxes payable............................. 2,874 (2,356)
-------- --------
Net cash provided by (used in) operating activities. 34,303 (6,950)
-------- --------
Investing activities
Investment in capital assets........................ (7,579) (7,311)
Proceeds from sales of capital assets............... 789 7,252
Proceeds from sales of available-for-sale securities 5,221 160,523
Gross purchases of available-for-sale securities.... (3,100) (153,516)
Increase in other assets............................ (2,062) (869)
-------- --------
Net cash (used in) provided by investing activities. (6,731) 6,079
-------- --------
Financing activities
Reduction of long-term borrowings................... (375) (21,051)
Purchases of treasury stock......................... 0 (39)
Proceeds from exercise of stock options............. 1,139 174
-------- --------
Net cash provided by (used in) financing activities. 764 (20,916)
-------- --------
Increase (Decrease) in cash and cash equivalents.... 28,336 (21,787)
Cash and cash equivalents, beginning of period...... 34,299 43,789
-------- --------
Cash and cash equivalents, end of period............ $ 62,635 $ 22,002
======== ========
</TABLE>
[FN]
See Notes to Condensed Consolidated Financial Statements
Certain prior-period amounts have been reclassified to conform to current-
period presentation
</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 April 29, 2000 and the
condensed consolidated statements of operations and comprehensive income
and cash flows for the thirteen weeks ended April 29, 2000 and May 1, 1999
have been prepared by the Company without audit. In the opinion of manage-
ment, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position at April 29, 2000 and
the results of operations and cash flows for the thirteen weeks ended April
29, 2000 and May 1, 1999 have been made. Certain prior-period amounts in
the condensed consolidated balance sheet and condensed consolidated state-
ments 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 weeks ended April 29, 2000 and May 1, 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 Catherines Stores Corporation.
The acquisitions were accounted for as purchases, and the results of oper-
ations 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
During the thirteen weeks ended April 29, 2000, stockholders' equity
increased $10,073,000. Stockholders' equity increased as the result of net
income of $8,943,000, payments of exercise price for stock options in the
amount of $939,000, and amortization of deferred compensation expense of
$225,000. These increases were partially offset by net unrealized losses
on available-for-sale securities of $34,000 (net of an income tax benefit
of $19,000).
6
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Accrued Restructuring Expenses
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. During the thirteen
weeks ended April 29, 2000, the Company completed the downsizing of 21
stores in connection with the Plan. To-date, 71 stores have been closed,
93 stores have been downsized, and 8 stores are scheduled for downsizing in
the fiscal year ending February 3, 2001. Accrued restructuring expenses
are included in accrued expenses in the accompanying condensed consolidated
balance sheet. The following table summarizes accrued restructuring
charges related to the Plan as of January 29, 2000 and payments charged
against the accrual during the thirteen weeks ended April 29, 2000:
<TABLE>
<CAPTION>
Accrued At Accrued At
January 29, April 29,
(in thousands) 2000 Payments 2000
<S> <C> <C> <C>
Lease terminations/amendments and
renovations of vacated store space.... $4,890 $(3,147) $1,743
Other costs............................. 1,807 (56) 1,751
------ ------- ------
$6,697 $(3,203) $3,494
====== ======= ======
</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
Catherines stores. The restructuring charge was primarily for lease term-
ination costs related to the closing of 11 Modern Woman stores that geo-
graphically overlap Catherines stores. During the thirteen weeks ended
April 29, 2000, no payments were charged against this accrual.
4. Repurchases of Convertible Notes
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 (the "Notes") at a total cost of $21,031,000. The Notes had
an aggregate carrying value of $22,927,000 as of the repurchase dates. The
repurchases resulted in an extraordinary gain of $1,232,000, net of income
taxes of $664,000. The Company did not repurchase any Notes during the
thirteen weeks ended April 29, 2000.
7
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Net Income (Loss) Per Share
<TABLE>
<CAPTION>
Thirteen Weeks Ended
April 29, May 1,
(In thousands) 2000 1999
<S> <C> <C>
Basic weighted average common shares outstanding... 100,850 98,164
Dilutive effect of assumed conversion of
convertible notes................................. 12,875 0
Dilutive effect of stock options................... 1,279 370
------- ------
Diluted weighted average common shares
and equivalents outstanding....................... 115,004 98,534
======= ======
Net income......................................... $ 8,943 $6,002
Decrease in interest expense from assumed
conversion of notes, net of income taxes.......... 1,125 0
------- ------
Net income used to determine
diluted earnings per share........................ $10,068 $6,002
======= ======
</TABLE>
For the thirteen-week periods ended April 29, 2000 and May 1, 1999,
net income per share assuming dilution was equal to basic net income per
share.
Options to purchase 2.8 million and 9.5 million shares of Common Stock
at April 29, 2000 and May 1, 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.
The assumed conversion of the Company's 7.5% Convertible Subordinated
Notes due 2006 was excluded from the computation of diluted net income per
share for the thirteen weeks ended May 1, 1999 because the effect would
have been antidilutive.
6. 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 ei-
ther assets or liabilities in the statement of financial position, and the
measurement of those instruments at fair value. The statement also speci-
fies the conditions under which derivative instruments qualify as hedging
activities, and the accounting for changes in the fair value of derivatives
8
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
designated as hedges. The Company currently manages a portion of its in-
terest 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.
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. The Company will adopt the provisions of SAB
101 as of the fiscal quarter ended July 29, 2000. The Company is currently
in the process of evaluating the impact that SAB 101 will have on its con-
solidated financial position and results of operations.
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 concern-
ing the Company's operations, performance and financial condition. In
particular, it includes forward-looking statements regarding sales and
earnings performance, store openings and closings, cost savings, capital
requirements, management's expectations for Year 2000 compliance, the Com-
pany's exposure to fluctuations in interest rates, and other matters. Such
forward-looking statements are subject 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 in-
clude, but are not limited to, (i) rapid changes in or miscalculation of
fashion trends, (ii) extreme or unseasonable weather conditions, (iii) eco-
nomic 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 fluctuations, 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) competitive pressures, (vii) failure to
realize merger-related synergies, (viii) fluctuations in interest rates,
and (ix) 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 ("Catherines Stores").
Catherines Stores operated 436 retail apparel stores in 40 states and the
District of Columbia, specializing in large-size women's apparel. The
Company is in the process of consolidating the Modern Woman stores into
Catherines Stores. The acquisitions have been accounted for as purchases,
and their results of operations are included in the Company's results of
operations for the thirteen weeks ended April 29, 2000 ("Fiscal 2001 First
Quarter"). Prior-period results have not been restated.
10
<PAGE>
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 Catherines
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 Fiscal 2001 First
Quarter include $1.2 million of amortization of goodwill.
The following table sets forth, as a percentage of net sales, certain
items appearing in the Condensed Consolidated Statements of Operations and
Comprehensive Income:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
April 29, May 1,
2000 1999
<S> <C> <C>
Net sales........................................... 100.0% 100.0%
Other income........................................ 0.5 1.2
Cost of goods sold, buying, and occupancy expenses.. 71.5 73.4
Selling, general, and administrative expenses....... 24.3 24.2
Amortization of goodwill............................ 0.3 --
Interest expense.................................... 0.6 0.8
Income before income taxes and extraordinary item... 3.8 2.8
Income tax provision................................ 1.4 1.0
Income before extraordinary item.................... 2.4 1.8
Gain on early retirement of debt, net of taxes...... -- 0.5
Net income.......................................... 2.4 2.3
</TABLE>
The following table sets forth certain information related to the Company's
net sales:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
April 29, May 1,
2000 1999
<S> <C> <C>
Increase in comparable Fashion Bug store sales(1)... 2.3% 5.7%
Sales from new Fashion Bug stores as a percentage
of total prior-period sales........................ 7.7 4.6
Sales from Catherines and Modern Woman stores as a
percentage of total prior-period sales(2).......... 40.3 --
Prior-period sales from closed Fashion Bug stores as
a percentage of total prior-period sales........... (3.0) (3.9)
Increase in total sales............................. 47.3 6.1
</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 Catherines stores acquired in January 2000 and Modern Woman
stores acquired in August 1999.
</FN>
11
<PAGE>
Net sales for the Fiscal 2001 First Quarter totaled $381.3 million as
compared to net sales of $259.0 million for the quarter ended May 1, 1999
("Fiscal 2000 First Quarter"). Fiscal 2001 First Quarter net sales include
$104.4 million of sales from Catherines Stores and Modern Woman stores.
Increases in comparable store sales for Fashion Bug stores were achieved in
sportswear, intimate apparel, and coats, reflecting favorable customer
response to the Company's spring merchandise offerings. As of April 29,
2000, the Company operated 1,192 Fashion Bug stores, 435 Catherines stores,
and 114 Modern Woman stores, as compared to 1,143 Fashion Bug stores as of
May 1, 1999.
Other income expressed as a percentage of sales decreased 0.7% in the
Fiscal 2001 First Quarter as compared to the Fiscal 2000 First Quarter.
The decrease was primarily a result of lower interest income from reduced
levels of available-for-sale securities during the Fiscal 2001 First Quar-
ter as compared to the Fiscal 2000 First Quarter. The Company sold a
portion of its available-for-sale securities during the latter half of Fis-
cal 2000 to finance the Catherines Stores and Modern Woman acquisitions.
Cost of goods sold, buying, and occupancy expenses expressed as a
percentage of sales decreased 1.9% in the Fiscal 2001 First Quarter as com-
pared to the Fiscal 2000 First Quarter. Cost of goods sold as a percentage
of sales decreased 1.5% in the Fiscal 2001 First Quarter as compared to the
Fiscal 2000 First Quarter. The improvement in merchandise margins was pri-
marily a result of reduced levels of markdowns and store-wide promotions.
Traditionally higher gross margins at Catherines stores also contributed to
the improvement in merchandise margins. Buying and occupancy expenses
expressed as a percentage of sales decreased 0.4% in the Fiscal 2001 First
Quarter as compared to the Fiscal 2000 First Quarter. Buying and occupancy
expenses as a percentage of sales benefited from the leveraging effect of
the increase in sales volume on the fixed portion of these expenses.
Selling, general, and administrative expenses expressed as a percent-
age of sales increased 0.1% in the Fiscal 2001 First Quarter as compared to
the Fiscal 2000 First Quarter. Selling expenses increased 0.4% as a
percentage of sales, primarily as a result of increases in payroll costs.
General and administrative expenses decreased 0.3% as a percentage of
sales. General and administrative expenses as a percentage of sales bene-
fited from the leveraging effect of the increase in sales volume and from
cost synergies related to the Catherines Stores and Modern Woman acqui-
sitions.
12
<PAGE>
Interest expense expressed as a percentage of sales decreased 0.2% in
the Fiscal 2001 First Quarter as compared to the Fiscal 2000 First Quarter
as the result of the leveraging effect of the increase in sales, but in-
creased slightly 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 Catherines Stores acqui-
sition. This increase was partially offset by reduced interest expense
resulting from the Company's repurchase of $23.3 million aggregate princi-
pal amount of its 7.5% Convertible Subordinated Notes due 2006 during the
Fiscal 2000 First Quarter.
The income tax provision for the Fiscal 2001 First Quarter was 38.2%
of the Company's pre-tax income, as compared to 35.0% for the Fiscal 2000
First Quarter. 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 Catherines Stores acquisition and a higher
effective tax rate for Catherines Stores.
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 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 Fiscal 2001 First
Quarter was $.09 as compared to $.06 for the Fiscal 2000 First Quarter.
Net income per share for the Fiscal 2000 First Quarter includes $.01 from
the extraordinary gain on the repurchase of the notes. Diluted net income
per share excluding goodwill amortization (cash earnings per share) for the
Fiscal 2001 First Quarter was $.10.
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 $150 million
revolving credit facility. As of April 29, 2000, the Company had working
capital of $174.0 million as compared to $161.4 million at January 29,
2000. Working capital at April 29, 2000 included $62.6 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 1.6 to 1 at April 29, 2000 and 1.7 to 1 at January 29,
2000.
13
<PAGE>
Net cash provided by operating activities was $34.3 million for the
Fiscal 2001 First Quarter, as compared to net cash used in operating activ-
ities of $7.0 million for the Fiscal 2000 First Quarter. The increase in
cash provided by operations was primarily the result of an increase in
trade accounts payable, primarily as a result of improved credit terms for
the Catherines stores, at the end of the Fiscal 2001 First Quarter and an
increase in earnings before depreciation and amortization. These increases
were partially offset by payments of 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 1, 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 April 29, 2000, the availability under this
facility was approximately $148.6 million, against which the Company had
outstanding letters of credit of $41.7 million. There were no cash borrow-
ings outstanding under this agreement as of April 29, 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.
At the time of its acquisition by the Company, Catherines Stores was a
party to a bank credit agreement that provided for a maximum working
capital availability of $19.5 million, including a swing line of credit of
$3 million. The agreement was secured by substantially all of Catherines
Stores assets except for assets securing the 7.5% mortgage note, discussed
below, and inventory. Amounts available under the agreement were based on
the amounts of Catherines Stores inventories and receivables. The working
capital facility could also be used to fund letters of credit. As a result
of the Company's acquisition of Catherines Stores, the bank providing the
agreement has extended the term of the agreement to June 22, 2000. At
April 29, 2000, the combined availability under the working capital and
swing line facilities was approximately $12.1 million, after considering
outstanding letters of credit of $7.4 million. The Company is currently
negotiating the extension of this agreement. Should this agreement not be
extended, the Company's working capital needs would not be adversely af-
fected.
As a result of the acquisition of Modern Woman, the Company also has
access to a working capital line of credit with a maximum availability of
$10 million. As of April 29, 2000, $5 million was available under this
agreement to fund letters of credit, and no letters of credit were
outstanding. 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.
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In connection with the acquisition of Catherines 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
land and buildings at the Memphis, Tennessee office of Catherines Stores.
The capital leases are for data processing and point-of-sale 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 point-of-
sale equipment), renewing the leases, or returning the equipment to the
lessor. As of April 29, 2000, the Company has current debt maturity
payments of $1.9 million, which are primarily for amounts due under the
Mortgage Note and the capital lease obligations.
Capital expenditures of $7.6 million during the first quarter of
Fiscal 2001 were primarily for the construction, remodeling, and fixturing
of new and existing retail stores and loss-prevention equipment. During
Fiscal 2001, the Company anticipates incurring capital expenditures of
approximately $65 million. The Company expects to finance these capital
expenditures principally through internally generated funds. The Company
plans to open approximately 110 new stores, remodel approximately 60
stores, and relocate approximately 50 stores during Fiscal 2001. During
the first quarter of Fiscal 2001, the Company opened 12, relocated 5, and
closed 5 Fashion Bug stores, opened 2 Catherines Stores, and closed 8 Mod-
ern Woman stores.
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 $3.5 million of
accrued, unpaid restructuring costs as of April 29, 2000. In connection
with the Company's plan to consolidate its Modern Woman stores into its
Catherines stores, the Company had approximately $1.5 million of accrued,
unpaid restructuring costs as of April 29, 2000. These accrued 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 any further 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.
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Charming Shoppes Receivables Corp. and Charming Shoppes, Street, Inc.,
wholly-owned indirect subsidiaries of the Company, are separate special-
purpose corporations. At April 29, 2000, Charming Shoppes Receivables
Corp. had $39.3 million of Charming Shoppes Master Trust Certificates, and
Charming Shoppes Street, Inc. had $533 thousand of cash. These assets will
be available first and foremost to satisfy 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 cred-
it enhancements and trust investors have no other recourse to the Company.
The Company does not receive collateral from any party to the securitiza-
tion, and the Company does not have any risk of counterparty non-
performance.
The Company also has a non-recourse agreement to permit a third party
to provide an accounts receivable proprietary credit card sales funding
program for its Catherines Stores. This funding program expires in Janu-
ary 2005. Under this agreement, the third party reimburses the Company
daily with respect to the proprietary credit card sales generated by the
Catherines 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 $150 million revolving credit facility are suffi-
cient 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.
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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.
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 April 29, 2000, the Company had floating-rate instru-
ments representing approximately $198.3 million, or approximately 72% of
all securitized assets under the program, which were subject to rate
exposure.
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 Condi-
tion and Results of Operations: FINANCIAL CONDITION -- Liquidity and Capi-
tal 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
April 29, 2000, there were no pledged amounts required under the terms of
the agreement.
To the extent that short-term interest rates were to increase by one
percentage point by the end of Fiscal 2001, an increase of approximately
$500 thousand in selling, general, and administrative expenses would
result.
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- MARKET RISK," above.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities
(a) and (b)
Not applicable.
(c) Recent Sales of Unregistered Securities
During the quarter ended April 29, 2000, the Company issued 5,500
shares of its Common Stock, $.10 par value. The shares were issued on
February 10, 2000 to employees of the Company under the terms of the Com-
pany's Restricted Stock Award Plan for Associates. No cash consideration
was received for the shares, which were issued as bonus awards to the
employees. The aggregate fair market value of the shares on the date of
issue was $16,775.00.
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 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 July 31, 1999. (Exhibit
3.2)
27 Financial Data Schedule.
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Item 6. Exhibits and Reports on Form 8-K (continued)
(b) Reports on Form 8-K
On March 22, 2000, the Company filed an amended report on Form 8-K/A
dated January 7, 2000, amending a report on Form 8-K filed on January 21,
2000. The Form 8-K filed on January 21, 2000 was filed to report the
merger of Rose Merger Sub, Inc., a Tennessee corporation and a wholly-owned
subsidiary of the Company, with and into Catherines Stores Corporation.
The disclosures required by Item 2, Item 5, and Item 7(a) were included in
the initial filing on Form 8-K. The Form 8-K/A was filed, in accordance
with Item 7(b)(2), within 60 days after the due date of the initial filing
on Form 8-K, to include the pro forma financial information required by
Item 7(b).
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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: June 9, 2000 /S/ DORRIT J. BERN
----------------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: June 9, 2000 /S/ ERIC M. SPECTER
----------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer
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