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 August 4, 2001
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 August
4, 2001, was 102,128,145 shares.
CHARMING SHOPPES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
August 4, 2001 and February 3, 2001............................ 2 - 3
Condensed Consolidated Statements of Operations and
Comprehensive Income
Thirteen weeks ended August 4, 2001 and July 29, 2000.......... 4
Twenty-six weeks ended August 4, 2001 and July 29, 2000........ 5
Condensed Consolidated Statements of Cash Flows
Twenty-six weeks ended August 4, 2001 and July 29, 2000........ 6
Notes to Condensed Consolidated Financial Statements.............. 7 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking Statements........................................ 14
Recent Developments............................................... 15
Results of Operations............................................. 16 - 21
Liquidity and Capital Resources................................... 21 - 24
Market Risk....................................................... 24
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.............................................................. 25
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...... 26
Item 6. Exhibits and Reports on Form 8-K......................... 26
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
August 4, February 3,
(In thousands) 2001 2001
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents............................. $125,536 $ 56,544
Available-for-sale securities, (including fair value
adjustments of $0 and $3, respectively.............. 45,307 48,817
Merchandise inventories............................... 276,010 259,127
Deferred taxes........................................ 10,678 10,678
Prepayments and other................................. 55,716 56,748
-------- --------
Total current assets................................ 513,247 431,914
-------- --------
Property, equipment, and leasehold improvements....... 545,429 504,071
Less: accumulated depreciation and amortization....... 306,784 286,208
-------- --------
Net property, equipment, and leasehold improvements. 238,645 217,863
-------- --------
Available-for-sale securities (including fair value
adjustments of $44 and $77, respectively)........... 17,335 76,461
Goodwill.............................................. 90,077 92,520
Other assets.......................................... 29,406 34,009
-------- --------
Total assets.......................................... $888,710 $852,767
======== ========
See Notes to Condensed Consolidated Financial Statements
2
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
August 4, February 3,
(In thousands except share amounts) 2001 2001
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable...................................... $105,460 $ 94,881
Accrued expenses...................................... 111,536 123,690
Income taxes payable.................................. 8,351 0
Current portion -- long-term debt..................... 6,492 4,954
-------- --------
Total current liabilities........................... 231,839 223,525
-------- --------
Deferred taxes........................................ 21,433 21,433
Long-term debt........................................ 118,062 113,540
Minority interest..................................... 1,000 1,000
Stockholders' equity
Common Stock $.10 par value
Authorized -- 300,000,000 shares
Issued -- 111,233,145 shares and
110,731,483 shares, respectively.................. 11,123 11,073
Additional paid-in capital............................ 84,462 80,977
Treasury stock at cost -- 9,105,000 shares............ (41,537) (41,537)
Deferred employee compensation........................ (4,258) (1,629)
Accumulated other comprehensive (loss) income......... (953) 74
Retained earnings..................................... 467,539 444,311
-------- --------
Total stockholders' equity.......................... 516,376 493,269
-------- --------
Total liabilities and stockholders' equity............ $888,710 $852,767
======== ========
See Notes to Condensed Consolidated Financial Statements
3
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
Thirteen Weeks Ended
August 4, July 29,
(In thousands except per-share amounts) 2001 2000
---- ----
(Restated)
Net sales.................................................... $402,700 $429,658
Other income................................................. 1,622 2,637
-------- --------
Total revenue................................................ 404,322 432,295
-------- --------
Cost of goods sold, buying, and occupancy expenses........... 291,881 296,530
Selling, general, and administrative expenses................ 84,553 89,044
Amortization of goodwill..................................... 1,221 1,196
Interest expense............................................. 2,386 2,093
-------- --------
Total expenses............................................... 380,041 388,863
-------- --------
Income before income taxes................................... 24,281 43,432
Income tax provision......................................... 9,421 16,591
-------- --------
Net income................................................... 14,860 26,841
-------- --------
Unrealized (losses) gains on available-for-sale securities,
net of income taxes of $9 and ($184),respectively.......... (44) 341
Reclassification of realized losses on available-for-sale
securities, net of income tax benefit of $0 and $18,
respectively............................................... 0 33
Reclassification of amortization of deferred loss on termina-
tion of derivative, net of income tax benefit of $52....... 97 0
Total other comprehensive gain, net of taxes................. 53 374
-------- --------
Comprehensive income......................................... $ 14,913 $ 27,215
======== ========
Basic net income per share................................... $ .15 $ .27
===== =====
Diluted net income per share................................. $ .14 $ .24
===== =====
See Notes to Condensed Consolidated Financial Statements
4
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
Twenty-six Weeks Ended
August 4, July 29,
(In thousands except per-share amounts) 2001 2000
---- ----
(Restated)
Net sales.................................................... $797,461 $808,583
Other income................................................. 4,205 4,695
-------- --------
Total revenue................................................ 801,666 813,278
-------- --------
Cost of goods sold, buying, and occupancy expenses........... 577,457 568,046
Selling, general, and administrative expenses................ 179,041 181,815
Amortization of goodwill..................................... 2,443 2,396
Interest expense............................................. 4,771 4,202
-------- --------
Total expenses............................................... 763,712 756,459
-------- --------
Income before income taxes and cumulative effect of
accounting change.......................................... 37,954 56,819
Income tax provision......................................... 14,726 21,705
-------- --------
Income before cumulative effect of accounting change......... 23,228 35,114
Cumulative effect of accounting change, net of income
tax benefit of $334........................................ 0 (540)
-------- --------
Net income................................................... 23,228 34,574
-------- --------
Unrealized (losses) gains on available-for-sale securities,
net of income taxes of $6 and ($150),respectively.......... (52) 278
Reclassification of realized losses on available-for-sale
securities, net of income tax benefit of $4 and $33,
respectively............................................... 6 62
Unamortized deferred loss on termination of derivative, net
of income tax benefit of $620.............................. (1,152) 0
Reclassification of amortization of deferred loss on termina-
tion of derivative, net of income tax benefit of $92....... 171 0
-------- --------
Total other comprehensive (loss) gain, net of taxes.......... (1,027) 340
-------- --------
Comprehensive income......................................... $ 22,201 $ 34,914
======== ========
Basic net income per share:
Income before cumulative effect of accounting change......... $ .23 $ .35
Cumulative effect of accounting change, net of taxes......... .00 (.01)
----- -----
Net income................................................... $ .23 $ .34
===== =====
Diluted net income per share:
Income before cumulative effect of accounting change......... $ .22 $ .33
Cumulative effect of accounting change, net of taxes......... .00 (.01)
----- -----
Net income................................................... $ .22 $ .32
===== =====
See Notes to Condensed Consolidated Financial Statements
5
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six Weeks Ended
August 4, July 29,
(In thousands) 2001 2000
---- ----
(Restated)
Operating activities
Net income............................................. $ 23,228 $ 34,574
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 25,750 23,440
Other, net........................................... 315 275
Changes in operating assets and liabilities:
Merchandise inventories............................ (16,883) 3,264
Accounts payable................................... 10,579 28,318
Prepayments and other.............................. (252) 3,185
Accrued expenses................................... (12,154) (21,510)
Income taxes payable............................... 8,351 12,488
-------- --------
Net cash provided by operating activities.............. 38,934 84,034
-------- --------
Investing activities
Investment in capital assets........................... (30,928) (23,713)
Proceeds from sales of capital assets.................. 0 789
Proceeds from sales of available-for-sale securities... 89,488 28,945
Gross purchases of available-for-sale securities....... (26,900) (22,397)
Increase in other assets............................... (489) (3,246)
-------- --------
Net cash provided by (used in) investing activities.... 31,171 (19,622)
-------- --------
Financing activities
Reduction of long-term borrowings...................... (2,730) (1,161)
Purchases of treasury stock............................ 0 (713)
Proceeds from exercise of stock options................ 1,617 2,372
-------- --------
Net cash provided by (used in) financing activities.... (1,113) 498
-------- --------
Increase in cash and cash equivalents.................. 68,992 64,910
Cash and cash equivalents, beginning of period......... 56,544 34,299
-------- --------
Cash and cash equivalents, end of period............... $125,536 $ 99,209
======== ========
Non-cash financing and investing activities
Equipment acquired through capital leases.............. $ 8,790 $ 4,645
======== ========
See Notes to Condensed Consolidated Financial Statements
6
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of August 4, 2001 and the con-
densed consolidated statements of operations and comprehensive income and
of cash flows for the thirteen and twenty-six weeks ended August 4, 2001
and July 29, 2000 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 August
4, 2001 and the results of operations and cash flows for the thirteen and
twenty-six weeks ended August 4, 2001 and July 29, 2000 have been made.
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 con-
densed consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's
February 3, 2001 Annual Report on Form 10-K. The results of operations for
the thirteen and twenty-six weeks ended August 4, 2001 and July 29, 2000
are not necessarily indicative of operating results for the full fiscal
year.
In the fourth quarter of the fiscal year ended February 3, 2001 ("Fiscal
2001"), the Company changed its method of accounting for sales returns and
layaway sales, as required by Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." The Company adopted SAB 101 effective as of the beginning of
Fiscal 2001 and restated its results of operations for the first three
quarters of Fiscal 2001. The cumulative effect of the adoption of SAB 101
as of January 30, 2000 was a decrease in income, net of taxes, of $540,000.
Results of operations for the thirteen and twenty-six weeks ended July 29,
2000 as previously reported, prior to restatement for the adoption of SAB
101, are as follows:
Thirteen Twenty-six
Weeks Ended Weeks Ended
July 29, July 29,
(In thousands, except per-share amounts) 2000 2000
---- ----
Net sales......................................... $428,229 $809,563
Cost of goods sold, buying, and occupancy expenses 295,744 568,585
Net income........................................ 26,444 35,387
Basic net income per share........................ $.26 $.35
Diluted net income per share...................... .24 .33
Certain components of cash flow from operating activities for the twenty-
six weeks ended July 29, 2000 have been restated to reflect the adoption of
SAB 101.
7
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. 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. As of February 3, 2001,
this restructuring plan was completed, and there were no remaining restruc-
ture accruals relating 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 twenty-six weeks ended
July 29, 2000:
Accrued At Accrued At
January 29, July 29,
(In thousands) 2000 Payments 2000
---- -------- ----
Lease termination costs................ $4,890 $(3,727) $1,163
Other costs............................ 1,807 (518) 1,289
------ ------- ------
$6,697 $(4,245) $2,452
====== ======= ======
During the fourth quarter of the fiscal year ended January 29, 2000 ("Fis-
cal 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 termination costs related to the closing of 11 Modern Woman stores
that geographically overlapped Catherine's stores. During Fiscal 2001, the
Company closed 10 of the 11 stores, and accrued restructuring charges of
$1,086,000 related to these stores were paid. During the twenty-six weeks
ended August 4, 2001, the Company closed the remaining store, and $373,000
was charged against this accrual. As of August 4, 2001, this restructuring
plan was completed, and there were no remaining restructure accruals relat-
ing to this plan.
3. Long-term Debt
August 4, February 3,
(In thousands) 2001 2001
---- ----
7.5% Convertible subordinated notes due 2006...... $ 96,047 $ 96,047
Capital lease obligations......................... 22,126 15,890
7.5% mortgage note................................ 6,357 6,449
Other............................................. 24 108
-------- --------
Total long-term debt............................ 124,554 118,494
Less current portion.............................. 6,492 4,954
-------- --------
$118,062 $113,540
======== ========
8
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Stockholders' Equity
Twenty-six
Weeks Ended
(In thousands) August 4, 2001
--------------
Total stockholders' equity, beginning of period........... $493,269
Net income................................................ 23,228
Exercises of stock options................................ 332
Amortization of deferred compensation expense............. 574
Net unamortized deferred loss on termination of
derivative, net of income tax benefit of $529........... (981)
Net unrealized losses on available-for-sale securities.... (46)
--------
Total stockholders' equity, end of period................. $516,376
========
5. Derivative Financial Instruments
The Company adopted the provisions of Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 133, "Ac-
counting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," as of the beginning of the fiscal year ending February
2, 2002 ("Fiscal 2002"). During Fiscal 2001, the Company terminated an in-
terest rate swap agreement with a notional principal amount of $50 million.
In accordance with SFAS No. 133, the deferred loss on termination of the
swap as of February 4, 2001 ($1,152,000 net of a tax benefit of $621,000)
has been recognized in "Accumulated other comprehensive (loss) income" on
the Company's consolidated balance sheet, and is being amortized to sell-
ing, general, and administrative expenses over the 44-month remaining life
of the original swap period.
6. Customer Loyalty Card Program
During the first quarter of the current fiscal year, the Company began a
customer loyalty card program for its Fashion Bug store customers. The
program grants discounts on customer purchases over a twelve-month period
upon payment of a $20 annual fee. Revenues from the program are recognized
as sales over the life of the membership as discounts are earned. Upon
cancellation of a loyalty card, refunds of membership fees are reduced by
the amount of any discounts granted to the member under the program. Costs
incurred by the Company in connection with the program are recognized in
cost of goods sold as incurred. During the thirteen and twenty-six weeks
ended August 4, 2001, the Company recognized $2,882,000 and $3,627,000,
respectively, of revenues in connection with this program.
9
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Net Income Per Share
Thirteen Weeks Ended Twenty-six Weeks Ended
August 4, July 29, August 4, July 29,
(In thousands, except per-share amounts) 2001 2000 2001 2000
---- ---- ---- ----
(Restated) (Restated)
Basic weighted average common shares
outstanding.............................. 101,377 101,121 101,311 100,986
Dilutive effect of assumed conversion
of convertible notes..................... 12,875 12,875 12,875 12,875
Dilutive effect of stock options........... 973 952 1,001 1,115
------- ------- ------- -------
Diluted weighted average common shares and
equivalents outstanding.................. 115,225 114,948 115,187 114,976
------- ------- ------- -------
Income before cumulative effect of
accounting change........................ $14,860 $26,841 $23,228 $35,114
Decrease in interest expense from
assumed conversion of notes, net
of income taxes.......................... 1,114 1,125 2,229 2,251
------- ------- ------- -------
Income before cumulative effect of
accounting change used to determine
diluted earnings per share............... 15,974 27,966 25,457 37,365
Cumulative effect of accounting change,
net of income taxes...................... 0 0 0 (540)
------- ------- ------- -------
Net income used to determine diluted
earnings per share....................... $15,974 $27,966 $25,457 $36,825
======= ======= ======= =======
Options with weighted average exercise
price greater than market price,
excluded from computation of diluted
earnings per share:
Number of shares........................... 4,710 4,635 5,181 3,742
Weighted average exercise price per share.. $7.76 $7.69 $7.58 $8.01
Grants of stock awards under the Company's restricted stock award programs
generally require continuing employment for a specified period of time as a
condition for vesting of the award. Grants that have not vested and are
subject to a risk of forfeiture are included in the calculation of diluted
earnings per share using the treasury stock method if the impact of the
award is dilutive. Upon vesting, shares issued under these award programs
are included in the calculation of basic earnings per share.
8. Impact of Recent Accounting Pronouncements
In September 2000, The FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," a
replacement of SFAS No. 125. SFAS No. 140 retains most of the provisions
of SFAS No. 125, but revises the standards for accounting for securiti-
zations and other transfers of financial assets and collateral and requires
10
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
certain disclosures. SFAS No. 140 is 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 serv
icing assets it controls and the liabilities it has incurred, de-recognizes
financial assets when control has been surrendered, and de-recognizes lia-
bilities when extinguished.
SFAS No. 140 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001, and is
effective for recognition and reclassification of collateral and for dis-
closures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. The Company adopted the disclosure
provisions of SFAS No. 140 as of Fiscal 2001, and will adopt the accounting
requirements of SFAS No. 140 to the extent that it issues new beneficial
interests after March 31, 2001. Adoption of SFAS No. 140 did not have a
material impact on the results of operations or financial position for the
thirteen or twenty-six weeks ended August 4, 2001, and is not expected to
have a material impact on future operating results.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires the use of the purchase method of accounting for business combina-
tions initiated after June 30, 2001, and expands the definition of
intangible assets that are to be recorded separately from goodwill. For
business combinations accounted for under the purchase method which were
completed prior to July 1, 2001, previously recorded goodwill and intangi-
bles are to be evaluated against the criteria in SFAS No. 141, which may
result in the reclassification of certain intangible assets into or out of
recorded goodwill. SFAS No. 142 requires that goodwill and certain intan-
gible assets with an indefinite useful life are not to be amortized, but
are to be reviewed for impairment at least annually and written down in
periods in which the recorded value of the goodwill or intangible asset
exceeds its fair value.
For goodwill and other intangible assets acquired prior to June 30, 2001,
the Company is required to adopt the provisions of SFAS No. 141 and SFAS
No. 142 as of February 3, 2002 (the beginning of the fiscal year ended
February 1, 2003). The Company's condensed consolidated balance sheet as
of August 4, 2001 includes $90.1 million of goodwill recognized as a result
of the acquisition of Catherines Stores, Inc. ("Catherine's") in January
2000. In accordance with the provisions of these statements, the Company
will continue to amortize the Catherine's goodwill through the end of Fis-
cal 2002, recognizing approximately $4.9 million of amortization for Fiscal
11
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2002. Commencing February 3, 2002, the Company will no longer amortize the
Catherine's goodwill; however, subsequent impairment reviews may result in
periodic write-downs of the Catherine's goodwill. In addition, intangible
assets meeting the requirement for separate disclosure under SFAS Nos. 141
and 142 may be reclassified out of the Catherine's goodwill as of the date
of adoption of the statements, and may be separately amortized based on
their useful lives. Except for discontinuing the amortization of goodwill,
the Company has not determined the impact of adoption of SFAS Nos. 141 and
142 with respect to the Catherine's goodwill on the Company's financial
condition or results of operations.
The Company is required to adopt the provisions of SFAS No. 141 for
business combinations accounted for under the purchase method that are
completed subsequent to June 30, 2001. In accordance with the transition
provisions of SFAS No. 142, the Company is required to adopt the provisions
relating to non-amortization of goodwill and recognition of intangible
assets for goodwill and intangibles acquired subsequent to June 30, 2001.
The Company is required to adopt the provisions of SFAS No. 142 in full as
of February 3, 2002. The Company will adopt the provisions of SFAS No. 141
and the transition provisions of SFAS No. 142 in accounting for its acqui-
sition of Lane Bryant, Inc. (see "Note 9. Subsequent Events" below).
9. Subsequent Events
On August 16, 2001, the Company announced the completion of the purchase of
Lane Bryant, Inc. ("Lane Bryant"), a subsidiary of the Limited, Inc., for
$335 million. Consideration paid for the purchase was $280 million cash
and approximately 8.7 million shares of Charming Shoppes Inc. Common Stock
valued at $55 million. Lane Bryant operates a chain of 651 retail apparel
stores in 46 states, specializing in fashion apparel and related acces-
sories for women wearing plus-sizes 14 and greater. Lane Bryant had net
sales of $930 million in the fiscal year ended February 3, 2001. The cash
portion of the transaction was financed through existing cash balances and
a new $375 million secured credit facility, discussed below. The Limited,
Inc. is restricted from selling the Charming Shoppes, Inc. Common Stock for
a one-year period after the close of the transaction.
The Lane Bryant acquisition is being accounted for under the purchase
method of accounting in accordance with the provisions of SFAS No. 141 and
SFAS No. 142 (see "Note 8. Impact of Recent Accounting Pronouncements"
above). The Company's prior-period results will not be restated. The Com-
pany has not completed the allocation of the purchase price to the net
assets acquired. However, the Company anticipates that the purchase price
will exceed the fair value of the net assets acquired.
12
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In connection with the acquisition of Lane Bryant, on August 16, 2001 the
Company replaced its existing $150,000,000 revolving credit facility with a
$375,000,000 credit facility pursuant to a loan and security agreement of
the same date (the "Facility" or the "Agreement"). This Facility includes
a revolving credit facility with a maximum availability of $300,000,000,
subject to borrowing limitations based on eligible inventory and the value
of certain real property, and a three-year term loan of $75,000,000. The
revolving credit facility expires on August 16, 2004, with an option to
renew the Agreement for an additional year. The Company also terminated
its existing $20,000,000 and $10,000,000 revolving credit facilities, which
were obtained in connection with the Company's previous acquisitions of the
Catherine's and Modern Woman stores.
The revolving credit facility enables the Company to issue up to
$150,000,000 of letters of credit for overseas purchases of merchandise and
provides for cash borrowings, if necessary. There is a fee of 1-1/2% per
annum on outstanding documentary letters of credit, a fee of 2% per annum
on outstanding stand-by letters of credit, a fee of .375% to .5% per annum
on the unused portion of the revolving credit facility, and annual servic-
ing fees totaling $156,000. The Facility is secured by the Company's mer-
chandise inventory, furniture and fixtures, certain of the Company's real
properties, and certain other assets. The interest rate on borrowings
under the revolving credit line ranges from Prime to Prime plus .75% per
annum for Prime Rate Loans, and LIBOR plus 2% to LIBOR plus 2.75% per annum
for Eurodollar Rate Loans. The interest rate on borrowings under the term
loan equals Prime plus 4% per annum, with minimum and maximum rates of
11.5% and 13%, respectively, per annum.
The Agreement includes limitations on sales and leasebacks, the incurrence
of additional liens and debt, capital lease financing, and other limita-
tions. The Agreement also requires, among other things, that the Company
not pay dividends on its Common Stock and maintain an Adjusted Tangible Net
Worth (as defined in the Agreement) of $228,000,000 (subject to increase or
decrease in certain circumstances). Until the term loan is paid in full,
the Company is required to maintain a minimum twelve-month earnings before
interest, income taxes, depreciation, and amortization ("EBITDA") of
$140,000,000 and maintain a ratio of Total Secured Debt to EBITDA of not
greater than 3 to 1, as more fully described in the Agreement.
13
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 Re-
sults of Operations contains certain forward-looking statements concerning
the Company's operations, performance and financial condition. In particu-
lar, it includes forward-looking statements regarding the Company's growth,
expense reduction initiatives, earnings, sales performance, store openings
and closings, cost savings, capital requirements, the Company'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 include, but are not
limited to, (i) failure to achieve successful integrations, (ii) rapid
changes in or miscalculation of fashion trends, (iii) extreme or unseason-
able weather conditions, (iv) economic downturns, a weakness in overall
consumer demand, inflation, and cyclical variations in the retail market
for women's fashion apparel, (v) 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 trans-
portation, (vi) the interruption of merchandise flow to the Company's
retail stores from its centralized distribution facilities, (vii) competi-
tive pressures, (viii) the ability to hire and train associates, (ix) the
availability of suitable store locations on appropriate terms, (x) failure
to realize merger-related synergies, and (xi) the adverse effects of acts
or threats of war, terrorism, or other armed conflict on the United States
and international economies. 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 Securi-
ties Litigation Reform Act of 1995" of the Company's Annual Report on Form
10-K for the fiscal year ended February 3, 2001, and in the Company's re-
ports filed with the Securities and Exchange Commission from time to time.
14
RECENT DEVELOPMENTS
On August 16, 2001, the Company announced the completion of the purchase of
Lane Bryant, Inc. ("Lane Bryant"), a subsidiary of the Limited, Inc., for
$335 million. Consideration paid for the purchase was $280 million cash
and approximately 8.7 million shares of Charming Shoppes Inc. Common Stock
valued at $55 million. Lane Bryant operates a chain of 651 retail apparel
stores in 46 states, specializing in fashion apparel and related acces-
sories for women wearing plus-sizes 14 and greater. Lane Bryant had net
sales of $930 million in the fiscal year ended February 3, 2001. The cash
portion of the transaction was financed through existing cash balances and
a new $375 million secured credit facility, discussed below. The Limited,
Inc. is restricted from selling the Charming Shoppes, Inc. Common Stock for
a one-year period after the close of the transaction.
The Lane Bryant acquisition is being accounted for under the purchase
method of accounting in accordance with the provisions of Financial
Accounting Standards Board ("FASB") Statements of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations," and No. 142, "Goodwill
and Other Intangible Assets" (see "Notes to Condensed Consolidated Finan-
cial Statements; Note 8. Impact of Recent Accounting Pronouncements" on
pages 10 through 12 above). The Company's prior-period results will not be
restated. The Company has not completed the allocation of the purchase
price to the net assets acquired. However, the Company anticipates that
the purchase price will exceed the fair value of the net assets acquired.
In connection with the acquisition of Lane Bryant, on August 16, 2001 the
Company replaced its existing $150,000,000 revolving credit facility with a
$375,000,000 credit facility pursuant to a loan and security agreement of
the same date (the "Facility" or the "Agreement"). This Facility includes
a revolving credit facility with a maximum availability of $300,000,000,
subject to borrowing limitations based on eligible inventory and the value
of certain real property, and a three-year term loan of $75,000,000. The
revolving credit facility expires on August 16, 2004, with an option to
renew the Agreement for an additional year. The Company also terminated
its existing $20,000,000 and $10,000,000 revolving credit facilities, which
were obtained in connection with the Company's previous acquisitions of the
Catherine's and Modern Woman stores.
The revolving credit facility enables the Company to issue up to
$150,000,000 of letters of credit for overseas purchases of merchandise and
provides for cash borrowings, if necessary. There is a fee of 1-1/2% per
annum on outstanding documentary letters of credit, a fee of 2% per annum
on outstanding stand-by letters of credit, a fee of .375% to .5% per annum
on the unused portion of the revolving credit facility, and annual servic-
ing fees totaling $156,000. The Facility is secured by the Company's
merchandise inventory, furniture and fixtures, certain of the Company's
real properties, and certain other assets. The interest rate on borrowings
15
under the revolving credit line ranges from Prime to Prime plus .75% per
annum for Prime Rate Loans, and LIBOR plus 2% to LIBOR plus 2.75% per annum
for Eurodollar Rate Loans. The interest rate on borrowings under the term
loan equals Prime plus 4% per annum, with minimum and maximum rates of
11.5% and 13%, respectively, per annum.
The Agreement includes limitations on sales and leasebacks, the incurrence
of additional liens and debt, capital lease financing, and other limita-
tions. The Agreement also requires, among other things, that the Company
not pay dividends on its Common Stock and maintain an Adjusted Tangible Net
Worth (as defined in the Agreement) of $228,000,000 (subject to increase or
decrease in certain circumstances). Until the term loan is paid in full,
the Company is required to maintain a minimum twelve-month earnings before
interest, income taxes, depreciation, and amortization ("EBITDA") of
$140,000,000 and maintain a ratio of Total Secured Debt to EBITDA of not
greater than 3 to 1, as more fully described in the Agreement.
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a per-
centage of net sales:
Thirteen Weeks Ended Twenty-six Weeks Ended
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
---- ---- ---- ----
Net sales............................... 100.0% 100.0% 100.0% 100.0%
Other income............................ 0.4 0.6 0.5 0.6
Cost of goods sold, buying, and
Occupancy expenses.................... 72.5 69.0 72.4 70.3
Selling, general, and administrative
Expenses.............................. 21.0 20.7 22.5 22.5
Amortization of goodwill................ 0.3 0.3 0.3 0.3
Interest expense........................ 0.6 0.5 0.6 0.5
Income tax provision.................... 2.3 3.9 1.8 2.7
Income before cumulative effect of
accounting change..................... 3.7 6.2 2.9 4.3
Net income.............................. 3.7 6.2 2.9 4.3
16
The following table sets forth certain comparative sales data:
Thirteen Weeks Ended Twenty-six Weeks Ended
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
---- ---- ---- ----
(Decrease) increase in comparable
store sales(1)(2):
Fashion Bug......................... (8.2)% (0.2)% (6.0)% 1.0%
Catherine's......................... (1.7) -- (0.1) --
Sales from new stores as a percent-
age of total prior-period sales(2):
Fashion Bug......................... 5.4 7.8 5.9 7.7
Catherine's......................... 3.3 33.2(3) 3.8 36.4(3)
Monsoon/Accessorize................. 0.1 -- 0.1 --
Prior-period sales from closed
stores as a percentage of total
prior-period sales(2):
Fashion Bug......................... (2.8) (3.4) (2.9) (3.2)
Catherine's stores.................. (4.5) -- (5.1) --
(Decrease) increase in total sales.... (6.3) 37.4 (1.4) 41.9
--------------------
(1) Sales from stores in operation during both periods. Stores are added
to the comparable store base after 13 full months of operation.
(2) Based on equivalent periods. Results for thirteen and twenty-six
weeks ended August 4, 2001 may not be equivalent to change in total
sales.
(3) Includes sales from Modern Woman stores acquired in August 1999.
Thirteen Weeks Ended August 4, 2001 and July 29, 2000
Net sales for the quarter ended August 4, 2001 ("Fiscal 2002 Second Quar-
ter") totaled $402.7 million as compared to net sales of $429.7 million for
the quarter ended July 29, 2000 ("Fiscal 2001 Second Quarter"). Net sales
for the Fiscal 2002 Second Quarter include $306.2 million in sales from
Fashion Bug stores and $96.5 million in sales from Catherine's Stores. Net
sales for the Fiscal 2001 Second Quarter include $325.9 million in sales
from Fashion Bug stores and $103.8 million in sales from Catherine's
Stores. Fashion Bug comparable store sales decreased primarily as a result
of exiting the girls merchandise business. In January 2001, the Company
announced plans to support growth in large-size apparel and eliminate girls
apparel from Fashion Bug stores, effective at the end of the 2000-2001
winter season. For Catherine's Stores, an increase in sales of casual
sportswear was offset by decreases in sales of career-wear and dresses.
Fashion Bug and Catherine's comparable store sales were also negatively
affected by a generally difficult retail sales environment.
As of August 4, 2001, the Company operated 1,237 Fashion Bug stores, 532
Catherine's stores, and 2 Monsoon/Accessorize stores, as compared to 1,204
Fashion Bug stores and 536 Catherine's/Modern Woman stores as of July 29,
2000.
17
Other income expressed as a percentage of sales decreased 0.2% in the
Fiscal 2002 Second Quarter as compared to the Fiscal 2001 Second Quarter,
primarily as a result of a decrease in interest income. Interest income
decreased as a result of lower levels of invested funds during the Fiscal
2002 Second Quarter as compared to the Fiscal 2001 Second Quarter. During
the Fiscal 2002 Second Quarter, the Company converted investments in
marketable securities to cash and cash equivalents pending the acquisition
of Lane Bryant (see "RECENT DEVELOPMENTS" above).
Cost of goods sold, buying, and occupancy expenses expressed as a percent-
age of sales increased 3.5% in the Fiscal 2002 Second Quarter as compared
to the Fiscal 2001 Second Quarter. Cost of goods sold as a percentage of
sales increased 1.7% in the Fiscal 2002 Second Quarter as compared to the
Fiscal 2001 Second Quarter. The reduction in merchandise margins was
primarily a result of higher than planned promotional activity in response
to a slow retail sales environment. Cost of goods sold includes merchan-
dise costs, net of discounts and allowances, freight, and inventory shrink-
age. Net merchandise costs and freight are capitalized as inventory costs.
Buying and occupancy expenses expressed as a percentage of sales increased
1.8% in the Fiscal 2002 Second Quarter as compared to the Fiscal 2001
Second Quarter. The increase in buying and occupancy expenses as a per-
centage of sales was primarily attributable to the lack of leverage on
relatively fixed occupancy costs as a result of a decline in comparable
store sales. Buying expenses include payroll, payroll related costs, and
operating expenses for the Company's buying departments and warehouses.
Occupancy expenses include rent, real estate taxes, insurance, common area
maintenance, utilities, maintenance, and depreciation for the Company's
stores and warehouse facilities and equipment. Buying and occupancy costs
are treated as period costs and are not capitalized as part of inventory.
Selling, general, and administrative expenses decreased $4.5 million in the
Fiscal 2002 Second Quarter as compared to the Fiscal 2001 Second Quarter,
but increased 0.3% as a percentage of sales. Cost containment initiatives
implemented during the Fiscal 2002 First Quarter favorably impacted selling
and corporate administrative expenses in the current quarter. Addition-
ally, selling expenses in the Fiscal 2002 Second Quarter benefited from a
reduced rate of wage increases in the Company's stores and an improvement
in the Company's credit operations as a result of reduced interest rates
related to the Company's asset securitization program. The increase in
selling, general, and administrative expenses as a percentage of sales
was a result of the lack of leverage from the decline in comparable store
sales. Selling, general, and administrative expenses exclude goodwill
amortization related to the acquisition of the Catherine's stores.
Interest expense expressed as a percentage of sales increased 0.1% in the
Fiscal 2002 Second Quarter as compared to the Fiscal 2001 Second Quarter.
During the Fiscal 2002 Second Quarter, the Company acquired $3.0 million of
point-of-sale equipment for its stores through the use of long-term capital
lease financing.
18
The income tax provision for the Fiscal 2002 Second Quarter was 38.8% of
the Company's pre-tax income, as compared to 38.2% for the Fiscal 2001
Second Quarter. The increase in the effective tax rate is primarily
attributable to an increase in the tax provision related to one of the
Company's employee insurance programs.
Net income per share, assuming dilution, for the Fiscal 2002 Second Quarter
was $.14 as compared to $.24 for the Fiscal 2001 Second Quarter. Diluted
net income per share excluding goodwill amortization (cash earnings per
share) was $.15 for the Fiscal 2002 Second Quarter as compared to $.25 for
the Fiscal 2001 Second Quarter.
Twenty-six Weeks Ended August 4, 2001 and July 29, 2000
Net sales for the twenty-six weeks ended August 4, 2001 ("first half of
Fiscal 2002") totaled $797.5 million as compared to net sales of $808.6
million for the twenty-six weeks ended July 29, 2000 ("first half of Fiscal
2001"). Net sales for the first half of Fiscal 2002 include $596.0 million
in sales from the Company's Fashion Bug stores and $201.5 million in sales
from Catherine's Stores. Net sales for the first half of Fiscal 2001
include $600.7 million in sales from the Company's Fashion Bug stores and
$207.9 million in sales from Catherine's Stores. Fashion Bug comparable
store sales decreased primarily as a result of exiting the girls merchan-
dise business. In January 2001, the Company announced plans to support
growth in large-size apparel and eliminate girls apparel from Fashion Bug
stores, effective at the end of the 2000-2001 winter season. For Cather-
ine's Stores, an increase in sales of casual sportswear was offset by
decreases in sales of career-wear and dresses. Fashion Bug and Catherine's
comparable store sales were also negatively affected by a generally
difficult retail sales environment.
Other income expressed as a percentage of sales decreased 0.1% in the first
half of Fiscal 2002 as compared to the first half of Fiscal 2001, primarily
as a result of a decrease in interest income. Interest income decreased as
a result of lower levels of invested funds during the first half of Fiscal
2002 as compared to the first half of Fiscal 2001. During the first half
of Fiscal 2002, the Company converted investments in marketable securities
to cash and cash equivalents pending the acquisition of Lane Bryant (see
"RECENT DEVELOPMENTS" above).
Cost of goods sold, buying, and occupancy expenses expressed as a percent-
age of sales increased 2.1% in the first half of Fiscal 2002 as compared to
the first half of Fiscal 2001. Cost of goods sold as a percentage of sales
increased 0.9% in the first half of Fiscal 2002 as compared to the first
half of Fiscal 2001. The reduction in merchandise margins was primarily a
19
result of higher than planned promotional activity in response to a slow
retail sales environment and costs related to exiting the girls business in
the Company's Fashion Bug stores, which were partially offset by strong
management of in-season inventory levels. Cost of goods sold includes
merchandise costs, net of discounts and allowances, freight, and inventory
shrinkage. Net merchandise costs and freight are capitalized as inventory
costs.
Buying and occupancy expenses expressed as a percentage of sales increased
1.2% in the first half of Fiscal 2002 as compared to the first half of
Fiscal 2001. The increase in buying and occupancy expenses as a percentage
of sales was primarily attributable to the lack of leverage on relatively
fixed occupancy costs as a result of a decline in comparable store sales.
Increased utilities expenses and relatively higher occupancy expenses for
new and relocated stores as compared to the Company's existing stores also
contributed to the increase in buying and occupancy expenses as a percent-
age of sales. Buying expenses include payroll, payroll related costs, and
operating expenses for the Company's buying departments and warehouses.
Occupancy expenses include rent, real estate taxes, insurance, common area
maintenance, utilities, maintenance, and depreciation for the Company's
stores and warehouse facilities and equipment. Buying and occupancy costs
are treated as period costs and are not capitalized as part of inventory.
Selling, general, and administrative expenses decreased $2.8 million in the
first half of Fiscal 2002 as compared to the first half of Fiscal 2001, and
were unchanged as a percentage of sales. The decrease was primarily
attributable to cost containment initiatives implemented during the Fiscal
2002 First Quarter, which favorably impacted selling and corporate adminis-
trative expenses. Additionally, selling expenses in the first half of
Fiscal 2002 benefited from a reduced rate of wage increases in the Com-
pany's stores and an improvement in the Company's credit operations as a
result of reduced interest rates related to the Company's asset securitiza-
tion program. Selling, general, and administrative expenses exclude good-
will amortization related to the acquisition of the Catherine's stores.
Interest expense expressed as a percentage of sales increased 0.1% in the
first half of Fiscal 2002 as compared to the first half of Fiscal 2001.
During the first half of Fiscal 2002, the Company acquired $8.8 million of
point-of-sale equipment for its stores through the use of long-term capital
lease financing.
The income tax provision for the first half of Fiscal 2002 was 38.8% of the
Company's pre-tax income, as compared to 38.2% for the first half of Fiscal
2001. The increase in the effective tax rate is primarily attributable to
an increase in the tax provision related to one of the Company's employee
insurance programs.
20
Net income per share, assuming dilution, for the first half of Fiscal 2002
was $.22 as compared to $.32 for the first half of Fiscal 2001. Diluted
net income per share excluding goodwill amortization (cash earnings per
share) was $.24 for the first half of Fiscal 2002 as compared to $.34 for
the first half of Fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are cash flow from opera-
tions, its proprietary credit card receivables securitization agreements,
its investment portfolio, and its credit facilities. The following table
highlights certain information related to the Company's liquidity and
capital resources:
August 4, February 3,
(Dollars in thousands) 2001 2001
---- ----
Working capital................................. $281,408 $208,389
Cash and cash equivalents....................... 125,536 56,544
Available-for-sale securities................... 62,642 125,278
Current ratio................................... 2.2 1.9
Long-term debt to equity (%).................... 22.9 23.0
Net cash provided by operating activities was $38.9 million for the first
half of Fiscal 2002, as compared to $84.0 million for the first half of
Fiscal 2001. Cash provided by operating activities for the first half of
Fiscal 2001 benefited from an increase in trade accounts payable, net of
the change in inventories, resulting from improved credit terms for the
Company's Catherine's Stores. Cash provided by operating activities for
the first half of Fiscal 2002 was negatively impacted by reduced operating
income and an increase in merchandise inventories, partially offset by a
net decrease in payments of accrued expenses. As a result of the recent
decline in interest rates, a portion of the Company's investments in U. S.
government agency bonds with early redemption provisions were called for
redemption during the first half of Fiscal 2002. The $62.6 million
decrease in available-for-sale securities during the first half of Fiscal
2002 was primarily a result of these redemptions. The Company invested the
proceeds from these early redemptions in money market funds pending their
possible use in connection with the acquisition of Lane Bryant (see "RECENT
DEVELOPMENTS" above), which resulted in an increase in cash and cash equiv-
alents.
As of August 4, 2001, the Company had 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. This facility, which was replaced with a $375 million facility
21
after the end of the current period (see "Recent Developments" above), en-
abled the Company to issue letters of credit for overseas purchases of
merchandise and provided for seasonal cash borrowings, if necessary. The
facility was secured by merchandise inventory, furniture and fixtures at
the Fashion Bug retail stores, and certain other Company assets. The
interest rate on borrowings was 0.5% above the Prime rate. There was a fee
of .25% on the unused portion of the first $105 million of the facility,
and a $100 thousand annual servicing fee. As of August 4, 2001, the avail-
ability under this facility was approximately $144.8 million, against which
the Company had outstanding letters of credit of $58.4 million. There were
no cash borrowings outstanding under this agreement as of August 4, 2001.
The agreement required among other things, that the Company maintain a min-
imum net worth of $350 million and not pay dividends on its Common Stock.
As a result of the Catherine's Stores acquisition, the Company had an
agreement with a bank to provide a revolving credit facility with a maximum
availability of $20 million. This facility, which was replaced in connec-
tion with the Company's new $375 million credit facility (see "Recent
Developments" above), enabled the Company to issue letters of credit for
overseas purchases of merchandise and provided for seasonal cash borrow-
ings, if necessary, by utilizing a $5 million swingline credit facility.
The agreement was secured by inventory, general intangibles, patents,
trademarks, and proceeds of the foregoing. The interest rate on borrowings
was equal to the agent bank's prime rate.
As a result of the acquisition of Modern Woman, the Company also had an
agreement with a bank to provide a revolving credit facility with a maximum
availability of $10 million. As of August 4, 2001, $5.0 million was
available under this agreement, against which the Company had outstanding
letters of credit of $0.7 million. The Company had pledged $5 million of
available-for-sale securities as security for the line of credit. This
facility was discontinued in connection with the Company's new $375 million
credit facility (see "Recent Developments" above).
During the first half of Fiscal 2002, pursuant to a program to replace its
existing POS equipment, the Company acquired $8.8 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 $7.0 million over the next 9-12
months, which will be financed through the use of capital leases.
As of August 4, 2001, the Company has current debt maturity payments of
$6.5 million, which are primarily for amounts due under the Company's
capital lease obligations and the Catherine's Stores 7.5% Mortgage Note.
22
Capital expenditures (excluding equipment acquired through capital leases)
were $30.9 million during the first half of Fiscal 2002. During the re-
mainder of Fiscal 2002, the Company anticipates incurring additional capi-
tal expenditures of approximately $30-35 million. These capital expendi-
tures will primarily be for the construction, remodeling, and fixturing of
new and existing retail stores, investments in management information
systems technology, and improvements to the Company's corporate offices and
distribution centers. The Company expects to finance these capital expen-
ditures principally through internally-generated funds.
The Company plans to open 110-120 new Fashion Bug and Catherine's stores,
remodel 35-40 stores, and relocate 65-70 stores during the fiscal year
ended February 2, 2002 ("Fiscal 2002"). The following table sets forth
information with respect to store activity for the first half of Fiscal
2002:
Fashion Monsoon/
Bug Catherine's Accessorize
Stores Stores Stores Total
------ ------ ------ -----
Stores at February 3, 2001..... 1,230 524 0 1,754
----- --- - -----
Stores opened.................. 23 15 2 40
Stores closed.................. (16) (7) 0 (23)
----- --- - -----
Net change in stores........... 7 8 2 17
----- --- - -----
Stores at August 4, 2001....... 1,237 532 2 1,771
===== === = =====
Stores relocated during period. 12 13 25
Stores remodeled during period. 19 9 28
On August 16, 2001, the Company announced the completion of the purchase of
Lane Bryant (see "Recent Developments" above). In addition to the 651 Lane
Bryant stores acquired, the Company plans to add 25-35 stores to the Lane
Bryant chain during the next 12 months. The total capital expenditure
commitment related to Lane Bryant for the next twelve months is approxi-
mately $20.0 million.
The Company has a trust to which the Company sells, at face value, its
interest in receivables created under the Company's Fashion Bug proprietary
credit card program. The Company, together with the trust, has entered
into various 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 August 4, 2001, Charming Shoppes Receivables
Corp. had $35.5 million of Charming Shoppes Master Trust Certificates, and
23
Charming Shoppes Street, Inc. had $1.1 million 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 counter-party non-
performance.
The Company has a non-recourse agreement pursuant to which a third party
provides an accounts receivable proprietary credit card sales funding
program for its Catherine's 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
Catherine's Stores credit card accounts.
The securitization and funding agreements improve the overall liquidity of
the Company 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 February 3,
2001.
The Company adopted the provisions of Financial Accounting Standards Board
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," as of the beginning of Fiscal 2002. During the fiscal year
ended February 3, 2001 ("Fiscal 2001"), the Company terminated an interest
rate swap agreement with a notional principal amount of $50 million. In
accordance with SFAS No. 133, the deferred loss on termination of the swap
as of February 4, 2001 ($1,152,000 net of a tax benefit of $621,000) has
been recognized in "Other comprehensive income" on the Company's consoli-
dated balance sheet, and is being amortized to selling, general, and admin-
istrative expenses over the 44-month remaining life of the original swap
period.
The Company believes that cash flow from operations, its proprietary credit
card receivables securitization and funding agreements, its investment
portfolio, and its credit facilities are sufficient to support current
operations.
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 to a trust under a credit
card securitization program. Under the securitization program, the Company
24
can be exposed to fluctuations in interest rates to the extent that
interest rates charged to its customers vary from the rates paid on
certificates issued by the trust. Finance charges on all accounts are
billed using a floating rate index (the Prime lending rate), subject to a
floor and limited by legal maximums. The floating rate index on all of the
certificates is either one-month LIBOR or the commercial paper rate,
depending on the issue. The Company has exposure in the movement of basis
risk between the floating rate index on the certificates and the Prime
rate. As of August 4, 2001, the floating rate finance charge rate was
below the contractual floor rate, thus exposing the Company to a portion of
interest-rate risk. To the extent that short-term interest rates were to
increase by one percentage point by the end of Fiscal 2002, an increase of
approximately $500,000 in selling, general, and administrative expenses
would result.
The Company is not subject to material foreign exchange risk, as the Com-
pany's foreign transactions are primarily U. S. Dollar-denominated and the
Company's foreign operations do not constitute a material part of its busi-
ness.
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.
25
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on June 14,
2001.
(b) Not applicable.
(c) Joseph L. Castle II, Pamela S. Lewis, and Katherine M. Hudson were
nominated for election, in the Company's Proxy Statement, to serve three-
year terms as Class B Directors. The total number of shares represented at
the Annual Meeting were 99,047,378 shares. The following table indicates
the number of votes cast in favor of election and the number of votes
withheld with respect to each of the Class B Directors nominated:
Name Votes For Votes Withheld
---------------------------- --------- --------------
Joseph L. Castle II 96,757,222 2,290,156
Pamela S. Lewis 96,757,564 2,289,814
Katherine M. Hudson 96,751,561 2,295,817
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of Exhibits filed as part of this Quarterly Report
on Form 10-Q. Where so indicated, Exhibits that were previously filed are
incorporated by reference. For Exhibits incorporated by reference, the
location of the Exhibit in the previous filing is indicated in parenthesis.
2.1 Stock Purchase Agreement dated as of July 9, 2001 among Charming
Shoppes, Inc., Venice Acquisition Corporation, LFAS, Inc. and The
Limited, Inc., incorporated by reference to Form 8-K of the Registrant
dated August 16, 2001, filed on August 31, 2001. (Exhibit 2.1)
2.2 Services Agreement dated as of August 16, 2001 between LBH, Inc. and
The Limited, Inc., incorporated by reference to Form 8-K of the Regis-
trant dated August 16, 2001, filed on August 31, 2001. (Exhibit 2.2)
2.3 Covenant Agreement dated as of August 16, 2001 between Charming
Shoppes, Inc. and The Limited, Inc., incorporated by reference to Form
8-K of the Registrant dated August 16, 2001, filed on August 31, 2001.
(Exhibit 2.3)
2.4 Master Sublease dated as of August 16, 2001 between The Limited, Inc.
and Lane Bryant, Inc. , incorporated by reference to Form 8-K of the
Registrant dated August 16, 2001, filed on August 31, 2001. (Exhibit
2.4)
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2.5 Lease Agreement dated as of August 16, 2001 by and between Distribu-
tion Land Corp. and Lane Bryant, Inc., incorporated by reference to
Form 8-K of the Registrant dated August 16, 2001, filed on August 31,
2001. (Exhibit 2.5)
2.6 Loan and Security Agreement dated as of August 16, 2001 by and among
Charming Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI Indus-
tries, Inc., Catherine Stores Corporation, Lane Bryant, Inc. and FB
Apparel, Inc., as Borrowers, Charming Shoppes of Delaware, Inc., as
Borrowers' Agent, Congress Financial Corporation, as Administrative
Agent, Collateral Agent, Joint Lead Arranger and Joint Bookrunner,
J.P. Morgan Business Credit Corp., as Co-Agent, Joint Lead Arranger
and Joint Bookrunner and The Financial Institutions named therein, as
Lenders, incorporated by reference to Form 8-K of the Registrant dated
August 16, 2001, filed on August 31, 2001. (Exhibit 2.6)
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)
4.1 Registration Agreement dated as of August 16, 2001 between Charming
Shoppes, Inc. and The Limited, Inc., incorporated by reference to Form
8-K of the Registrant dated August 16, 2001, filed on August 31, 2001.
(Exhibit 4.1)
(b) Reports on Form 8-K
On August 31, 2001, the Company filed a report on Form 8-K dated August 16,
2001. The Form 8-K was filed to report, under "Item 2. Acquisition or
Disposition of Assets," the acquisition by Venice Acquisition Corporation,
a subsidiary of the Company, of all of the outstanding capital stock of
LBH, Inc. from a subsidiary of The Limited, Inc. LBH, Inc. owns all of the
outstanding capital stock of Lane Bryant, Inc. and certain other entities
that hold assets used in Lane Bryant's business. In accordance with Items
7(a)(4) and 7(b)(2) of Form 8-K, the financial statements and pro forma
financial information required by "Item 7. Financial Statements, Pro Forma
Financial Information, and Exhibits" of Form 8-K will be filed by amendment
to the Form 8-K dated August 16, 2001 no later than 60 days after August
31, 2001.
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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: September 17, 2001 /S/DORRIT J. BERN
-----------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: September 17, 2001 /S/ERIC M. SPECTER
------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer
28