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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 4, 2002
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. 000-07258
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
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(Registrant's telephone number, including Area Code)
NOT APPLICABLE
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(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 May 4,
2002, was 113,015,311 shares.
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CHARMING SHOPPES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
May 4, 2002 and February 2, 2002................................ 2 - 3
Condensed Consolidated Statements of Operations and
Comprehensive Income
Thirteen weeks ended May 4, 2002 and May 5, 2001................ 4
Condensed Consolidated Statements of Cash Flows
Thirteen weeks ended May 4, 2002 and May 5, 2001................ 5
Notes to Condensed Consolidated Financial Statements.................. 6 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking Statements............................................ 15 - 16
Critical Accounting Policies.......................................... 17
Results of Operations................................................. 17 - 20
Recent Developments................................................... 20 - 21
Liquidity and Capital Resources....................................... 21 - 24
Financing............................................................. 24 - 25
Market Risk........................................................... 25
Impact of Recent Accounting Pronouncements............................ 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 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
May 4, February 2,
(In thousands) 2002 2002
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents ......................................... $ 37,399 $ 36,640
Available-for-sale securities, (including fair value adjustments of
$20 as of May 4, 2002 and $24 as of February 2, 2002) ......... 56,543 48,351
Merchandise inventories ........................................... 338,700 300,407
Deferred taxes .................................................... 20,315 21,228
Prepayments and other ............................................. 92,091 78,118
---------- ----------
Total current assets .......................................... 545,048 484,744
---------- ----------
Property, equipment, and leasehold improvements ................... 657,033 657,067
Less: accumulated depreciation and amortization ................... 346,849 341,055
---------- ----------
Net property, equipment, and leasehold improvements ........... 310,184 316,012
---------- ----------
Trademarks and other intangible assets ............................ 171,624 171,794
Goodwill .......................................................... 108,808 110,243
Available-for-sale securities (including fair value adjustments of
$0 as of May 4, 2002 and $(39) as of February 2, 2002) ........ 22,850 22,015
Other assets ...................................................... 28,374 27,869
---------- ----------
Total assets ...................................................... $1,186,888 $1,132,677
========== ==========
See Notes to Condensed Consolidated Financial Statements
2
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
May 4, February 2,
(In thousands except share and per-share amounts) 2002 2002
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings ............................................. $ 21,742 $ 54,296
Accounts payable .................................................. 149,555 107,891
Accrued expenses .................................................. 175,915 148,373
Accrued restructuring costs ....................................... 18,484 19,758
Current portion - long-term debt .................................. 50,163 9,379
----------- -----------
Total current liabilities ..................................... 415,859 339,697
----------- -----------
Deferred taxes .................................................... 33,687 33,687
Long-term debt .................................................... 165,979 208,491
Minority interest ................................................. 939 1,000
Stockholders' equity
Common Stock $.10 par value
Authorized - 300,000,000 shares
Issued - 113,015,311 shares at May 4, 2002 and
111,891,156 shares at February 2, 2002 ..................... 11,302 11,189
Additional paid-in capital ........................................ 107,949 103,267
Deferred employee compensation .................................... (4,326) (3,741)
Accumulated other comprehensive (loss) income ..................... (717) (818)
Retained earnings ................................................. 456,216 439,905
----------- -----------
Total stockholders' equity .................................... 570,424 549,802
----------- -----------
Total liabilities and stockholders' equity ........................ $ 1,186,888 $ 1,132,677
=========== ===========
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
May 4, May 5,
(In thousands except per-share amounts) 2002 2001
---- ----
Net sales .................................................................. $ 630,616 $ 394,761
--------- ---------
Cost of goods sold, buying, and occupancy expenses ......................... 438,808 285,576
Selling, general, and administrative expenses .............................. 159,156 93,933
Amortization of goodwill ................................................... 0 1,222
--------- ---------
Total operating expenses ................................................... 597,964 380,731
--------- ---------
Income from operations ..................................................... 32,652 14,030
Other income, principally interest ......................................... 444 2,028
Interest expense ........................................................... (6,802) (2,385)
--------- ---------
Income before income taxes ................................................. 26,294 13,673
Income tax provision ....................................................... 10,044 5,305
--------- ---------
Income before minority interest ............................................ 16,250 8,368
Minority interest in net loss of consolidated subsidiary,
net of income taxes of $37 ............................................. 61 0
--------- ---------
Net income ................................................................. 16,311 8,368
--------- ---------
Unrealized gains/(losses) on available-for-sale securities, net of
income taxes of $(20) at May 4, 2002 and $3 at May 5, 2001 ............. 15 (8)
Reclassification of realized losses on available-for-sale securities, net of
income tax benefit of $3 at May 5, 2001 ................................ 0 6
Unamortized deferred loss on termination of derivative, net of
income tax benefit of $620 at May 5, 2001 .............................. 0 (1,152)
Reclassification of amortization of deferred loss on termination
of derivative, net of income tax benefit of $46 at May 4, 2002
and $40 at May 5, 2001 ................................................. 86 74
--------- ---------
Total other comprehensive income (loss), net of taxes ...................... 101 (1,080)
--------- ---------
Comprehensive income ....................................................... $ 16,412 $ 7,288
========= =========
Basic net income per share ................................................. $ .15 $ .08
========= =========
Diluted net income per share ............................................... $ .14 $ .08
========= =========
Certain prior-period amounts have been reclassified to conform to the current
presentation.
See Notes to Condensed Consolidated Financial Statements
4
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirteen Weeks Ended
May 4, May 5,
(In thousands) 2002 2001
---- ----
Operating activities
Net income ........................................... $ 16,311 $ 8,368
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................... 18,335 12,599
Other, net ....................................... (32) 376
Changes in operating assets and liabilities:
Merchandise inventories ....................... (38,293) (52,479)
Accounts payable .............................. 41,664 49,990
Prepayments and other ......................... (14,148) (8,762)
Accrued expenses .............................. 29,890 2,919
Income taxes payable .......................... 0 4,205
Accrued restructuring costs ................... (1,274) 0
--------- ---------
Net cash provided by operating activities ............ 52,453 17,216
--------- ---------
Investing activities
Investment in capital assets ......................... (10,606) (15,511)
Proceeds from sales of available-for-sale securities . 3 63,325
Gross purchases of available-for-sale securities ..... (8,996) (15,817)
Increase in other assets ............................. (1,239) (2,293)
--------- ---------
Net cash used in investing activities ................ (20,838) 29,704
--------- ---------
Financing activities
Proceeds from short-term borrowings .................. 222,613 0
Repayments of short-term borrowings .................. (255,167) 0
Repayments of long-term borrowings ................... (2,355) (1,272)
Proceeds from exercise of stock options .............. 4,053 1,486
--------- ---------
Net cash provided by (used in) financing activities .. (30,856) 214
--------- ---------
Increase in cash and cash equivalents ................ 759 47,134
Cash and cash equivalents, beginning of period ....... 36,640 56,544
--------- ---------
Cash and cash equivalents, end of period ............. $ 37,399 $ 103,678
========= =========
Non-cash financing and investing activities
Equipment acquired through capital leases ............ $ 640 $ 5,810
========= =========
Common stock issued on conversion of convertible notes $ 13 $ 0
========= =========
See Notes to Condensed Consolidated Financial Statements
5
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of May 4, 2002 and the
condensed consolidated statements of operations and comprehensive income and of
cash flows for the thirteen weeks ended May 4, 2002 and May 5, 2001 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 May 4, 2002 and the results of
operations and cash flows for the thirteen weeks ended May 4, 2002 and May 5,
2001 have been made. Certain prior-year amounts in the consolidated statements
of operations have been reclassified to conform to the current 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 conjunction with the
financial statements and notes thereto included in the Company's February 2,
2002 Annual Report on Form 10-K. The results of operations for the thirteen
weeks ended May 4, 2002 and May 5, 2001 are not necessarily indicative of
operating results for the full fiscal year.
As used in these notes, the terms "Fiscal 2003" and "Fiscal 2002" refer
to the Company's fiscal year ending February 1, 2003 and fiscal year ended
February 2, 2002, respectively.
2. Acquisition
On August 16, 2001, the Company acquired 100% of the outstanding stock
of Lane Bryant, Inc. ("Lane Bryant") from a subsidiary of The Limited, Inc. The
acquisition has been accounted for under the purchase method of accounting, and
the results of operations of Lane Bryant are included in the Company's results
of operations for the thirteen weeks ended May 4, 2002. Prior-period results
have not been restated.
The acquisition of Lane Bryant complements the Company's long-term
growth strategy of becoming a leader in the sale of plus-size specialty apparel.
Lane Bryant is a premier brand in the plus-size market with an established
customer base and proprietary brand names, and operates profitably in multiple
retail venues, primarily in leading malls.
The following unaudited pro forma results of operations for the
thirteen weeks ended May 5, 2001 are based on historical data, and give effect
to the Company's acquisition of Lane Bryant as if the acquisition had occurred
on February 4, 2001. The pro forma information includes adjustments having a
continuing impact on the consolidated company as a result of using the purchase
method of accounting for the acquisition. Pro forma adjustments consist of
additional depreciation from the step-up in value of property, equipment, and
leasehold improvements acquired, additional amortization expense related to
intangible assets acquired, additional interest expense and amortization of
deferred financing costs related to debt incurred to finance the acquisition,
and a reduction in interest income from the use of approximately $83,000,000 of
the Company's cash and cash equivalents to fund a portion of the acquisition.
6
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Acquisition (continued)
The unaudited pro forma results of operations are not necessarily
indicative of the actual results of operations that would have occurred if the
acquisition had occurred as of February 4, 2001, and are not necessarily
indicative of the results that may be achieved in the future. The unaudited pro
forma information does not reflect adjustments for operating synergies that the
Company may realize as a result of the acquisition. No assurances can be given
as to the amount and timing of any financial benefits that the Company may
realize as a result of the acquisition.
Thirteen
Weeks Ended
(In thousands) May 5, 2001
-----------
Net sales.............................................. $631,473
Net income............................................. 13,230
Net income per share:
Basic.............................................. $.12
Diluted............................................ .12
In connection with the acquisition of Lane Bryant, the Company recorded
a liability of $4,640,000 for estimated costs related to an unfavorable service
contract. During the thirteen weeks ended May 4, 2002, the Company finalized the
contract and revised its estimate of costs related to the contract to
$2,292,000, which resulted in a reduction of $1,435,000 (net of income taxes of
$913,000) in the goodwill recognized in connection with the Lane Bryant
acquisition.
3. Trademarks and Other Intangible Assets
May 4, February 2,
(Dollars in thousands) 2002 2002
---- ----
Trademarks, tradenames, and internet domain names .... $168,800 $168,800
Customer lists and covenant not to compete ........... 3,300 3,300
-------- --------
Total at cost ........................................ 172,100 172,100
Less accumulated amortization of customer lists and
covenant not to compete .......................... 476 306
-------- --------
Net trademarks and other intangible assets ........... $171,624 $171,794
======== ========
7
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Debt
Long-term debt:
May 4, February 2,
(In thousands) 2002 2002
---- ----
7.5% Convertible Subordinated Notes due 2006.......... $ 96,034 $ 96,047
Term loan due August 16, 2004 ........................ 67,500 67,500
Capital lease obligations ............................ 30,973 32,256
7.77% mortgage note .................................. 10,786 10,885
8.15% mortgage note .................................. 4,627 4,908
7.5% mortgage note ................................... 6,212 6,261
Other ................................................ 10 13
-------- --------
Total long-term debt ............................. 216,142 217,870
Less current portion ................................. 50,163 9,379
-------- --------
$165,979 $208,491
======== ========
During the thirteen weeks ended May 4, 2002, $13,000 principal amount
of the 7.5% Convertible Subordinated Notes due 2006 (the "Notes") were converted
into 1,742 shares of the Company's common stock pursuant to the conversion terms
of the Notes.
On May 28, 2002 (subsequent to the end of the quarter), the Company
completed a private offering of $130,000,000 of 4.75% Senior Convertible Notes
due 2012. A portion of the net proceeds received from the private offering was
used to repay in full the $67,500,000 term loan due August 16, 2004 and amounts
outstanding under the Company's revolving credit facility. The term loan that
was repaid had an 11.5% interest rate and various restrictive covenants. With
the exception of a covenant to maintain an Adjusted Tangible Net Worth (as
defined in the loan agreement) of $228,000,000 (subject to adjustment), these
restrictive covenants are no longer in effect. On May 29, 2002, the Company
announced that it has called for redemption the remaining 7.5% Convertible
Subordinated Notes due 2006 (see "Note 11. Subsequent Events" below). The
redemption price will be paid from the remaining proceeds of the 4.75% Senior
Convertible Notes, internally-generated funds, and, if necessary, from the
Company's revolving credit facility. The estimated redemption price in excess of
proceeds from the Senior Convertible Notes of $40,000,000 is included in the
current portion of long-term debt.
5. Accrued Restructuring Costs
On January 28, 2002, the Company announced a restructuring plan,
including a number of initiatives designed to position the Company for increased
profitability and growth in the plus-size businesses. The major components of
the plan include (1) the closing of The Answer/Added Dimensions chain of 77
stores
8
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Accrued Restructuring Costs (continued)
and the conversion of approximately 20% of the Added Dimensions stores to
Catherine's stores, (2) the closing of 130 under-performing Fashion Bug stores,
and (3) the conversion of 44 Fashion Bug store locations to Lane Bryant stores.
The restructuring plan resulted in a pre-tax charge of $37,708,000 in the fourth
quarter of Fiscal 2002.
The restructuring charge included a $17,763,000 non-cash write-down of
fixed assets (primarily store fixtures and improvements) in the stores to be
closed, $18,500,000 of anticipated payments to landlords for the early
termination of existing store leases, $829,000 for severance costs, and $616,000
for sign removal and other costs. The fixtures and improvements have no
alternative use or salvage value, and are expected to be scrapped at the time
the stores are closed. The Company expects to substantially complete the
restructuring plan by the end of Fiscal 2003.
The following is a summary of restructuring costs accrued in connection
with the plan and payments charged against the accrual during the thirteen weeks
ended May 4, 2002:
Accrued At Accrued At
February 2, May 4,
(In thousands) 2002 Payments 2002
---- -------- ----
Lease terminations/amendments............ $ 18,500 $ (1,116) $ 17,384
Severance ............................... 829 (132) 697
Sign removal and other costs............. 429 (26) 403
-------- -------- --------
$ 19,758 $ (1,274) $ 18,484
======== ======== ========
6. Stockholders' Equity
Thirteen
Weeks Ended
(In thousands) May 4, 2002
-----------
Total stockholders' equity, beginning of period................... $549,802
Net income........................................................ 16,311
Exercises of stock options........................................ 3,877
Conversion of convertible notes................................... 13
Amortization of deferred compensation expense..................... 320
Amortization of deferred loss on termination of derivative,
net of income tax benefit of $46............................. 86
Net unrealized gains on available-for-sale securities............. 15
--------
Total stockholders' equity, end of period......................... $570,424
========
9
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Derivative Financial Instruments
The Company adopted the provisions of Financial Accounting Standards
Board ("FASB") 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 $50,000,000. 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) was recognized in
"Accumulated other comprehensive (loss) income" during the thirteen weeks ended
May 5, 2001, and is being amortized to selling, general, and administrative
expenses over the 44-month remaining life of the original swap period.
8. Customer Loyalty Card Program
In Fiscal 2002, 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 $25 annual fee. Revenues
from card fees under the program are recognized as sales over the life of the
membership dependent on discounts being earned by the customer. If a customer
does not earn discounts in an amount that exceeds that card fee, such difference
is recognized as revenue upon the expiration of the annual period. Upon early
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 administering the program are recognized in
cost of goods sold as incurred. During the thirteen weeks ended May 4, 2002 and
May 5, 2001, the Company recognized $4,311,000 and $745,000, respectively, of
revenues in connection with this program.
9. Net Income Per Share
Thirteen Weeks Ended
May 4, May 5,
(In thousands) 2002 2001
---- ----
Basic weighted average common shares outstanding ......... 111,741 101,244
Dilutive effect of assumed conversion of convertible notes 12,875 0
Dilutive effect of stock options ......................... 2,387 1,031
------- -------
Diluted weighted average common shares and equivalents
outstanding .......................................... 127,003 102,275
======= =======
Net income ............................................... $16,311 $ 8,368
Decrease in interest expense from assumed conversion
of notes, net of income taxes ........................ 1,120 0
------- -------
Net income used to determine diluted earnings per share .. $17,431 $ 8,368
======= =======
10
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Net Income Per Share (continued)
Thirteen Weeks Ended
May 4, May 5,
(In thousands, except per-share amounts) 2002 2001
---- ----
Options with weighted average exercise price greater than
market price, excluded from computation of diluted
earnings per share:
Number of shares ......................................... 828 5,653
Weighted average exercise price per share ................ $12.01 $7.43
The effect of 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 5, 2001 because the effect
would have been anti-dilutive.
10. Impact of Recent Accounting Pronouncements
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 combinations 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 that were completed prior to July 1, 2001, previously
recorded goodwill and intangibles 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
intangible assets with an indefinite useful life not be amortized, but 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. The
transition provisions of SFAS No. 142 require the continuation of amortization
of goodwill acquired prior to June 30, 2001, and require non-amortization of
goodwill and indefinite-lived intangible assets acquired subsequent to June 30,
2001, until the provisions of SFAS No. 142 are adopted in full.
The Company adopted the provisions of SFAS No. 142 in full as of
February 3, 2002. The Company's consolidated balance sheet as of February 2,
2002 included $87,205,000 of goodwill related to the acquisition of Catherines
Stores Corporation ("Catherine's"). The Company recognized $1,222,000 of
amortization of the Catherine's goodwill during the thirteen weeks ended May 5,
2001. Commencing February 3, 2002, the Company is no longer amortizing the
Catherine's goodwill. However, the goodwill will be subject to periodic
impairment reviews in accordance with the provisions of SFAS No. 142.
11
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. Impact of Recent Accounting Pronouncements (continued)
The pro forma effect of applying the non-amortization provisions of
SFAS No. 142 for the thirteen weeks ended May 5, 2001 is as follows:
Thirteen
Weeks Ended
(In thousands) May 5, 2001
-----------
Net income as reported.............................................. $8,368
Amortization of goodwill (1)........................................ 1,222
------
Pro forma net income excluding goodwill amortization................ $9,590
======
Net income per share as reported.................................... $.08
Pro forma per share effect of excluding goodwill amortization (1)... .01
-----
Pro forma net income per share...................................... $.09
====
--------------------
(1) The goodwill amortization is not deductible for tax purposes and therefore
has no related tax effect.
At the time of the Catherine's acquisition, the Company did not
separately recognize or account for intangible assets acquired (primarily
trademarks and tradenames) that would be amortized over the same period as
goodwill, and included the value of these intangible assets in goodwill. In
accordance with the provisions of SFAS No. 142, the Company will test the
Catherine's goodwill for impairment no later than August 3, 2002 (the end of the
Company's second fiscal quarter). If the Company determines that there has been
an impairment, it would be required to write-down the goodwill associated with
that acquisition. The Company currently believes that it may be required to
write-down a significant portion of the goodwill associated with the Catherine's
acquisition. Any such write-down would be presented in the Company's
Consolidated Statement of Operations and Comprehensive Income (Loss) as the
cumulative effect of an accounting change as of February 3, 2002.
The Company has evaluated its trademarks in accordance with the
provisions of SFAS No. 142 as of February 3, 2002, and has determined that there
has been no impairment.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002, and addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Adoption of SFAS No. 143 is not expected to
have a material impact on the Company's financial position or results of
operations.
12
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. Impact of Recent Accounting Pronouncements (continued)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" related to the disposal of a segment of a
business. SFAS No. 144 also resolves certain implementation issues related to
SFAS No. 121. The adoption of SFAS No. 144 did not have a material impact on the
Company's financial position or results of operations for the thirteen weeks
ended May 4, 2002.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 requires gains and losses on extinguishments of debt
to be classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS No. 4. Extraordinary
treatment will be required for certain extinguishments as provided in Accounting
Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." SFAS No. 145 also
amends SFAS No. 13, "Accounting for Leases" to require certain modifications to
capital leases to be treated as sale-leaseback transactions and modifies the
accounting for sub-leases when the original lessee remains a secondary obligor
(or guarantor). SFAS No. 145 also rescinded SFAS No. 44 "Accounting for
Intangible Assets of Motor Carriers," and made numerous technical corrections.
SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. Upon
adoption of SFAS No. 145, any gain or loss on extinguishment of debt previously
classified as an extraordinary item in prior periods that does not meet the
criteria of APB Opinion No. 30 for such classification should be reclassified to
conform with the provisions of SFAS No. 145. Earlier application of the
provisions of SFAS No. 145 related to the rescission of SFAS No. 4 is
encouraged.
On May 29, 2002, the Company announced that it has called for
redemption its 7.5% Convertible Subordinated Notes due 2006 (see "Note 4. Debt"
above and "Note 11. Subsequent Events" below). To the extent that the notes are
not converted to shares of common stock before their redemption, the Company
could recognize a pre-tax loss of up to approximately $2,400,000 in connection
with the redemption. In accordance with the early-application provisions of SFAS
No. 145, any loss recognized will be classified as a loss from continuing
operations in the Company's Consolidated Statement of Operations and
Comprehensive Income (Loss) for the thirteen-week and twenty-six week periods
ending August 3, 2002 and for the year ending February 1, 2003.
11. Subsequent Events
On May 28, 2002, Company completed a private placement of $130,000,000
of 4.75% Senior Convertible Notes due 2012 (the "Senior Notes"). The Company has
granted the initial purchasers a 30-day option to purchase up to an additional
$20,000,000 of the Senior Notes to cover over-allotments.
13
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
11. Subsequent Events (continued)
The Senior Notes will mature on June 1, 2012 and are convertible at any
time prior to maturity into shares of the Company's common stock at a conversion
price of $9.88, subject to adjustment upon certain events. The Senior Notes are
redeemable at the Company's option, in whole or in part, at any time on or after
June 4, 2007, at declining redemption prices, starting at 102.38% of principal
and decreasing to 100.48% on or after June 1, 2011. Under certain circumstances
involving a change in control of the Company, holders of the Senior Notes may
require the Company to repurchase all or a portion of the Senior Notes at 100%
of the principal amount plus accrued and unpaid interest, if any. Also, under
such circumstances the Company has the option of paying the repurchase price in
shares of the Company's common stock, valued at 95% of the average of the
closing prices of the common stock for the five trading days immediately before
and including the third trading day preceding the repurchase date. There is no
sinking fund for the Senior Notes.
Net proceeds received from the issuance of the Senior Notes were
$126,100,000. The Company used a portion of the net proceeds to repay in full
its $67,500,000 term loan due August 16, 2004, accrued interest on the term loan
of $582,000, and $3,486,000 outstanding under its revolving credit facility (see
"Note 4. Debt" above). The remaining proceeds ($54,532,000) were invested in
cash equivalents pending their use for redemption of the Company's Convertible
Subordinated notes (see below) or for other corporate purposes. The term loan
that was repaid had an 11.5% interest rate and various restrictive covenants.
With the exception of a covenant to maintain an Adjusted Tangible Net Worth (as
defined in the loan agreement) of $228,000,000 (subject to adjustment), these
restrictive covenants are no longer in effect.
On May 29, 2002, the Company called for redemption its 7.5%
Convertible Subordinated Notes due 2006 (the "Subordinated Notes") issued
pursuant to an Indenture between the Company and Wachovia Bank, National
Association (formerly known as First Union National Bank), as trustee (see "Note
4. Debt" above). The redemption price will be 102.5% of the principal amount of
the Subordinated Notes, plus accrued and unpaid interest up to the date of
redemption. As of May 29, 2002, there was $96,024,000 principal amount of the
Subordinated Notes outstanding.
The Subordinated Notes have a maturity date of July 15, 2006, and may
be converted into shares of the Company's common stock until the close of
business on June 27, 2002 at a conversion price of $7.46. The Notes are being
called for redemption on June 28, 2002.
14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the financial
statements and accompanying notes appearing elsewhere in this report. It should
also be read in conjunction with the Management's Discussion and Analysis of
Financial Condition and Results of Operations, financial statements, and
accompanying notes appearing in the Company's Annual Report on Form 10-K for the
fiscal year ended February 2, 2002. As used herein, the terms "Fiscal 2003" and
"Fiscal 2002" refer to our fiscal year ending February 1, 2003 and fiscal year
ended February 2, 2002, respectively.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters contained in
the following analysis and elsewhere in this report are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements may include, but are not limited to, projections of
revenues, income or loss, and capital expenditures, plans for future operations,
and financing needs or plans, as well as assumptions relating to the foregoing.
The words "expect," "project," "estimate," "predict," "anticipate," "believes,"
and similar expressions are also intended to identify forward-looking
statements. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results, performance, and achievements could differ materially from
those set forth in, contemplated by, or underlying the forward-looking
statements. We assume no obligation to update any forward-looking statement to
reflect actual results or changes in or additions to the factors affecting such
forward-looking statements.
Factors that could cause our actual results of operations or financial
condition to differ from those described in this report include, but are not
necessarily limited to, the following:
o Our business is dependent upon our being able to accurately predict
rapidly changing fashion trends, customer preferences and other
fashion-related factors, which we may not be able to successfully
accomplish in the future.
o The general slowdown in the United States economy and the uncertain
economic outlook has led to reduced consumer demand for our apparel and
accessories and may continue to do so in the future.
o The women's specialty retail apparel industry is highly competitive and
we may be unable to compete successfully against existing or future
competitors.
o We cannot assure the successful implementation of our business plan for
increased profitability and growth in our plus-sized women's apparel
business.
o Our business plan is largely dependent upon the continued growth in the
plus-sized women's apparel market, which may not continue.
o We depend on key personnel, particularly our Chief Executive Officer,
Dorrit J. Bern, and we may not be able to retain or replace these
employees or recruit additional qualified personnel.
15
o We depend on our distribution centers and could incur significantly
higher costs and longer lead times associated with distributing our
products to our stores if any of these distribution centers were to
shut down for any reason.
o We depend for our working capital needs on the availability of credit,
including credit we receive from our suppliers and their agents, and on
our credit card securitization program. If we were unable to obtain
sufficient financing at affordable cost, our ability to merchandise our
stores would be adversely affected.
o We rely significantly on foreign sources of production and face a
variety of risks (including political instability, imposition of duties
or quotas, increased security requirements applicable to imports,
delays in shipping, increased costs of transportation, and issues
relating to compliance with domestic or international labor standards)
generally associated with doing business in foreign markets and
importing merchandise from abroad.
o Our stores experience seasonal fluctuations in net sales and operating
income. Any decrease in sales or margins during our peak sales periods,
or in the availability of working capital needed in the months
preceding such periods, could have a material adverse effect on our
business. In addition, extreme or unseasonable weather conditions may
have an impact on our sales.
o War, acts of terrorism, or the threat of either may negatively impact
availability of merchandise and customer traffic to our stores, or
otherwise adversely affect our business.
o We may be unable to obtain adequate insurance for our operations at a
reasonable cost.
o We may be unable to protect our trademarks and other intellectual
property rights, which we believe are important to our success and our
competitive position.
o We may be unable to hire and retain suitable sales associates at our
stores.
o We may be unable to successfully implement our restructuring plan
described elsewhere in this report.
o Our manufacturers may be unable to manufacture and deliver merchandise
to us in a timely manner or to meet our quality standards.
o Our sales are dependent upon a high volume of traffic in the strip
centers and malls in which our stores are located, and our future
growth is dependent upon the availability of suitable locations for new
stores.
o We may be unable to successfully integrate Lane Bryant into our current
operating structure, and we currently rely on management information
systems and logistics services from The Limited with respect to our
Lane Bryant stores.
16
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are discussed in the Management's
Discussion and Analysis of Financial Condition and Results of Operations and
notes accompanying the consolidated financial statements that appear in the
Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2002.
Except as otherwise disclosed in the financial statements and accompanying notes
included in this report, there were no material changes in our critical
accounting policies or in the assumptions or estimates we used to prepare the
financial information appearing in this report.
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a
percentage of net sales and on a comparative basis:
Percentage
Thirteen Weeks Ended Increase
-------------------- (Decrease)
May 4, May 5, From Prior
2002 2001 Period
---- ---- ------
Net sales ........................................ 100.0% 100.0% 59.7%
Cost of goods sold, buying, and occupancy expenses 69.6 72.3 53.7
Selling, general, and administrative expenses .... 25.2 23.8 69.4
Amortization of goodwill ......................... 0.0 0.3 (100.0)
Income from operations ........................... 5.2 3.6 132.7
Other income, principally interest ............... 0.1 0.5 (78.1)
Interest expense ................................. 1.1 0.6 185.2
Income tax provision ............................. 1.6 1.4 89.3
Minority interest in net loss of subsidiary ...... 0.0 -- --
Net income ....................................... 2.6 2.1 94.9
The following table sets forth our net sales by store brand:
Thirteen Weeks Ended
May 4, May 5,
(in millions) 2002 2001
---- ----
Fashion Bug................................................ $289.9 $289.6
Lane Bryant................................................ 238.8 --
Catherine's................................................ 101.0 105.0
Monsoon/Accessorize........................................ 0.9 0.2
------ ------
Total net sales............................................ $630.6 $394.8
====== ======
17
The following table sets forth certain additional information related
to changes in our net sales:
Thirteen Weeks Ended
May 4, May 5,
2002 2001
---- ----
(Decrease) increase in comparable store sales (1):
Fashion Bug......................................... (3)% (3)%
Catherine's......................................... (2) 1
Sales from new stores as a percentage of total
prior-period sales:
Fashion Bug......................................... 4 6
Catherine's......................................... 3 4
Lane Bryant......................................... 61 -
Monsoon/Accessorize................................. 0 0
Prior-period sales from closed stores as a
percentage of total prior-period
sales:
Fashion Bug......................................... (3) (3)
Catherine's stores.................................. (3) (6)
Increase in total sales................................. 60 4
--------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation.
Comparison of Thirteen Weeks Ended May 4, 2002 and May 5, 2001
Net Sales
Net sales were $630.6 million for the quarter ended May 4, 2002
("Fiscal 2003 First Quarter"), an increase of 59.7% from net sales of $394.8
million for the quarter ended May 5, 2001 ("Fiscal 2002 First Quarter"),
primarily due to our acquisition of Lane Bryant in August 2001. The number of
retail stores in operation at the end of the Fiscal 2003 First Quarter was 2,415
(including 653 Lane Bryant stores), compared to 1,776 at the end of the Fiscal
2002 First Quarter. Including Lane Bryant comparable store sales on a pro forma
basis, we experienced a year-over-year decrease in overall comparable store
sales of 1%. For Fashion Bug stores, sales improvements in footwear, junior
sportswear, accessories, plus, and misses were offset by declines in other
merchandise categories. For Lane Bryant stores, sales improvements in knit tops,
jackets, sweaters, skirts, and dresses were offset by declines in other
merchandise categories. For Catherine's Stores, sales improvements in casual
knits and wovens, pantsuits, social occasion dressing, petite career separates,
and denims were offset by declines in other merchandise categories.
In Fiscal 2002, we began a customer loyalty card program for our
Fashion Bug store customers. We recognized $4.3 million of revenues in the
Fiscal 2003 First Quarter and $.7 million of revenues in the Fiscal 2002 First
Quarter (the inception of the program) in connection with this program.
18
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $438.8 million
in the Fiscal 2003 First Quarter, an increase of 53.7% from $285.6 million in
the Fiscal 2002 First Quarter, principally reflecting the increase in net sales.
As a percentage of net sales, these costs decreased 2.7% in the Fiscal 2003
First Quarter as compared to the Fiscal 2002 First Quarter.
Cost of goods sold as a percentage of net sales decreased 4.6% in the
Fiscal 2003 First Quarter as compared to the Fiscal 2002 First Quarter. The
decrease was a result of higher merchandise margins in the Lane Bryant stores
and improved gross margins for Fashion Bug and Catherine's spring merchandise
offerings. We include in cost of goods sold 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 as a percentage of net sales increased
1.9% in the Fiscal 2003 First Quarter as compared to the Fiscal 2002 First
Quarter. 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. Relatively higher
occupancy expenses for the Lane Bryant stores also contributed to the increase
in buying and occupancy expenses as a percentage of net 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
Selling, general, and administrative expenses were $159.2 million in
the Fiscal 2003 First Quarter, an increase of 69.4% from $93.9 million in the
Fiscal 2002 First Quarter, principally reflecting the acquisition of Lane
Bryant. As a percentage of net sales, these costs increased by 1.4% in the
Fiscal 2003 First Quarter as compared to the Fiscal 2002 First Quarter. Selling
expenses increased 1.0% as a percentage of sales. The increase was attributable
to a number of factors, including higher benefits and insurance costs, new
point-of-sales systems at Fashion Bug, and the lack of leverage on relatively
fixed store payroll expenses as a result of the decline in comparable store
sales. Credit income (a component of selling expenses) decreased in the Fiscal
2003 First Quarter, partially as a result of increased delinquencies in our
proprietary credit card program. General and administrative expenses increased
0.4% as a percentage of sales, primarily as a result of the lack of leverage on
fixed costs at Fashion Bug and Catherine's. Selling, general, and administrative
expenses exclude goodwill amortization related to the acquisition of the
Catherine's stores.
Amortization of Goodwill
We recognized $1.2 million of amortization of goodwill during the
Fiscal 2002 First Quarter related to the Catherine's acquisition. We adopted the
provisions of Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," as of February 3, 2002, and we are no longer amortizing the Catherine's
goodwill. However, the Catherine's goodwill, and goodwill recognized in
connection with the Lane Bryant acquisition, will be subject to periodic
impairment reviews in accordance with the provisions of SFAS No. 142.
19
Other Income
Other income was $0.4 million in the Fiscal 2003 First Quarter, a
decrease of 78.1% from $2.0 million in the Fiscal 2002 First Quarter. This
decrease was primarily caused by a decrease in interest income. Interest income
decreased as a result of lower levels of invested funds and a decrease in the
average yield on investments during the Fiscal 2003 First Quarter as compared to
the Fiscal 2002 First Quarter. During Fiscal 2002, investments in marketable
securities were converted into cash and cash equivalents, and we used $83.0
million of cash and cash equivalents in connection with the acquisition of Lane
Bryant.
Interest Expense
Interest expense was $6.8 million in the Fiscal 2003 First Quarter, an
increase of 185.2% from $2.4 million in the Fiscal 2002 First Quarter. This
increase was primarily the result of short-term and long-term borrowings
incurred in connection with the Lane Bryant acquisition, and to a lesser extent,
the result of additional long-term mortgage borrowings and acquisitions of
point-of-sale equipment under long-term capital leases.
Income Tax Provision
The income tax provision for the Fiscal 2003 First Quarter was $10.0
million, resulting in a 38.2% effective tax rate, as compared to an income tax
provision for the Fiscal 2002 First Quarter of $5.3 million, resulting in a
38.8% effective tax rate.
RECENT DEVELOPMENTS
Issuance of 4.75% Senior Convertible Notes due 2012
On May 28, 2002 (subsequent to the close of the period covered by this
report), we completed a private placement of $130.0 million of 4.75% Senior
Convertible Notes due 2012 (the "Senior Notes"), and granted the initial
purchasers a 30-day option to purchase up to an additional $20.0 million of the
Senior Notes to cover over-allotments.
The Senior Notes will mature on June 1, 2012 and are convertible at any
time prior to maturity into shares of our common stock at a conversion price of
$9.88, subject to adjustment upon certain events. The Senior Notes are
redeemable at our option, in whole or in part, at any time on or after June 4,
2007, at declining redemption prices, starting at 102.38% of principal and
decreasing to 100.48% on or after June 1, 2011. Under certain circumstances
involving a change in control of the Company, holders of the Senior Notes may
require us to repurchase all or a portion of the Senior Notes at 100% of the
principal amount plus any accrued and unpaid interest. Also, under such
circumstances we have the option of paying the repurchase price in shares of our
common stock, valued at 95% of the average of the closing prices of the common
stock for a five-day trading period immediately before and including the third
trading day preceding the repurchase date. There is no sinking fund for the
Senior Notes.
Net proceeds received from the issuance of the Senior Notes were $126.1
million. We used a portion of the net proceeds to repay in full our $67.5
million term loan due August 16, 2004, accrued interest on the term loan of $0.6
million, and $3.5 million outstanding under our revolving credit facility. We
invested the remainder of the proceeds ($54.5 million) in cash equivalents
pending their use for redemption of our Convertible Subordinated notes (see
below) or for other corporate purposes. The term loan that was repaid
20
had an 11.5% interest rate and various restrictive covenants. With the exception
of a covenant to maintain an Adjusted Tangible Net Worth (as defined in the loan
agreement) of $228,000,000 (subject to adjustment), these restrictive covenants
are no longer in effect.
Redemption of 7.5% Convertible Subordinated Notes due 2006
On May 29, 2002, we called for redemption our 7.5% Convertible
Subordinated Notes due 2006 (the "Subordinated Notes"). The redemption price
will be 102.5% of the principal amount of the Subordinated Notes plus accrued
and unpaid interest up to the date of redemption. As of May 29, 2002, there was
$96,024,000 principal amount of the Subordinated Notes outstanding.
The Subordinated Notes have a maturity date of July 15, 2006, and may
be converted into shares of our common stock until the close of business on June
27, 2002 at a conversion price of $7.46. The Notes are being called for
redemption on June 28, 2002. To the extent that the notes are not converted to
shares of common stock before their redemption, the Company could recognize a
pre-tax loss of up to approximately $2,400,000 in connection with the
redemption. In accordance with the early application provisions of SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement
No. 13, and Technical Corrections," any loss recognized will be classified as a
loss from continuing operations in the Company's Consolidated Statement of
Operations and Comprehensive Income (Loss) for the thirteen week and twenty-six
week periods ending August 3, 2002, and for the year ending February 1, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of working capital are cash flow from operations,
our proprietary credit card receivables securitization agreements, our
investment portfolio, and our credit facilities. The following table highlights
certain information related to our liquidity and capital resources:
May 4, February 2,
(Dollars in thousands) 2002 2002
---- ----
Cash and cash equivalents............................. $ 37,399 $ 36,640
Available-for-sale securities......................... 79,393 70,366
Working capital....................................... 129,189 145,047
Current ratio......................................... 1.3 1.4
Long-term debt to equity ratio........................ 29.1% 37.9%
Our net cash provided by operating activities was $52.5 million for the
Fiscal 2003 First Quarter, as compared to $17.2 million for the Fiscal 2002
First Quarter. The increase was primarily a result of increases in operating
income and accrued expenses. In addition, our investment in inventories, net of
accounts payable, decreased during the Fiscal 2003 First Quarter as compared to
the Fiscal 2002 First Quarter as a result of certain inventory management
initiatives. We paid $1.3 million of accrued restructuring costs during the
Fiscal 2003 First Quarter.
Our capital expenditures were $10.6 million during the Fiscal 2003
First Quarter. In addition, we acquired $0.6 million of point-of-sale equipment
under a capital lease. During the remainder of Fiscal 2003, we anticipate
incurring additional capital expenditures of approximately $45.0-$55.0 million.
These capital expenditures will primarily be for the construction and fixturing
of
21
new stores, remodeling and fixturing of existing stores, investments in
management information systems technology, and improvements to our corporate
offices and distribution centers. We expect to finance these capital
expenditures principally through internally generated funds. We are currently
analyzing our existing distribution network, and we are considering whether to
purchase or lease an additional distribution center, either of which
alternatives would require additional capital expenditures and will require
approval under our existing credit arrangements.
We plan to open approximately 55-60 new stores and relocate
approximately 75 stores during Fiscal 2003. During the Fiscal 2003 First
Quarter, we closed 7 Fashion Bug stores and 32 Added Dimensions stores and
converted 4 Added Dimensions stores to Catherine's stores in connection with our
restructuring plan (see "Note 5. Accrued Restructuring Costs" of "Notes to
Condensed Consolidated Financial Statements" included in "PART I. Item 1.
Financial Statements (Unaudited)" above. The following table sets forth
information with respect to store activity for the Fiscal 2003 First Quarter:
Catherine's/
Fashion Lane Added Monsoon/
Bug Bryant Dimensions Accessorize
Stores Stores Stores Stores Total
------ ------ ------ ------ -----
Stores at February 2, 2002......... 1,252 647 538 9 2,446
----- --- --- - -----
Stores opened...................... 4 9 8 0 21
Stores converted................... (0) 0 0(1) 0
Stores closed...................... (7) (3) (42) 0 (52)
----- --- --- - -----
Net change in stores............... (3) 6 (34) 0 (31)
----- --- --- - -----
Stores at May 4, 2002.............. 1,249 653 504 9 2,415
===== === === = =====
Stores relocated during period..... 6 0 5 11
Stores remodeled during period..... 2 1 2 5
--------------------
(1) During the Fiscal 2003 First Quarter, 4 Added Dimensions stores were
converted to Catherine's stores.
We have formed a trust called the Charming Shoppes Master Trust to
which Spirit of America National Bank, our credit card bank, has transferred
through a special purpose entity its interest in credit card receivables created
under our Fashion Bug proprietary credit card program. We, together with the
trust, have entered into various agreements under which the trust 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 parties with whom the trust has entered into
the securitization agreement. We securitized $71.1 million of credit card
receivables during the Fiscal 2003 First Quarter and had $282.4 million of
securitized credit card receivables outstanding as of May 4, 2002. We held
retained interests in our securitizations of $51.5 million as of May 4, 2002,
which were generally subordinated in right of payment to certificates issued by
the trust to third-party investors. Our obligation to repurchase receivables
sold to the trust is limited to those receivables that, at the time of their
transfer, fail to meet the trust's eligibility standards under normal
representations and warranties. To date, we have repurchased only a small amount
of receivables pursuant to this obligation. A securitization series in the
aggregate principal amount of $83.5 million is scheduled to mature before the
end of Fiscal 2003. We are currently considering various alternatives to replace
this series. No assurance can be given that we will be successful in securing
such replacement financing.
22
Charming Shoppes Receivables Corp. and Charming Shoppes Seller, Inc.,
our consolidated wholly owned indirect subsidiaries, are separate special
purpose entities created for the securitization program. At May 4, 2002,
Charming Shoppes Receivables Corp. held $39.4 million of Charming Shoppes Master
Trust Certificates (which are included in the $51.5 million of retained
interests we held at May 4, 2002) and Charming Shoppes Seller, Inc. held
retained interests of $1.3 million. These assets are first and foremost
available to satisfy the claims of the respective creditors of these separate
corporate entities, including certain claims of investors in the Charming
Shoppes Master Trust. We could be affected by certain events that would cause
the trust to require additional enhancement from proceeds within the trust that
would otherwise be available to be paid to us with respect to our subordinated
interests. Specifically, if either the trust or we fail to meet certain
financial performance standards, a credit enhancement condition would occur and
the trust would be required to retain amounts otherwise payable to us. During
Fiscal 2002, credit card receivable credit loss percentages exceeded a specified
threshold percentage, which obligated the trust to accumulate $9.5 million into
such an enhancement account. As of May 4, 2002, the Charming Shoppes Master
Trust had $5.8 million segregated for such additional enhancement purposes. In
addition, tangible net worth fell below a specific threshold, which required
$7.9 million to be placed into an enhancement account. The $7.9 million was
funded subsequent to the close of the period covered by this report. Amounts
placed into enhancement accounts, if not required to be paid to the other
certificate holders, will be available to us at the termination of the
securitization series. The $13.7 million in the enhancement accounts is
classified as "prepaids and other" in current assets as of May 4, 2002. We do
not expect the requirement to materially affect our liquidity or results of
operations. We have no obligation to directly fund these enhancement accounts of
the trust, other than for breaches of customary representations, warranties, and
covenants. These representations, warranties, covenants, and related indemnities
do not protect the trust or investors in the trust against credit-related losses
on the receivables. The providers of the credit enhancements and trust investors
have no other recourse to us.
These securitization agreements are intended to improve our overall
liquidity by providing short-term sources of funding. Additional information
regarding this program is included in "Part II, Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" of our Annual
Report on Form 10-K for the fiscal year ended February 2, 2002.
We also have non-recourse agreements under which third parties provide
accounts receivable proprietary credit card sales funding programs for both our
Catherine's and Lane Bryant stores. These funding programs expire in January
2005 for Catherine's and in January 2006 for Lane Bryant. Under these
agreements, the third parties reimburse us daily with respect to the proprietary
credit card sales generated by the respective store's credit card accounts.
Additional information regarding these agreements is included in "Part II, Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" of our Annual Report on Form 10-K for the fiscal year ended February
2, 2002.
As a result of recent unfavorable court decisions upholding the
Internal Revenue Service's position that interest related to loans on
broad-based, company owned life insurance policies is not deductible for income
tax purposes, we may be required to pay taxes and interest arising from income
tax deductions we have previously taken in connection with one of our employee
insurance programs. While the ultimate outcome of this matter cannot be
predicted with certainty, we have provided for the possibility of an adverse
result, and we believe that an adverse resolution of this matter will not have a
material adverse impact on our financial condition or results of operations.
23
We believe that our capital resources and liquidity position are
sufficient to support our current operations. Our requirements for working
capital, capital expenditures, and repayment of debt and other obligations are
expected to be funded from operations, supplemented as needed by short-term or
long-term borrowings available under our credit facility, our proprietary credit
card receivables securitization agreements, leases, and other available
financing sources.
FINANCING
As of May 4, 2002, we had a $367.5 million credit facility, which
consisted of a $300.0 million revolving credit facility and a $67.5 million
three-year term loan. The credit facility provides for cash borrowings and
enables us to issue up to $150.0 million of letters of credit for overseas
purchases of merchandise. As of May 4, 2002, we had $21.7 million outstanding
under the revolving credit facility, $67.5 million outstanding under the term
loan, and $48.0 million of outstanding letters of credit. The availability of
borrowings under our revolving credit facility is subject to limitations based
on eligible inventory and the value of certain real property. The credit
facility is secured by our general assets, except for certain assets related to
our credit card securitization program, certain real properties and equipment
subject to other mortgages, our interest in our joint venture with Monsoon plc,
and the assets of our non-U.S. subsidiaries. The credit facility expires on
August 16, 2004, with an option to renew the revolving portion for an additional
year. At May 4, 2002, we had unused availability under the revolving credit
facility of $199.5 million.
The interest rate on borrowings under the revolving credit facility
ranges from Prime to Prime plus .75% per annum for Prime Rate Loans, and LIBOR
plus 2.0% to LIBOR plus 2.75% per annum for Eurodollar Rate Loans, and is
determined quarterly, based on our Leverage Ratio or excess availability, as
defined in the credit facility. As of May 4, 2002, the interest rate on
borrowings under the revolving credit line was 3.9%. The interest rate on
borrowings under the term loan equals Prime plus 4.0% per annum, with minimum
and maximum rates of 11.5% and 13.0%, respectively, per annum. As of May 4,
2002, the interest rate on borrowings under the term loan was 11.5%.
The credit facility includes limitations on sales and leasebacks, the
incurrence of additional liens and debt, capital lease financing, and other
limitations. The credit facility also requires, among other things, that we not
pay dividends on our common stock and, under certain circumstances, that we
maintain an Adjusted Tangible Net Worth of $228.0 million (subject to
adjustment).
Until the term loan is paid in full, the credit facility requires that
we maintain a minimum twelve-month earnings before interest, income taxes,
depreciation, and amortization, as adjusted pursuant to the terms of the credit
facility and to account for the acquisition of Lane Bryant ("Adjusted EBITDA"),
of $120.0 million through the end of Fiscal 2003. Thereafter, until the term
loan is paid in full, the credit facility requires that we maintain a
twelve-month Adjusted EBITDA of $140.0 million. Until the term loan is paid in
full, the credit facility also requires that we maintain a ratio of Total
Secured Debt to Adjusted EBITDA of not greater than 2.85 to 1.0 at the end of
the Fiscal 2003 First Quarter, decreasing to 2.55 to 1.0 at the end of Fiscal
2003, and increasing to 3.0 to 1.0 at the end of each fiscal quarter thereafter.
As of May 4, 2002, we were not in violation of any of the covenants included in
the credit facility. As a result of the repayment of the term loan subsequent to
the close of the quarter (see next paragraph), these restrictive covenants
related to the term loan are no longer in effect.
On May 28, 2002 (subsequent to the close of the period covered by this
report), we completed a private placement of $130.0 million of 4.75% Senior
Convertible Notes due 2012 (the "Senior Notes"), and
24
granted the initial purchasers a 30-day option to purchase up to an additional
$20.0 million of the Senior Notes to cover over-allotments. We used a portion of
the net proceeds to repay in full the $67.5 million term loan due August 16,
2004, accrued interest on the term loan of $0.6 million, and $3.5 million
outstanding under the revolving credit facility. On May 29, 2002, we called for
redemption our 7.5% Convertible Subordinated Notes due 2006 (the "Subordinated
Notes"). The redemption price will be 102.5% of the principal amount of the
Subordinated Notes plus accrued and unpaid interest up to the date of
redemption. The redemption price will be paid from the remaining proceeds of the
4.75% Senior Convertible Notes, internally-generated funds, and, if necessary,
the Company's revolving credit facility. As of May 29, 2002, there was
$96,024,000 principal amount of the Subordinated Notes outstanding. See "RECENT
DEVELOPMENTS" above for additional information regarding the private placement
and redemption call.
MARKET RISK
We manage our Fashion Bug proprietary credit card program through
various operating entities that we own. The primary activity of these entities
is to service our proprietary credit card portfolio, the balances of which we
sell under a credit card securitization program. Under the securitization
program, we can be exposed to fluctuations in interest rates to the extent that
the interest rates charged to our customers vary from the rates paid on
certificates issued by the trust. Until November 2000, the credit card program
billed finance charges based on a fixed rate. As of November 2000, 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 issuance. Consequently, we have reduced
our exposure to fluctuations in interest rates. However, we have exposure in the
movement of basis risk between the floating rate index on the certificates and
the Prime rate. As of May 4, 2002, the floating-rate finance charge rate was
below the contractual floor rate, thus exposing us 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 2003, an increase of approximately $500
thousand in selling, general, and administrative expenses would result.
As of May 4, 2002, only our borrowings of $21.7 million under our
credit facility were exposed to variable interest rates. An increase in market
interest rates will increase our interest expense and decrease our cash flows. A
decrease in market interest rates will decrease our interest expense and
increase our cash flows.
We are not subject to material foreign exchange risk, as our foreign
transactions are primarily U.S. Dollar-denominated and our foreign operations do
not constitute a material part of our business.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
See "Item 1. Financial Statements; Notes to Condensed Consolidated
Financial Statements; Note 10. Impact of Recent Accounting Pronouncements"
above.
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 1. Legal Proceedings
On October 24, 2001, a terminated employee filed a purported class
action suit in Alameda Superior Court, California against Lane Bryant, Inc.
alleging that she was misclassified as an exempt employee and that she was
entitled to be paid overtime which she had not received. She further asserted
that all of the Lane Bryant store sales managers in California were also
misclassified and entitled to overtime. The Court has now established the
process by which the issue of class certification will be addressed. Discovery
is now underway with respect to whether the case is appropriate for class
treatment. Discovery on this issue will be cut off as of July 31, 2002. The
plaintiff must file her motion to certify the class by August 31, 2002.
Discovery on the merits will not be undertaken until after the motion for class
certification is resolved. It is premature, therefore, to speculate on the
potential risk this suit presents to Lane Bryant. We intend to vigorously defend
this suit.
There are no other pending legal proceedings, other than ordinary
routine litigation incidental to our business, to which we or any of our
subsidiaries is a party or of which our property or the property of any of our
subsidiaries is the subject that are expected to have a material adverse effect
on our financial condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of Exhibits filed as part of this Quarterly
Report on Form 10-Q. Where so indicated, Exhibits that were previously filed are
incorporated by reference. For Exhibits incorporated by reference, the location
of the Exhibit in the previous filing is indicated in parenthesis.
3.1 Restated Articles of Incorporation, incorporated by reference to Form
10-K of the Registrant for the fiscal year ended January 29, 1994.
(Exhibit 3.1)
3.2 Bylaws, as Amended and Restated, incorporated by reference to Form 10-Q
of the Registrant for the quarter ended July 31, 1999. (Exhibit 3.2)
4.1 Indenture, dated as of May 28, 2002, between Charming Shoppes, Inc. and
Wachovia Bank, National Association.
4.2 Registration Rights Agreement, dated as of May 28, 2002, by and among
Charming Shoppes, Inc., as Issuer, and J. P. Morgan Securities, Inc.,
Bear Stearns & Co., Inc., First Union Securities, Inc., Lazard Freres &
Co., LLC, and McDonald Investments, Inc., as Initial Purchasers.
4.3 Amendment No. 2, dated May 17, 2002, to Loan and Security Agreement
dated as of August 16, 2001 by and among Charming Shoppes, Inc.,
Charming Shoppes of Delaware, Inc., CSI Industries, 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
26
Corp., as Co-Agent, Joint Lead Arranger and Joint Bookrunner and The
Financial Institutions named therein, as Lenders.
(b) Reports on Form 8-K
On May 17, 2002, we filed an amendment on Form 8-K/A to amend and
restate in its entirety Item 7(b) of our Current Report on Form 8-K, dated
August 16, 2001 and filed on August 31, 2001, as amended by a Form 8-K/A filed
October 30, 2001. We filed the Form 8-K/A on May 17, 2002 to provide the
financial statements and pro forma financial information required by "Item 7.
Financial Statements, Pro Forma Financial Information, and Exhibits" of Form 8-K
as of our fiscal year ended February 2, 2002.
On May 21, 2002, we filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure" the text of a press release
we issued on May 20, 2002, announcing our intention to make a private offering
of senior convertible notes due 2012.
On May 22, 2002, we filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure" the text of a press release
we issued on May 22, 2002, announcing the terms of the private offering of
senior convertible notes due 2012 previously announced on May 20, 2002.
On May 28, 2002, we filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure" the text of a press release
we issued on May 28, 2002, announcing the completion of the private offering of
senior convertible notes due 2012 previously announced on May 20, 2002.
On May 29, 2002, we filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure" the text of a press release
we issued on May 29, 2002, announcing that we have called for redemption our
convertible subordinated notes doe 2006.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARMING SHOPPES, INC.
----------------------
(Registrant)
Date: June 18, 2002 /S/DORRIT J. BERN
-----------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: June 18, 2002 /S/ERIC M. SPECTER
------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer
28
Exhibit Index
Exhibit No. Item
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 Indenture, dated as of May 28, 2002, between Charming Shoppes,
Inc. and Wachovia Bank, National Association.
4.2 Registration Rights Agreement, dated as of May 28, 2002, by and
among Charming Shoppes, Inc., as Issuer, and J. P. Morgan
Securities, Inc., Bear Stearns & Co., Inc., First Union
Securities, Inc., Lazard Freres & Co., LLC, and McDonald
Investments, Inc., as Initial Purchasers.
4.3 Amendment No. 2, dated May 17, 2002, to Loan and Security
Agreement dated as of August 16, 2001 by and among Charming
Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI
Industries, 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.
29