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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 29, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-7258
CHARMING SHOPPES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1721355
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
450 Winks Lane, Bensalem, Pennsylvania 19020
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 245-9100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.10 per share)
(Title of Class)
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. (X) YES ( ) NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. (X)
As of April 17, 2000, 100,993,140 common shares were outstanding. The
aggregate market value of the common shares (based upon the closing price
on April 17, 2000), held by non-affiliates was approximately $550 million.
DOCUMENTS INCORPORATED BY REFERENCE: As stated in Part III of this annual
report, portions of the following document are incorporated herein by
reference:
Definitive proxy statement for annual shareholders meeting to be filed
within 120 days after the end of the fiscal year covered by this Annual
Report.
CHARMING SHOPPES, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1 Business
General...................................................... 1
Merchandising and Marketing.................................. 2
Purchasing................................................... 5
Distribution................................................. 6
Stores....................................................... 6
Store Management and Employees............................... 7
Trademarks and Servicemarks.................................. 8
Cautionary Statement for Purposes of the "Safe
Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995.............................. 8
Item 2 Properties..................................................... 9
Item 3 Legal Proceedings.............................................. 10
Item 4 Submission of Matters to a Vote of Security Holders............ 10
Item 4a Executive Officers of the Registrant........................... 11
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters.................................. 13
Item 6 Selected Financial Data........................................ 14
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 16
Forward-Looking Statements................................... 16
Acquisitions................................................. 16
Results of Operations........................................ 18
Financial Condition.......................................... 25
Item 7a Quantitative and Qualitative Disclosures About Market Risk..... 31
Item 8 Financial Statements and Supplementary Data.................... 32
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 62
PART III
Item 10 Directors and Executive Officers of the Registrant............. 63
Item 11 Executive Compensation......................................... 63
Item 12 Security Ownership of Certain Beneficial Owners and Management. 63
Item 13 Certain Relationships and Related Transactions................. 63
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 64
PART I
Item 1. Business
General
Charming Shoppes, Inc., a Pennsylvania corporation formed in 1969, operates
through its subsidiary corporations 1,740 women's specialty apparel stores
in 48 states, under the names Fashion Bug, Fashion Bug Plus, Catherine's,
PS...Plus Sizes, Added Dimensions, The Answer, and Modern Woman (as of
January 29, 2000). Unless the context indicates otherwise, the term
"Company" refers to Charming Shoppes, Inc. and, where appropriate, one or
more of its wholly-owned subsidiaries.
The Company's 1,185 Fashion Bug stores specialize in selling, at moderate
and popular prices, a wide variety of large-size, misses, junior, and
girls-size sportswear, dresses, coats, lingerie, accessories, and casual
footwear. The stores sell both brand-name merchandise and specially
manufactured garments under one of the Company's private labels. The
majority of these stores are located in the Northeast quadrant of the
United States.
During the fiscal year ended January 29, 2000 ("Fiscal 2000"), the Company
acquired the Catherine's Stores chain of 436 retail stores and the Modern
Woman chain of 136 retail stores. As of January 29, 2000, Catherine's
Stores operated 433 retail stores in 41 states and the District of
Columbia, specializing in large-size women's apparel, under the names
Catherine's, PS...Plus Sizes, Added Dimensions, and The Answer. These
stores are located primarily in the Southeast, Mid-Atlantic, and Eastern
Central regions of the United States. As of January 29, 2000, Modern Woman
operated 122 retail stores in 22 states throughout the United States,
specializing in large-size women's apparel. These stores are located
primarily in the West Coast, Midwest, and New Jersey/Long Island markets.
The Company plans to consolidate the Modern Woman chain into Catherine's
Stores and to operate Catherine's Stores as a nationwide chain of more than
500 women's large-size specialty apparel stores.
The Company's real estate strategy is focused on locating stores in strip
shopping centers. As of the end of Fiscal 2000, approximately 85% of the
Company's stores were located in strip shopping centers. The Company
believes that its customers visit strip shopping centers more frequently
than malls for their shopping needs as a result of the mix of the tenants
in, and the convenience of, strip shopping centers. In addition, the
Company benefits from substantially lower occupancy costs as compared to
store occupancy costs in malls.
The Company's Fashion Bug stores average 9,000 square feet in size. During
Fiscal 2000, the Company opened 74 Fashion Bug stores while closing 24
stores. The Company's Catherine's, PS...Plus Sizes, Added Dimensions, The
Answer, and Modern Woman stores average 4,000 square feet in size. Since
the dates of acquisition of Catherine's Stores and Modern Woman, the
(1)
Company opened 1 Modern Woman store and closed 3 Catherine's and 15 Modern
Woman stores. The Company continues to seek new locations that meet its
financial and operational objectives.
The Company employs a business strategy that focuses efforts on providing
fashion apparel and related merchandise which meet the demands of its
primary customers. For Fashion Bug stores, such customers are generally in
the 20 to 49 year old age group, generally shop in the lower to moderate
price range, and tend to follow, rather than set, fashion trends.
Generally, the targeted Catherine's customer wears size 14 and larger, is
over 35 years of age, generally shops in the moderate to better price
range, has traditional but fashion-conscious tastes, and is primarily
concerned with fit and value in apparel selection.
The Company responds to the needs of its customers by providing a variety
of choices in its merchandise assortment. The Company offers an assortment
of both casual and career-oriented products. Merchandise that complements
these areas, such as accessories, intimate apparel, and footwear, are also
featured.
Product assortments are generally tailored to the demographics of an area,
and merchandise is available for six seasons -- spring, summer,
transitional, fall, holiday, and transitional. The Company maintains
quality standards with respect to merchandise fabrication, construction,
and fit. Realistic initial pricing is also part of the business strategy.
The pricing provides sufficient margin to permit merchandise discounts in
order to stimulate customer purchases. In addition, the Company's
advertising expenditures are focused on stimulating customer traffic
through targeted direct mail advertising to preferred customers. These
customers are selected from a database of customer purchase information
that includes approximately 2.8 million active proprietary credit card
customers, as well as customers who utilize cash and third-party credit
cards. The Company also may use radio, television, and newspaper
advertising to stimulate traffic at certain strategic times of the year.
In order to meet the demands of its primary customers, the Company utilizes
the domestic wholesale apparel marketplace for a significant portion of its
purchases. This allows management to maintain short lead times, respond
quickly to current fashion trends, and quickly replenish merchandise
inventory as necessary. The Company uses its overseas sourcing operation
and agency relationships to procure basic low-risk commodity merchandise,
which generally requires longer lead times.
Merchandising and Marketing
The Company employs a merchandise strategy that emphasizes a variety of
choices in its merchandise assortment. The Company utilizes domestic
fashion market guidance, fashion advisory services, and in-store testing to
determine the optimal product assortment for its customer base. Management
believes that this strategy results in a higher degree of accuracy in
predicting consumer preferences while reducing the Company's inventory
investment and risk. The purpose of this strategy is to enable the Company
to provide merchandise assortments to meet its customers' preferences.
(2)
The Company offers an assortment of both casual and career-oriented
products, in plus (large-size), misses, petite, junior, and girls sizes.
Merchandise that complements these areas, such as accessories, intimate
apparel, and footwear, are also featured. In addition, Catherine's Stores
offers a broad assortment of merchandise in extended sizes (over size 26),
making the Company one of the few retailers to emphasize these sizes.
Product assortments are generally tailored to the demographics of an area,
and merchandise is available for six seasons -- spring, summer,
transitional, fall, holiday, and transitional. In addition, the Company
maintains quality standards with respect to merchandise fabrication,
construction and fit. The Company also continues to redefine its
merchandise assortments to reflect the needs and demands of diverse
customer groups. The Company has distribution systems in place whereby
stores that are identified as having certain customer profiles can be
merchandised with products specifically targeted to such customers. In
addition, the Company continues to work to improve inventory turnover by
better managing the inventory receipt flow of seasonal merchandise to its
stores across all geographic regions. Further, the Company addresses the
different lifestyle needs of its customers with respect to fashion by
varying the depth and assortments of career and casual merchandise.
The Company employs a realistic pricing strategy that is aimed at setting
the initial price markup of fashion merchandise in order to increase the
percentage of sales at the ticketed price. Management believes this
strategy has resulted in a greater degree of credibility with the customer,
reducing the need for aggressive price promotions. The pricing does allow
sufficient margin to permit merchandise discounts in order to stimulate
customer purchases when necessary. The Company expects to continue to
achieve a higher initial markup in the basic low-risk commodity merchandise
that is purchased through its overseas sourcing operations.
The Company continues to be promotionally oriented. The Company's
advertising expenditures are focused on stimulating customer traffic
through targeted direct mail advertising to customers. These customers are
selected from a database of more than 18 million proprietary credit card,
third-party credit card, and cash customers. The Company also may use
radio, television, and newspaper advertising to stimulate traffic at
certain strategic times of the year. Pricing policies, displays, store
promotions, and convenient store hours are also used to attract customers.
With the planning and guidance of specialized home office personnel, each
store provides such displays and advertising as may be necessary to feature
certain merchandise or certain promotional selling prices from time to
time.
In order to meet the demands of its primary customers, the Company utilizes
the domestic wholesale apparel marketplace for a significant portion of its
purchases. This allows management to maintain short lead times, respond
quickly to current fashion trends, and quickly replenish merchandise
inventory as necessary. The Company uses its overseas sourcing operation
to procure basic low-risk commodity merchandise, which generally requires
longer lead times. In Fiscal 2000, the Company purchased approximately 70%
of its merchandise in the domestic market, with the remainder being
(3)
developed by the Company's sourcing organization. Catherine's Stores has
purchased approximately 85% of its merchandise in the domestic marketplace.
The Company anticipates a reduction in the percentage of domestically-
sourced product for Catherine's to a level closer to the Company's overall
domestic sourcing percentage of 70%.
The retail sale of women's apparel is a highly competitive business with
numerous competitors, including moderate-price department stores, discount
department stores, other low- to moderate-price, moderate-price, and
moderate-to-better-price specialty apparel stores, and mail-order
companies. The Company cannot estimate the number of competitors or its
relative competitive position, due to the large number of companies selling
women's apparel. The primary elements of competition are merchandise
style, size, selection, quality, display, and price, as well as store
location, design, advertising, and promotion and personalized service to
the customers.
The Company's Fashion Bug stores experience a normal seasonal sales pattern
for the retail apparel industry, with peak sales occurring during the
Easter, Labor Day, and Christmas seasons. The Company generally builds
inventory levels prior to these peak selling periods. To keep inventory
current and fashionable, the Company reduces the price of slow-moving
merchandise throughout the year. End-of-season sales are conducted with
the objective of carrying a minimal amount of seasonal merchandise over
from one season to another. Sales for Fashion Bug for the four quarters of
Fiscal 2000, as a percent of total Fashion Bug sales, were 22.7%, 27.4%,
22.6% and 27.3%, respectively. The acquisitions of Catherine's Stores and
Modern Woman are not expected to have a material impact on the Company's
overall seasonal sales pattern.
The Company accelerated merchandise production schedules and the receipt of
inventories from January 2000 to December 1999, and shipped additional
merchandise to its stores to help protect against possible disruptions
resulting from the Year 2000 computer problem. The Company did not
experience any significant disruptions as a result of the Year 2000
problem.
The Company encourages sales through its proprietary credit cards. The
Company's proprietary credit card programs have approximately 2.8 million
active accounts, which accounted for approximately 34% of retail sales in
Fiscal 2000. The Company believes that the credit card is a promotional
vehicle in itself, engendering customer loyalty, creating a substantial
base for targeted direct mail promotion, and encouraging incremental sales.
The Company controls and services its entire Fashion Bug proprietary credit
card file, and has entered into various agreements whereby it securitizes
and sells all of these receivables. In each securitization, the
receivables are transferred by the Company's credit card bank to a trust,
which issues certificates representing ownership interests in the trust.
Under these agreements, the Company continues to service the receivables
and control credit policies. This allows the Company to continue to fund
receivable growth, provide customer service, and collect past-due accounts.
Accordingly, its relationship with its credit card customers is not
(4)
affected by the securitization agreements. During the second quarter of
Fiscal 2000, the Company, through the trust, completed an offering of $150
million of asset-backed certificates with a five-year term to replace its
five-year facility that matured in April 1999.
The Company's Fashion Bug proprietary credit card portfolio is administered
by Spirit of America National Bank, a national banking association that is
a wholly-owned subsidiary of the Company. Spirit of America National Bank
approves credit applications and a third party performs all billing and
collection activities. The Company's proprietary credit card customers
tend to be a higher credit risk than bank-issued credit card customers.
Catherine's Stores also offers its customers the convenience of a private-
label credit card. The Company uses a third-party bank to finance and
service the Catherine's private-label credit card program. This third-
party bank provides new account approval, credit authorization, billing,
and account collection services. Under a non-recourse agreement with the
third-party bank, the Company is reimbursed daily with respect to sales
generated by the Catherine's Stores private-label credit card. The
agreement may require the Company to repurchase receivables from the third-
party bank under certain conditions relating to a change in control of the
Company.
The Company's stores feature wall and selling-floor displays that
coordinate merchandise in order to promote multiple sales. The stores,
which the Company believes must present a fresh, contemporary shopping
environment, are redecorated or remodeled as necessary. The Company is
constantly testing and implementing new store designs and fixture packages
aimed at providing an effective merchandise presentation.
The Company emphasizes customer service, including the presence of
salespeople in the stores, rather than self-service; lay-away plans; and
acceptance of merchandise returns for cash or credit within a reasonable
time period.
Purchasing
Purchasing is conducted on a departmental basis for each of the Fashion Bug
and Catherine's merchandise groups by a staff of buyers supervised by one
or more merchandise managers. The Company believes that specialization of
buyers within their departments enhances their expertise in obtaining
quality merchandise at a cost that will permit attractive selling prices,
while obtaining the desired markup for the Company.
The merchandising staff obtains store and chain-wide inventory information
generated by merchandise information systems that utilize point-of-sale
terminals. Through these terminals, merchandise can be followed from the
placement of the order to the actual sale. Based upon this data, the
merchandise managers compare budgeted-to-actual sales and make
merchandising decisions, as needed, including re-order, markdowns, and
changes in the buying plans for upcoming seasons.
(5)
During Fiscal 2000, the Company's Fashion Bug stores purchased merchandise
from approximately 700 suppliers, none of which accounted for more than 5%
of its purchases. Catherine's Stores purchased merchandise from
approximately 630 suppliers, none of which accounted for more than 5% of
its purchases. The Company purchased approximately 70% of its merchandise
in the domestic market on an open account basis, with the remainder being
obtained through the Company's sourcing organization. During Fiscal 2000,
the Company conducted its sourcing operations in 21 countries through its
offices in Hong Kong and Singapore. Merchandise purchases outside the
United States are done via letter of credit with third party vendors, with
the Company being the importer of record. To date, the Company has not
experienced difficulties in purchasing merchandise overseas or importing
such merchandise into the United States. Should political instability
result in a disruption of normal activities in a country with which the
Company does business, the Company believes it would have adequate
alternative sources of supply.
Distribution
For its Fashion Bug stores, the Company operates a distribution center in
Greencastle, Indiana. The 150-acre tract of land contains a building of
approximately 900,000 square feet. The Company estimates that, by
operating multiple shifts, it would have the ability to service over 2,000
stores from this distribution center. For Catherine's Stores, the Company
operates a 213,000 square foot distribution center in Memphis, Tennessee,
which is designed to handle up to approximately 1,000 stores.
The majority of merchandise purchased by the Company is received at the
Greencastle and Memphis facilities, where it is prepared for distribution
to the stores. The functions performed at these central facilities include
quality control inspection, receiving, ticketing, packing, and shipping.
The Company's automated sorting system in these distribution centers
enhances the flow of merchandise from receipt to shipment. Merchandise is
shipped to each store by trucks operated principally by common carriers.
The Company utilizes computerized automated distribution models that
enhance the efficiency of the distribution operations. These models enable
the distribution operations to build various customer profiles into each
store's plan. These profiles determine not only the number of units, but
also the type of unit to be distributed to each store.
The Company's merchandise and purchasing strategy, and enhancements to the
Company's inventory management, facilitate the timely and orderly purchase
and flow of merchandise. This enables the Company's stores to offer fresh
product assortments on a regular basis.
Stores
The Company's 1,740 stores (as of January 29, 2000) are primarily located
in suburban areas and small towns. Approximately 85% of these stores are
located in strip shopping centers, while the balance are located in
(6)
community and regional malls. Typically, stores are open seven days per
week, eleven hours per day Monday through Saturday, and seven hours on
Sunday.
The Company's Fashion Bug stores range in size, generally, from 5,000
square feet to 15,000 square feet, averaging approximately 9,000 square
feet. The Company's Catherine's Stores range in size, generally, from
2,000 square feet to 8,000 square feet, averaging approximately 4,000
square feet. Total leased space was 12,911,000 square feet as of the end
of Fiscal 2000, as compared to 10,462,000 square feet as of the end of the
fiscal year ended January 30, 1999 ("Fiscal 1999").
The Company plans to open approximately 115 stores, remodel approximately
50 stores, and relocate approximately 50 stores during the fiscal year
ending February 3, 2001 ("Fiscal 2001").
The Company's store openings and closings over the past five fiscal years
are set forth in the following table:
Year Ended
Jan. 29, Jan. 30, Jan. 31, Feb. 1, Feb. 3,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Number of Stores
Open at beginning
of period.............. 1,135 1,135 1,134 1,301 1,428
Opened during period..... 75 65 25 5 47
Acquired during period... 572 0 0 0 0
Closed or combined
during period.......... (42) (65) (24) (172) (174)
----- ----- ----- ----- -----
1,740 1,135 1,135 1,134 1,301
===== ===== ===== ===== =====
Store Type
Fashion Bug.............. 1,185 1,135 1,135 1,134 1,301
Catherine's and
Modern Woman........... 555 0 0 0 0
----- ----- ----- ----- -----
1,740 1,135 1,135 1,134 1,301
===== ===== ===== ===== =====
Store Management and Employees
All stores are operated under the direct management of the Company. Each
store has a manager and an assistant manager, who are in daily operational
control. The Company has district managers, who travel to all stores in
their district on a frequent basis, to supervise store operations. Each
(7)
district manager has responsibility for an average of approximately 11
stores. Regional managers, who report to a Director of Stores, supervise
the district managers. Generally, store managers are appointed from the
group of assistant managers, and district managers are appointed from the
group of store managers. The Company's policy is to motivate its store
personnel through promotion from within, with competitive wages and various
incentive, medical, and retirement plans. Store operational and purchasing
policies are developed centrally, leaving individual store management with
the principal duties of display, selling, and reporting through point-of-
sale terminals.
As of the end of Fiscal 2000, the Company employed approximately 18,000
people, which included approximately 11,000 part-time employees. In
addition, a number of temporary employees are hired during the Christmas
season. Some of the Company's Memphis, Tennessee distribution center
employees are represented by the Upholstery and Allied Industries Division
of the United Steelworkers of America. The Company and the union have
ratified their contract, which expires in 2001. There have been no
material effects on the Company's operations to date as a result of the
union representation.
Trademarks and Servicemarks
The Company owns, or is in the process of obtaining, all rights to the
trademarks and trade names it believes are necessary to conduct its
business as presently operated. "Fashion Bug" (R), "Fashion Bug Plus" (R),
"Glitter" (R), "Maggie Lawrence" (R), "Stefano" (R), "L.A. Blues" (R),
"Catherine's" (R), "PS...Plus Sizes, Plus Savings," "Added Dimensions" (R),
"The Answer Large Sizes for Less" (R), "The Answer the Elegant Large-Size
Discounter" (R), "CST Studio" (R), "CST Sport," "Maggie Barnes" (R), "Kathy
White" (R), "Liz & Me" (R), "AD Sport" (R), "Grove Avenue" (R), "Jon
Lawrence" (R), "Capistrano" (R), "Fitting Image" (R), and "Modern Woman"
(R) and several other trademarks and servicemarks of lesser importance to
the Company have been registered or are in the process of being registered
with the United States Patent and Trademark Office and in other countries.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The Company has made in this report, and from time to time may otherwise
make, forward-looking statements concerning the Company's operations,
performance and financial condition. This report includes, in particular,
forward-looking statements regarding the Company's expectations of future
performance following its acquisitions, restructurings, and expense
reduction initiatives, and the expected benefits thereof. In addition, the
information contained herein includes certain forward-looking statements
regarding sales and earnings performance, store openings and closings, cost
savings, capital requirements, management's expectations for Year 2000
compliance, the Company's exposure to fluctuations in interest rates, and
other matters. Such forward-looking statements are subject to various
(8)
risks and uncertainties that could cause actual results to differ
materially from those currently anticipated due to a number of factors,
including those identified below.
Dependence on Key Management
The Company's success and its ability to successfully execute its business
strategy depends largely on the efforts and abilities of Dorrit J. Bern,
the Company's Chairman of the Board, President and Chief Executive Officer,
and her management team. The loss of the services of one or more of such
key personnel could have a material adverse effect on the Company's
business and financial results. The Company does not maintain key-man
insurance policies with respect to any of its employees.
Other Factors
Actual results could also differ materially from those currently
anticipated due to (i) rapid changes in or miscalculation of fashion
trends, (ii) extreme or unseasonable weather conditions, (iii) economic
downturns, a weakness in overall consumer demand, inflation, and cyclical
variations in the retail market for women's fashion apparel, (iv) a further
increase in the Federal (or State) Minimum Wage, (v) an acceleration in the
rate of business failures in the retail industry, (vi) the loss of certain
or all of the collateral pledged under the Company's credit facilities,
(vii) the availability and/or cost of receivables securitization
arrangements, (viii) an increase in the rate of bad debt expense among the
Company's proprietary credit card customers, (ix) the risks attendant to
the sourcing of the Company's merchandise needs abroad, including exchange
rate fluctuations, political instability, trade sanctions or restrictions,
changes in quota and duty regulations, delays in shipping, or increased
costs of transportation, (x) the interruption of merchandise flow to the
Company's retail stores from its centralized distribution facilities, (xi)
the availability and cost of external financing, (xii) competitive
pressures, (xiii) failure to realize merger-related synergies, (xiv)
disruptions to operations as a result of Year 2000 compliance issues, and
(xv) the imposition of more onerous payment terms for merchandise
purchases. In addition, the market price of the Company's Common Stock,
which is quoted on the Nasdaq National Market, may be subject to
significant fluctuation in response to quarter-to-quarter variations in the
Company's revenues and earnings, variations in monthly sales figures, and
general stock market volatility unrelated to the Company's operating
performance.
Item 2. Properties
The Company leases all store premises, with the exception of 6 stores,
which the Company owns. Typically, store leases have initial terms of 5 to
20 years and contain provisions for renewal options, additional rental
charges based on sales performance, and payment of real estate taxes and
common area charges.
(9)
With respect to leased stores open as of January 29, 2000, the following
table shows the number of store leases expiring during the periods
indicated, assuming the exercise of the Company's renewal options:
Number
of Leases
Period Expiring
------ --------
2000 51
2001 - 2005 502
2006 - 2010 268
2011 - 2015 270
2016 - 2020 246
2021 - 2025 307
Thereafter 96
The Company owns a 900,000 square foot distribution center in Greencastle,
Indiana that services the Company's Fashion Bug stores. In 1998, the
Company closed its 515,000 square foot distribution center in Bensalem,
Pennsylvania in conjunction with the decision to consolidate the Company's
distribution center operations in Greencastle. In 1999, the Company sold
the Bensalem distribution center, retaining 91,000 square feet of office
space under a lease expiring in March 2004.
As a result of the acquisition of Catherine's Stores, the Company owns a
213,000 square foot distribution center that services the Company's
Catherine's stores and a buying office in New York City that occupies
13,000 square feet of leased space.
The Company also owns approximately 22 acres in Bensalem, Pennsylvania,
with a 145,000 square foot office building housing the Company's data
processing facility and additional administrative offices. Spirit of
America National Bank, the Company's wholly-owned credit card bank
subsidiary, occupies 30,000 square feet of leased office space in Miami
Township, Ohio. The Company owns or leases a total of 50,000 square feet
of office and warehouse space in Asia.
Item 3. Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Company or any
of its subsidiaries is a party or of which any of their property is the
subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
(10)
Item 4a. Executive Officers of the Registrant
The following list contains certain information relative to Executive
Officers of the Company as of April 17, 2000. There are no family
relationships among any Executive Officers. The term of each Executive
Officer expires at the next annual meeting of the Board of Directors
following the Annual Meeting of Shareholders scheduled to be held during
June 2000, or until their successors are duly elected and qualified.
Dorrit J. Bern, 49, has served as Chairman of the Board of Directors since
January 1997. Prior to that, she served as Vice Chairman of the Board of
Directors from September 1995 to January 1997. She has also served as
President and Chief Executive Officer since September 1995. Prior to that,
she served as Group Vice President of Women's Apparel and Home Fashions for
Sears, Roebuck & Co. from December 1993 to August 1995. Ms. Bern's term as
a Director expires in 2002.
Anthony A. DeSabato, 51, has served as Executive Vice President and Cor-
porate Director of Human Resources for more than five years.
Eric M. Specter, 42, has served as Executive Vice President - Chief
Financial Officer since January 1997. He also served as Treasurer from
February 1998 to March 2000. Prior to that he served as Vice President -
Chief Financial Officer from December 1995 to January 1997. Prior to that,
he served as Vice President - Corporate Controller for more than five
years.
Colin D. Stern, 51, has served as Executive Vice President and General
Counsel for more than five years. He has also served as Secretary since
February 1998.
Elizabeth Williams, 46, was appointed President of Fashion Bug in December
1999. Prior to that, she served as Executive Vice President -
Merchandising from October 1995 to December 1999. Prior to that, she
served as Divisional Vice President - Misses Sportswear and Special Sizes
for Sears, Roebuck & Co. from February 1994 to October 1995.
Erna Zint, 56, has served as Executive Vice President - Sourcing since
January 1996. Prior to that, she served as Corporate Vice President -
Southeast Asia Operations for Leslie Fay Companies, Inc. from December 1990
to December 1995.
Carmen Monaco, 53, has served as Vice President - Marketing since May 1997.
Prior to that he served as Senior Vice President - Marketing/Advertising
for Goody's Family Clothing Inc. from August 1992 to May 1997.
John J. Sullivan, 53, has served as Vice President - Corporate Controller
since October 1998. Prior to that, he served as Senior Vice President and
Chief Financial Officer for National Media Corp. from January 1998 to
October 1998 and from September 1991 to April 1995, and as Senior Vice
President of Administration from April 1995 to January 1998.
(11)
Jeffery A. Warzel, 43, has served as Senior Vice President - Infrastructure
Operations and Strategic Planning since January 2000. Prior to that, he
served as Vice President - Operations Support and Business Development for
Western Auto, a subsidiary of Sears Roebuck & Co. from August 1996 to
December 1999. Prior to that, he served as Vice President - Process
Improvement for Melville Corporation from 1992 to 1996.
Jonathon Graub, 41, has served as Senior Vice President - Real Estate,
since December 1999. Prior to that, he served as Vice President - Real
Estate for more than five years.
(12)
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Principal Market: The Company's Common Stock is traded on the over-
the-counter market and quoted on the Nasdaq National Market under the
symbol CHRS.
(b) The following table sets forth the high and low sale prices for the
Company's Common Stock during the indicated periods, as reported by Nasdaq.
Fiscal 2000 Fiscal 1999
High Low High Low
---- --- ---- ---
1st Quarter.... $4 5/8 $2 13/16 $5 1/8 $4
2nd Quarter.... 7 1/16 3 9/16 5 3/4 4 1/2
3rd Quarter.... 6 13/16 4 9/16 5 3 1/4
4th Quarter.... 8 1/4 5 4 5/8 3 3/8
On October 2, 1995, the Company's Board of Directors announced an
indefinite suspension of dividends on the Company's Common Stock. On
November 30, 1995, the Company entered into borrowing agreements that
require, among other things, that the Company not pay dividends on its
Common Stock (see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial
Statements - Debt" below).
(c) Approximate Number of Holders of Common Stock:
The approximate number of holders of record of the Company's Common
Stock as of April 17, 2000 was 2,383. This number excludes individual
stockholders holding stock under nominee security position listings.
(d) Recent Sales of Unregistered Securities
Not applicable.
(13)
Item 6. Selected Financial Data
The following table presents selected financial data for the Company for
each of the five fiscal years ended as of February 3, 1996 through January
29, 2000. All of the selected financial data are extracted from the
Company's audited financial statements and should be read in conjunction
with the financial statements and the notes thereto included under "Item 8.
Financial Statements and Supplementary Data" of this Form 10-K.
CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY
Year Ended
(in thousands, except Jan. 29, Jan. 30, Jan. 31, Feb. 1, Feb. 3,
per share amounts) 2000(1) 1999 1998 1997 1996(2)
------- ---- ---- ---- -------
Net sales.............. $1,196,529 $1,035,160 $1,016,537 $1,016,297 $1,102,384
Restructuring charge
(credit)............ (3,471)(3) 54,246(4) 0 0 103,000(5)
Non-recurring gain from
demutualization of
insurance company.... 6,700(6) 0 0 0 0
Non-recurring gain from
asset securitization. 0 0 13,018(7) 0 0
Extraordinary gain on
early retirement
of debt, net of tax.. 1,232 0 0 0 0
Net income (loss)...... 45,059 (20,135) 19,334 (7,237) (139,241)
Basic net income (loss)
Per share............ .46 (.20) .18 (.07) (1.35)
Net income (loss)
per share, assuming
dilution............. .43 (.20) .18 (.07) (1.35)
Cash dividends per
common share(8)...... .00 .00 .00 .00 .045
At year end:
Total assets........... $784,796 $684,649 $709,738 $710,397 $681,746
Current portion -
Long-term debt....... 1,920 16 16 16 57,691
Long-term debt......... 105,213 119,475 138,116 138,128 38,102
Working capital........ 161,376 192,274 163,208 224,144 199,457
Stockholders' equity... 436,263 353,572 416,810 421,035 419,029
[FN]
(1) Results for the fiscal year ended January 29, 2000 ("Fiscal 2000")
include the results of Catherines Stores Corporation, acquired January 7,
2000, and Modern Woman Holdings, Inc., acquired August 2, 1999, from the
dates of their respective acquisitions (See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations;
Acquisitions" and "Item 8. Financial Statements and Supplementary Data;
Notes to Consolidated Financial Statements -- Acquisitions" below.)
(2) The fiscal year ended February 3, 1996 consisted of 53 weeks.
(14)
(3) During Fiscal 2000, the Company revised its estimates of costs
recognized during the fiscal year ended January 30, 1999 ("Fiscal 1999")
relating to the closing of the Company's Bensalem distribution center and
elimination of the Company's men's business (see note (4) below). As a
result, the Company recognized pre-tax restructuring credits of $2,834,000
relating to the closing of the distribution center and $2,096,000 relating
to the elimination of the men's business. In addition, the Company
recognized a pre-tax restructuring charge of $1,459,000 in Fiscal 2000 in
conjunction with the consolidation of the Modern Woman chain of stores into
the Catherine's Stores chain. (See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations; Acquisitions"
and "Results of Operations -- Restructuring Charge (Credit)" and "Item 8.
Financial Statements and Supplementary Data; Notes to Consolidated
Financial Statements -- Restructuring Charge (Credit)" below.)
(4) During Fiscal 1999, the Company's Board of Directors approved a
restructuring plan in conjunction with the elimination of the Company's
men's business, which resulted in a pre-tax charge of $34,000,000. In
addition, the Company's Board of Directors approved a restructuring plan in
conjunction with the decision to consolidate the Company's distribution
center operations, which resulted in a pre-tax charge of $20,246,000. (See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations; Results of Operations -- Restructuring Charge
(Credit)" and "Item 8. Financial Statements and Supplementary Data; Notes
to Consolidated Financial Statements -- Restructuring Charge (Credit)"
below.)
(5) During the fiscal year ended February 3, 1996, the Company's Board of
Directors approved a restructuring plan which resulted in a pre-tax charge
of $103,000,000.
(6) During Fiscal 2000, the Company received a stock distribution from one
of its mutual insurance carriers in connection with the carrier's
conversion to a publicly-held corporation (demutualization). The Company
recorded the distribution at its fair value and recognized the resulting
non-recurring gain in income from continuing operations (see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations; Results of Operations -- Non-recurring Gain from
Demutualization of Insurance Company" and "Item 8. Financial Statements
and Supplementary Data; Notes to Consolidated Financial Statements -- Non-
recurring Gain from Demutualization of Insurance Company" below).
(7) During the fiscal year ended January 31, 1998 ("Fiscal 1998"), the
Company recorded a non-recurring gain of $13,018,000 as a result of the
adoption of SFAS No. 125 as related to the sale of credit card receivables
during Fiscal 1998 (see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations; Results of Operations --
Non-recurring Gain from Asset Securitization" and "Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial
Statements -- Asset Securitization" below).
(15)
(8) On October 2, 1995, the Company's Board of Directors announced an
indefinite suspension of dividends on the Company's Common Stock. In
addition, the Company's revolving credit facility requires that the Company
not pay dividends on its Common Stock. (See "Item 5. Market for the
Registrant's Common Equity and Related Stockholders' Matters" above).
Item 7. 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 the notes thereto included under "Item 8. Financial
Statements and Supplementary Data" of this Form 10-K.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements
concerning the Company's operations, performance, and financial condition.
In particular, it includes forward-looking statements regarding sales and
earnings performance, store openings and closings, cost savings, capital
requirements, management's expectations for Year 2000 compliance, the
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) rapid changes in, or
miscalculation of, fashion trends, (ii) extreme or unseasonable weather
conditions, (iii) economic downturns, a weakness in overall consumer
demand, inflation, and cyclical variations in the retail market for women's
fashion apparel, (iv) the risks attendant to the sourcing of the Company's
merchandise needs abroad, including exchange rate fluctuations, political
instability, trade sanctions or restrictions, changes in quota and duty
regulations, delays in shipping, or increased costs of transportation, (v)
competitive pressures, (vi) failure to realize merger-related synergies,
(vii) fluctuations in interest rates, and (viii) disruption to operations
as a result of Year 2000 compliance issues. These, and other risks and
uncertainties are detailed further in this Item 7, in "Part I, Item 1 -
Business: Cautionary Statement for Purposes of the Safe Harbor Provisions
of the Private Securities Litigation Reform Act of 1995," and in the
Company's reports filed with the Securities and Exchange Commission from
time to time.
ACQUISITIONS
On August 2, 1999, the Company completed the acquisition of 100% of the
outstanding stock of Modern Woman Holdings, Inc. ("Modern Woman") for $8.7
million net of cash acquired. Modern Woman operated 136 retail apparel
stores in 24 states, specializing in large-size women's apparel. The
acquisition has been accounted for as a purchase, and Modern Woman's
(16)
results of operations are included in the Company's financial statements as
of the acquisition date. Prior-period results have not been restated. The
fair value of the net assets acquired exceeded the purchase price, and the
excess has been applied to reduce the fair value of non-current assets.
The recorded values of assets acquired and liabilities assumed are subject
to adjustment, pending final determination of their acquisition values.
The final allocation of the purchase price is not expected to differ
materially from the allocations used to prepare these financial statements.
The acquisition was financed through the use of internally-generated funds.
On January 7, 2000, the Company completed the acquisition of 100% of the
outstanding stock of Catherines Stores Corporation ("Catherine's Stores")
for $136.6 million net of cash acquired. The Company also assumed $11.2
million of short-term and long-term debt and capital lease obligations.
The acquisition was funded from the Company's existing cash and available-
for-sale securities. Catherine's Stores operated 436 retail apparel stores
in 40 states and the District of Columbia, specializing in large-size
women's apparel. The Company plans to consolidate its Modern Woman stores
into its Catherine's Stores. In addition, the Company expects to realize
merger-related cost savings of $4-$5 million in the fiscal year ended
February 3, 2001 ("Fiscal 2001") and $8-$10 million in the fiscal year
ended February 2, 2002 ("Fiscal 2002"). The acquisition has been accounted
for as a purchase, and Catherine's Stores results of operations are
included in the Company's financial statements as of the acquisition date.
Prior-period results have not been restated. Assets acquired and
liabilities assumed have been recorded at their estimated fair values, and
are subject to adjustment pending final determination of their acquisition
values. The final allocation of the purchase price is not expected to
differ materially from the allocations used to prepare these financial
statements. The purchase price exceeded the fair value of identifiable net
assets acquired, and the excess, approximately $97.7 million, has been
accounted for as goodwill, and will be amortized over a 20-year period.
In connection with the consolidation of the Modern Woman stores into
Catherine's Stores, the Company recorded a restructuring charge of $1.4
million in the fourth quarter of Fiscal 2000. The restructuring charge was
primarily for lease termination costs related to the closing of 11
geographically overlapping Modern Woman stores.
(17)
RESULTS OF OPERATIONS
Financial Summary
The following table sets forth certain financial data expressed as a per-
centage of net sales and on a comparative basis:
Percentage Increase
(Decrease)
Percentage of Net Sales From Prior Year
Fiscal Fiscal Fiscal Fiscal Fiscal
2000 1999 1998 2000-1999 1999-1998
---- ---- ---- --------- ---------
Net sales.............. 100.0% 100.0% 100.0% 15.6% 1.8%
Cost of goods sold,
buying, and occupancy 71.4 74.5 76.0 10.9 (0.2)
Selling, general, and
administrative....... 23.6 23.8 22.9 14.7 5.9
Non-recurring gain from
demutualization of
insurance company.... 0.6 -- -- ** --
Non-recurring gain from
asset securitization. -- -- 1.3 -- (100.0)
Restructuring charge
(credit)............. (0.3) 5.2 -- (106.4) **
Interest expense....... 0.6 1.0 1.0 (27.3) (3.3)
Income tax provision
(benefit)............ 2.2 (1.0) 1.0 ** **
Income (loss) before
extraordinary item... 3.7 (1.9) 1.9 ** **
Gain on early
retirement of debt,
net of taxes......... 0.1 -- -- ** --
Net income (loss)...... 3.8 (1.9) 1.9 ** **
- --------------------
[FN]
** Not meaningful
(18)
Net Sales
The following table sets forth certain information related to the Company's
net sales:
Year Ended Year Ended
January 29, 2000 January 30, 1999
---------------- ----------------
Fiscal Fourth Fiscal Fourth
Year Quarter Year Quarter
---- ------- ---- -------
Increase (decrease) in comparable
Fashion Bug store sales (1)........ 8.7% 11.1% (0.3%) (4.1%)
Sales from new Fashion Bug stores as
a percentage of total prior-period
sales.............................. 5.2% 7.3% 4.1% 4.3%
Sales from Catherine's and Modern
Woman stores as a percentage of
total prior-period sales (2)....... 5.6% 13.8% -- --
Prior-period sales from closed
Fashion Bug stores as a percentage
of total prior-period sales........ (3.6%) (3.7%) (2.0%) (2.7%)
Increase (decrease) in total sales... 15.6% 28.0% 1.8% (2.4%)
- --------------------
[FN]
(1) Sales from stores in operation during the same weeks of each period.
(2) Sales from stores acquired during the year ended January 29, 2000 from
their dates of acquisition (see "ACQUISITIONS" above).
Net sales for the fiscal year ended January 29, 2000 ("Fiscal 2000")
totaled $1,196,529,000 as compared to net sales of $1,035,160,000 for the
year ended January 30, 1999 ("Fiscal 1999") and net sales of $1,016,537,000
for the fiscal year ended January 31, 1998 ("Fiscal 1998"). Net sales for
the fourth quarter of Fiscal 2000 totaled $348,370,000 as compared to net
sales of $272,229,000 for the fourth quarter of Fiscal 1999 and net sales
of $278,950,000 for the fourth quarter of Fiscal 1998. Net sales for
Fiscal 2000 include the results of the Modern Woman and Catherine's Stores
chains from the dates of their respective acquisitions.
During Fiscal 2000, increases in comparable Fashion Bug store sales were
achieved in sportswear, coats, intimate apparel, accessories, and girls, as
customers responded favorably to the Company's merchandise offerings
throughout the year. The Fiscal 1999 decreases in comparable store sales
were primarily attributable to the elimination of men's merchandise from
the Company's stores (see "Restructuring Charge (Credit) - STORE
RESTRUCTURING AND ELIMINATION OF MEN'S MERCHANDISE FROM THE COMPANY'S
(19)
FASHION BUG STORES" below). Excluding men's merchandise, comparable store
sales increased 3.2% in Fiscal 1999 and 1.6% in the fourth quarter of
Fiscal 1999. These increases were achieved in the Company's core
merchandising departments, including sportswear, dresses, footwear,
intimate apparel, and girls clothing. The number of retail stores in
operation was 1,740 at the end of Fiscal 2000 including the acquired
Catherine's and Modern Woman stores, and 1,135 at the end of both Fiscal
1999 and Fiscal 1998.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses expressed as a
percentage of sales decreased 3.1% in Fiscal 2000 as compared to the prior
year. Cost of goods sold as a percentage of sales decreased 1.7% in Fiscal
2000 as compared to Fiscal 1999. The improvement in merchandise margins
was primarily a result of reduced levels of markdowns and reductions in
store-wide promotions in the current year. Merchandise margins also
benefited from a reduction in inventory shrinkage costs. Buying and
occupancy expenses as a percentage of sales decreased 1.4% in Fiscal 2000
as compared to the prior year primarily as a result of cost savings from
consolidation of the Company's distribution centers and the leveraging
effect of increased sales volume on relatively fixed store occupancy and
buying expenses. Cost of goods sold, buying, and occupancy expenses for
Fiscal 2000 include the results of the Modern Woman and Catherine's Stores
chains from the dates of their respective acquisitions.
Cost of goods sold, buying, and occupancy expenses expressed as a
percentage of sales decreased 2.6% in the fourth quarter of Fiscal 2000 as
compared to the corresponding period of Fiscal 1999. Cost of goods sold as
a percentage of sales decreased 1.5% in the fourth quarter of Fiscal 2000
as compared to the fourth quarter of Fiscal 1999. This decrease was
primarily attributable to improvements in gross margins as a result of
reduced levels of markdowns as compared to the prior year and a reduction
in inventory shrinkage costs. Buying and occupancy expenses in the fourth
quarter of Fiscal 2000 expressed as a percentage of sales decreased 1.1% in
the fourth quarter of Fiscal 2000 as compared to the fourth quarter of
Fiscal 1999. The decrease was a result of the leveraging effect of
increased sales volume on relatively fixed store occupancy and buying
expenses. Cost of goods sold, buying, and occupancy expenses for the
fourth quarter of Fiscal 2000 include the results of the Modern Woman and
Catherine's Stores chains from the dates of their respective acquisitions.
Cost of goods sold, buying, and occupancy expenses expressed as a
percentage of sales decreased 1.5% in Fiscal 1999 as compared to Fiscal
1998. Cost of goods sold as a percentage of sales decreased 1.1% in Fiscal
1999 as compared to Fiscal 1998. The decrease was primarily due to
customer response to the Company's merchandise offerings, which resulted in
lower merchandise markdowns as compared to the prior year. Increased
markdowns on sales of remaining men's merchandise had a marginally negative
effect on gross margin. Buying and occupancy expenses decreased 0.4% as a
percentage of sales in Fiscal 1999 as compared to the prior year as a
result of a reduction in store occupancy expenses, primarily depreciation
and utility costs.
(20)
Cost of goods sold, buying, and occupancy expenses expressed as a
percentage of sales decreased 1.2% in the fourth quarter of Fiscal 1999 as
compared to the corresponding period of Fiscal 1998. The decrease as a
percentage of sales was attributable to improvements in gross margins as a
result of the elimination of men's merchandise from the Company's stores
and a reduction in inventory shrinkage costs. Buying and occupancy
expenses in the fourth quarter of Fiscal 1999 and the fourth quarter of
Fiscal 1998 were constant as a percent of sales.
Selling, General, and Administrative
Selling, general, and administrative expenses expressed as a percentage of
sales decreased 0.2% in Fiscal 2000 as compared to Fiscal 1999. This
decrease was primarily attributable to the leveraging effect of the
increase in sales volume on relatively fixed general and administrative
expenses. Selling expenses were constant as a percentage of sales.
Increases in payroll costs, store incentive programs, and certain volume-
related expenses, and inclusion of expenses incurred by Modern Woman, were
offset by the leveraging effect of increased sales volume. Selling,
general, and administrative expenses for the fourth quarter of Fiscal 2000
increased 0.2% as a percentage of sales as compared to the fourth quarter
of Fiscal 1999, primarily as a result of the inclusion of expenses incurred
by Modern Woman and Catherine's Stores.
Selling, general, and administrative expenses expressed as a percentage of
sales increased 0.9% in Fiscal 1999 as compared to Fiscal 1998. This
increase was primarily attributable to increased advertising expenses as a
result of the Company's new television and radio campaign and the impact of
Federal minimum wage legislation on store operations. Selling expenses for
Fiscal 1998 were adversely impacted by higher levels of delinquencies
within the Company's securitized proprietary credit card receivables
portfolio. This adverse impact was partially offset by reduced expenses
related to the servicing of the credit card operations.
Restructuring Charge (Credit)
STORE RESTRUCTURING AND ELIMINATION OF MEN'S MERCHANDISE FROM THE COMPANY'S
FASHION BUG STORES
On March 5, 1998, the Company's Board of Directors approved a restructuring
plan that resulted in a pre-tax charge of $34.0 million. The plan was
approved in conjunction with the decision to eliminate men's merchandise
from the Company's Fashion Bug stores. The restructuring charge included a
$10.0 million non-cash write-down of store fixtures and improvements,
accruals of $19.7 million for terminations and amendments of store leases
and renovation of vacated store space and $4.3 million for other costs,
including severance for approximately 650 employees. As of January 29,
2000, the following payments had been charged against the accruals: $13.0
million for lease terminations and amendments and renovations, and $2.2
million for severance for approximately 590 employees and other costs.
(21)
During Fiscal 2000, the Company closed 19 stores and completed the
downsizing of 42 stores in connection with the plan. To-date, 71 stores
have been closed in connection with the plan. In addition, 72 stores have
been downsized to-date and 29 stores are under contract for downsizing in
Fiscal 2001. Elimination of the men's merchandise from the stores was
completed in October 1998, the balance of the men's inventory has been
sold, and the selling space used for men's merchandise has been re-
merchandised. In the fourth quarter of Fiscal 2000, the Company revised
its estimates of costs relating to the plan that were recognized during
Fiscal 1999. As a result, the Company recognized a pre-tax restructuring
credit of $2.1 million.
DISTRIBUTION CENTER RESTRUCTURING
In December 1998, the Company consolidated its distribution center
operations in its Greencastle, Indiana distribution center and closed its
Bensalem, Pennsylvania distribution center. As a result, the Company
recognized a pre-tax restructuring charge of $20.2 million during Fiscal
1999. The restructuring charge included an $18.0 million write-down of the
cost of the Bensalem facilities to a net realizable value of $5.7 million,
based on an independent appraisal. The restructuring charge also included
accruals of $1.5 million for severance costs resulting from a workforce
reduction of approximately 100 employees and $0.7 million for other non-
recurring costs relating to the closure. The Bensalem distribution center
closed on December 10, 1998, and the facilities were held for sale. During
Fiscal 2000, the Company completed the sale of the Bensalem facility and
revised its estimate of costs relating to the distribution center
restructuring. As a result, the Company recognized a pre-tax restructuring
credit of $2.8 million in Fiscal 2000, which primarily represents sales
proceeds in excess of the estimated net realizable value of the Bensalem
facility.
CLOSING OF MODERN WOMAN STORES
In the fourth quarter of Fiscal 2000, the Company recorded a restructuring
charge of $1.4 million in connection with the consolidation of the Modern
Woman stores into the Catherine's Stores division (see "ACQUISITIONS"
above). The restructuring charge was primarily for lease termination costs
related to the closing of 11 geographically overlapping Modern Woman
stores.
Non-recurring Gain From Demutualization of Insurance Company
During Fiscal 2000, the Company received a stock distribution from one of
its mutual insurance carriers in connection with the carrier's conversion
to a publicly-held corporation (demutualization). In accordance with the
consensus reached in Emerging Issues Task Force Issue No. 99-4, "Accounting
for Stock Received from the Demutualization of A Mutual Insurance Company,"
the Company recorded the distribution at its fair value and recognized the
resulting non-recurring gain in income from continuing operations, and
subsequently sold the securities received.
(22)
Non-recurring Gain From Asset Securitization
The Company securitizes all of its Fashion Bug proprietary credit card
receivables in the public and private markets. In each securitization,
credit card receivables are transferred to a trust, which issues
certificates representing ownership interest in the trust to institutional
investors. The Company retains a participation interest in the trust,
reflecting the excess of the total amount of receivables transferred to the
trust over the portion represented by certificates sold to investors. The
Company is subject to certain recourse provisions in connection with
securitizations entered into prior to January 1, 1997 and has established
reserves relating to these provisions.
The Company adopted the provisions of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," in January 1997. SFAS No. 125 establishes the accounting for
certain financial asset transfers, including securitization transactions.
For transfers that result in the recognition of a sale, SFAS No. 125
requires that assets obtained and liabilities incurred by transferors are
to be measured at fair value. In conjunction with the sale of $83.5
million of credit card receivables during Fiscal 1998, the Company
evaluated the fair value of its participation interest and related recourse
provisions in these securitizations. As a result of such evaluation, the
Company recognized a non-recurring gain of $13.0 million in Fiscal 1998.
Interest Expense
Interest expense decreased in Fiscal 2000 as compared to Fiscal 1999 and
decreased in Fiscal 1999 as compared to Fiscal 1998. The decreases were a
result of the Company's repurchases during Fiscal 2000 and Fiscal 1999 of
$23.3 million and $18.6 million aggregate principal amount, respectively,
of its 7.5% Convertible Subordinated Notes due 2006.
Other Income
Other income expressed as a percentage of sales decreased 0.7% in Fiscal
2000 as compared to Fiscal 1999. The decrease was primarily a result of a
decrease in interest income from the Company's available-for-sale
securities and realized losses from sales of available-for-sale securities
during Fiscal 2000. The Company utilized proceeds from the sale of a
portion of its available-for-sale securities for the acquisitions of Modern
Woman and Catherine's Stores in the latter part of Fiscal 2000 and to
repurchase portions of the Company's convertible notes and common stock
during Fiscal 1999 and Fiscal 2000. The decrease in other income was
partially offset by the decrease in interest expense that resulted from the
repurchases of the convertible notes. Other income increased in Fiscal
1999 as compared to Fiscal 1998 primarily as the result of increased
interest income from higher levels of investments in available-for-sale
securities.
(23)
Income Tax Provision (Benefit)
The income tax provision for Fiscal 2000 was $26.9 million, resulting in a
38% effective tax rate, as compared to an income tax benefit for Fiscal
1999 of $10.9 million, resulting in a (35%) effective tax rate. The change
in the effective tax rate from Fiscal 1999 to Fiscal 2000 is primarily
attributable to a non-recurring provision of $2.0 million in Fiscal 2000
related to one of the Company's employee insurance programs.
The income tax provision for Fiscal 1998 was $10.1 million, resulting in a
34.3% effective tax rate. The change in the effective tax rate from Fiscal
1998 to Fiscal 1999 is primarily attributable to decreases in state and
foreign income taxes and an increase in non-deductible permanent
differences relating to certain Company-owned life insurance policies (see
"Item 8. Financial Statements and Supplementary Data; Notes to Consolidated
Financial Statements - Income Taxes" below).
Gain on Early Retirement of Debt
During Fiscal 2000, the Company repurchased $23.3 million aggregate
principal amount of its 7.5% Convertible Subordinated Notes due 2006 at a
total cost of $21.0 million. The notes had an aggregate carrying value of
$22.9 million as of the repurchase dates. The repurchases resulted in an
extraordinary gain of $1.2 million, net of income taxes of $0.7 million.
Performance Analysis
The following ratios measure the Company's overall performance as shown by
the return on average stockholders' equity and return on average total
assets.
Fiscal Fiscal Fiscal
2000 1999 1998
---- ---- ----
Including Restructuring Charge (Credit) and
Non-recurring Items:
Net return on average stockholders' equity.. 11.0% (5.0)% 4.6%
Net return on average total assets.......... 6.1% (2.9)% 2.7%
Excluding Restructuring Charge (Credit) and
Non-recurring Items:
Net return on average stockholders' equity.. 9.0% 3.7% 2.6%
Net return on average total assets.......... 5.3% 2.2% 1.5%
(24)
FINANCIAL CONDITION
Liquidity and Capital Resources
The Company's primary sources of working capital are cash flow from
operations, its proprietary credit card receivables securitization
agreements, its investment portfolio, and its $150 million revolving credit
facility described below. The following table highlights certain
information related to the Company's liquidity and capital resources:
Fiscal Fiscal Fiscal
(dollars in thousands) 2000 1999 1998
---- ---- ----
Working capital................ $161,376 $192,274 $163,208
Cash and cash equivalents...... 34,299 43,789 12,349
Available-for-sale securities.. 115,829 246,625 292,100
Cash provided by
operating activities......... 57,894 63,371 83,484
Current ratio.................. 1.7 2.1 2.1
Debt to equity ratio........... 24.1% 31.2% 33.1%
The Company's cash flow from operations decreased $5.5 million in Fiscal
2000 as compared to Fiscal 1999. The decrease resulted primarily from
payments related to restructurings (see "RESULTS OF OPERATIONS --
Restructuring Charge (Credit)" above) and an increase in inventories, net
of accounts payable, partially offset by an increase in net income.
The Company's cash flow from operations decreased $20.1 million in Fiscal
1999 as compared to Fiscal 1998. The decrease resulted primarily from the
following: (i) payments related to restructurings; (ii) a smaller decrease
in inventories, net of accounts payable, in Fiscal 1999 as compared to
Fiscal 1998; (iii) net payments for income taxes; and (iv) payments of
accrued expenses.
On August 2, 1999, the Company completed the acquisition of 100% of the
outstanding stock of Modern Woman Holdings, Inc. ("Modern Woman") for $8.7
million, net of cash acquired of $1.1 million. The acquisition has been
accounted for as a purchase, and Modern Woman's assets and liabilities are
included in the Company's balance sheet at January 29, 2000.
On January 7, 2000, the Company completed the acquisition of 100% of the
outstanding stock of Catherines Stores Corporation ("Catherine's Stores")
for $21 per share. The total cost of the acquisition was approximately
$136.6 million, net of cash acquired of $18.3 million. The Company also
assumed $11.2 million of short-term and long-term debt and capital lease
obligations. The acquisition was funded from the Company's existing cash
and available-for-sale securities. The acquisition has been accounted for
(25)
as a purchase, and Catherine's Stores assets and liabilities are included
in the Company's balance sheet as of January 29, 2000. (See "Acquisitions"
above).
In July 1996, the Company completed a public offering of $138 million
aggregate principal amount of 7.5% Convertible Subordinated Notes due 2006
(the "Notes"). The Notes are convertible into shares of the Company's
Common Stock at a conversion price of $7.46 per share. The Notes are
redeemable, at the Company's option, at declining redemption prices
starting on July 15, 1999 at 103.75% of principal and decreasing to 100%
after July 15, 2005. Holders of the Notes may require the Company to
repurchase some or all of the Notes under certain circumstances involving a
change in control of the Company. During Fiscal 1999, the Company
repurchased $18.6 million aggregate principal amount of the Notes, which
had a net carrying value of $18.3 million as of the date of purchase, at a
total cost of $17.8 million. During Fiscal 2000, the Company repurchased
an additional $23.3 million aggregate principal amount of the Notes, which
had a net carrying value of $22.9 million as of the date of purchase, at a
total cost of $21.0 million. The Company will continue to evaluate market
conditions to determine if additional Notes will be repurchased during
Fiscal 2001.
As part of the acquisition of Catherine's Stores, the Company assumed a
7.5% Mortgage Note (the "Mortgage Note") and certain capital lease
obligations. The mortgage financing agreement provides for a $6.9 million
mortgage facility with a seven-year term and a 20-year amortization period.
The Mortgage Note is secured by land and buildings at the Memphis,
Tennessee office of Catherine's Stores. The capital leases are for data
processing and point-of-sale equipment. At the end of the initial lease
term, the Company has the option of purchasing the equipment at fair market
value (or at $1 in the case of the point-of-sale equipment), renewing the
leases, or returning the equipment to the lessor. The Company has debt
maturity payments of $1.9 million in Fiscal 2001, which are primarily for
amounts due under the Mortgage Note and the capital lease obligations.
The Company has an agreement with a commercial finance company to provide a
revolving credit facility with a maximum availability of $150 million,
subject to limitations based upon eligible inventory. The primary purpose
of the facility, which expires June 1, 2001, is to enable the Company to
issue letters of credit for overseas purchases of merchandise as well as to
provide for seasonal cash borrowings. The facility is secured by
merchandise inventory, furniture and fixtures within retail stores, and
certain other Company assets. As of the end of Fiscal 2000, the
availability under the facility was approximately $105.8 million, against
which the Company had outstanding letters of credit of $34.3 million.
There were no cash borrowings outstanding under the agreement as of the end
of Fiscal 2000. The agreement requires that, among other things, the
Company maintain a minimum net worth of $300 million and not pay dividends
on its Common Stock.
At the time of its acquisition by the Company, Catherine's Stores was a
party to a bank credit agreement that provided for a maximum working
capital availability of $19.5 million, including a swing line of credit of
(26)
$3 million. The agreement was secured by substantially all of Catherine's
Stores assets except for inventory and assets securing the 7.5% mortgage
note discussed above. Amounts available under the agreement were based on
the amounts of Catherine's Stores inventories and receivables. The working
capital facility could also be used to fund letters of credit. As a result
of the Company's acquisition of Catherine's Stores, the bank providing the
agreement has extended the term of the agreement to April 27, 2000. At
January 29, 2000, the combined availability under the working capital and
swing line facilities was approximately $13.4 million, after considering
outstanding letters of credit of $6.1 million. The Company is currently
negotiating the extension of this agreement. Should this agreement not be
extended, Catherine's Stores will have adequate working capital available
to meet its needs from internally-generated funds.
As a result of the acquisition of Modern Woman, the Company also has access
to a working capital line of credit with a maximum availability of $10
million. As of January 29, 2000, $5 million was available under this
agreement to fund letters of credit, against which the Company had
outstanding letters of credit of $350 thousand. In exchange for the bank's
release of its security interest in all of the assets of Modern Woman, the
Company pledged $5 million of available-for-sale securities.
The Company's Board of Directors has approved the repurchase of up to
20,000,000 shares of the Company's Common Stock. Shares repurchased will
be held as treasury stock available for use under the Company's employee
benefits program or for other corporate purposes. During Fiscal 2000, the
Company repurchased 245,000 shares at an aggregate cost of $1.4 million.
During Fiscal 1999, the Company repurchased 3,130,000 shares at an
aggregate cost of $14.0 million. During Fiscal 1998, the Company
repurchased 5,580,000 shares at an aggregate cost of $25.4 million. The
Company will continue to evaluate market conditions to determine if
additional shares will be repurchased during Fiscal 2001.
The Company has formed a trust to which the Company's credit card bank has
transferred, 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
whereby the principal payments are made to the party with whom the trust
has entered into the securitization agreement.
During Fiscal 2000, the Company, through the trust, completed an offering
of $150 million of asset-backed certificates with a five-year term to
replace its five-year facility that matured in April 1999.
The Company securitized $398.6 million and $360.7 million of credit card
receivables in Fiscal 2000 and Fiscal 1999, respectively, and had $285.8
million of credit card receivables under securitizations outstanding as of
January 29, 2000, of which the Company retained an interest equal to $41.2
million (see "Item 8. Financial Statements and Supplementary Data; Notes to
Consolidated Financial Statements - Asset Securitization" below).
(27)
These securitization agreements improve the overall liquidity of the
Company and lessen the effect of interest rate volatility by providing
short-term sources of funding. The agreements provide for the Company to
continue to service the credit card receivables and control credit
policies. This control allows the Company to fund continued credit card
receivable growth and to provide the appropriate customer service and
collection activities. Accordingly, its relationship with its credit card
customers is not affected by these agreements.
If such securitization agreements were to become unavailable to the Company
or prohibitively expensive, this could have a material adverse effect on
the Company's results of operations and financial position. The Company
receives loan servicing proceeds from the Charming Shoppes Master Trust
representing income from credit card finance charge income and fees in
excess of interest paid to certificate holders, credit losses, and other
expenses. As a result, although the Company's securitization agreements
provide for the Company to continue to service the credit card receivables
and control credit policy, a significant decrease in loan servicing
proceeds could have a material adverse effect on the Company's results of
operations. A significant decrease in loan servicing proceeds could result
from increases in interest paid to certificate holders, credit losses, or
other expenses.
Charming Shoppes Receivables Corp. and Charming Shoppes Street, Inc.,
wholly-owned indirect subsidiaries of the Company, are separate special
purpose corporations. At January 29, 2000, Charming Shoppes Receivables
Corp. had $29.5 million of Charming Shoppes Master Trust Certificates and
Charming Shoppes Street, Inc. had $610 thousand of cash. These assets will
be available first and foremost to satisfy the claims of the respective
creditors of these separate corporate entities, including certain claims of
investors in the Charming Shoppes Master Trust. The providers of the
credit enhancements and trust investors have no other recourse to the
Company. The Company does not receive collateral from any party to the
securitization, and the Company does not have any risk of counter-party
non-performance.
The Company has historically entered into interest-rate swap and interest-
rate cap agreements to reduce the impact of increases in interest rates on
the Company's floating-rate credit card securitizations. The Company has
entered into interest-rate cap agreements with an aggregate notional amount
of $83.5 million and $243.5 million as of the end of Fiscal 2000 and Fiscal
1999, respectively. On September 15, 1999, the Company entered into an
interest rate swap with a notional amount of $50 million. Under the terms
of the swap agreement, the Company may be required to pledge certain assets
if the market value of the interest rate swap falls below an amount set
forth in the agreement. As of January 29, 2000, there were no pledged
amounts required under the terms of the agreement. The Company recognizes
interest rate payments it makes to the swap counter-party as expenses in
the period incurred. The Company paid $142 thousand to the swap counter-
party during Fiscal 2000. The interest rate swap expires on October 15,
2004. The Company had no interest-rate swap agreements in effect during
(28)
Fiscal 1999 or Fiscal 1998 (see "Item 8, Financial Statements and
Supplementary Data; Notes to Consolidated Financial Statements - Derivative
Financial Instruments Held For Purposes Other Than Trading" below).
The Company has a non-recourse agreement to permit a third party to provide
an accounts receivable proprietary credit card sales funding program for
its Catherine's Stores, which expires in January 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 agreement may require the Company to repurchase
receivables from the third party under certain conditions relating to a
change in control of the Company. Net proceeds received for the month of
January 2000 (which approximates the period subsequent to the Company's
acquisition of Catherine's Stores), were approximately $6.6 million. The
net balance of accounts receivable held by the third party was
approximately $93.6 million at January 29, 2000.
Capital expenditures amounted to $39.2 million, $32.4 million, and $22.0
million in Fiscal 2000, 1999, and 1998, respectively. In Fiscal 2000,
these expenditures were primarily for the construction, remodeling, and
fixturing of new and existing retail stores, loss-prevention equipment,
systems technology, and expansion of the Company's Greencastle, Indiana
distribution center. In Fiscal 1999, such expenditures were primarily for
leasehold improvements and fixtures for new stores, the remodeling and
fixturing of existing retail stores, systems technology, and loss
prevention equipment. In Fiscal 1998, such expenditures were for leasehold
improvements and fixtures for new stores, the remodeling and fixturing of
existing stores, the acquisition of leases for stores opened during Fiscal
1999, loss prevention equipment, and systems technology.
During Fiscal 2001, the Company anticipates capital expenditures of
approximately $65 million, which are intended principally for (i)
construction and fixturing of new stores, (ii) remodeling and fixturing of
existing retail stores, and (iii) investments in management information
systems technology and distribution centers. The Company also anticipates
entering into a lease for new point-of-sale equipment for the Fashion Bug
chain. The total commitment under the lease is expected to be
approximately $25 million, to be paid over a five-year period. The Company
plans to open approximately 115 new stores, remodel approximately 50
stores, and relocate approximately 50 stores during Fiscal 2001. It is
anticipated that the funds required for capital expenditures will be
financed principally through internally- generated funds.
During Fiscal 1999, the Company recorded total restructuring charges of
$54.2 million. During Fiscal 2000, the Company recognized credits of $4.9
million for revisions of the estimated charges recorded in 1999, and
recognized a restructuring charge of $1.4 million. As of January 29, 2000,
the Company had approximately $8.3 million of accrued, unpaid restructuring
costs. These costs, the majority of which the Company expects to pay by
the end of Fiscal 2001, are included in current liabilities. It is
anticipated that the funds required for payments of the accrued
restructuring costs will be financed principally through internally-
(29)
generated funds. See "Results of Operations -- Restructuring Charge
(Credit)" above, and "Item 8. Financial Statements and Supplementary Data;
Notes to Consolidated Financial Statements -- Restructuring Charge
(Credit)" below.
The Company has not paid cash dividends since Fiscal 1996. On October 2,
1995, the Company's Board of Directors announced an indefinite suspension
of dividends on the Company's Common Stock. In addition, the Company's
$150 million revolving credit facility (discussed above) requires that the
Company not pay dividends on its Common Stock during the term of such
agreement.
The Company believes that cash flow from operations, its proprietary credit
card receivables securitization agreements, its investment portfolio, and
its revolving credit facilities are sufficient to support current
operations.
Impact of Year 2000
The Year 2000 computer problem can occur when a computer that has been
programmed to store dates as two-digit numbers rather than four-digit
numbers cannot properly recognize dates beyond 1999. Computer calculations
using such two-digit dates may inaccurately interpret a date stored as "00"
as the year 1900 rather than the year 2000, possibly resulting in incorrect
calculations, execution of faulty logic, or outright system failure.
Beginning in 1997, the Company implemented a program to remediate and test
its computer systems in order to minimize the potential for Year 2000
computer problems.
The Company has not experienced any significant adverse consequences to-
date as a result of the Year 2000 problem, and does not anticipate any
significant impact on future operations. The Company does not sell
products which use computer systems, embedded chip technology, or other
devices that may be sensitive to dates. The Company is a retailer of
women's apparel, and does not rely on a single customer for any significant
amount of sales. However, it is possible that the full impact of the Year
2000 problem has not yet been fully recognized. Issues related to the Year
2000 problem could still occur during quarterly or annual financial
closings. In addition, the Company's vendors or suppliers could still be
adversely affected by Year 2000 problems. The Company's management
believes that any such problems would most likely be minor and correctable.
The Company is not currently aware of any Year 2000 problems affecting its
vendors or suppliers.
The Company accelerated the receipt of inventories from January 2000 to
December 1999, and shipped additional merchandise to its stores in
anticipation of potential Year 2000 problems.
The total cost of implementing the Company's Year 2000 readiness program
was approximately $6.0 million, of which approximately $0.9 million was for
replacement systems and the remainder was for remediation and upgrade
costs. Of the total Year 2000 costs, $3.6 million were incurred in Fiscal
(30)
year 2000. The Company funded the Year 2000 readiness program from
operating cash flows. The Company did not delay any significant
information technology projects as a result of its Year 2000 compliance
effort.
Market Risk
The Company manages its Fashion Bug proprietary credit card program through
various operating entities that are wholly owned by the Company. The
primary activity of these entities is to service the proprietary credit
card portfolio, the balances of which are sold under a credit card
securitization program. Under the securitization program, the Company may
be exposed to fluctuations in interest rates to the extent that a portion
of the investor certificates are floating-rate instruments.
The Company manages its interest rate risk through the use of derivative
instruments. The Company regularly monitors interest rate fluctuations and
business implications surrounding interest rate changes, especially related
to the management of its Fashion Bug proprietary credit card program, which
is securitized. As of January 29, 2000, the Company had rate exposure to
floating-rate instruments representing approximately $209.8 million, or
approximately 73% of all securitized assets under the program.
The Company has entered into certain interest rate cap agreements that
protect the Company's securitization master trust if interest rates were to
exceed 9% and 11%. In addition, the Company has entered into an interest
rate swap that limits the Company's exposure to rising interest rates
should interest rates increase to a rate above the agreement's specified
rate.
The interest rate swap may subject the Company to market risk associated
with changes in interest rates, as well as the risk of default by a
counter-party to the agreement. Under the terms of the swap agreement, the
Company may be required to pledge certain assets if the market value of the
interest rate swap falls below an amount set forth in the agreement. As of
January 29, 2000, there were no pledged amounts required under the terms of
the agreement.
To the extent that short-term interest rates were to increase by one
percentage point by the end of Fiscal 2001, an increase of approximately
$500 thousand in selling, general, and administrative expenses would
result.
The Company is not subject to material foreign exchange risk, as the
Company's foreign transactions are primarily U. S. Dollar-denominated and
the Company's foreign operations do not constitute a material part of its
business.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Market Risk," above.
(31)
Item 8. Financial Statements and Supplementary Data
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
Charming Shoppes, Inc.
We have audited the accompanying consolidated balance sheets of Charming
Shoppes, Inc. and subsidiaries as of January 29, 2000 and January 30, 1999,
and the related consolidated statements of operations and comprehensive
income (loss), stockholders' equity, and cash flows for each of the three
fiscal years in the period ended January 29, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Charming
Shoppes, Inc. and subsidiaries at January 29, 2000 and January 30, 1999,
and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended January 29, 2000, in
conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 9, 2000
(32)
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 29, January 30,
(dollars in thousands) 2000 1999
---- ----
ASSETS
Current Assets
Cash and Cash Equivalents........................... $ 34,299 $ 43,789
Available-for-Sale Securities, Including Fair
Value Adjustments of $0 as of January 29,
2000 and $19 as of January 30, 1999............... 41,339 100,743
Merchandise Inventories............................. 260,792 171,327
Deferred Taxes...................................... 10,801 15,194
Prepayments and Other............................... 47,090 30,487
-------- --------
Total Current Assets................................ 394,321 361,540
-------- --------
Property, Equipment, and Leasehold
Improvements - at Cost............................ 450,401 391,152
Less: Accumulated Depreciation and Amortization..... 259,477 236,569
-------- --------
Net Property, Equipment, and Leasehold Improvements. 190,924 154,583
-------- --------
Available-for-Sale Securities, Including Fair Value
Adjustments of ($2,222) as of January 29, 2000
and $389 as of January 30, 1999................... 74,490 145,882
Goodwill............................................ 97,405 0
Other Assets........................................ 27,656 22,644
-------- --------
Total Assets........................................ $784,796 $684,649
======== ========
[FN]
See Notes to Consolidated Financial Statements.
(33)
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
January 29, January 30,
(dollars in thousands except per share amounts) 2000 1999
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable.................................... $ 88,721 $ 61,806
Accrued Expenses.................................... 134,033 84,444
Income Taxes Payable................................ 0 4,552
Accrued Restructuring Expenses...................... 8,271 18,448
Current Portion -- Long-Term Debt................... 1,920 16
-------- --------
Total Current Liabilities........................... 232,945 169,266
-------- --------
Deferred Taxes...................................... 10,375 12,336
Long-Term Debt...................................... 105,213 119,475
Stockholders' Equity
Common Stock $.10 Par Value
Authorized - 300,000,000 Shares
Issued - 109,639,425 Shares and 106,830,596 Shares 10,964 10,683
Additional Paid-In Capital.......................... 76,125 64,924
Treasury Stock at Cost - 8,955,000 Shares and
8,710,000 Shares................................. (40,824) (39,405)
Deferred Employee Compensation...................... (1,792) (1,051)
Accumulated Other Comprehensive Income (Loss)....... (1,423) 267
Retained Earnings................................... 393,213 348,154
-------- --------
Total Stockholders' Equity.......................... 436,263 383,572
-------- --------
Total Liabilities and Stockholders' Equity.......... $784,796 $684,649
======== ========
[FN]
See Notes to Consolidated Financial Statements.
34
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Year Ended
(in thousands except January 29, January 30, January 31,
per share amounts) 2000 1999 1998
---- ---- ----
Net Sales........................................... $1,196,529 $1,035,160 $1,016,537
Other Income........................................ 8,993 16,003 15,986
---------- ---------- ----------
Total Revenue....................................... 1,205,522 1,051,163 1,032,523
---------- ---------- ----------
Cost of Goods Sold, Buying, and Occupancy Expenses.. 854,774 771,107 772,709
Selling, General, and Administrative Expenses....... 282,932 246,747 233,020
Restructuring Charge (Credit)....................... (3,471) 54,246 0
Non-recurring Gain from Demutualization of
Insurance Company................................. (6,700) 0 0
Non-recurring Gain from Asset Securitization........ 0 0 (13,018)
Interest Expense.................................... 7,308 10,052 10,390
---------- ---------- ----------
Total Expenses...................................... 1,134,843 1,082,152 1,003,101
---------- ---------- ----------
Income (Loss) Before Income Taxes
and Extraordinary Item............................ 70,679 (30,989) 29,422
Income Tax Provision (Benefit)...................... 26,852 (10,854) 10,088
---------- ---------- ----------
Income (loss) Before Extraordinary Item............. 43,827 (20,135) 19,334
Extraordinary Item - Gain on Early Retirement of
Debt, Net of Income Taxes of $664................. 1,232 0 0
---------- ---------- ----------
Net Income (Loss)................................... 45,059 (20,135) 19,334
---------- ---------- ----------
Other Comprehensive Income (Loss), Net of Tax:
Unrealized (Losses) Gains on Available-for-Sale
Securities, Net of Income Tax Benefit (Expense) of
$214 in 2000, ($86) in 1999, and ($158) in 1998... (343) 164 244
Reclassification of Realized Gains on Available-for-
Sale Securities Included in Net Income, Net of
Income Tax Expense of $726 in 2000, $124 in 1999
and $38 in 1998................................... (1,347) (229) (71)
---------- ---------- ----------
Total Other Comprehensive Income (Loss)............. (1,690) (65) 173
---------- ---------- ----------
Comprehensive Income (Loss)......................... $ 43,369 $ (20,200) $ 19,507
========== ========== ==========
Basic Net Income (Loss) per Share:
Before Extraordinary Item......................... $ .45 $(.20) $ .18
Extraordinary Item................................ .01 .00 .00
----- ----- -----
Net Income (Loss)................................. $ .46 $(.20) $ .18
===== ===== =====
Diluted Net Income (Loss) per Share:
Before Extraordinary Item......................... $ .42 $(.20) $ .18
Extraordinary Item................................ .01 .00 .00
----- ----- -----
Net Income (Loss)................................. $ .43 $(.20) $ .18
===== ===== =====
[FN]
See Notes to Consolidated Financial Statements.
(35)
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Stock Paid-in Treasury Stock
(dollars in thousands) Shares Amount Capital Shares Amount
------ ------ ------- ------ ------
Balance, February 1, 1997... 105,470,251 $10,547 $62,818 0 $ 0
Issued to Employees, Net.... 286,627 29 (23)
Exercise of Stock Options... 492,507 49 1,302
Purchases of Treasury Stock. (5,580,000) (25,382)
Tax Expense - Employee Stock
Programs.................. (78)
----------- ------- ------- --------- --------
Balance, January 31, 1998... 106,249,385 10,625 64,019 (5,580,000) (25,382)
Issued to Employees, Net.... 106,150 11 860
Exercise of Stock Options... 475,061 47 434
Purchases of Treasury Stock. (3,130,000) (14,023)
Tax Expense - Employee Stock
Programs.................. (389)
----------- ------- ------- --------- --------
Balance, January 30, 1999... 106,830,596 10,683 64,924 (8,710,000) (39,405)
Issued to Employees, Net.... 354,620 36 1,575
Exercise of Stock Options... 2,454,209 245 7,578
Purchases of Treasury Stock. (245,000) (1,419)
Tax Benefit - Employee Stock
Programs.................. 2,048
----------- ------- ------- --------- --------
Balance, January 29, 2000... 109,639,425 $10,964 $76,125 (8,955,000) $(40,824)
=========== ======= ======= ========= ========
Accumulated
Deferred Other
Employee Comprehensive Retained
(in thousands) Compensation Income (Loss) Earnings
------------ ------------- --------
Balance, February 1, 1997... $(1,444) $ 159 $348,955
Issued to Employees, net.... (347)
Amortization................ 718
Unrealized Gains, Net of
Income Taxes of $120...... 173
Net Income.................. 19,334
------- ------- --------
Balance, January 31, 1998... (1,073) 332 368,289
Issued to Employees, net.... (688)
Amortization................ 710
Unrealized Losses, Net of
Tax Benefit of $38........ (65)
Net Loss.................... (20,135)
------- ------- --------
Balance, January 30, 1999... (1,051) 267 348,154
Issued to Employees, net.... (1,488)
Amortization................ 747
Unrealized Losses, Net of
Tax Benefit of $940....... (1,690)
Net Income.................. 45,059
------- ------- --------
Balance, January 29, 2000... $(1,792) $(1,423) $393,213
======= ======= ========
[FN]
See Notes to Consolidated Financial Statements.
(36)
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
January 29, January 30, January 31,
(in thousands) 2000 1999 1998
---- ---- ----
Operating Activities
Net Income (Loss)................................... $ 45,059 $ (20,135) $ 19,334
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided By Operating Activities:
Depreciation and Amortization..................... 32,650 35,091 40,810
Amortization of Goodwill.......................... 302 0 0
Deferred Income Taxes, Net of Acquisitions........ 18,250 (14,099) 5,401
Non-recurring Gain from Demutualization of
Insurance Company............................... (6,700) 0 0
Non-recurring Gain from Asset Securitization...... 0 0 (13,018)
Write-down of Capital Assets due to Restructuring. 0 27,969 0
Net (Gain) Loss from Disposition of Capital Assets (1,469) 3,139 (2,107)
Tax Benefit (Expense) Related to Stock Plans...... 2,048 (389) (78)
Net (Gain) Loss on Sale of Available-for-Sale
Securities...................................... 4,627 (353) (109)
Net Gain on Repurchase of Notes................... (1,896) (466) 0
Changes in Operating Assets and Liabilities, Net
of Acquisitions:
Income Tax Refund Receivable.................... 0 0 3,836
Merchandise Inventories......................... (29,703) 4,458 18,192
Accounts Payable................................ (1,797) 8,183 (1,878)
Prepayments and Other........................... (5,097) 1,563 (2,266)
Accrued Expenses................................ 16,349 1,533 9,364
Income Taxes Payable............................ (4,552) (1,571) 6,003
Accrued Restructuring Expenses.................. (10,177) 18,448 0
--------- --------- ---------
Net Cash Provided By Operating Activities........... 57,894 63,371 83,484
--------- --------- ---------
Investing Activities
Gross Purchases of Available-for-Sale Securities.... (393,393) (406,651) (419,983)
Proceeds from Sales of Available-for-Sale Securities 523,545 452,263 304,189
Acquisition of Catherine's Stores and Modern Woman,
Net of Cash Acquired.............................. (145,309) 0 0
Investment in Capital Assets........................ (39,211) (32,369) (22,001)
Proceeds from Sales of Capital Assets............... 10,556 368 3,565
(Increase) Decrease in Other Assets................. (4,927) (14,302) 7,908
--------- --------- ---------
Net Cash Used In Investing Activities............... (48,739) (691) (126,322)
--------- --------- ---------
Financing Activities
Reduction of Long-Term Borrowings................... (21,237) (17,806) (12)
Proceeds from Short-Term Borrowings................. 30,600 0 0
Reduction of Short-Term Borrowings.................. (34,393) 0 0
Purchases of Treasury Stock......................... (1,419) (14,023) (25,382)
Proceeds from Exercise of Stock Options............. 7,804 589 1,602
--------- --------- ---------
Net Cash Used In Financing Activities............... (18,645) (31,240) (23,792)
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents.... (9,490) 31,440 (66,630)
Cash and Cash Equivalents, Beginning of Year........ 43,789 12,349 78,979
--------- --------- ---------
Cash and Cash Equivalents, End of Year.............. $ 34,299 $ 43,789 $ 12,349
========= ========= =========
[FN]
See Notes to Consolidated Financial Statements.
(37)
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2000
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company operates a chain of retail specialty stores located throughout
the continental United States which merchandises low- to moderate- and
better-priced junior, misses, large-size, and girls-size sportswear,
dresses, coats, lingerie, accessories, and casual footwear.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions are eliminated. The parent and its
subsidiaries have a 52-53 week fiscal year ending on the Saturday nearest
to January 31.
Foreign Operations
The Company uses a December 31 fiscal year for all foreign subsidiaries in
order to expedite the year-end closing.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly-liquid investments with a maturity of
three months or less when purchased to be cash equivalents. These amounts
are stated at cost, which approximates market value.
Investments
The Company's investments are classified as available-for-sale. These
securities are carried at fair value and unrealized gains and losses are
reported in a separate component of stockholders' equity. The cost of
investments is adjusted for amortization of premiums and the accretion of
discounts to maturity. Such amortization is included in other income.
Realized gains and losses and interest from investments are also included
in other income. The cost of securities sold is based on the specific
identification method. Short-term investments include investments with an
original maturity of greater than three months and a remaining maturity of
less than one year. Long-term investments have an original maturity of
greater than one year, but are available on an as-needed basis to support
working capital needs.
Inventories
Merchandise inventories are valued at the lower of cost or market as
determined by the retail method (average cost basis).
(38)
Property and Depreciation
Depreciation and amortization for financial reporting purposes are
principally computed by the straight-line method over the estimated useful
lives of the assets, or in the case of leasehold improvements, over the
lives of the respective leases. Accelerated depreciation methods are used
for income tax reporting purposes. Depreciation expense was $30,483,000,
$32,323,000, and $35,307,000 in Fiscal 2000, 1999, and 1998, respectively.
Amortization of Goodwill
Goodwill is amortized on a straight-line basis over 20 years. The Company
periodically evaluates goodwill to determine if a revision to the remaining
estimated useful life is required, or if a reduction in the carrying value
is required due to an impairment of the asset.
Store Opening Costs
Costs other than capital expenditures incurred in opening new stores are
expensed as incurred.
Asset Securitizations
The Company accounts for the securitization of its proprietary credit card
receivables in accordance with the provisions of SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." Transaction expenses related to securitizations are deferred
and amortized over the reinvestment period of the transaction. Net
securitization income is included as a reduction of selling, general, and
administrative expenses in the accompanying consolidated statements of
operations.
Interest-Rate Cap and Swap Agreements
The Company's interest-rate cap and swap agreements are designated as
hedges of its asset-backed certificates issued in connection with its
Fashion Bug proprietary credit card programs.
Payments to be received from cap agreements that have become favorable are
accrued in other assets and are recognized as a reduction of selling,
general, and administrative expenses. The cost of cap agreements is
included in other assets and amortized to selling, general, and
administrative expenses ratably during the life of the agreement. Interest
rate payments that the Company makes to, or receives from, swap counter-
parties are recognized as increases or reductions in selling, general, and
administrative expenses when paid or received.
Upon termination of a favorable interest-rate cap agreement, gains
attributable to the agreement are deferred to the extent it is probable
that asset-backed certificates of at least as much as the notional amount
of the terminated cap will remain outstanding. The deferred gain is
included in other liabilities and amortized as a reduction of selling,
general, and administrative expenses over the remaining original
contractual life of the agreement. Additional gains or losses are
recognized in earnings. Notional amounts of agreements exceeding the
balance of asset-backed certificates to be outstanding during their terms
are marked to market, with changes in market value recorded in selling,
general, and administrative expenses.
(39)
Common Stock Plans
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and its related interpretations. Deferred
compensation expense attributable to Employee Stock Option and Stock
Incentive Plans is amortized over the required employment period. No
compensation expense is recognized for option plans having an exercise
price equal to the market price on the date of grant or for the Company's
Employee Stock Purchase Plan. The Company has adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation."
Revenue Recognition
Revenues from merchandise sales are net of returns and allowances, and
exclude sales tax.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs
charged to expense were $28,876,000, $29,442,000, and $22,677,000 in Fiscal
2000, 1999, and 1998, respectively.
Income Taxes
The Company uses the liability method of accounting for income taxes as
prescribed by SFAS No. 109, "Accounting for Income Taxes." Under the
liability method, deferred tax assets and liabilities are adjusted to
reflect the effect of changes in enacted tax rates on expected reversals of
financial statement and income tax carrying value differences.
U.S. income taxes have not been provided on undistributed earnings of
foreign subsidiaries accumulated prior to January 29, 2000 because the
Company intends to reinvest such undistributed earnings in foreign
operations. Presently, income taxes would not be significantly increased
if such earnings were remitted because of available foreign tax credits.
Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted-average number of
common shares outstanding during each fiscal year. Net income per share
assuming dilution is based on the weighted-average number of common shares
and share equivalents outstanding. Common share equivalents include the
effect of dilutive stock options, using the treasury stock method. Common
share equivalents also include the effect of assumed conversion of the
Company's 7.5% Convertible Subordinated Notes Due 2006, using the "if-
converted" method, when the effect of such assumed conversion is dilutive.
Share equivalents are not included in the weighted-average shares
outstanding for determining net loss per share, as the result would be
antidilutive.
Comprehensive Income (Loss)
The consolidated statements of operations and comprehensive income (loss)
include transactions from non-owner sources that affect stockholders'
equity. Unrealized gains and losses recognized in comprehensive income are
reclassified to net income (loss) upon their realization.
(40)
Business Segments and Related Disclosures
The Company adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," as of the end of Fiscal
1999. The Company's Fashion Bug, Catherine's, and Modern Woman stores
operate within a single segment -- retail sales of women's apparel, and
within a single geographic area -- the continental United States. The
Company's foreign sourcing operations do not constitute a material
geographic segment.
Costs of Computer Software Developed or Obtained for Internal Use
The Company adopted the provisions of American Institute of Certified
Public Accountants ("AICPA") Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," effective as of January 31, 1999. Costs related to the
development of internal-use software, other than those incurred during the
application development stage, are expensed as incurred. Costs incurred
during the application development stage are capitalized and amortized over
the estimated useful life of the software. The adoption of SOP 98-1 did
not have a material effect on the Company's consolidated financial
statements.
Impact of Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company is required to adopt this
statement as of the beginning of the fiscal year ending February 2, 2002.
SFAS No. 133 requires the recognition of all derivative instruments as
either assets or liabilities in the statement of financial position, and
the measurement of those instruments at fair value. The statement also
specifies the conditions under which derivative instruments qualify as
hedging activities, and the accounting for changes in the fair value of
derivatives designated as hedges. The Company currently manages a portion
of its interest-rate risk through the use of derivative instruments that
cap a portion of the Company's interest-rate risk. Management has not
completed its determination of the effect that SFAS 133 will have on the
Company's consolidated financial statements or financial statement
disclosures.
ACQUISITIONS
On August 2, 1999, the Company completed the acquisition of 100% of the
outstanding stock of Modern Woman Holdings, Inc. ("Modern Woman") for
$9,773,000 ($8,709,000 net of cash acquired). Modern Woman operated 136
retail apparel stores in 24 states, specializing in large-size women's
apparel. The acquisition has been accounted for as a purchase, and Modern
Woman's results of operations are included in the Company's financial
statements as of the acquisition date. Prior-period results have not been
restated. The fair value of the net assets acquired exceeded the purchase
price, and the excess has been applied to reduce the fair value of non-
current assets. The recorded values of assets acquired and liabilities
assumed are subject to adjustment, pending final determination of their
acquisition values. The final allocation of the purchase price is not
(41)
expected to differ materially from the allocations used to prepare these
financial statements. The acquisition was financed through the use of
internally-generated funds.
On January 7, 2000, the Company completed the acquisition of 100% of the
outstanding stock of Catherines Stores Corporation ("Catherine's Stores")
for $154,884,000 ($136,600,000 net of cash acquired). Catherine's Stores
operated 436 retail apparel stores in 40 states and the District of
Columbia, specializing in large-size women's apparel. The Company plans to
consolidate the Modern Woman stores into the Catherine's Stores division.
The acquisition has been accounted for as a purchase, and Catherine's
Stores results of operations are included in the Company's financial
statements as of the acquisition date. Prior-period results have not been
restated. Assets acquired and liabilities assumed have been recorded at
their estimated fair values, and are subject to adjustment pending final
determination of their acquisition values. The final allocation of the
purchase price is not expected to differ materially from the allocations
used to prepare these financial statements. The purchase price exceeded
the fair value of identifiable net assets acquired, and the excess,
approximately $97,707,000, has been accounted for as goodwill, and will be
amortized over a 20-year period. The acquisition was financed through the
use of the Company's existing cash and available-for-sale securities.
The following unaudited pro forma information is based on historical data,
and gives effect to the Company's acquisition of Catherine's Stores as if
the acquisition had occurred on February 1, 1998. Pro forma adjustments
primarily represent a reduction in interest income from the use of
investments and amortization of goodwill resulting from the acquisition.
The pro forma information does not include the acquisition of Modern Woman,
as the effect would have been immaterial.
(in thousands except per share amounts) 2000 1999
---- ----
Net Sales......................................... $1,487,053 $1,330,438
Income (Loss) Before Extraordinary Items.......... 45,693 (22,156)
Net Income (Loss)................................. 46,925 (22,156)
Net Income (Loss) per Share:
Basic........................................... $0.48 $(0.22)
Diluted......................................... 0.45 (0.22)
The unaudited pro forma information is not necessarily indicative of the
actual results of operations that would have occurred if the acquisition
had occurred as of February 1, 1998, and is not necessarily indicative of
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 the result of the acquisition. No assurances can be
made as to the amount and timing of any financial benefits that the Company
may realize as the result of the acquisition.
(42)
PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Lives
(in thousands) (Years) 2000 1999
----- ---- ----
Land.......................... $ 1,757 $ 2,010
Buildings and Improvements.... 10 to 40 52,543 46,970
Store Fixtures................ 5 to 10 141,331 101,862
Equipment..................... 3 to 10 134,099 116,029
Leasehold Improvements........ 10 to 20 120,671 124,281
-------- --------
Total at Cost................. 450,401 391,152
Less Accumulated Depreciation
and Amortization............ 259,477 236,569
-------- --------
$190,924 $154,583
======== ========
AVAILABLE-FOR-SALE SECURITIES
Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
---- ----- ------ ----------
January 29, 2000
U. S. Treasury and Government
Agency Bonds........................ $ 68,520 $ 4 $(2,226) $ 66,298
Charming Shoppes Master Trust
Certificates........................ 41,245 0 0 41,245
Low Income Housing Partnerships....... 7,952 0 0 7,952
Other................................. 334 0 0 334
-------- ---- ------- --------
$118,051 $ 4 $(2,226) $115,829
======== ==== ======= ========
January 30, 1999
U. S. Treasury and Government
Agency Bonds........................ $168,693 $424 $ (16) $169,101
Charming Shoppes Master Trust
Certificates........................ 56,559 0 0 56,559
Charming Shoppes Master Trust Note.... 13,769 0 0 13,769
Low Income Housing Partnerships....... 6,849 0 0 6,849
Other................................. 347 0 0 347
-------- ---- ------- --------
$246,217 $424 $ (16) $246,625
======== ==== ======= ========
(43)
Gross realized gains and (losses) on available-for-sale securities were
$6,910,000 and $(4,837,000), respectively, during Fiscal 2000. Gross
realized gains and (losses) were $629,000 and $(276,000), respectively,
during Fiscal 1999.
Contractual maturities of available-for-sale securities at January 29, 2000
were:
Estimated
(in thousands) Cost Fair Value
---- ----------
Due in One Year or Less................ $ 41,339 $ 41,339
Due After One Year Through Five Years.. 68,760 66,538
-------- --------
110,099 107,877
Equity Securities...................... 7,952 7,952
-------- --------
$118,051 $115,829
======== ========
INCOME TAXES
Income (loss) before income taxes and extraordinary item:
(in thousands) 2000 1999 1998
---- ---- ----
Domestic........ $65,615 $(34,479) $27,853
Foreign......... 5,064 3,490 1,569
------- -------- -------
$70,679 $(30,989) $29,422
======= ======== =======
Income tax provision (benefit):
(in thousands) 2000 1999 1998
---- ---- ----
Current:
Federal....... $ 5,431 $ 4,321 $ 6,376
State......... 1,158 692 2,061
Foreign....... 514 192 4
-------- -------- -------
7,103 5,205 8,441
-------- -------- -------
Deferred(1)..... 19,749 (16,059) 1,647
-------- -------- -------
$ 26,852 $(10,854) $10,088
======== ======== =======
[FN]
(1) Primarily Federal
(44)
The Company made income tax payments of $9,692,000, $5,982,000, and
$2,000,000 during Fiscal 2000, 1999, and 1998, respectively. Included in
"Prepayments and Other" in the accompanying consolidated balance sheet as
of January 29, 2000 is an income tax receivable of $6,808,000.
Reconciliation of the effective tax rate with the statutory Federal income
tax rate:
2000 1999 1998
---- ---- ----
Statutory Federal Income Tax
(Benefit) Rate................ 35.0% (35.0)% 35.0%
State Income Tax, Net
of Federal Income Tax......... 1.0 1.5 2.8
Foreign Income.................. (1.7) (3.4) (3.0)
Employee Benefits............... 3.1 1.4 (0.2)
Other, Net...................... 0.6 0.5 (0.3)
---- ---- ----
38.0% (35.0)% 34.3%
==== ==== ====
Components of deferred tax assets and liabilities:
Net Current Net Long-Term
Assets Assets
(in thousands) (Liabilities) (Liabilities)
----------- -----------
January 29, 2000
Property, Equipment, and Leasehold
Improvements........................... $ (8,112)
Tax Net Operating Losses
and Credit Carryforwards............... 8,467
Accrued Expenses......................... $ 5,206
Inventory................................ (3,317)
Deferred Employee Compensation........... 1,585
Prepaid Employee Benefits................ 2,233
Investments.............................. (6,184)
Deferred Rent............................ 2,059
Other.................................... 4,620 (6,131)
------- --------
$10,801 $(10,375)
======= ========
(45)
Net Current Net Long-Term
Assets Assets
(in thousands) (Liabilities) (Liabilities)
----------- -----------
January 30, 1999
Property, Equipment, and Leasehold
Improvements........................... $(15,646)
Tax Credit Carryforwards................. 10,268
Accrued Expenses......................... $16,510
Inventory................................ (4,960)
Deferred Employee Compensation........... 2,333
Prepaid Employee Benefits................ (972)
Investments.............................. (4,059)
Deferred Rent............................ 2,579
Other.................................... 2,037 (5,232)
------- --------
$15,194 $(12,336)
======= ========
Based on the Company's evaluation of its operating plans and history of
earnings, a net deferred tax asset of $426,000 is included in the
accompanying consolidated balance sheet as of January 29, 2000.
At January 29, 2000, the Company had Alternative Minimum Tax and General
Business Credit carryforwards of $6,128,000. The tax credit carryforwards
do not expire. In addition, the Company had net operating loss
carryforwards of $2,339,000, which begin to expire in 2019.
NET INCOME (LOSS) PER SHARE
(in thousands) 2000 1999 1998
---- ---- ----
Basic Weighted Average Common Shares
Outstanding......................... 98,609 99,441 105,678
Dilutive Effect of Assumed Conversion
of Convertible Notes................ 16,001 0 0
Dilutive Effect of Stock Options...... 1,278 0 1,403
------- ------ -------
Diluted Weighted Average Common
Shares and Equivalents Outstanding.. 115,888 99,441 107,081
======= ====== =======
(46)
Options to purchase 4.1 million, 6.1 million, and 4.0 million shares of
Common Stock at a weighted average exercise price of $6.95, $6.61, and
$8.49 per share were outstanding at January 29, 2000, January 30, 1999, and
January 31, 1998, respectively, but were not included in the computation of
diluted net income (loss) per share because the option exercise prices were
greater than the average market price of the Company's Common Stock. The
effect of an assumed conversion of the Company's Convertible Notes was
excluded from the computation of diluted net income (loss) per share for
the years ended January 30, 1999 and January 31, 1998 because the effect
would have been antidilutive.
Options to purchase 0.7 million shares of Common Stock at January 30, 1999,
with exercise prices below the average market price of the Company's Common
Stock, were excluded from the calculation of diluted net loss per share
because the effect would have been antidilutive.
For the fiscal year ended January 29, 2000, $4,708,000 of after-tax
interest expense on the convertible notes was excluded from income before
extraordinary item and net income for purposes of calculating diluted
income per share as a result of the assumed conversion of the notes.
DEBT
Long-term debt at year end:
(in thousands) 2000 1999
---- ----
7.5% Convertible Subordinated Notes
Due 2006............................. $ 96,047 $119,363
7.5% Mortgage Note..................... 6,652 0
Capital Lease Obligations.............. 4,332 0
Other.................................. 102 128
-------- --------
Total Long-Term Debt................... 107,133 119,491
Less Current Portion................... 1,920 16
-------- --------
$105,213 $119,475
======== ========
The 7.5% Convertible Subordinated Notes (the "Notes") are convertible at
any time prior to maturity into shares of Common Stock of the Company at a
conversion price of $7.46 per share. The Notes are redeemable at the
Company's option, in whole or in part, at declining redemption prices
starting on July 15, 1999 at 103.75% of principal and decreasing to 100% on
or after July 15, 2005. Under certain circumstances involving a change in
(47)
control of the Company, holders of the Notes may require the Company to
repurchase all or a portion of the Notes at 100% of the principal amount
plus accrued and unpaid interest, if any. There is no sinking fund for the
Notes.
During the fiscal year ended January 29, 2000, the Company repurchased
$23,316,000 aggregate principal amount of the Notes, which had a net
carrying value of $22,927,000 as of the dates of purchase, at a total cost
of $21,031,000. The repurchases resulted in an extraordinary gain of
$1,232,000, net of income taxes of $664,000, for the year ended January 29,
2000. During the fiscal year ended January 30, 1999, the Company
repurchased $18,637,000 aggregate principal amount of the Notes, which had
a net carrying value of $18,268,000 as of the dates of purchase, at a total
cost of $17,802,000. The net gain on the repurchases of the Notes was not
material.
The 7.5% Mortgage Note (the "Mortgage Note") and the capital lease
obligations were assumed in connection with the acquisition of Catherine's
Stores. On February 27, 1998, Catherine's Stores entered into a mortgage
financing agreement providing for a $6,919,000 mortgage facility with a
seven-year term and a 20-year amortization period. The Mortgage Note is
secured by land and buildings at the Catherine's Stores Memphis, Tennessee
office. The capital leases are for data processing and point-of-sale
equipment. At the end of the initial lease term, the Company has the
option of purchasing the equipment at fair market value (or at $1 in the
case of the point-of-sale equipment), renewing the leases, or returning the
equipment to the lessor.
The Company has an agreement with a commercial finance company to provide a
revolving credit facility with a maximum availability of $150,000,000,
subject to limitations based upon eligible inventory. The primary purpose
of the facility, which expires June 1, 2001, is to enable the Company to
issue letters of credit for overseas purchases of merchandise as well as to
provide for seasonal cash borrowings. The facility is secured by
merchandise inventory, furniture and fixtures within retail stores, and
certain other Company assets. The interest rate on borrowings is 0.5%
above the Prime rate. There is a fee of .25% on the unused portion of the
first $105,000,000 of the facility, and an annual servicing fee of
$100,000. As of January 29, 2000, the availability under the facility was
approximately $105,776,000, against which the Company had outstanding
letters of credit of $34,269,000. There were no cash borrowings
outstanding under the agreement as of January 29, 2000. The agreement
requires that, among other things, the Company maintain a minimum net worth
of $300,000,000 and not pay dividends on its Common Stock.
At the time of its acquisition by the Company, Catherine's Stores was a
party to a bank credit agreement that provided for a maximum working
capital availability of $19,500,000, including a swing line of credit of
$3,000,000. The agreement was secured by substantially all of Catherine's
Stores assets except for inventory and assets securing the 7.5% mortgage
note discussed above. Amounts available under the agreement were based on
the amounts of Catherine's Stores inventories and receivables. The working
capital facility could also be used to fund letters of credit. The
(48)
interest rate on borrowings fluctuated based on Catherine's Stores debt
coverage ratio, and ranged from LIBOR plus 1-1/4% to LIBOR plus 2-1/4% or
the agent bank's prime rate, at Catherine's Stores option. As a result of
the Company's acquisition of Catherine's Stores, the bank providing the
agreement has extended the term of the agreement to April 27, 2000. At
January 29, 2000, the combined availability under the working capital and
swing line facilities was approximately $13,400,000, after considering
outstanding letters of credit of $6,122,000. The Company is currently
negotiating the extension of this agreement.
As a result of the acquisition of Modern Woman, the Company also has access
to a working capital line of credit with a maximum availability of
$10,000,000. As of January 29, 2000, $5,000,000 was available under this
agreement to fund letters of credit, against which the Company had
outstanding letters of credit of $350,000. In exchange for the bank's
release of its security interest in all of the assets of Modern Woman, the
Company pledged $5,000,000 of available-for-sale securities.
During Fiscal 2000, 1999, and 1998, the Company made interest payments of
$7,519,000, $9,756,000, and $10,361,000, respectively.
Aggregate maturities of long-term debt during the next five fiscal years
are:
7.5% Capital Capital
Mortgage Lease Lease
(in thousands) Note Principal Interest Other Total
---- --------- -------- ----- -----
2001 $182 $1,720 $268 $18 $2,188
2002 196 1,605 137 84 2,022
2003 211 889 34 0 1,134
2004 221 90 6 0 317
2005 235 28 0 0 263
STOCKHOLDERS' EQUITY
The Company's capital consists of 1,000,000 shares of Series Participating
Preferred Stock, $1.00 par value, of which 500,000 shares of Participating
Series A Junior Preferred Stock, $1.00 par value, have been authorized; and
300,000,000 shares of Common Stock, $.10 par value.
In November 1997, the Company's Board of Directors ("the Board") authorized
the repurchase of up to 10,000,000 shares of the Company's Common Stock.
In March 1999, the Board authorized the repurchase of an additional
10,000,000 shares of Common Stock. Shares repurchased will be held as
treasury stock available for use under the Company's employee benefits
program or for other corporate purposes. During Fiscal 2000, the Company
(49)
purchased 245,000 shares at an aggregate cost of $1,419,000. During Fiscal
1999, the Company purchased 3,130,000 shares at an aggregate cost of
$14,023,000. During Fiscal 1998, the Company purchased 5,580,000 shares at
an aggregate cost of $25,382,000.
STOCK OPTION AND STOCK INCENTIVE PLANS
At January 29, 2000, the Company had various stock-based compensation
plans, which are described below. The Company applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its stock plans. Accordingly, no compensation has been
recognized in the financial statements for options issued under such plans
with an exercise price equal to the market price of the Company's Common
Stock at the date of grant. In addition, no compensation expense has been
recognized for shares of stock issued under the Company's Employee Stock
Purchase Plan. Compensation cost recognized in the financial statements
for discounted stock options, restricted stock awards and performance share
awards granted was $747,000, $710,000, and $718,000 in Fiscal 2000, 1999,
and 1998, respectively.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires pro forma
disclosures of the effect of using fair values at the dates of grant to
determine compensation cost for awards under stock-based compensation
plans. Using the method prescribed under SFAS No. 123 to determine compen-
sation cost for the Company's plans, the Company's net income (loss) and
net income (loss) per share would have changed to the pro forma amounts
shown below:
(in thousands except per-share data) 2000 1999 1998
---- ---- ----
Pro forma net income (loss).......... $43,102 $(21,629) $17,690
Pro forma diluted net income
(loss) per share................... $.41 $(.22) $.17
For purposes of determining the pro forma disclosures, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. In applying the Black-Scholes model, the following
assumptions were used: dividend yield of 0%; expected stock price
volatility of 37.6%; expected lives of 3 months for the Employee Stock
Purchase Plan, 1 to 3 years for stock award plans, and 6 years for stock
option and stock incentive plans; and the following risk-free interest
rates:
2000 1999 1998
---- ---- ----
Employee stock purchase plan..... 5.4% 4.7% 5.3%
Stock award plans................ 6.5% 5.1% 5.5%
Stock option and incentive plans. 6.6% 5.2% 5.6%
(50)
In accordance with the transition provisions of SFAS No. 123, the pro forma
disclosures presented above reflect the statement's application only to
option grants and stock awards dated on or after January 29, 1995. Option
grants and awards generally vest over several years and the Company expects
to grant additional awards in the future. Therefore, the pro forma results
should not be considered to be representative of the effects on reported
results for future years.
The Company's Board of Directors adopted the 1999 Associates' Stock
Incentive Plan in February 1999. The plan provides for the grant of
options to purchase up to 1,000,000 shares of the Company's Common Stock.
The exercise price of such options may not be less than the fair market
value at the date of grant. The maximum term of options issued under the
plan is ten years. As of January 29, 2000, no options were exercisable
under this plan.
The Company's 1993 Employees' Stock Incentive Plan provides for the grant
of options to purchase up to 9,000,000 shares of Common Stock plus 9% of
shares issued by the Company after the effective date of the plan and any
shares available but unissued under the 1990 Plan described below. The
form of the grants and exercise price, where applicable, are at the
discretion of the Board of Directors and the Stock Option Committee of the
Board of Directors. The maximum term of options issued under the plan is
ten years. As of January 29, 2000 and January 30, 1999, 3,415,250 options
and 2,465,230 options, respectively, were exercisable under this plan.
During Fiscal 2000, 306,307 shares of Restricted Stock were awarded at no
cost under this plan. These shares had grant date fair values ranging from
$3.63 to $5.94 per share.
The Company's 1990 Employees' Stock Incentive Plan provides for the grant
of options to purchase Common Stock to key employees of the Company. The
exercise price of such options may not be less than the fair market value
at the date of grant. As a result of adoption of the 1993 Employees' Stock
Incentive Plan, the Company no longer intends to issue options under this
Plan. As of January 29, 2000 and January 30, 1999, 483,800 options and
3,522,142 options, respectively, were exercisable under this plan.
The Company's Amended and Restated Non-Employee Directors Program was
adopted by the Board of Directors on July 1, 1999. This program provides
for the automatic annual grant of options to purchase 20,000 shares of
Common Stock to each non-employee director. The options vest in equal
installments over five years. The exercise price of such options shall be
equal to the fair market value of the stock on the date of grant. As of
January 29, 2000, no options were exercisable under this plan. The program
also provides for a one-time grant of 10,000 shares of Restricted Common
Stock to each newly elected non-employee director. The grants vest in
equal amounts over three years. During Fiscal 2000, 20,000 shares were
granted and issued under this program. The weighted average fair value at
date of grant for shares granted in Fiscal 2000 was $6.21.
The Company's 1989 Non-Employee Director Stock Option Plan provides for the
grant of options to purchase up to 30,000 shares of Common Stock to each
member of the Board of Directors who is not an employee of the Company.
(51)
The exercise price of such options shall be equal to the fair market value
of the stock on the date of grant. As of January 29, 2000 and January 30,
1999, 78,000 options and 90,000 options, respectively, were exercisable
under this plan. As a result of the adoption of the Amended and Restated
Non-Employee Directors Program on July 1, 1999, the Company no longer
intends to issue options under this plan.
The Company's 1988 Key Employee Stock Option Plan provides for the grant of
options to purchase up to 3,000,000 shares of Common Stock to key employees
of the Company. The exercise price of options granted under this plan is
$1.00 per share. As of January 29, 2000 and January 30, 1999, 205,330
options and 412,245 options, respectively, were exercisable under this
plan.
The table below summarizes the activity in all Stock Option Plans:
Average Option
Option Option Prices
Shares Price Per Share
------ ----- ---------
Outstanding at February 1, 1997...... 10,871,374 $5.450 $ .222-17.000
Granted-Option Price Equal to Market. 1,177,000 5.948 5.063- 6.188
Granted-Option Price Less Than Market 35,600 1.000 1.000- 1.000
Canceled/Forfeited................... (812,295) 6.733 .500-15.750
Expired.............................. (165,900) 5.813 5.813- 5.813
Exercised............................ (493,668) 2.751 .333- 6.000
---------- ------ -------------
Outstanding at January 31, 1998...... 10,612,111 5.512 .222-17.000
Granted-Option Price Equal to Market. 1,551,722 4.306 3.594- 5.250
Granted-Option Price Less Than Market 18,500 1.000 1.000- 1.000
Canceled/Forfeited................... (1,279,938) 7.797 .500-17.000
Exercised............................ (475,061) 1.013 .222- 5.375
---------- ------ -------------
Outstanding at January 30, 1999...... 10,427,334 5.249 .500-16.875
Granted-Option Price Equal to Market. 1,794,970 4.077 3.625- 6.625
Granted-Option Price Less Than Market 16,000 1.000 1.000- 1.000
Canceled/Forfeited................... (417,387) 5.068 .500-15.750
Exercised............................ (3,364,058) 4.247 .500- 6.188
---------- ------ -------------
Outstanding at January 29, 2000...... 8,456,859 $5.400 $ .500-16.875
========== ====== =============
Weighted average grant date fair value for options granted, using Black-
Scholes model and assumptions described above:
2000 1999 1998
---- ---- ----
Option Price = Market Price.........$1.92 $1.94 $2.32
Option Price < Market Price......... 2.96 3.59 4.45
(52)
The table below summarizes information regarding weighted average exercise
price and weighted average remaining contractual life in years for options
outstanding and options exercisable as of January 29, 2000 for the ranges
of exercise prices shown:
Weighted Weighted
Average Average
Option Option Remaining
Ranges of Option Prices Shares Price Life
- ----------------------- ------ ----- ----
$0.50-$1.00:
Options Outstanding........ 268,659 $.688 3.4
Options Exercisable........ 205,330 .591 2.2
$1.01-$5.00:
Options Outstanding........ 5,047,800 $4.006 7.1
Options Exercisable........ 2,140,500 4.105 5.7
$5.01-$10.00:
Options Outstanding........ 2,241,950 $6.027 6.1
Options Exercisable........ 1,055,500 6.047 4.9
$10.01-$16.88:
Options Outstanding........ 898,450 $13.072 3.3
Options Exercisable........ 781,050 13.159 3.3
At January 29, 2000, 2,981,524 shares were available for future grant under
the 1993 Employees' Stock Incentive plan, 428,672 shares were available for
grant under the Amended and Restated Non-employee Directors Program,
216,214 shares were available for grant under the 1988 Key Employee Stock
Option Plan, and 89,500 shares were available for grant under the 1999
Associates' Stock Incentive Plan.
The Company's Board of Directors adopted the Restricted Stock Award Plan
for Associates on January 26, 1995. The plan provides for discretionary
awards of rights to receive up to 200,000 shares of restricted Common Stock
to associates who are not directors or executive officers of the Company.
Associates will pay no cash consideration for restricted stock received
under an award. During Fiscal 2000, 5,500 rights were granted under this
plan, and 5,500 shares were issued. During Fiscal 1999, 5,500 rights were
granted under this plan, and 12,783 shares were issued. The weighted
average fair value at date of grant for shares granted in Fiscal 2000 was
$3.63 per share.
The Company's Non-Employee Director Compensation Program and the
Compensation Program for the Non-Employee Chairman of the Board of
Directors were adopted on August 21, 1996 and approved by shareholders on
June 19, 1997. These programs stipulate that, effective June 27, 1996, 60%
of Non-Employee Director and 50% of Non-Employee Chairman compensation
shall be paid in Common Stock of the Company. During Fiscal 2000 and
Fiscal 1999, rights to receive 1,500 shares and 41,904 shares,
respectively, have been granted under these plans. During Fiscal 2000 and
(53)
Fiscal 1999, 1,500 shares and 41,904 shares, respectively, were issued
under these plans. The weighted average fair value at date of grant for
shares granted in Fiscal 2000 was $4.00 per share. Awards under this
program were discontinued as of July 1, 1999 as a result of adoption of the
Amended and Restated Non-Employee Directors Program.
The Company's 1998 Restricted Stock Award Program provides for the grant of
rights to receive shares of the Company's Common Stock subject to
attainment of specified performance goals for Fiscal 2000. During Fiscal
2000, 4,591 rights to receive shares were granted and 7,768 rights to
receive shares were cancelled under this plan. During Fiscal 1999, a total
of 114,232 rights to receive shares were granted under the Plan. The
weighted average fair value at date of grant for awards granted in Fiscal
2000 was $4.03 per share. Associates pay no cash consideration for shares
received under the plan.
The shares issued and options granted under the above plans are subject to
forfeiture if the employees do not remain employed by the Company for a
specified period of time. Under the 1989 Non-Employee Director Stock
Option Plan, the Non-Employee Director Compensation Program, the
Compensation Program for the Non-Employee Chairman of the Board of
Directors, and the Amended and Restated Non-Employee Directors Program,
shares issued and options granted are subject to forfeiture if the
individual ceases to remain a Director of the Company except, under certain
circumstances, in the case of retirement.
EMPLOYEE STOCK PURCHASE PLAN
The Company's 1994 Employee Stock Purchase Plan permits employees to
purchase shares during each quarterly offering period at a price equal to
85% of the market price of the Company's Common Stock on either the first
day of the offering period or the fifth business day after the end of the
offering period, whichever is lower. The shares are purchased through the
accumulation of payroll deductions of up to 10% of each participating
employee's compensation during such offering period. Under this plan,
2,000,000 shares have been reserved for grant. During Fiscal 2000 and
Fiscal 1999, 31,343 shares and 56,119 shares, respectively, were purchased
under the plan. The weighted average grant date fair value for shares
purchased during Fiscal 2000 was $4.84 per share. At January 29, 2000,
1,731,491 shares were available for future purchase under this plan.
SHAREHOLDER RIGHTS PLAN
In February 1999, the Company's Board of Directors adopted a Shareholder
Rights Plan to replace the existing Shareholder Rights Plan with effect
from April 26, 1999, when the existing Shareholder Rights Plan expired.
The Board of Directors also increased the authorized shares of
Participating Series A Junior Preferred Stock, $1.00 par value, from
300,000 shares to 500,000 shares, and declared a dividend of one Right for
each outstanding share of Common Stock, payable as of the close of business
on April 26, 1999 to shareholders of record as of the close of business on
(54)
April 12, 1999. Such Rights only become exercisable or transferable apart
from the Common Stock ten days after a person or group (Acquiring Person)
acquires, or obtains the right to acquire, beneficial ownership of twenty
percent (20%) or more of the Company's outstanding common shares. Each
Right then may be exercised to acquire one three-hundredth of a share of
newly created Series A Junior Participating Preferred Stock or a
combination of securities and assets of equivalent value at a purchase
price of $20, subject to adjustment.
Upon the occurrence of certain events (for example, if the Company is a
surviving corporation in a merger with an Acquiring Person), the Rights
entitle holders other than the Acquiring Person to acquire Common Stock
having a value of twice the exercise price of the Rights. Upon the
occurrence of certain other events (for example, if the Company is acquired
in a merger or other business combination transaction in which the Company
is not the surviving corporation), the rights entitle holders other than
the Acquiring Person to acquire Common Stock of the Acquiring Person having
a value twice the exercise price of the Rights. The Rights may be redeemed
by the Company at $.01 per Right at any time until the tenth day following
public announcement that a twenty percent (20%) position has been acquired.
The Rights will expire on April 25, 2009.
EMPLOYEE RETIREMENT BENEFIT PLAN
The Company provides a comprehensive retirement benefit program for its
employees. This plan provides for a noncontributory profit-sharing
contribution which covers substantially all full-time employees who meet
age and service requirements. The contribution is completely discretionary
and is determined by the Board of Directors on an annual basis.
The program also includes a 401(k) employee savings plan, whereby eligible
participating employees may elect to contribute up to 15% of their
compensation to an investment trust. The 401(k) plan includes a matching
Company contribution of 50% of the participant's elective contribution on
up to 6% of the participant's compensation. Participating employees are
immediately vested in their own contributions. Full vesting in the
matching Company contribution occurs on the earlier of the participant's
attainment of 6 years of service, retirement, death, or disability, as
defined in the plan.
The total expense for the above plans amounted to $1,312,000, $1,556,000,
and $709,000 for Fiscal 2000, 1999, and 1998, respectively.
As of the dates of their respective acquisitions, Catherine's Stores and
Modern Woman provided retirement plans for its employees with benefits
substantially the same as the Company's plan. The Catherine's Stores and
Modern Woman plans will be merged into the Company's plan. Participants in
the Catherine's Stores and Modern Woman plans as of the dates of their
respective acquisitions will retain credited years of service earned under
those plans.
(55)
Also available to officers and certain key executives is a non-qualified
deferred compensation plan. Under this plan, which was adopted January 1,
1998, participants may contribute up to 77% of their base compensation and
100% of bonus compensation.
ASSET SECURITIZATION
Asset securitization involves the transfer by the Company's credit card
bank of Fashion Bug proprietary credit card receivables to a special
purpose corporation, which in turn transfers the receivables to a single
purpose trust (the "Trust") created for the securitization. Asset-backed
certificates issued by the Trust represent undivided interests in those
credit card receivables transferred into the Trust. Certificates issued by
the Trust are sold to investors, with any seller's interest retained by the
Company. These asset-backed certificates issued to investors are generally
credit-enhanced by a third party to provide various levels of an
investment-grade credit rating at the time of issuance. The Company
includes the seller's interest and any other retained interest in
investment securities available for sale in the accompanying consolidated
balance sheet. The carrying value of these retained interests approximates
their fair value.
The Company has adopted the requirements of Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,"
effective as of January 1, 1997, for the securitization of its Fashion Bug
proprietary credit card receivables. In connection with the execution of
the Series 1997-1 securitization, the Company evaluated the fair market
value of its retained interests and related recourse provisions and, as a
result, recognized a non-recurring gain of $13,018,000 in Fiscal 1998.
Additionally, the effect of applying SFAS No. 125 as related to sales of
credit card receivables during Fiscal 1998 was to increase income before
income taxes by $3,941,000. The effect of applying SFAS No. 125 during
Fiscal 1999 and Fiscal 2000 was immaterial.
The Company records gains or losses on the securitization of Fashion Bug
credit card receivables based on the estimated fair value of the assets
retained and liabilities incurred in the sale. Gains represent the present
value of the estimated cash flows that the Company has retained over the
estimated outstanding period of the receivables. This excess cash flow
essentially represents an "interest-only" ("I/O") strip, consisting of the
excess finance charges and past due fees over the sum of the return paid to
certificate holders and credit losses. During Fiscal Years 2000 and 1999,
the Company recognized additions to the I/O strip of $9,876,000 and
$9,765,000, respectively, and of those balances, $9,814,000 and $10,254,000
were amortized during each respective Fiscal Year. In addition, the
Company recognized a servicing liability of $2,744,000 and $2,370,000 in
Fiscal Years 2000 and 1999, respectively, and of those balances, $2,797,000
and $2,579,000 were amortized in each Fiscal Year, respectively. Prior to
January 1, 1997, no gains were recorded due to the relatively short average
life of the credit card loans securitized. Excess servicing fee income was
recorded over the life of each sale transaction.
(56)
During Fiscal 2000, the Company, through the trust, completed an offering
of $150 million of asset-backed certificates with a five-year term to
replace its five-year facility that matured in April 1999. Proceeds from
securitization transactions were approximately $398,646,000, $360,686,000,
and $376,885,000 for Fiscal 2000, Fiscal 1999, and Fiscal 1998,
respectively. At January 29, 2000 and January 30, 1999, approximately
$285,782,000 and $427,209,000 of investor certificates remained
outstanding, respectively. The investor certificates mature as follows:
$85,204,000 in the fiscal year ending February 1, 2003 ("Fiscal 2003") and
$150,000,000 in the fiscal year ending January 31, 2005 ("Fiscal 2005").
The Company's retained interests in its securitizations, which aggregated
$41,245,000 and $56,559,000 at January 29, 2000 and January 30, 1999,
respectively, are generally subordinated in right of payment to
certificates issued by the Trust to third party investors.
Charming Shoppes Receivables Corp. and Charming Shoppes Street, Inc.,
wholly-owned indirect subsidiaries of the Company, are separate special
purpose corporations. At January 29, 2000, Charming Shoppes Receivables
Corp. had $29,481,000 of Charming Shoppes Master Trust Certificates and
Charming Shoppes Street, Inc. had $610,000 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
credit enhancements and trust investors have no other recourse to the
Company. The Company does not receive collateral from any party to the
securitization, and the Company does not have any risk of counterparty non-
performance.
The Company is active in originating proprietary credit card lines to the
customers of the Company's retail stores. Holders of credit cards issued
by a subsidiary of the Company are located throughout the United States and
have various available lines of credit which are granted on an unsecured
basis after reviewing each potential cardholder's credit application and
evaluating his or her financial history and ability to repay.
The Company has a non-recourse agreement to permit a third party to provide
an accounts receivable proprietary credit card sales funding program for
its Catherine's Stores, which expires in January 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 agreement may require the Company to repurchase
receivables from the third party under certain conditions relating to a
change in control of the Company. Net proceeds received for the month of
January 2000 (which approximates the period subsequent to the Company's
acquisition of Catherine's Stores), were approximately $6,611,000. The net
balance of accounts receivable held by the third party was approximately
$93,648,000 at January 29, 2000.
DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
Although the Company securitizes credit card receivables from its Fashion
Bug proprietary credit card program in a non-consolidated master trust, the
Company is exposed to fluctuations in interest rates. The Company actively
(57)
manages its exposure to fluctuations in interest rates with respect to the
securitized credit card receivables through the use of interest rate cap
and swap agreements.
The Company purchases interest-rate cap agreements that are designed to
limit its exposure to increasing interest rates and are designated as
hedges of its asset-backed certificates issued in connection with its
credit card securitizations. An interest-rate cap entitles the Company to
receive a payment from the counterparty equal to the excess, if any, of the
hypothetical interest expense (strike price) on a specified notional amount
at a current market interest rate over an amount specified in the
agreement. The only amount the Company is obligated to pay to the
counterparty is an initial premium. The strike price of these agreements
exceeds the current market levels at the time they are entered into. The
interest-rate indices specified by the agreements have been, and are
expected to be, highly correlated with the interest rates the Company
incurs on its asset-backed certificates.
The Company has entered into interest-rate cap agreements with an aggregate
notional amount of $83,500,000 as of January 29, 2000, which mature as
follows: $56,000,000 in Fiscal 2003 and $27,500,000 in the fiscal year
ended January 31, 2004 ("Fiscal 2004"). The aggregate notional amount of
interest-rate cap agreements as of January 30, 1999 was $243,500,000. The
agreements effectively entitle the Company to receive from a bank the
amount, if any, by which the interest rates on the Company's floating-rate
credit card securitizations exceed 9% for $27,500,000 notional amount and
11% for $56,000,000 notional amount. The premiums paid for these interest-
rate cap agreements are included in other assets and are being amortized to
selling, general, and administrative expenses over the respective lives of
the individual interest-rate cap agreements. Any payments that may be
received as a result of the cap will be accrued as a reduction of selling,
general, and administrative expenses.
The Company's credit exposure on interest-rate caps is limited to the value
of interest-rate caps that have become favorable to the Company, but the
Company does not anticipate non-performance by any of these counter-
parties. The amount of such exposure is generally the unrealized gains in
the contracts.
On September 15, 1999, the Company entered into an interest rate swap
transaction with a notional amount of $50,000,000 that limits the Company's
exposure to rising interest rates should the one-month LIBOR rate increase
to a rate above the agreement's specified rate. Interest rate swap
agreements are agreements between counter-parties to exchange cash flows
based on the difference between two interest rates, applied to a notional
principal amount for a specified period. Interest rate swap agreements may
subject the Company to market risk associated with changes in interest
rates as a result of the change to floating-rate funding sources, as well
as the risk of default by a counter-party to the agreement. Under the
terms of the swap agreement, the Company may be required to pledge certain
assets if the market value of the interest rate swap falls below an amount
set forth in the agreement. As of January 29, 2000, there were no pledged
amounts required under the terms of the agreement.
(58)
The Company recognizes interest rate payments it makes to the swap counter-
party as expenses in the period incurred. The Company paid $142,000 to the
swap counter-party during Fiscal 2000. This interest rate swap expires on
October 15, 2004.
LEASES
The Company leases substantially all of its stores under non-cancelable
operating lease agreements. Generally, these leases have initial periods
of 5 to 20 years and contain provisions for renewal options, additional
rentals based on a percentage of sales, and payment of certain real estate
taxes. The Company also leases certain other buildings and equipment.
Rental expense was:
(in thousands) 2000 1999 1998
---- ---- ----
Minimum Rental...... $ 86,438 $80,058 $80,050
Contingent Rental... 15,399 13,399 13,216
-------- ------- -------
$101,837 $93,457 $93,266
======== ======= =======
Minimum annual rental commitments for all non-cancelable leases for the
next five fiscal years and thereafter are: 2001 - $118,608,000; 2002 -
$104,955,000; 2003 - $88,648,000; 2004 - $69,805,000; 2005 - $47,020,000;
Thereafter - $83,687,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of the carrying amounts and estimated fair
values of the Company's financial instruments:
January 29, 2000 January 30, 1999
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
------ ----- ------ -----
Assets:
Cash and Cash Equivalents.... $ 34,299 $ 34,299 $ 43,789 $ 43,789
Available-for-Sale Securities 115,829 115,829 246,625 246,625
Liabilities:
7.5% Convertible Subordinated
Notes due 2006............. 96,047 98,448 119,363 106,403
7.5% Mortgage Note........... 6,652 6,652 0 0
Other Long-Term Debt......... 102 102 128 128
Off-Balance-Sheet Financial
Instruments:
Interest Rate Caps 0 116 0 0
Interest Rate Swaps 0 1,096 0 0
(59)
The fair value of cash and cash equivalents approximates their carrying
amount because of the short maturities of such instruments. The fair value
of available-for-sale securities is based on quoted market prices of the
securities, except for certain equity securities that are not traded in the
open market. The carrying amount of these equity securities ($7,952,000 at
January 29, 2000 and $6,849,000 at January 30, 1999) was used to
approximate fair value. The fair value of the Company's 7.5% Convertible
Subordinated Notes is based on quoted market prices for the securities.
The fair values of the 7.5% Mortgage Note and other long-term debt
approximate their carrying amounts based on estimated current interest
rates that the Company could obtain on similar borrowings. The fair values
of interest-rate caps and swaps were determined on the basis of valuation
pricing models which take into account current market and contractual
prices of the underlying instruments, as well as the time value and yield
curve or volatility factors underlying the positions.
RESTRUCTURING CHARGE (CREDIT)
On March 5, 1998, the Company's Board of Directors approved a restructuring
plan that resulted in a pre-tax charge of $34,000,000. The plan was
approved in conjunction with the decision to eliminate men's merchandise
from the Company's Fashion Bug stores. To-date, 71 stores have been closed
in connection with the plan. In addition, 72 stores have been downsized,
with an additional 29 stores under contract for downsizing in Fiscal 2001.
Elimination of the men's merchandise from the stores was completed in
October 1998, the balance of the men's inventory has been sold, and the
selling space used for men's merchandise has been re-merchandised. In the
fourth quarter of Fiscal 2000, the Company revised its estimates of costs
relating to the plan that were recognized during Fiscal 1999. As a result,
the Company recognized a pre-tax restructuring credit of $2,096,000.
The restructuring charge included a $10,000,000 write-down of store
fixtures and improvements. The following is a summary of other restructure
charges accrued and payments charged against the accrual to-date:
Revision Accrued At
Beginning of Cost January 29,
(in thousands) Accrual Payments Estimate 2000
------- -------- -------- ----
Lease terminations/amendments
and renovations of vacated
store space.................. $19,700 $(13,026) $(1,784) $4,890
Severance..................... 320 (290) (30) 0
Other costs................... 3,980 (1,891) (282) 1,807
------- -------- ------- ------
$24,000 $(15,207) $(2,096) $6,697
======= ======== ======= ======
(60)
On December 10, 1998, the Company's Board of Directors approved a plan to
close the Company's Bensalem, Pennsylvania distribution center. The plan
was approved in conjunction with the decision to consolidate the Company's
distribution center operations in the Company's Greencastle, Indiana
distribution center. The plan resulted in a pre-tax restructuring charge
of $20,246,000 during Fiscal 1999.
The restructuring charge included a $17,969,000 write-down of the cost of
the Bensalem facilities to a net realizable value of $5,662,000, based on
an independent appraisal. The restructuring charge also included accruals
of $1,556,000 for severance costs resulting from a workforce reduction, and
$721,000 for other non-recurring costs relating to the closure. The
Bensalem distribution center closed on December 10, 1998, and the
facilities were held for sale. During Fiscal 2000, the Company completed
the sale of the Bensalem facility and revised its estimate of costs
relating to the distribution center restructuring. As a result, the
Company recognized a pre-tax restructuring credit of $2,834,000 in Fiscal
2000, which primarily represents sales proceeds in excess of the estimated
net realizable value of the Bensalem facility.
During the fourth quarter of Fiscal 2000, the Company recorded a
restructuring charge of $1,459,000 in connection with the Company's
acquisitions of Modern Woman and Catherine's Stores. The Company plans to
consolidate Modern Woman stores into the Catherine's Stores division. The
restructuring charge was primarily for lease termination costs related to
the closing of 11 Modern Woman stores that geographically overlap
Catherine's Stores. There were no payments charged against this accrual as
of January 29, 2000.
NON-RECURRING GAIN FROM DEMUTUALIZATION OF INSURANCE COMPANY
During Fiscal 2000, the Company received a stock distribution from one of
its mutual insurance carriers in connection with the carrier's conversion
to a publicly-held corporation (demutualization). In accordance with the
consensus reached in Emerging Issues Task Force Issue No. 99-4, "Accounting
for Stock Received from the Demutualization of A Mutual Insurance Company,"
the Company recorded the distribution at its fair value and recognized the
resulting non-recurring gain in income from continuing operations, and
subsequently sold the securities received.
(61)
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
(in thousands) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal 2000
Net Sales........... $258,975 $311,743 $277,441 $348,370
Gross Profit........ 68,913 96,971 78,264 97,607
Net Income.......... 6,002(1) 22,225(2) 8,276(3) 8,556(4)
Diluted Net Income
per Share......... .06(1) .21 .08 .08
Fiscal 1999
Net Sales........... $244,031 $279,158 $239,742 $272,229
Gross Profit........ 61,579 73,713 59,594 69,167
Net Income (Loss)... (19,902)(5) 9,328 (424) (9,137)(6)
Diluted Net Income
(Loss) per Share.. (.20) .09 (.00) (.09)
- --------------------
[FN]
(1) Net income includes an after-tax extraordinary gain from early
retirement of debt of $1,232 ($.01 per share).
(2) Net income includes an after-tax restructuring credit of $1,842.
(3) Net income includes an after-tax non-recurring gain from
demutualization of insurance company of $4,355.
(4) Net income includes an after-tax restructuring credit of $1,362 and an
after-tax restructuring charge of $948.
(5) Net income (loss) includes an after-tax restructuring charge of
$22,100.
(6) Net income (loss) includes an after-tax restructuring charge of
$13,147.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There are no matters which are required to be reported under this Item 9.
(62)
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding Directors of the Company is included under the
caption "Election of Directors" of the Company's definitive proxy
statement, which is incorporated herein by reference. Information
regarding Executive Officers is included under "Item 4A. Executive
Officers of the Registrant," in Part I of this Report.
Item 11. Executive Compensation
Information regarding executive compensation is included under the captions
"Management Compensation" and "Report of the Compensation and Stock Option
Committees of the Board of Directors on Executive Compensation" of the
Company's definitive proxy statement, which is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding the security ownership of certain beneficial owners
and management is set forth under the caption "Principal Shareholders and
Management Ownership" of the Company's definitive proxy statement, which is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is set
forth under the caption "Certain Relationships and Related Transactions" of
the Company's definitive proxy statement, which is incorporated herein by
reference.
(63)
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The following Consolidated Financial Statements of Charming Shoppes, Inc.
and its subsidiaries are included in Part II, Item 8:
Report of Independent Auditors.........................................32
Consolidated Balance Sheets - January 29, 2000 and January 30, 1999....33
Consolidated Statements of Operations and Comprehensive Income (Loss) -
years ended January 29, 2000, January 30, 1999, and January 31, 1998.35
Consolidated Statements of Stockholders' Equity - years ended
January 29, 2000, January 30, 1999, and January 31, 1998.............36
Consolidated Statements of Cash Flows - years ended
January 29, 2000, January 30, 1999 and January 31, 1998..............37
Notes to Consolidated Financial Statements.............................38
(a)(2) Financial Statement Schedules
No schedules required to be filed.
(b) Reports on Form 8-K
No reports were filed during the quarter ended January 29, 2000.
(c) Exhibits, including those incorporated by reference
The following is a list of Exhibits filed as part of this Annual Report on
Form 10-K. Where so indicated by footnote, 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.
Articles of Incorporation and By-Laws
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 By-Laws, as Amended and Restated, incorporated by reference to Form
10-Q of the Registrant for the quarter ended July 31, 1999. (Exhibit 3.2).
(64)
Instruments Defining the Rights of Security Holders, Including Indentures
4.1 Shareholders' Rights Plan, incorporated by reference to Form 8-K of
the Registrant, filed April 28, 1999.
4.2 Rights Agreement, dated as of April 26, 1999, between Charming
Shoppes, Inc. and American Stock Transfer & Trust Company, as Rights Agent,
incorporated by reference to Form 8-K of the Registrant, filed April 28,
1999. (Exhibit 4).
Material Contracts
10.1.1 Amended and Restated Pooling and Servicing Agreement dated as of
December 24, 1992, as amended and restated as of May 4, 1994, by and
between Spirit of America National Bank, as Seller and Servicer, and First
Fidelity Bank, National Association, as Trustee, incorporated by reference
to Form 8-K of Spirit of America National Bank (No. 33-73884) dated May 4,
1994. (Exhibit No. 4).
10.1.2 Amendment No. 1, dated as of December 22, 1995, to Amended and
Restated Pooling and Service Agreement, dated as of December 24, 1992, as
Amended and Restated as of May 4, 1994, between Spirit of America National
Bank as Seller and Servicer, and First Fidelity Bank, National Association,
as Trustee for Charming Shoppes Master Trust, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended February 3, 1996.
(Exhibit 10.1.11).
10.1.3 Amendment No. 2, dated as of March 22, 1996, to Amended and
Restated Pooling and Service Agreement, dated as of December 24, 1992, as
Amended and Restated as of May 4, 1994, as Amended by Amendment No. 1 as of
December 22, 1995, between Spirit of America National Bank as Seller and
Servicer, and First Union National Bank as Trustee for Charming Shoppes
Master Trust, incorporated by reference to Form 10-K of the Registrant for
the fiscal year ended February 3, 1996. (Exhibit 10.1.12).
10.1.4 Series 1994-1 Supplement dated as of May 4, 1994 to Amended and
Restated Pooling and Servicing Agreement dated as of December 24, 1992 and
amended and restated as of May 4, 1994, by and between Spirit of America
National Bank, as Seller and Servicer, and First Fidelity Bank, National
Association, as Trustee, (for $200,000,000 Charming Shoppes Master Trust
Asset-Backed Certificates Series 1994-1), incorporated by reference to Form
8-K of Spirit of America National Bank (No. 33-73884) dated May 4, 1994.
(Exhibit No. 4).
10.1.5 First Amendment and Assignment dated as of November 25, 1997 to
the Series 1994-1 Supplement, dated as of May 4, 1994 by and between Spirit
of America National Bank, as Seller and Servicer, and First Union National
Bank, as Trustee for Charming Shoppes Master Trust, incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended January
31, 1998. (Exhibit 10.1.5).
(65)
10.1.6 Series 1994-2 Supplement dated as of August 15, 1994, to Amended
and Restated Pooling and Servicing Agreement, dated as of December 24,
1992, as amended and restated as of May 4, 1994 by and between Spirit of
America National Bank, as Seller and Servicer, and First Fidelity Bank,
National Association, as Trustee (for $14,000,000 Charming Shoppes Master
Trust Asset-Backed Certificates Series 1994-2), incorporated by reference
to Form 10-K of the Registrant for the fiscal year ended January 28, 1995.
(Exhibit 10.1.14).
10.1.7 Amendment No. 1, dated as of March 29, 1996, to Series 1994-2
Supplement, between Spirit of America National Bank as Seller and Servicer,
and First Union National Bank as Trustee for Charming Shoppes Master Trust,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended February 3, 1996. (Exhibit 10.1.13).
10.1.8 Second Amendment dated as of November 25, 1997 to the Series
1994-2 Supplement, dated as of August 15, 1994, as amended on March 29,
1996, by and between Spirit of America National Bank, as Seller and
Servicer, and First Union National Bank, as Trustee for Charming Shoppes
Master Trust, incorporated by reference to Form 10-K of the Registrant for
the fiscal year ended January 31, 1998. (Exhibit 10.1.8).
10.1.9 Series 1997-1 Supplement dated as of November 25, 1997 to the
Second Amended and Restated Pooling and Servicing Agreement dated as of
November 25, 1997 by and among Charming Shoppes Receivables Corp., as
Seller, Spirit of America National Bank, as Servicer and First Union
National Bank, as Trustee on behalf of the Series 1997-1 Certificate
Holders ($83,500,000 Charming Shoppes Master Trust Series 1997-1),
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended January 31, 1998. (Exhibit 10.1.9).
10.1.10 Release Agreement, dated as of February 28, 1997, among (a)
Congress Financial Corporation (Lender) and (b) Charming Shoppes, Inc.,
Charming Shoppes of Delaware, Inc., CSI Industries, Inc. and FB Apparel,
Inc. (collectively, the Borrowers), incorporated by reference to Form 10-K
of the Registrant for the fiscal year ended February 1, 1997. (Exhibit
10.1.15).
10.1.11 Second Amended and Restated Loan and Security Agreement, Dated
February 28, 1997, by and between (a) Congress Financial Corporation, as
Lender, (b) Charming Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI
Industries, Inc. and FB Apparel, Inc., as borrowers and (c) Charming
Shoppes of Delaware, Inc., as Borrower's Agent, incorporated by reference
to Form 10-K of the Registrant for the fiscal year ended February 1, 1997.
(Exhibit 10.1.16).
10.1.12 Amendment of Second Amended and Restated Loan and Security Agree-
ment, dated February 28, 1997 among Charming Shoppes, Inc. (the "Company"),
certain subsidiaries of the Company which are parties thereto, Borrowers'
Agent and Congress Financial Corporation, dated as of May 1, 1998,
incorporated by reference to Form 10-Q for the quarter ended May 2, 1998.
(Exhibit 10.1).
(66)
10.1.13 Amendment No. 2 to Second Amended and Restated Loan and Security
Agreement, dated February 28, 1997 (as amended and supplemented) among
Charming Shoppes, Inc. (the "Company"), certain subsidiaries of the Company
which are parties thereto, Borrowers' Agent and Congress Financial
Corporation, dated as of December 21, 1998, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended January 30, 1999.
(Exhibit 10.1.14)
10.1.14 Consent of Congress Financial Corporation, dated July 30, 1999,
to the Modern Woman Acquisition, Re: Second Amended and Restated Loan and
Security Agreement, dated February 28, 1997, as amended and supplemented,
among Charming Shoppes, Inc. (the "Company"), certain subsidiaries of the
Company which are parties thereto (collectively, with the Company,
"Borrowers"), Borrower's Agent, and Congress Financial Corporation.
10.1.15 Amendment, dated as of October 19, 1999, to Second Amended and
Restated Loan and Security Agreement, by and among Congress Financial
Corporation, as Lender, Charming Shoppes, Inc., Charming Shoppes of
Delaware, Inc., CSI Industries, Inc., and FB Apparel, Inc., as Borrowers,
and Charming Shoppes of Delaware, Inc., as Borrower's Agent, dated February
28, 1997.
10.1.16 Consent of Congress Financial Corporation, dated November 1999,
to Catherine Stores Merger Transaction, Re: Second Amended and Restated
Loan and Security Agreement, dated February 28, 1997, as amended and
supplemented, among Charming Shoppes, Inc. (the "Company"), certain
subsidiaries of the Company which are parties thereto (collectively, with
the Company, "Borrowers"), Borrower's Agent, and Congress Financial
Corporation.
10.1.17 Amendment No. 3, dated as of December 27, 1999, to Second Amended
and Restated Loan and Security Agreement, dated February 28, 1997, as
amended and supplemented, among Charming Shoppes, Inc. (the "Company"),
certain subsidiaries of the Company which are parties thereto
(collectively, with the Company, "Borrowers"), Borrower's Agent, and
Congress Financial Corporation.
10.1.18 Amended and Restated Receivables Purchase Agreement dated as of
November 25, 1997 by and among First Union National Bank, in its capacity
as Trustee for the Charming Shoppes Master Trust, as the Seller, Charming
Shoppes Receivables Corp., as the Owner and the Subordinated Purchaser,
Spirit of America National Bank, as the Servicer and the Originator,
Corporate Receivables Corporation, as the Purchaser, Citibank, N.A., as a
Bank, and Citicorp North America, Inc., as the Agent, incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended January
31, 1998. (Exhibit 10.1.18).
10.1.19 Amendment No. 1 to Amended and Restated Receivables Purchase
Agreement, dated as of October 29, 1998, among First Union National Bank, a
national banking association, solely in its capacity as the trustee for
Charming Shoppes Master Trust, a trust formed pursuant to the Pooling and
(67)
Servicing Agreement, Charming Shoppes Receivables Corp., a Delaware
corporation, in its capacity as the owner of the Receivables and in its
capacity as Subordinated Purchaser, Spirit of America National Bank, a
national banking association, in its capacity as the originator of the
Receivables and in its capacity as the Servicer, Corporate Receivables
Corporation, a California corporation, as a purchaser, Citicorp North
America, Inc., a Delaware corporation, as agent for the Purchasers and the
Banks and Citibank NA, a national banking association, as a Bank,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended January 30, 1999. (Exhibit 10.1.21).
10.1.20 Second Amended and Restated Pooling and Servicing Agreement,
dated as of November 25, 1997, as amended on July 22, 1999, among Charming
Shoppes Receivables Corp., as Seller, Spirit of America, Inc., as Servicer,
and First Union National Bank as Trustee, incorporated by reference to Form
8-K of Charming Shoppes Receivables Corp., (No. 333-71757) dated July 22,
1999. (Exhibit No. 4.1).
10.1.21 Series 1999-1 Supplement, dated as of July 22, 1999, to Second
Amended and Restated Pooling and Service Agreement, dated as of November
25, 1997, as amended on July 22, 1999, among Charming Shoppes Receivables
Corp., as Seller, Spirit of America, Inc., as Servicer, and First Union
National Bank, as Trustee, for $150,000,000 Charming Shoppes Master Trust
Asset-Backed Certificates Series 1999-1, incorporated by reference to Form
8-K of Charming Shoppes Receivables Corp., (No. 333-71757) dated July 22,
1999. (Exhibit No. 4.2).
10.1.22 Receivables Purchase Agreement, dated as of May 28, 1999, among
Charming Shoppes Street, Inc. as Seller, Spirit of America, Inc., as
Servicer, Clipper Receivables Corporation, as Purchaser, State Street
Capital Corporation, as Administrator, and State Street Bank & Trust
Company, as Relationship Bank.
10.1.23 Series 1999-2 Supplement, dated as of May 28, 1999, to Second
Amended and Restated Pooling and Service Agreement, dated as of November
25, 1997, as amended on July 22, 1999, among Charming Shoppes Receivables
Corp., as Seller, Spirit of America, Inc., as Servicer, and First Union
National Bank, as Trustee, for $55,750,000 Charming Shoppes Master Trust
Asset-Backed Certificates Series 1999-2.
10.1.24 Agreement and Plan of Merger, dated as of November 15, 1999, by
and among Catherines Stores Corporation, Charming Shoppes, Inc., and Rose
Merger Sub, Inc., incorporated by reference to Schedule 14(D)-1 of the
Registrant filed November 19, 1999. (Item 11(c)(1)).
10.1.25 Merchant Services Agreement, between Hurley State Bank and
Catherines, Inc., incorporated by reference to Form 10-Q of Catherines
Stores Corp. (Commission File No. 000-19372) for the quarter ended May 1,
1999. (Item 6. (A)(1).)
(68)
Management Contracts and Compensatory Plans and Arrangements
10.2.1 The 1986 Employees' Stock Option Plan of Charming Shoppes, Inc.,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended February 1, 1992. (Exhibit 10.2.2, Pg. 240).
10.2.2 The 1988 Key Employee Stock Option Plan of Charming Shoppes,
Inc., as amended, incorporated by reference to Form 10-K of the Registrant
for the fiscal year ended January 30, 1993. (Exhibit 10.2.3, Pg. 486).
10.2.3 The 1990 Employees' Stock Incentive Plan of Charming Shoppes,
Inc., as amended, incorporated by reference to Form 10-K of the Registrant
for the fiscal year ended January 30, 1993. (Exhibit 10.2.4, Pg. 492).
10.2.4 The 1989 Non-Employee Director Stock Option Plan of Charming
Shoppes, Inc., as amended, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended January 30, 1993. (Exhibit 10.2.5,
Pg. 499).
10.2.5 Non-Employee Director Restricted Stock Plan of Charming Shoppes,
Inc., as amended, incorporated by reference to Form 10-K of the Registrant
for the fiscal year ended January 30, 1993. (Exhibit 10.2.6, Pg. 503).
10.2.6 The Charming Shoppes, Inc. Non-Employee Directors Compensation
Program, As Amended and Restated, incorporated by reference to Form 10-Q of
the Registrant for the quarter ended July 31, 1999. (Exhibit 10.1).
10.2.7 The Charming Shoppes, Inc. Non-Employee Directors Compensation
Program Stock Option Agreement, incorporated by reference to Form 10-Q of
the Registrant for the quarter ended July 31, 1999. (Exhibit 10.2).
10.2.8 The Charming Shoppes, Inc. Non-Employee Directors Compensation
Program Restricted Stock Agreement, incorporated by reference to Form 10-Q
of the Registrant for the quarter ended July 31, 1999. (Exhibit 10.3).
10.2.9 Subplan and Summary Description of the Annual Incentive Plan of
Charming Shoppes, Inc., incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended February 1, 1992. (Exhibit 10.2.13,
Pg. 251).
10.2.10 The 1993 Employees' Stock Incentive Plan of Charming Shoppes,
Inc., incorporated by reference to Form 10-K of the Registrant for the
fiscal year ended January 29, 1994. (Exhibit 10.2.10).
10.2.11 The 1993 Employees' Stock Incentive Plan Stock Option Agreement
(regular vesting schedule) of Charming Shoppes, Inc., incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended January
29, 1994. (Exhibit 10.2.11).
(69)
10.2.12 The 1993 Employees' Stock Incentive Plan Stock Option Agreement
(accelerated vesting schedule) of Charming Shoppes, Inc., incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended January
29, 1994. (Exhibit 10.2.12).
10.2.13 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Restricted Stock Agreement, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended January 30, 1999. (Exhibit 10.2.10).
10.2.14 The Charming Shoppes, Inc. Employee Stock Purchase Plan, as
amended, incorporated by reference to Form 10-K of the Registrant for the
fiscal year ended February 3, 1996. (Exhibit 10.2.10).
10.2.15 The Charming Shoppes, Inc. Restricted Stock Award Plan for
Associates, incorporated by reference to Form 10-K of the Registrant for
the fiscal year ended February 3, 1996. (Exhibit 10.2.11).
10.2.16 The Charming Shoppes, Inc. 1996 Restricted Stock Award Program,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended February 3, 1996. (Exhibit 10.2.12).
10.2.17 The Charming Shoppes, Inc. 1996 Restricted Stock Award Program
Restricted Stock Agreement, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended February 3, 1996. (Exhibit 10.2.13).
10.2.18 Employment Agreement, dated as of May 17, 1995, by and between
Charming Shoppes, Inc., and David V. Wachs, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended February 3, 1996.
(Exhibit 10.2.14).
10.2.19 Employment Agreement, dated as of August 22, 1995 by and between
Charming Shoppes, Inc., and Dorrit J. Bern, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended February 3, 1996.
(Exhibit 10.2.15).
10.2.20 Employment Agreement, dated as of October 12, 1999, by and
between Charming Shoppes, Inc. and Dorrit J. Bern, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended October 30,
1999. (Exhibit 10.1).
10.2.21 1993 Employees' Stock Incentive Plan Stock Option Agreement,
dated as of August 23, 1995, by and between Charming Shoppes, Inc., and
Dorrit J. Bern, incorporated by reference to Form 10-K of the Registrant
for the fiscal year ended February 3, 1996. (Exhibit 10.2.16).
10.2.22 1993 Employees' Stock Incentive Plan Restricted Stock and Stock
Bonus Agreement, dated as of March 20, 1996, by and between Charming
Shoppes, Inc., and Dorrit J. Bern, incorporated by reference to Form 10-K
of the Registrant for the fiscal year ended February 3, 1996. (Exhibit
10.2.17).
(70)
10.2.23 1993 Employees' Stock Incentive Plan Restricted Stock Agreement,
dated as of October 12, 1999, by and between Charming Shoppes, Inc. and
Dorrit J. Bern, incorporated by reference to Form 10-Q of the Registrant
for the quarter ended October 30, 1999. (Exhibit 10.2).
10.2.24 Settlement Agreement and Release, dated as of February 9, 1996,
by and between Charming Shoppes, Inc., and Philip Wachs, incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended February
3, 1996. (Exhibit 10.2.20).
10.2.25 Settlement Agreement and Release, dated as of April 25, 1996, by
and between Charming Shoppes, Inc., and Samuel Sidewater, incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended February
3, 1996. (Exhibit 10.2.21).
10.2.26 The Charming Shoppes, Inc. Non-Employee Directors Compensation
Program, incorporated by reference to Registration Statement on Form S-8
(Registration No. 333-22323), of the Registrant, dated February 25, 1997.
(Exhibit 4.1).
10.2.27 The Charming Shoppes, Inc. Compensation Program for the Non-
Employee Chairman of the Board of Directors, incorporated by reference to
Registration Statement on Form S-8 (Registration No. 333-22323), of the
Registrant, dated February 25, 1997. (Exhibit 4.2).
10.2.28 Charming Shoppes, Inc. 1998 Restricted Award Program,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended January 31, 1998. (Exhibit 10.2.22).
10.2.29 Charming Shoppes Inc. 1999 Associates' Stock Incentive Plan,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended January 30, 1999. (Exhibit 10.2.24).
10.2.30 Charming Shoppes, Inc. 1999 Associates' Stock Incentive Plan
Stock Option Agreement, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended January 30, 1999. (Exhibit 10.2.25).
10.2.31 Charming Shoppes, Inc. 2000 Associates' Stock Incentive Plan.
10.2.32 Charming Shoppes, Inc. 2000 Associates' Stock Incentive Plan
Stock Option Agreement.
10.2.33 Forms of Executive Severance Agreements by and between the
Company, the named executive officers in the Company's Proxy Statement for
the Annual Meeting to be held on June 15, 2000, and certain other Executive
Officers of the Company.
(71)
Other Exhibits
Exhibit 21 - Subsidiaries of Registrant
Exhibit 23 - Consent of independent auditors
Exhibit 27 - Financial data schedule
All other schedules are omitted because they are not applicable or not
required, or because the required information is included in the consoli-
dated financial statements or notes thereto.
(72)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Charming Shoppes, Inc., has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
CHARMING SHOPPES, INC.
- -------------------------------------
By: Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: April 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
- ------------------------------------- ------------------------------------
Dorrit J. Bern, April 27, 2000 Eric M. Specter, April 27, 2000
Chairman of the Board Executive Vice President
President and Chief Executive Officer Chief Financial Officer And Treasurer
- ------------------------------------- ------------------------------------
John J. Sullivan, April 27, 2000 Joseph L. Castle II, April 27, 2000
Vice President, Corporate Controller Director
Chief Accounting Officer
- ------------------------------------- ------------------------------------
Alan Rosskamm Marvin L. Slomowitz, April 27, 2000
Director Director
- ------------------------------------- ------------------------------------
Marjorie Margolies-Mezvinsky Pamela S. Lewis, April 27, 2000
April 27, 2000 Director
Director
- ------------------------------------- ------------------------------------
Kenneth S. Olshan Charles T. Hopkins
April 27, 2000 April 27, 2000
Director Director
(73)