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<SEC-DOCUMENT>0000019353-03-000072.txt : 20030421
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ACCESSION NUMBER: 0000019353-03-000072
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 12
CONFORMED PERIOD OF REPORT: 20030201
FILED AS OF DATE: 20030421
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: CHARMING SHOPPES INC
CENTRAL INDEX KEY: 0000019353
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621]
IRS NUMBER: 231721355
STATE OF INCORPORATION: PA
FISCAL YEAR END: 0131
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-07258
FILM NUMBER: 03656227
BUSINESS ADDRESS:
STREET 1: 450 WINKS LANE
CITY: BENSALEM
STATE: PA
ZIP: 19020
BUSINESS PHONE: 2152459100
MAIL ADDRESS:
STREET 1: 450 WINKS LANE
CITY: BENSALEM
STATE: PA
ZIP: 19020
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<DESCRIPTION>FORM 10-K
<TEXT>
================================================================================
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 February 1, 2003
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 000-07258
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)
Stock Purchase Rights
(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 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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [X] YES [ ] NO
The aggregate market value of the outstanding common stock held by
non-affiliates as of August 3, 2002 (the last day of the registrant's most
recently completed second fiscal quarter), based on the closing price on August
2, 2002, was approximately $761,588,000.
As of April 1, 2003, 112,940,265 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of Form 10-K is incorporated by
reference herein from the registrant's definitive proxy statement for its annual
shareholders meeting, which is expected to be filed within 120 days after the
end of the fiscal year covered by this Annual Report.
================================================================================
<PAGE>
CHARMING SHOPPES, INC.
2003 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I Page
Item 1 Business
General......................................................... 1
Stores.......................................................... 2
Merchandising and Buying........................................ 4
Marketing and Promotions........................................ 5
Proprietary Credit Card Programs................................ 5
Sourcing........................................................ 6
Distribution and Logistics...................................... 6
Competition..................................................... 7
Monsoon and Accessorize Joint Venture........................... 7
Employees....................................................... 7
Trademarks and Servicemarks..................................... 8
Executive Offices............................................... 8
Available Information........................................... 8
Item 2 Properties...................................................... 9
Item 3 Legal Proceedings............................................... 10
Item 4 Submission of Matters to a Vote of Security Holders............. 10
Additional Part I Information - Our Executive Officers.................... 11
PART II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters.......................................... 12
Item 6 Selected Financial Data......................................... 13
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 15
Forward-Looking Statements...................................... 15
Critical Accounting Policies.................................... 17
Results of Operations........................................... 23
Recent Developments............................................. 30
Financial Condition............................................. 31
Market Risk..................................................... 38
Impact of Recent Accounting Pronouncements...................... 39
Item 7A Quantitative and Qualitative Disclosures About Market Risk...... 39
Item 8 Financial Statements and Supplementary Data..................... 40
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure..................................... 78
PART III
Item 10 Directors and Executive Officers of the Registrant.............. 79
Item 11 Executive Compensation.......................................... 79
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.............................. 79
Item 13 Certain Relationships and Related Transactions.................. 79
Item 14 Controls and Procedures......................................... 79
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K. 81
SIGNATURES................................................................ 90
CERTIFICATIONS............................................................ 91
<PAGE>
PART I
Item 1. Business
General
We are a leading specialty apparel retailer primarily focused on plus-size
women's apparel through our three distinct brands: Lane Bryant, Fashion Bug, and
Catherine's Plus Sizes. During Fiscal 2003, the sale of plus-size apparel
represented approximately 72% of our total net sales. We anticipate that this
percentage will approach 74% during Fiscal 2004. Through our fashion content,
store layouts, and broad merchandise assortments, we seek to appeal to customers
from a broad range of socioeconomic, demographic, and cultural profiles. As of
February 1, 2003, we operated 2,248 stores in 48 states.
In the late 1990's, our management team initiated a strategic plan aimed at
capitalizing on the anticipated growth in the market for plus-size women's
apparel. We began this process by increasing the floor space allocated to
plus-size apparel in our Fashion Bug stores. In August 1999, we acquired the
Modern Woman chain of 136 stores in 22 states, which specialized in plus-size
women's apparel. In January 2000, we acquired the Catherine's chain of stores,
which operated 436 stores in 40 states and the District of Columbia, and also
specialized in plus-size women's apparel. We have since closed or converted all
of the original Modern Woman stores into Catherine's stores. In August 2001, we
acquired Lane Bryant, Inc., which operated 651 stores across the United States.
Lane Bryant is a premier brand in the plus-size market with an established
customer base and proprietary branded labels. The acquisition of Lane Bryant
significantly accelerated our long-term growth strategy of becoming a leader in
the sale of plus-size women's apparel.
Each of our brands is designed to attract a distinct customer:
Lane Bryant. Lane Bryant is a widely recognized name in plus-size
fashion. Through private labels, such as VENEZIA JEANS CLOTHING CO.(R) and
CACIQUE(R) (a line of intimate apparel), Lane Bryant offers fashionable and
sophisticated clothes in plus-sizes 14 - 28. Lane Bryant has a loyal
customer base, generally ranging in age from 18 to 54 years old, that shops
for fashionable merchandise in the moderate price range. Primarily a
mall-based destination store for the plus-size woman, Lane Bryant currently
operates 689 stores in 46 states that average approximately 6,100 square
feet. In March 2003, we began e-commerce operations on our Lane Bryant
website.
Fashion Bug and Fashion Bug Plus. Fashion Bug and Fashion Bug Plus
stores specialize in selling a wide variety of plus-size, misses and junior
sportswear, dresses, coats, intimate apparel, accessories, and casual
footwear. Fashion Bug customers generally range in age from 20 to 49 years
old and shop in the low-to-moderate price range. Our 1,083 Fashion Bug
stores are located in 45 states, primarily in strip shopping centers, and
average approximately 9,000 square feet.
Catherine's Plus Sizes. Catherine's specializes in plus-sizes and is
particularly known for extended sizes (over size 28) and petite plus-sizes.
Catherine's offers classic apparel and accessories for career and casual
lifestyles in a one-on-one selling environment. Catherine's customers
generally range in age from 40 to 65 years old, shop in the moderate price
range, and are concerned with fit and value when purchasing clothes. Our
467 Catherine's stores are located in 45 states, primarily in strip
shopping centers in the Southeast, Mid-Atlantic, and Eastern Central
regions of the United
1
<PAGE>
States, and average approximately 4,100 square feet. In March 2002, we
began e-commerce operations on our Catherine's website.
On January 28, 2002, we announced a restructuring plan that included a
number of initiatives designed to position our business for increased
profitability and growth. The major components of this plan included: the
closing of our The Answer/Added Dimensions chain, including the conversion of
certain Added Dimensions stores to Catherine's stores; the closing of certain
under-performing Fashion Bug stores; and the conversion of certain Fashion Bug
store locations to Lane Bryant stores.
The Answer/Added Dimensions chain, which we acquired as part of the
Catherine's transaction in January 2000, operated 77 plus-size stores in 21
states, concentrated in the Southeast and the Northeast. The square footage for
the chain was approximately 300,000 square feet, which was approximately 2% of
the total square footage under lease for all our stores. We completed these
store closings and conversions by the end of the third quarter of Fiscal 2003.
We also completed our restructuring plan for our Fashion Bug stores during
Fiscal 2003. We closed 124 under-performing Fashion Bug stores, resulting in a
reduction of 1.1 million square feet, or 6% of total square footage under lease
for all of our stores. The locations are dispersed throughout the country, and
do not significantly represent any one geographic region. We also converted 30
Fashion Bug stores to the Lane Bryant format.
On March 18, 2003, we announced a cost reduction plan, designed to take
advantage of the centralization of all corporate administrative services
throughout the Company and to realize efficiencies available to us, in order to
improve our profitability. We expect this cost reduction plan to improve
annualized pre-tax earnings by approximately $45 million, with an improvement of
approximately $18 million in pre-tax earnings during Fiscal 2004. We expect that
the full annual pre-tax benefit of $45 million will first be realized during the
fiscal year ending January 30, 2005. Execution of the cost reduction plan is
expected to result in a pre-tax charge of approximately $10 - 12 million in
Fiscal 2004. Components of the charge include a $7 - $8 million non-cash charge,
primarily for the write-down of distribution center fixed assets, and $3 - $4
million of cash items, primarily related to severance as a result of a reduction
in work force. We expect the execution of the plan to have no material after-tax
cash impact. Further details of the plan are included in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Recent Developments" below.
Stores
Our 2,248 stores (as of February 1, 2003) are primarily located in suburban
areas and small towns. Approximately 65% of these stores are located in strip
shopping centers, while the balance are located in community and regional malls.
The majority of our Fashion Bug and Catherine's stores are strip-center based.
Most of our Lane Bryant stores are in malls. Over the past few years, Lane
Bryant has expanded into strip centers, and has demonstrated success in strip
center locations.
We believe that our customers visit strip shopping centers frequently as a
result of the tenant mix and convenience of strip shopping centers. Our
long-term store growth plans are to aggressively expand both Lane Bryant and
Catherine's into additional strip center locations. Availability of strip center
retail space continues to significantly outpace mall expansion. In addition, we
benefit in strip centers from substantially lower occupancy costs as compared to
occupancy costs in malls.
2
<PAGE>
Our merchandise displays enable our customers to assemble coordinated and
complete outfits that satisfy many of their lifestyle needs. We relocate or
remodel our stores as appropriate to convey a fresh and contemporary shopping
environment. We frequently test and implement new store designs and fixture
packages aimed at providing an effective merchandise presentation. In
particular, we intend, on a targeted basis, to continue remodeling certain of
our Fashion Bug stores to present a bright, well-defined, easy to shop layout.
In addition, we emphasize customer service, including the presence of helpful
salespeople in the stores, layaway plans, and acceptance of merchandise returns
for cash or credit within a reasonable time period. Typically, our stores are
open seven days per week, eleven hours per day Monday through Saturday, and
seven hours on Sunday.
We continue to seek additional new locations that meet our financial and
operational objectives. We currently plan to open 50 - 55 stores during Fiscal
2004. The breakdown by brand is approximately: 35 Lane Bryant stores (excluding
conversions), 15 Catherine's stores, and 3 Fashion Bug stores. Additionally, we
currently plan to remodel approximately 30 stores and relocate 55 - 70 stores
during Fiscal 2004.
Our store openings and closings and number of locations over the past five
fiscal years are set forth in the following table:
<TABLE>
<CAPTION>
Fiscal Year Ended
Feb. 1, Feb. 2, Feb. 3, Jan. 29, Jan. 30,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Store Activity:
Number of stores open at beginning of period.. 2,446 1,755 1,740 1,135 1,135
Opened during period.......................... 57 125 106 75 65
Acquired during period........................ 0 651 0 572 0
Closed during period.......................... (255)(1) (85) (91)(2) (42) (65)
----- ----- ----- ----- -----
Number of stores open at end of period........ 2,248 2,446 1,755 1,740 1,135
===== ===== ===== ===== =====
Number of Stores by Brand:
Fashion Bug and Fashion Bug Plus.............. 1,083 1,252 1,230 1,185 1,135
Lane Bryant................................... 689 647 0 0 0
Catherine's................................... 467 461 414 452(3) 0
The Answer/Added Dimensions 0 77 110 103 0
Monsoon/Accessorize(4)........................ 9 9 1 0 0
----- ----- ----- ----- -----
Number of stores open at end of period........ 2,248 2,446 1,755 1,740 1,135
===== ===== ===== ===== =====
<FN>
- --------------------
(1) Includes 124 Fashion Bug stores and 68 Added Dimensions stores closed in
connection with a restructuring plan announced on January 28, 2002.
(2) Includes 35 Modern Woman stores that were closed as a result of the
consolidation of Modern Woman stores into Catherine's during the year ended
February 3, 2001.
(3) Includes 122 Modern Woman stores that were closed or converted to the
Catherine's formats during the year ended February 3, 2001.
(4) We expect to close these stores during Fiscal 2004 (see "Monsoon and
Accessorize Joint Venture" below).
</FN>
</TABLE>
All stores are operated under our direct management. Each store has a
manager and an assistant manager or supervisor, who are in daily operational
control of their location. We employ district managers, who travel to all stores
in their district on a frequent basis, to supervise store operations. Each
district manager has responsibility for an average of 11 - 12 stores. Regional
managers, who report to a Director of Stores, supervise the district managers.
Generally, we appoint store managers from the group of assistant
3
<PAGE>
managers, and district managers are appointed from the group of store managers.
We seek to motivate our store personnel through internal advancement and
promotion, competitive wages and various incentive, medical, and retirement
plans. We centrally develop store operations, merchandising, and buying
policies, assigning to individual store management the principal duties of
display, selling, and reporting through point-of-sale terminals.
Merchandising and Buying
We employ a merchandising and buying strategy that is focused on providing
an attractive selection of apparel and accessories that reflect the fashion
preferences of the target customer for each of our brands. Merchandise
purchasing is conducted by separate merchandise groups for each of our brands by
buyers supervised by one or more merchandise managers. We believe that
specialization of buyers within our brands enhances the distinctiveness between
the brands and their offerings. In addition, we use domestic and international
fashion market guidance, fashion advisory services, proprietary design, and
in-store testing to determine the optimal product assortments for each of our
brands. We believe that this approach results in greater success in predicting
customer preferences while reducing our inventory investment and risk. We also
seek to maintain high quality standards with respect to merchandise fabrication,
construction, and fit.
We continually refine our merchandise assortments to reflect the needs and
demands of our diverse customer groups and the demographics of each store's
location. At Lane Bryant, we offer a combination of fashion basics, seasonal
fashions, and high fashion in casual and career-oriented merchandise and
intimate apparel. We strive to translate the latest trends into plus-sizes and
to be first to market with our merchandise. At Fashion Bug, we offer an
assortment of both casual and career-oriented products, in plus, misses, and
junior sizes at low-to-moderate prices. Fashion Bug's plus and misses size
merchandise typically reflects established fashion trends and includes a broad
offering of ready-to-wear apparel, including knit and woven tops, dresses,
shorts, pants and skirts, as well as footwear, accessories, intimate apparel,
and seasonal items, such as outerwear. Fashion Bug's junior merchandise reflects
the latest fashion trends and includes a significant amount of third-party,
well-recognized national brands. At Catherine's, we offer a broad assortment of
plus-size merchandise in classic styles designed to provide "head-to-toe"
dressing for the 40 to 65 year-old customer. Catherine's features sportswear,
dresses, intimate apparel, suits, and accessories in a variety of plus-sizes,
including petites and extended sizes. Catherine's has developed a unique
expertise in the fit, design, and manufacturing of extended sizes, making it one
of the few retailers to emphasize these sizes.
We have distribution systems in place whereby stores that are identified as
having certain customer profiles can be stocked with products specifically
targeted to such customers. Our merchandising staffs obtain store and chain-wide
inventory information generated by merchandise information systems that use
point-of-sale terminals. Through these terminals, merchandise can be followed
from the placement of our initial order for the merchandise to the actual sale
to our customer. Based upon this data, our 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. In
addition, we continue to work to improve inventory turnover by better managing
the flow of seasonal merchandise to our stores across all geographic regions.
Our merchandising and buying philosophy, coupled with enhancements in
inventory management, helps facilitate the timely and orderly purchase and flow
of merchandise. This enables our stores to offer fresh product assortments on a
regular basis.
4
<PAGE>
We employ 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 original ticketed price. We believe this strategy has resulted in a
greater degree of credibility with the customer, reducing the need for
aggressive price promotions. However, our pricing strategy typically does allow
sufficient margin to permit merchandise discounts in order to stimulate customer
purchases when necessary. In the future, we expect to continue to achieve a
higher initial markup in our merchandise that is purchased through our overseas
sourcing operations.
Our stores experience a normal seasonal sales pattern for the retail
apparel industry, with peak sales occurring during the Easter, Labor Day, and
Christmas seasons. We generally build inventory levels before these peak selling
periods. To keep inventory current and fashionable, we reduce the price of
slow-moving merchandise throughout the year. Much of our merchandise is
developed for one or more of our six seasons: spring, summer, summer-fall
transitional, fall, holiday, and holiday-spring transitional. 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 the four quarters of
Fiscal 2003, as a percent of total sales, were 26.1%, 26.5%, 22.5%, and 24.9%,
respectively.
During the second half of Fiscal 2003, the Lane Bryant chain experienced
poor customer acceptance of, and fit and quality issues with, certain of its
products, resulting in higher levels of promotional pricing. In addition,
certain basic products were under-stocked, resulting in missed sales
opportunities. Due to product lead times, these issues are expected to
negatively impact Lane Bryant results for the Fiscal 2004 first quarter, and
could negatively impact Lane Bryant results for the Fiscal 2004 second quarter.
We are currently executing a plan to re-establish growth at Lane Bryant which
includes improved merchandise assortments for the Fall 2003 season.
Marketing and Promotions
We use several types of advertising to stimulate customer traffic. We use
targeted direct mail advertising to preferred customers selected from a database
of approximately 24 million proprietary credit card, third-party credit card,
and cash customers. We may also use radio, television, and newspaper advertising
and fashion shows to stimulate traffic at certain strategic times of the year.
We also use pricing policies, displays, store promotions, and convenient store
hours to attract customers. We believe that, with the planning and guidance of
our 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.
We maintain websites for our Lane Bryant, Fashion Bug, and Catherine's
brands that provide information regarding current fashions and promotions. Our
Lane Bryant website enjoys more than 700,000 unique visitors per month and an
established on-line community. In March 2002, we began e-commerce operations on
our Catherine's website, and in March 2003, we began e-commerce operations on
our Lane Bryant website.
Proprietary Credit Card Programs
We seek to encourage sales through the promotion of proprietary credit
cards. We believe that our credit cards act as promotional vehicles by
engendering customer loyalty, creating a substantial base for targeted direct
mail promotion, and encouraging incremental sales.
5
<PAGE>
Our Fashion Bug credit card program has approximately two million active
accounts, which accounted for approximately 31% of Fashion Bug retail sales in
Fiscal 2003. We control credit policies and service the Fashion Bug proprietary
credit card file, and have entered into various agreements whereby we securitize
and sell all of our credit card receivables generated by this program.
Our Lane Bryant and Catherine's brands also offer customers the convenience
of proprietary credit card programs. The Lane Bryant credit card program has
approximately one million active accounts, which accounted for approximately 28%
of Lane Bryant retail sales during Fiscal 2003. The Catherine's credit card
program has approximately one million active accounts, which accounted for
approximately 33% of Catherine's retail sales during Fiscal 2003. We use
third-party banks to finance and service the Lane Bryant and Catherine's credit
card programs. These third-party banks provide new account approval, credit
authorization, billing, and account collection services. Under non-recourse
agreements with the third-party banks, we are reimbursed with respect to sales
generated by the credit cards.
A more comprehensive description of our asset securitization process and
our commitments under the third-party bank agreements is included in "Item 8.
Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note 14. Asset Securitization" below.
Sourcing
To meet the demands of our customers, we access both the domestic and
overseas wholesale apparel marketplace for our merchandise purchases. This
allows us to maintain flexible lead times, respond quickly to current fashion
trends, and quickly replenish merchandise inventory as necessary. During Fiscal
2003, we purchased merchandise from approximately 1,100 suppliers and factories
located throughout the world. We use our overseas sourcing operations primarily
to procure fashion-basic merchandise for our brands, which generally requires
longer lead times. In Fiscal 2003, overseas sourcing accounted for approximately
25% of Fashion Bug merchandise purchases and approximately 15% of Catherine's
merchandise purchases. During Fiscal 2003, we purchased a portion of Lane Bryant
merchandise from Mast Industries, Inc. ("Mast"), a contract manufacturer and
apparel importer, which is a wholly-owned subsidiary of Limited Brands, Inc.
("Limited Brands"). These purchases from Mast accounted for approximately 10% of
our total merchandise purchases and approximately 37% of merchandise purchases
for Lane Bryant. No other vendor accounted for more than 4% of total merchandise
purchases.
We pay for merchandise purchases outside the United States via letters of
credit with third-party vendors where we are the importer of record. To date, we
have 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 any single country with which we
do business, we believe that we would have adequate alternative sources of
supply.
Distribution and Logistics
We currently utilize three distribution centers. For our Fashion Bug
stores, we operate a distribution center in Greencastle, Indiana. Located on a
150-acre tract of land, this facility contains a building of approximately
1,000,000 square feet. We estimate that this facility has the capacity to
service up to approximately 1,800 stores. For our Catherine's stores, we operate
a 213,000 square foot distribution center in Memphis, Tennessee, which is
designed to handle up to approximately 600 stores. For our Lane Bryant stores,
we utilize a 514,000 square foot facility near Columbus, Ohio under an agreement
with Distribution Land Corp., an affiliate of Limited Brands. Under a services
agreement with Limited Brands, we receive
6
<PAGE>
inbound and outbound logistics and transportation services and receiving,
handling, processing, storing, and distribution of all merchandise for Lane
Bryant at the Ohio distribution facility.
Substantially all of our merchandise purchases are received at our
distribution facilities, where they are prepared for distribution to our stores.
In the Greencastle, Indiana distribution center, automated sorting systems
enhance the flow of merchandise from receipt to quality control inspection,
receiving, ticketing, packing, and final shipment. Merchandise is shipped to
each store principally by common carriers. We use computerized automated
distribution profiles to combine shipments when possible and improve the
efficiency of the distribution operations. These profiles provide information
not only about the quantity of merchandise to be distributed to each store, but
also about the type of merchandise to be shipped, and enable the distribution
operations to include various customer profiles in each store's plan.
On September 24, 2002, we acquired a 393,000 square foot distribution
center on 29 acres of land in White Marsh, Maryland. As a result of the use of
automated sorting systems and improved facility design in the White Marsh
facility, we will be able to consolidate both the Memphis and the Columbus
facilities into the White Marsh facility. We estimate that the White Marsh
facility will initially have the capacity to service up to approximately 1,400
stores. We plan to relocate the Memphis distribution center by June 2003 and the
Columbus distribution center by the end of December 2003. The lease for the
Columbus distribution center and the related logistics and transportation
services agreement, which were originally scheduled to terminate in August 2004,
were terminated effective as of December 31, 2003 in accordance with early
cancellation provisions of the lease and agreement.
Competition
The retail sale of women's apparel is a highly competitive business with
numerous competitors, including department stores, specialty apparel stores,
discount stores, and mail-order and e-commerce companies. We cannot reasonably
estimate the number of our competitors 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.
Monsoon and Accessorize Joint Venture
In October 2000, we announced the signing of a joint venture agreement with
Monsoon plc, in order to bring the United Kingdom's apparel and accessories
concepts of MONSOON(R) and ACCESSORIZE(R) stores to the United States. We tested
the concept in the United States during 2001 and 2002. The performance of the
stores opened during the test period did not meet our expectations. Higher than
anticipated lease costs led to our decision to discontinue the operation of
these stores. We plan to close the 9 Monsoon/Accessorize stores during Fiscal
2004 (see "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Recent Developments" below).
Employees
As of the end of Fiscal 2003, we employed approximately 24,000 associates,
which included approximately 15,000 part-time employees. In addition, we hire a
number of temporary employees during the Christmas season. Approximately 60 of
our employees are represented by unions, including approximately 35 employees at
our Memphis, Tennessee distribution center. We believe that overall our
relationship with these unions, and our employees generally, is satisfactory.
7
<PAGE>
On March 18, 2003, we announced a cost reduction plan, which included
reductions in our corporate, divisional, distribution center, and credit
operations workforces. This plan, when fully implemented, is expected to result
in a net reduction in our workforce of approximately 285 employees.
Trademarks and Servicemarks
We own, or are in the process of obtaining, all rights to the trademarks
and trade names we believe are necessary to conduct our business as presently
operated. "Fashion Bug(R)", "Fashion Bug PLUS(R)", "L.A. BLUES(R)",
"Catherines(R)", "Catherine's PLUS SIZES(R)", "C.S.T. STUDIO(R)", "C.S.T.
SPORT(R)", "MAGGIE BARNES(R)", "ANNA MAXWELL(R)", "LIZ & ME(R)", "Lane
Bryant(R)", "VENEZIA(R)", "VENEZIA JEANS CLOTHING CO.(R)", "CACIQUE(R)",
"ELEMENTAL STRETCH(R)", "PLUS SIZE SPECIALIST(TM)", "FASHION BUG FASHION CHOICES
FASHION SAVINGS(TM)", "SERENADA(TM)", "CAPISTRANO(R)", and several other
trademarks and servicemarks of lesser importance to us have been registered or
are in the process of being registered with the United States Patent and
Trademark Office and in other countries.
We also own the following domain name registrations: charming.com,
charmingshoppes.com, fashionbug.com, fashionbugplus.com, catherines.com,
lanebryant.com and others of lesser importance.
Executive Offices
Charming Shoppes, Inc., was incorporated in Pennsylvania in 1969. Our
principal offices are located at 450 Winks Lane, Bensalem, Pennsylvania 19020.
Our telephone number is (215) 245-9100.
Available Information
We maintain an Internet website at www.charmingshoppes.com. As of March 25,
2003, copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, are available free of charge on or through this website as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission ("SEC"). Our historical
filings can also be accessed directly from the SEC's website at www.sec.gov.
8
<PAGE>
Item 2. Properties
We lease all our stores, with the exception of four stores, which we own.
Typically, store leases have initial terms of 5 to 20 years and generally
contain provisions for co-tenancies, renewal options, additional rentals based
on a percentage of sales, and payment of real estate taxes and common area
charges.
With respect to leased stores open as of February 1, 2003, the following
table shows the number of store leases expiring during the calendar periods
indicated, assuming the exercise of our renewal options:
<TABLE>
<CAPTION>
Number of
Period Leases Expiring
------ ---------------
<S> <C> <C>
2003 127(1)
2004 - 2008 739
2009 - 2013 394
2014 - 2018 326
2019 - 2023 393
2024 - 2028 220
Thereafter 45
<FN>
- --------------------
(1) Includes 66 stores on month-to-month leases
</FN>
</TABLE>
We own a 1,000,000 square foot distribution center in Greencastle, Indiana
that services our Fashion Bug and Fashion Bug Plus stores and a 213,000 square
foot distribution center in Memphis, Tennessee that services our Catherine's
stores. We also lease a 514,000 square foot distribution center near Columbus,
Ohio that services our Lane Bryant stores under an agreement with an affiliate
of Limited Brands to use the Ohio distribution center and receive related
distribution services.
On September 24, 2002, we acquired a 393,000 square foot distribution
center on 29 acres of land in White Marsh, Maryland. As a result of the use of
automated sorting systems and improved facility design in the White Marsh
facility, we will be able to consolidate both the Memphis and the Columbus
facilities into the White Marsh facility. As part of our cost reduction plan
(see "Item 1. General" above), we plan to relocate the Memphis distribution
center by June 2003. We plan to relocate the Columbus distribution center by
December 2003. The lease for the Columbus, Ohio distribution center and the
related logistics and transportation services agreement, which were originally
scheduled to terminate in August 2004, were terminated effective as of December
31, 2003 in accordance with early cancellation provisions of the lease and
agreement.
We lease 105,000 square feet of office space in Bensalem, Pennsylvania that
houses our corporate headquarters and certain Fashion Bug operations. We also
own approximately 22 acres in Bensalem with a 145,000 square foot office
building that houses our primary data processing facility and additional
administrative offices. We own a 99,000 square foot facility in Memphis,
Tennessee that houses our Catherine's corporate offices. We also lease 130,000
square feet of office space near Columbus, Ohio that houses our Lane Bryant
corporate offices. Spirit of America National Bank, our wholly owned credit card
bank subsidiary, occupies 30,000 square feet of leased office space in Miami
Township, Ohio and 48,000 square feet of leased space for a credit card
processing facility in Hollywood, Florida. As part of our cost reduction plan
(see "Item 1. General" above), we expect to move most of the functions performed
at the Hollywood, Florida facility to the Miami Township, Ohio facility by June
2003. We also maintain offices in New York City that
9
<PAGE>
occupy 13,000 square feet of leased space, and we own or lease a total of 43,000
square feet of office and warehouse space in Asia.
Item 3. Legal Proceedings
On October 26, 2001, a terminated employee filed a purported class action
suit in Alameda Superior Court, California against Lane Bryant, Inc. alleging
that she and all Lane Bryant store sales managers in California were
misclassified as exempt employees, and are actually nonexempt employees and
entitled to be paid overtime which they had not received. The plaintiff alleges
violations of Labor Code Sections 1194 and 515 and related claims, and seeks
back pay and injunctive relief for the misclassification, and reimbursement and
disgorgement of profits. The issue as to whether the case would be appropriate
for class treatment has not yet been joined.
On March 13, 2003, a former employee of Fashion Bug filed a purported class
action suit in Los Angeles County Superior Court, California against Charming
Shoppes and Fashion Bug of California, Inc. The allegations and claims in this
case are similar to those of the October 26, 2001 lawsuit. As of March 28, 2003,
the case has not yet been served on Charming Shoppes or Fashion Bug, and an
answer has not yet been prepared.
Charming Shoppes, Lane Bryant, and Fashion Bug intend to vigorously and
aggressively oppose class certification and the merits of the class cases should
either be certified, or the individual case should a class not be certified.
Although the ultimate outcome of these matters cannot be predicted with any
certainty at this stage, we do not believe that the cases will have a material
impact on our financial condition or results of operations based on the
information we presently have.
Other than ordinary routine litigation incidental to our business, there
are no other pending legal proceedings to which we or any of our subsidiaries
are a party, and there are no other proceedings that are expected to have a
material adverse effect on our financial condition or results of operations.
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
<PAGE>
Additional Part I Information - Our Executive Officers
The following list contains certain information relative to our executive
officers. There are no family relationships among any of our executive officers.
Dorrit J. Bern, 52, has served as Chairman of the Board of Directors since
January 1997. She has also served as President and Chief Executive Officer since
September 1995. Ms. Bern's term as a Director expires in 2005.
Joseph M. Baron, 55, has served as Executive Vice President and Chief
Operating Officer since March 2002. Prior to that, he served as President and
Chief Executive Officer of Homelife Corporation from February 1999 to October
2001, and as President of Sears Homelife Furniture from 1996 to February 1999.
Homelife Corporation filed a bankruptcy petition under Chapter 11 of the U. S.
Bankruptcy Code during July 2001.
Anthony A. DeSabato, 54, has served as Executive Vice President and
Corporate Director of Human Resources since 1990, and he has been employed by us
since 1987.
Eric M. Specter, 45, has served as Executive Vice President - Chief
Financial Officer since January 1997, and he has been employed by us since 1983.
He also served as Treasurer from February 1998 to March 2000.
Colin D. Stern, 54, has served as Executive Vice President and General
Counsel since 1990, and he has been employed by us since 1989. He has also
served as Secretary since February 1998.
Erna Zint, 59, has served as Executive Vice President - Sourcing since
January 1996.
Jonathon Graub, 44, has served as Senior Vice President - Real Estate,
since December 1999, and he has been employed by us since 1981.
Carmen Monaco, 56, 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, 56, 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 as Senior Vice President of Administration for National Media Corp. from
April 1995 to January 1998.
11
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Our common stock is traded on the over-the-counter market and quoted on the
Nasdaq National Market under the symbol "CHRS." The following table sets forth
the high and low sale prices for our common stock during the indicated periods,
as reported by Nasdaq.
<TABLE>
<CAPTION>
Fiscal 2003 Fiscal 2002
High Low High Low
<S> <C> <C> <C> <C>
1st Quarter............... $9.14 $5.46 $7.13 $4.62
2nd Quarter............... 8.90 5.74 7.05 5.18
3rd Quarter............... 7.42 3.86 7.00 4.48
4th Quarter............... 5.47 3.30 6.70 4.73
</TABLE>
The approximate number of holders of record of our common stock as of April
1, 2003 was 2,252. This number excludes individual stockholders holding stock
under nominee security position listings.
We have not paid any dividends since 1995, and we do not expect to declare
or pay any dividends on our common stock in the foreseeable future. In addition,
our existing credit facility and one of our agreements with Limited Brands
restrict the payment of dividends on our common stock. (See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Financing" and "Item 8. Financial Statements
and Supplementary Data - Notes to Consolidated Financial Statements - Note 7.
Debt").
12
<PAGE>
Item 6. Selected Financial Data
The following table presents selected financial data for each of our five
fiscal years ended as of January 30, 1999 through February 1, 2003. The selected
financial data is taken from our audited financial statements and should be read
in conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and
accompanying notes included under "Item 8. Financial Statements and
Supplementary Data."
<TABLE>
<CAPTION>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY
Fiscal Year Ended
Feb. 1, Feb. 2, Feb. 3, Jan. 29, Jan. 30,
(in thousands, except per-share amounts) 2003(1) 2002(1) 2001(1)(2) 2000(1) 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Statement Data:
Net sales...................................... $2,412,409 $1,993,843 $1,607,079 $1,196,529 $1,035,160
---------- ---------- ---------- ---------- ----------
Cost of goods sold, buying, and occupancy
expenses................................... 1,721,052 1,455,601 1,134,554 854,774 771,107
Selling, general, and administrative expenses.. 603,502 486,204 382,398 281,637 245,164
Amortization of goodwill....................... 0 4,885 4,885 0 0
Restructuring charge (credit).................. (4,813)(3) 37,708(3) 0 (3,471)(4) 54,246(5)
Non-recurring gain from demutualization of
insurance company.......................... 0 0 0 (6,700)(6) 0
---------- ---------- ---------- ---------- ----------
Total operating expenses....................... 2,319,741 1,984,398 1,521,837 1,126,240 1,070,517
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.................. 92,668 9,445 85,242 70,289 (35,357)
Other income, principally interest............. 2,328 4,730 8,304 9,594(7) 14,420
Interest expense............................... (20,292) (18,701) (8,894) ( 7,308) (10,052)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes, minority
interest, and cumulative effect of
accounting changes......................... 74,704 (4,526) 84,652 72,575 (30,989)
Income tax provision (benefit)................. 29,055 (120) 33,014 27,516(7) (10,854)
---------- ---------- ---------- ---------- ----------
Income (loss) before minority interest and
cumulative effect of accounting changes.... 45,649 (4,406) 51,638 45,059 (20,135)
Minority interest in net loss of consolidated
subsidiary................................. 679 0 0 0 0
Cumulative effect of accounting changes,
net of tax................................. (49,098)(8) 0 (540)(9) 0 0
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. $ (2,770) $ (4,406) $ 51,098 $ 45,059 $ (20,135)
========== ========== ========== ========== ==========
Basic net income (loss) per share:
Before cumulative effect of accounting
changes................................ $ .41 $(.04) $.51 $.46 $(.20)
Net income (loss).......................... (.02) (.04) .50 .46 (.20)
Basic weighted average common shares
outstanding................................ 113,810 105,842 101,119 98,609 99,441
Net income (loss) per share, assuming dilution:
Before cumulative effect of accounting
changes................................ $.39 $(.04) $.49 $.43 $(.20)
Net income (loss).......................... .01 (.04) .48 .43 (.20)
Diluted weighted average common shares and
equivalents outstanding.................... 130,937 105,842 115,027 115,888 99,441
Balance Sheet Data:
Total assets................................... $1,139,156 $1,143,917 $852,767 $784,796 $684,649
Current portion - long-term debt............... 12,595 9,379 4,954 1,920 16
Long-term debt................................. 203,045 208,491 113,540 105,213 119,475
Working capital................................ 196,725 145,047 208,389 161,376 192,274
Stockholders' equity........................... 561,634 549,802 493,269 436,263 383,572
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY
(Continued)
Fiscal Year Ended
Feb. 1, Feb. 2, Feb. 3, Jan. 29, Jan. 30,
2003(1) 2002(1) 2001(1)(2) 2000(1) 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Performance Data:
Including cumulative effect of accounting changes:
Net return on average stockholders' equity.. (0.5)% (0.8)% 11.0% 11.0% (5.0)%
Net return on average total assets.......... (0.2) (0.4) 6.2 6.1 (2.9)
Excluding cumulative effect of accounting changes:
Net return on average stockholders' equity.. 9.1% (0.9)% 11.2% 11.0% (5.0)%
Net return on average total assets.......... 3.9 (0.4) 6.3 6.1 (2.9)
</TABLE>
- --------------------
(1) Results for Fiscal 2003 and Fiscal 2002 include the results of Lane Bryant,
Inc., acquired August 16, 2001, from the date of acquisition. Results for
Fiscal 2003, Fiscal 2002, Fiscal 2001, and 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.
(2) Fiscal 2001 consisted of 53 weeks.
(3) In January 2002, our Board of Directors approved a restructuring plan which
included the closing of The Answer/Added Dimensions chain of 77 stores, the
conversion of approximately 20% of the Added Dimensions stores to
Catherine's stores, the closing of 130 under-performing Fashion Bug stores,
and the conversion of 44 Fashion Bug stores to Lane Bryant stores, which
resulted in a pre-tax charge of $37,708,000 in Fiscal 2002. We completed
the restructuring plan by the end of Fiscal 2003, and recognized a pre-tax
restructuring credit of $4,813,000, primarily as a result of favorable
negotiations of lease terminations.
(4) During Fiscal 2000, we revised our estimates of costs recognized during
Fiscal 1999 relating to the closing of our Bensalem distribution center and
the elimination of our men's business (see note (5) below). As a result, we
recognized pre-tax restructuring credits of $2,834,000 relating to the
closing of our distribution center and $2,096,000 relating to the
elimination of our men's business. In addition, we 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
chain.
(5) During Fiscal 1999, our Board of Directors approved a restructuring plan in
conjunction with the elimination of our men's business, which resulted in a
pre-tax charge of $34,000,000. In addition, our Board of Directors approved
a restructuring plan in conjunction with the decision to consolidate our
distribution center operations, which resulted in a pre-tax charge of
$20,246,000.
(6) During Fiscal 2000, we received a stock distribution from one of our mutual
insurance carriers in connection with the carrier's conversion to a
publicly held corporation (demutualization). We recorded the distribution
at its fair value and recognized the resulting non-recurring gain in income
from operations.
(7) During Fiscal 2003, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 145,
"Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 requires gains
and losses on extinguishments of debt to be classified as income from
continuing operations rather than as extraordinary items as previously
required under SFAS No. 4. In accordance with the early adoption provisions
of SFAS No. 145, we reclassified an extraordinary gain on early retirement
of debt of $1,232,000, net of income taxes of $664,000, for Fiscal 2000 to
income from continuing operations.
14
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY
(Continued)
(8) In Fiscal 2003, we fully adopted the provisions of SFAS No. 142, "Goodwill
and Other Intangible Assets." In accordance with the transition provisions
of SFAS No. 142, we tested goodwill related to our Catherine's acquisition
for impairment, and recorded a write-down of $43,975,000 to reduce the
carrying value of the goodwill to its estimated fair value. In addition, in
connection with the adoption of FASB Emerging Issues Task Force ("EITF")
Issue 02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor," we recognized a charge of
$5,123,000, net of income taxes of $2,758,000, that represents a reduction
in inventory cost for the cumulative effect of cash received from vendors
as of the beginning of Fiscal 2003. Pro forma net income (loss) and per
share information as if we had applied the provisions of EITF Issue 02-16
for all years presented is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
Feb. 2, Feb. 3, Jan. 29, Jan. 30,
2002(1) 2001(1)(2) 2000(1) 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pro forma net income (loss)...................... $(5,189) $51,309 $44,600 $(20,186)
Basic net income (loss) per share................ (.05) .51 .45 (.20)
Net income (loss) per share, assuming dilution... (.05) .48 .43 (.20)
</TABLE>
(9) We changed our method of accounting for sales returns and layaway sales in
accordance with the provisions of Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101") effective as of January 30, 2000.
The cumulative effect of the change as of January 30, 2000 was a reduction
in income of $540,000, net of a tax benefit of $334,000.
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 accompanying notes appearing elsewhere in this report. As used in
this report, the terms "Fiscal 2003," "Fiscal 2002," and "Fiscal 2001" refer to
our fiscal years ended February 1, 2003, February 2, 2002, and February 3, 2001,
respectively. Fiscal 2003 and Fiscal 2002 consisted of 52 weeks, while Fiscal
2001 consisted of 53 weeks. The term "Fiscal 2004" refers to our fiscal year
which will end on January 31, 2004.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters contained in the
following analysis and elsewhere in this report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements may include, but are not limited to, projections of revenues, income
or loss, capital expenditures and cost reductions, plans for future operations,
and financing needs or plans, as well as assumptions relating to the foregoing.
The words "expect," "project," "estimate," "predict," "anticipate," "plan,"
"believes," and similar expressions are also intended to identify
forward-looking statements. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
events and actual results, performance, and achievements could differ materially
from those set forth in, contemplated by, or underlying the forward-looking
statements. We assume no obligation to update any forward-looking statement to
reflect actual results or changes in, or additions to, the factors affecting
such forward-looking statements.
15
<PAGE>
Factors that could cause our actual results of operations or financial
condition to differ from those described in this report include, but are not
necessarily limited to, the following:
o Our business is dependent upon our being able to accurately predict
rapidly changing fashion trends, customer preferences and other
fashion-related factors, which we may not be able to successfully
accomplish in the future.
o The general slowdown in the United States economy and the uncertain
economic outlook has led to reduced consumer demand for our apparel
and accessories and may continue to do so in the future.
o The women's specialty retail apparel industry is highly competitive
and we may be unable to compete successfully against existing or
future competitors.
o We cannot assure the successful implementation of our business plan
for increased profitability and growth in our plus-sized women's
apparel business.
o Our business plan is largely dependent upon the continued growth in
the plus-sized women's apparel market which may not continue.
o We depend on key personnel, particularly our Chief Executive Officer,
Dorrit J. Bern, and we may not be able to retain or replace these
employees or recruit additional qualified personnel.
o We depend on our distribution centers and could incur significantly
higher costs and longer lead times associated with distributing our
products to our stores if any of these distribution centers were to
shut down for any reason.
o We depend for our working capital needs on the availability of credit,
including credit we receive from our suppliers and their agents, and
on our credit card securitization program. If we were unable to obtain
sufficient financing at affordable cost, our ability to merchandise
our stores would be adversely affected.
o We rely significantly on foreign sources of production and face a
variety of risks (including political instability, imposition of
duties or quotas, increased security requirements applicable to
imports, delays in shipping, increased costs of transportation, and
issues relating to compliance with domestic or international labor
standards) generally associated with doing business in foreign markets
and importing merchandise from abroad.
o Our stores experience seasonal fluctuations in net sales and operating
income. Any decrease in sales or margins during our peak sales
periods, or in the availability of working capital needed in the
months preceding such periods, could have a material adverse effect on
our business. In addition, extreme or unseasonable weather conditions
may have an impact on our sales.
o War, acts of terrorism, or the threat of either may negatively impact
availability of merchandise and customer traffic to our stores, or
otherwise adversely affect our business.
16
<PAGE>
o We may be unable to obtain adequate insurance for our operations at a
reasonable cost.
o We may be unable to protect our trademarks and other intellectual
property rights, which we believe are important to our success and our
competitive position.
o We may be unable to hire and retain suitable sales associates at our
stores.
o We may be unable to successfully implement our cost reduction plan
described elsewhere in this report.
o Our manufacturers may be unable to manufacture and deliver merchandise
to us in a timely manner or to meet our quality standards.
o Our sales are dependent upon a high volume of traffic in the strip
centers and malls in which our stores are located, and our future
growth is dependent upon the availability of suitable locations for
new stores.
o We may be unable to successfully integrate Lane Bryant into our
current operating structure, or implement our plan to re-establish
growth and improve merchandise assortments in our Lane Bryant stores,
and we currently rely on logistics services from Limited Brands, Inc.
("Limited Brands") with respect to our Lane Bryant stores.
CRITICAL ACCOUNTING POLICIES
We have prepared the financial statements and accompanying notes included
elsewhere in this report in conformity with accounting principles generally
accepted in the United States. This requires us to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. These estimates and assumptions are based on historical
experience, analysis of current trends, and various other factors that we
believe to be reasonable under the circumstances. Actual results could differ
from those estimates under different assumptions or conditions.
We periodically reevaluate our accounting policies, assumptions, and
estimates and make adjustments when facts and circumstances warrant.
Historically, actual results have not differed materially from those determined
using required estimates. Our significant accounting policies are described in
the notes accompanying the financial statements included elsewhere in this
report. However, we consider the following accounting policies to be more
critical to, and involve the most significant management judgments and estimates
in, the preparation of our financial statements and accompanying notes.
Revenue Recognition
Our revenues from merchandise sales are net of returns and allowances and
exclude sales tax. We have adopted Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," effective as of the beginning of Fiscal 2001. As a result of
adoption of SAB 101, we established a reserve for estimated future sales returns
based on an analysis of actual returns and we began deferring recognition of
layaway sales to the date of delivery. A change in our actual rates of sales
returns and layaway sales experience would affect the level of revenue
recognized.
17
<PAGE>
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. The program provides discounts on customer purchases over a
twelve-month period upon payment of a $25 annual fee. Revenues from card fees
under the program are recognized as sales over the life of the membership as
discounts are earned by the customer. If a customer does not earn discounts in
an amount that exceeds the card fee, such difference is recognized as revenue
upon the expiration of the annual period. Upon early cancellation of a loyalty
card, refunds of membership fees are reduced by the amount of any discounts
granted to the member under the program. We recognize our costs of administering
the program in cost of goods sold as incurred. Revenues recognized from card
fees offset discounts granted under the program. An increase in the level of
refunds of membership fees could impact the level of revenue recognized. As of
December 1, 2002, we discontinued the issuance of new cards under this program
and will introduce a new customer loyalty card program during Fiscal 2004 that
will be operated under our proprietary credit card program.
Inventories
We value our merchandise inventories at the lower of cost or market under
the retail inventory method (average cost basis), which is an averaging method
that has been widely used in the retail industry. Under the retail inventory
method ("RIM"), the valuation of inventories at cost and the resulting gross
margins are adjusted in proportion to markdowns and shrinkage on our retail
inventories. The use of the RIM will result in valuing inventories at the lower
of cost or market if markdowns are currently taken as a reduction of the retail
value of inventories. The RIM calculation involves certain significant
management judgments and estimates including, among others, merchandise markon,
markup, markdowns, and shrinkage, which significantly affect the ending
inventory valuation at cost as well as resulting gross margins. Events such as
store closings, liquidations, and the general economic environment for retail
apparel sales could result in an increase in the level of markdowns, which under
the RIM could result in lower inventory values and increases to cost of goods
sold as a percentage of net sales in future periods. In addition, failure to
properly estimate markdowns currently can result in an overstatement of
inventory cost under the lower of cost or market principle. At the end of Fiscal
2003, for purposes of valuing our inventory, we recognized markdowns that had
not been taken and which reduced inventories by approximately $9.6 million.
In connection with our restructuring plan announced on January 28, 2002
(see "RESULTS OF OPERATIONS - Restructuring Charge/Credit" below), we recognized
additional markdowns of $3.0 million in the fourth quarter of Fiscal 2002. The
markdowns were related to the valuation of inventory for stores that we closed
during the first half of Fiscal 2003.
We elected to adopt the provisions of FASB EITF Issue 02-16 (see
"Accounting for Cash Consideration Received From a Vendor" below) as of the
beginning of Fiscal 2003. As of February 1, 2003, $8.1 million of cash received
from vendors has been deferred into inventory and will be recognized as
inventory is sold.
Impairment of Long-Lived Assets
Prior to Fiscal 2003, we evaluated the recoverability of our long-lived
assets in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." In August 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121 and the accounting
and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
18
<PAGE>
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" related to the disposal of a segment of a business.
SFAS No. 144 also resolved certain implementation issues related to SFAS No.
121. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 related to
the recognition and measurement of the impairment of long-lived assets to be
held and used and provides additional guidance on estimating cash flows when
testing for recoverability. SFAS No. 141 also requires that long-lived assets to
be disposed of other than by sale (such as by abandonment) be classified as held
and used until disposal, and establishes more restrictive criteria for
classifying assets as held for sale.
Under SFAS No. 144, we are required to assess our long-lived assets for
recoverability whenever events or changes in circumstances indicate that the
carrying amounts of long-lived assets may not be recoverable. We consider
historical performance and future estimated results in our evaluation of
potential impairment and then compare the carrying amount of the asset to the
estimated future undiscounted cash flows expected to result from the use of the
asset. If the estimated future undiscounted cash flows are less than the
carrying amount of the asset, we write down the asset to its estimated fair
value and recognize an impairment loss. Our estimate of fair value is generally
based on either appraised value or the present value of future cash flows, based
on a number of assumptions and estimates.
During Fiscal 2003, we recorded a $2.7 million write-down of under-
performing assets related to our joint venture in accordance with the provisions
of SFAS No. 144. The amount of the write-down is the same as what would have
been recorded under SFAS No. 121. The adoption of SFAS No. 144 did not have a
material impact on our financial position or results of operations in Fiscal
2003. In connection with our restructuring plan announced on January 28, 2002
(see "RESULTS OF OPERATIONS - Restructuring Charge/Credit" below), we recognized
a write-down of store fixed assets of approximately $17.8 million during Fiscal
2002 in accordance with the provisions of SFAS No. 121. We believe that the
estimates and assumptions used in determining these impairment charges are
reasonable and appropriate.
We fully adopted SFAS No. 142, "Goodwill and Other Intangible Assets" as of
the beginning of Fiscal 2003. In accordance with the transition provisions of
SFAS No. 142, we performed a review of our goodwill and other intangible assets
for possible impairment. As a result, we determined that the carrying value of
goodwill related to our Catherine's acquisition (including the value of
intangible assets we did not separately account for at the date of the
Catherine's acquisition) exceeded the estimated fair value of the Catherine's
goodwill under SFAS No. 142. We determined the estimated fair value of the
Catherine's goodwill using the present value of expected future cash flows
associated with the Catherine's assets, and we recorded a write-down, which is
not deductible for income tax purposes, of $44.0 million to reduce the carrying
value of the goodwill to its estimated fair value. The majority of the
write-down is attributable to the value of unrecorded trademarks. We also
evaluated our goodwill, trademarks, tradenames, and internet domain names
related to our Lane Bryant acquisition as of February 3, 2002 in accordance with
the provisions of SFAS No. 142, and determined that there has been no impairment
of these assets. The write-down of the Catherine's goodwill has been presented
as the cumulative effect of an accounting change as of February 3, 2002 in our
Consolidated Statement of Operations and Comprehensive Income (Loss) for Fiscal
2003. The calculation of the estimated fair value of the goodwill and other
intangible assets required estimates, assumptions, and judgments, and results
might have been materially different if different estimates, assumptions, and
judgments had been used.
In accordance with the provisions of SFAS No. 142, we are required to
re-evaluate goodwill and other intangible assets at least annually, or more
frequently if there is an indication of possible impairment. We performed this
annual review during the fourth quarter of Fiscal 2003, and determined that
there has been no additional impairment of these assets.
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<PAGE>
Acquisitions - Purchase Price Allocation
In accordance with SFAS No. 141, "Business Combinations," we allocate the
cost of acquisitions to the assets acquired and liabilities assumed. We assign
to all identifiable assets acquired (including intangible assets), and to all
identifiable liabilities assumed, a portion of the cost of the acquired company
equal to the estimated fair value of such assets and liabilities at the date of
acquisition. We record the excess of the cost of the acquired company over the
sum of the amounts assigned to identifiable assets acquired less liabilities
assumed as goodwill. We make the initial purchase price allocation based on the
evaluation of information and estimates available at the date of the financial
statements. As final information regarding the fair value of assets acquired and
liabilities assumed is evaluated and estimates are refined, we make appropriate
adjustments to the amounts allocated to those assets and liabilities and make
corresponding changes to the amounts allocated to goodwill. We use all available
information to make these fair value determinations and, for major business
acquisitions, typically engage an outside appraisal firm to assist in the fair
value determination of the acquired long-lived assets. We have, if necessary, up
to one year after the closing date of an acquisition to finish these fair value
determinations and finalize the purchase price allocation.
In connection with the acquisition of Lane Bryant on August 16, 2001, we
recorded a liability of $4.6 million for estimated costs related to an
unfavorable service contract. During the first quarter of Fiscal 2003, we
revised our estimate of costs related to the contract to $2.3 million, which
resulted in a decrease in the goodwill recognized in connection with our Lane
Bryant acquisition of $1.4 million, net of deferred income taxes of $0.9
million. During the second quarter of Fiscal 2003, we recorded a liability for
severance in accordance with an agreement entered into with an affiliate of
Limited Brands at the time of the acquisition to use the existing Lane Bryant
distribution center and receive related distribution services on a transition
basis, which resulted in an increase in Lane Bryant goodwill of $0.6 million,
net of deferred income taxes of $0.4 million. During the third quarter of Fiscal
2003, we reduced the acquisition value assigned to equipment and leasehold
improvements in the existing Lane Bryant distribution center, which will be
abandoned at the end of the transition period as a result of our acquisition of
a replacement distribution center in White Marsh, Maryland. During the third
quarter of Fiscal 2003, we also increased a liability for future claims related
to Lane Bryant's pre-acquisition operations and decreased deferred tax assets as
a result of a correction of the effective tax rate used to determine deferred
taxes related to certain assets acquired. These third-quarter adjustments
resulted in an increase in Lane Bryant goodwill of $3.7 million, including net
deferred income taxes of $0.7 million. During the fourth quarter of Fiscal 2003,
we finalized the unfavorable service contract and other liabilities, which
resulted in a decrease in Lane Bryant goodwill of $0.6 million, net of deferred
income taxes of $0.2 million.
Asset Securitization
We use an asset securitization program to fund the credit card receivables
generated by our Fashion Bug credit card program. The Fashion Bug credit cards
are issued by Spirit of America National Bank, one of our subsidiaries. Asset
securitization is a practice commonly used in the retail industry which allows
companies with proprietary credit card programs to finance credit card
receivables at attractive rates. Asset securitization involves the sale of the
bank's Fashion Bug proprietary credit card receivables to a special purpose
entity, which in turn transfers the receivables to a qualified special purpose
entity (the "Trust") which is administered by an independent trustee. Because
the Trust qualifies as a qualifying special purpose entity ("QSPE"), its assets
and liabilities are not consolidated in our balance sheet.
The Trust issues to investors various forms of certificates or credit card
receivable interests (the "Certificates") that represent interests in the
underlying Trust assets. The Trust pays to the holders of
20
<PAGE>
Certificates a portion of future scheduled cash flows under preset terms and
conditions, the receipt of which is dependent upon cash flows generated by the
underlying performance of the Trust assets.
In each securitization transaction, we retain certain subordinated
interests, which effectively serve as a form of credit enhancement to the
Certificates sold to outside investors. To the extent amounts remain available
after repayment to the outside investors, the amounts are paid to us. Neither
the investors nor the Trust have recourse against us beyond the combination of
Trust assets and our subordinated interests, other than for breaches of certain
customary representations, warranties and covenants. These representations,
warranties, covenants, and related indemnities do not protect the Trust or the
outside investors against credit-related losses on the receivables.
In accordance with SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," we record an interest in
the estimated present value of cash flows to be received by us over the expected
outstanding period of the receivables. These cash flows essentially represent
finance charges and late fees in excess of the amounts paid to Certificate
holders, credit losses, and service fees, and are referred to as the
interest-only strip ("I/O strip"). We use certain valuation assumptions related
to the average lives of the receivables sold and anticipated credit losses, as
well as the appropriate market discount rate, in determining the estimated
present value of the I/O strip. Changes in the average life of the receivables
sold, discount rate, and credit-loss percentage could adversely impact the
actual value of the I/O strip. Accordingly, actual results could differ
materially from the estimates, and changes in circumstances could result in
significant future changes to the assumptions currently being used.
Costs Associated With Exit or Disposal Activities
We have traditionally recognized certain costs associated with
restructuring plans as of the date of commitment to the plan, in accordance with
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." In July 2002, the FASB
issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," which nullified EITF Issue No. 94-3. Under SFAS No. 146, for
disposal activities initiated after December 31, 2002 we are required to
recognize liabilities for costs associated with an exit or disposal activity
when the liabilities are incurred. Our commitment to a plan, by itself, does not
create an obligation that meets the definition of a liability. Under SFAS No.
146, we would be required to recognize severance pay over time rather than "up
front" if the benefit arrangement requires employees to render future service
beyond a "minimum retention period." The liability for severance pay would be
recognized as employees render service over the future service period, even if
the benefit formula used to calculate an employee's termination benefit is based
on length of service. Fair value should be used for initial measurement of
liabilities under SFAS No. 146. Adoption of SFAS No. 146 could result in the
deferral of recognition of certain costs for restructuring plans that we
initiate subsequent to December 31, 2002 from the date we commit to such a plan
to the date that costs are incurred under the plan.
On March 18, 2003, we announced the implementation of a cost reduction plan
(see "RECENT DEVELOPMENTS" below). Costs incurred in connection with the
implementation of this plan will be accounted for in accordance with the
provisions of SFAS No. 146.
Accounting for Cash Consideration Received From a Vendor
EITF Issue 02-16, "Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor," addresses the accounting for cash
consideration received from a vendor, including both a reseller of the vendor's
products and an entity that purchases the vendor's products from a reseller.
21
<PAGE>
We elected to adopt the provisions of EITF Issue No. 02-16 as of the beginning
of Fiscal 2003. We recognized a charge of $5.1 million, net of income taxes of
$2.8 million, that represents the cumulative effect of the deferral of cash
received from vendors as of the beginning of Fiscal 2003. The impact of the
adoption of EITF 02-16 on the year ended February 1, 2003 was an increase in
cost of goods sold of $0.2 million. As of February 1, 2003, $8.1 million of cash
received from vendors has been deferred into inventory and will be recognized as
a reduction of cost of goods sold as inventory is sold.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
allows two alternatives for accounting for stock-based compensation: the
"intrinsic value method" in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," or the "fair value"
method in accordance with SFAS No. 123. Companies electing to adopt the
intrinsic value method are required to provide pro forma disclosures of the
effect of adopting the fair value method.
We account for stock-based compensation using the intrinsic value method.
We recognize compensation expense for stock options and stock awards which have
an exercise price less than the market price of our common stock at the date of
grant of the option or award. We measure compensation expense based on the
difference between the market price and the exercise price of an option or award
at the date of grant. This compensation expense is recognized over the vesting
period of each option or award. We do not recognize compensation expense for
options having an exercise price equal to the market price on the date of grant
or for shares purchased under our Employee Stock Purchase Plan.
Under the fair value method, we would be required to recognize compensation
expense for all stock options and stock awards. Compensation would be measured
based on an estimated fair value of the option or award, using an option pricing
model, such as the Black-Scholes or binomial pricing model. These models require
estimates or assumptions as to the dividend yield and price volatility of the
underlying stock, the expected life of the option or award, and a relevant
risk-free interest rate. Under the fair value method, our after-tax compensation
expense would have increased by $5.1 million ($.03 per diluted share), $2.6
million ($.03 per diluted share), and $1.9 million ($.01 per diluted share) for
Fiscal 2003, 2002, and 2001, respectively. For purposes of determining these
amounts, we used the Black-Scholes option-pricing model and various assumptions
which are detailed in "Item 8. Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements - NOTE 1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - Common Stock Plans" below. The effect of using the fair
value method for determining stock-based compensation expense might have been
materially different if different estimates, assumptions, and judgments had been
used.
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<PAGE>
RESULTS OF OPERATIONS
Financial Summary
The following table sets forth certain financial data expressed as a
percentage of net sales and on a comparative basis:
<TABLE>
<CAPTION>
Percentage Increase
(Decrease)
Percentage of Net Sales From Prior Year
Fiscal Fiscal Fiscal Fiscal Fiscal
2003 2002 2001 2003-2002 2002-2001
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 21.0% 24.1%
Cost of goods sold, buying, and occupancy..... 71.3 73.0 70.6 18.2 28.3
Selling, general, and administrative.......... 25.0 24.4 23.8 24.1 27.1
Restructuring charge (credit)................. (0.2) 1.9 -- ** **
Amortization of goodwill...................... -- 0.2 0.3 (100.0) 0.0
Income from operations........................ 3.9 0.5 5.3 881.1 (88.9)
Other income, principally interest............ 0.1 0.2 0.5 (50.8) (43.0)
Interest expense.............................. 0.8 0.9 0.5 8.5 110.3
Income tax provision (benefit)................ 1.2 -- 2.1 ** (100.4)
Minority interest in net loss of subsidiary... 0.0 -- -- ** --
Cumulative effect of accounting changes....... (2.0) -- (0.0) ** **
Net income (loss)............................. (0.0) (0.2) 3.2 (37.1) (108.6)
<FN>
- --------------------
** Not meaningful
</FN>
</TABLE>
The following table sets forth our net sales by store brand:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
February 1, 2003 February 2, 2002 February 3, 2001
Fiscal Fourth Fiscal Fourth Fiscal Fourth
(in millions) Year Quarter Year Quarter Year Quarter
---- ------- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Fashion Bug............ $1,156.0 $288.9 $1,164.0 $303.4 $1,213.1 $340.8
Lane Bryant............ 906.9 236.1 445.3(1) 254.1 0.0 0.0
Catherine's(2)......... 345.2 74.6 381.7 88.0 394.0 93.9
Monsoon/Accessorize.... 4.3 1.5 2.8 1.6 0.0 0.0
-------- ------ -------- ------ -------- ------
Total net sales........ $2,412.4 $601.1 $1,993.8 $647.1 $1,607.1 $434.7
======== ====== ======== ====== ======== ======
<FN>
- --------------------
(1) Sales from the date of acquisition on August 16, 2001.
(2) Includes sales of Added Dimensions stores, which have been closed or
converted to Catherine's stores.
</FN>
</TABLE>
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<PAGE>
The following table sets forth certain additional information related to
changes in our net sales:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 1, 2003 February 2, 2002
Fiscal Fourth Fiscal Fourth
Year Quarter Year Quarter
---- ------- ---- -------
<S> <C> <C> <C> <C>
(Decrease) increase in comparable store sales(1)(2):
Fashion Bug....................................... 0 % 1 % (7)% (8)%
Catherine's(3).................................... 0 0 (2) (5)
Lane Bryant....................................... (6) (12) -- --
Sales from new stores as a percentage of total
consolidated prior-period sales:
Fashion Bug....................................... 2 1 5 4
Catherine's....................................... 2 1 3 2
Lane Bryant....................................... 25 2 28 58
Prior-period sales from closed stores as a percentage
of total consolidated prior-period sales:
Fashion Bug....................................... (3) (4) (3) (3)
Catherine's(3).................................... (4) (3) (3) (1)
Lane Bryant....................................... (0) (1) (0) --
Increase (decrease) in total sales..................... 21 % (7)% 24 % 49 %
<FN>
- --------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation.
(2) Comparable store sales for Lane Bryant are based on historical data, giving
effect to our acquisition of Lane Bryant as if it had occurred on February
4, 2001. Results may not be equivalent to the change in total sales.
(3) Includes sales of Added Dimensions stores, which have been closed or
converted to Catherine's stores.
</FN>
</TABLE>
Comparison of Fiscal 2003 to Fiscal 2002
Net Sales
Net sales were $2,412.4 million in Fiscal 2003, an increase of 21.0% from
$1,993.8 million in Fiscal 2002, primarily due to our acquisition of Lane Bryant
in August 2001. The number of retail stores in operation at the end of Fiscal
2003 was 2,248, compared to 2,446 at the end of Fiscal 2002. For details
regarding store activity, see the table included in "FINANCIAL CONDITION -
Liquidity and Capital Resources" below. Had we acquired Lane Bryant as of the
beginning of Fiscal 2002, we would have experienced an overall comparable store
sales decrease of 2.0% from Fiscal 2002. Lane Bryant stores had comparable store
sales decreases in sweaters, denim, and intimate apparel. In particular, the
Lane Bryant chain experienced poor customer acceptance of, and fit and quality
issues with, certain of its products during the second half of Fiscal 2003,
resulting in higher levels of promotional pricing. In addition, certain basic
products were under-stocked, resulting in missed sales opportunities. Due to
product lead times, these issues are expected to negatively impact Lane Bryant
results for the Fiscal 2004 first quarter, and could negatively impact Lane
Bryant results for the Fiscal 2004 second quarter. We are currently executing a
plan to re-establish growth at Lane Bryant which includes improved merchandise
assortments for the Fall 2003 season.
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<PAGE>
For Fashion Bug stores, comparable store sales increases in junior and plus
sportswear, footwear, intimate apparel, and accessories were offset by declines
in other missy sportswear, dresses, and coats. For Catherine's stores,
comparable store sales increases in casual sportswear were offset by declines in
other merchandise categories. During Fiscal 2003, we discontinued the Added
Dimensions chain, closed the remaining stores in the chain, and liquidated the
remaining Added Dimensions store inventory. We continue to be affected by a weak
economy and an uncertain geopolitical climate. During the first two months of
Fiscal 2004, we experienced a 12% decrease in Lane Bryant comparative store
sales and a 7% decrease in overall comparative store sales.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers (see "CRITICAL ACCOUNTING POLICIES - Revenue Recognition"
above). We recognized $23.2 million of revenues in Fiscal 2003 and $13.6 million
of revenues in Fiscal 2002 in connection with this program. We offset revenues
recognized from card fees by discounts granted under the program. As of December
1, 2002 we discontinued the issuance of new cards under this program and will
introduce a new customer loyalty card program during Fiscal 2004 that will be
operated under our proprietary credit card program.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $1,721.1 million in
Fiscal 2003, an increase of 18.2% from $1,455.6 million in Fiscal 2002,
principally reflecting the increase in net sales. As a percentage of net sales,
these costs decreased 1.7% in Fiscal 2003 as compared to Fiscal 2002.
Cost of goods sold as a percentage of net sales decreased 3.0% in Fiscal
2003 as compared to Fiscal 2002. The higher merchandise margins reflected
improved inventory management in the Fashion Bug and Catherine's chains and
benefits from our restructuring plan (see "Restructuring Charge/Credit" below),
partially offset by declining margins in the Lane Bryant chain. Markdowns taken
in connection with liquidation of Added Dimensions inventories during Fiscal
2003 were offset by $3.0 million of costs accrued at the end of Fiscal 2002
related to the valuation of inventory for stores to be closed as the result of
our restructuring plan. Merchandise margins for Fiscal 2003 were negatively
impacted by higher levels of promotional activity during the second half of the
fiscal year as a result of a generally sluggish Christmas holiday season and
poor customer acceptance of certain Lane Bryant products, as discussed above.
Cost of goods sold includes merchandise costs, net of discounts and allowances,
freight, and inventory shrinkage. Net merchandise costs and freight are
capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales increased 1.3%
in Fiscal 2003 as compared to Fiscal 2002. The increase in buying and occupancy
expenses as a percentage of net sales was primarily attributable to the lack of
leverage on relatively fixed occupancy costs as a result of negative comparable
store sales. Occupancy expenses for Fiscal 2003, as a percentage of net sales,
increased 1.2% from Fiscal 2002. Relatively higher occupancy expenses for the
Lane Bryant stores and a $2.7 million write-down of under-performing assets
related to our joint venture (see "RECENT DEVELOPMENTS" below) contributed to
the increase in occupancy expenses as a percentage of net sales. Buying expenses
for Fiscal 2003, as a percentage of net sales, increased 0.1% from Fiscal 2002.
Buying expenses include payroll, payroll related costs, and operating expenses
for our buying departments and warehouses. Occupancy expenses include rent, real
estate taxes, insurance, common area maintenance, utilities, maintenance, and
depreciation for our stores and warehouse facilities and equipment. Buying and
occupancy costs are treated as period costs and are not capitalized as part of
inventory.
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<PAGE>
Selling, General, and Administrative
Selling, general, and administrative expenses were $603.5 million in Fiscal
2003, an increase of 24.1% from $486.2 million in Fiscal 2002, principally
reflecting the acquisition of Lane Bryant. As a percentage of net sales, these
costs increased by 0.6% in Fiscal 2003 as compared to Fiscal 2002. Selling
expenses increased 0.4% as a percentage of net sales. The increase was
attributable to a number of factors, including higher store payroll and benefit
costs, new point-of-sales systems at Fashion Bug, and an increase in direct
marketing expenses in the Catherine's and Lane Bryant chains. General and
administrative expenses increased 0.2% as a percentage of net sales in Fiscal
2003, primarily as a result of increased employee benefit costs, costs
associated with transitional service agreements related to the Lane Bryant
acquisition, and the lack of leverage on fixed costs, particularly at Lane
Bryant. During Fiscal 2003, we completed the integration of Lane Bryant's
information systems, which we expect will result in future cost synergies for
the Company.
Restructuring Charge/Credit
On January 28, 2002, we announced a restructuring plan, including a number
of initiatives designed to position us for increased profitability and growth in
the women's plus-size apparel business. The major components of the plan
included (1) the closing of The Answer/Added Dimensions chain of 77 stores,
including the conversion of approximately 20% of the Added Dimensions stores to
Catherine's stores, (2) the closing of 130 under-performing Fashion Bug stores,
and (3) the conversion of 44 Fashion Bug store locations to Lane Bryant stores.
The restructuring plan resulted in a pre-tax charge of $37.7 million in the
fourth quarter of Fiscal 2002. The restructuring charge included a $17.8 million
non-cash write-down of fixed assets (primarily store fixtures and improvements)
in the stores to be closed, $18.5 million of anticipated payments to landlords
for the early termination of existing store leases, $800 thousand for severance
costs, and $600 thousand for sign removal and other costs.
During Fiscal 2003, we completed the restructuring plan, and we recognized
a pre-tax restructuring credit of $4.8 million. The restructuring credit was
primarily a result of our ability to negotiate lease terminations on terms more
favorable than our original estimates. Because a majority of the store closings
occurred during the second half of Fiscal 2003, the full benefit of the
restructuring plan will not occur until Fiscal 2004.
Amortization of Goodwill
We recognized $4.9 million of amortization of goodwill during Fiscal 2002
related to our Catherine's acquisition. We adopted the provisions of SFAS No.
142 as of February 3, 2002, and we are no longer amortizing the Catherine's
goodwill. However, the Catherine's goodwill and goodwill related to our
acquisition of Lane Bryant are subject to periodic impairment reviews in
accordance with the provisions of SFAS No. 142 (see "CRITICAL ACCOUNTING
POLICIES - Impairment of Long-Lived Assets" above and "Cumulative Effect of
Accounting Changes" below).
Other Income
Other income was $2.3 million in Fiscal 2003, a decrease of 50.8% from $4.7
million in Fiscal 2002. This decrease was primarily caused by a decrease in
interest income. Interest income decreased as a result of a decrease in the
average yield on investments during Fiscal 2003 as compared to Fiscal 2002.
26
<PAGE>
Interest Expense
Interest expense was $20.3 million in Fiscal 2003, an increase of 8.5% from
$18.7 million in Fiscal 2002. This increase was primarily a result of
amortization of fees related to our credit facility, and to a lesser extent, a
result of additional long-term mortgage borrowings and acquisitions of
point-of-sale equipment under long-term capital leases. In addition, a write-off
of $951 thousand of unamortized deferred financing costs related to our $67.5
million term loan, which was repaid during the period (see "FINANCING" below),
resulted in additional interest expense in Fiscal 2003. These increases were
partially offset by reduced interest expense in Fiscal 2003 as compared to
Fiscal 2002 as a result of relatively lower interest rates on borrowings and
reduced levels of borrowings. During Fiscal 2003, we converted or redeemed $96.0
million of 7.5% Convertible Subordinated Notes due 2006, repaid a $67.5 million
11.5% term loan, and issued $150.0 million of 4.75% Senior Convertible Notes Due
2012 (see "FINANCING" below).
Income Tax Provision
The income tax provision for Fiscal 2003 was $29.1 million, resulting in a
38.9% effective tax rate, as compared to an income tax benefit for Fiscal 2002
of $120 thousand, resulting in a (2.7)% effective tax rate. The unusual Fiscal
2002 effective tax rate was a result of the effect of a $1.8 million provision
related to one of our employee insurance programs on a relatively small pre-tax
loss.
Cumulative Effect of Accounting Changes
We adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets" in full as of February 3, 2002. In accordance with the transition
provisions of SFAS No. 142, we tested goodwill related to our Catherine's
acquisition for impairment during Fiscal 2003, and recorded a write-down of
$44.0 million to reduce the carrying value of the goodwill to its estimated fair
value. We also elected to adopt the provisions of EITF Issue No. 02-16,
"Accounting by a Customer (Including a Reseller) for Cash Consideration Received
from a Vendor" as of the beginning of Fiscal 2003. The cumulative effect at the
beginning of Fiscal 2003 from deferring the recognition of cash received from
vendors was a charge of $5.1 million, net of income taxes of $2.8 million. The
write-down of goodwill and the deferral of cash received from vendors have been
presented as the cumulative effect of accounting changes as of February 3, 2002
in our Consolidated Statement of Operations and Comprehensive Income (Loss) for
Fiscal 2003 (see "CRITICAL ACCOUNTING POLICIES - Impairment of Long-Lived
Assets" and "CRITICAL ACCOUNTING POLICIES - Accounting for Cash Consideration
Received From a Vendors" above).
Comparison of Fiscal 2002 to Fiscal 2001
Net Sales
Net sales were $1,993.8 million in Fiscal 2002, an increase of 24.1% from
$1,607.1 million in Fiscal 2001, primarily due to our acquisition of Lane Bryant
in August 2001. The number of retail stores in operation at the end of Fiscal
2002 was 2,446 (including 647 Lane Bryant stores), compared to 1,755 at the end
of Fiscal 2001. In line with overall consumer shopping trends and a generally
weak retail sales environment, we experienced a year-over-year decrease in
overall comparable store sales in Fiscal 2002 of 4.0%. For Fashion Bug stores,
improvements in junior sportswear were offset by declines in other merchandise
categories. In January 2001, we announced plans to support growth in plus-size
apparel, and eliminated girls apparel from Fashion Bug stores effective at the
end of the 2000 - 2001 winter season. Sales of Fashion Bug
27
<PAGE>
girls apparel were approximately $38.0 million during Fiscal 2001. For
Catherine's stores, an increase in Fiscal 2002 sales of casual sportswear was
offset by declines in other merchandise categories.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers (see "CRITICAL ACCOUNTING POLICIES - Revenue Recognition"
above). We recognized $13.6 million of revenues from card fees in connection
with this program in Fiscal 2002.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $1,455.6 million in
Fiscal 2002, an increase of 28.3% from $1,134.6 million in Fiscal 2001,
principally reflecting the increase in net sales. As a percentage of net sales,
these costs increased by 2.4% in Fiscal 2002 as compared to Fiscal 2001.
Cost of goods sold as a percentage of net sales increased 0.4% in Fiscal
2002 as compared to Fiscal 2001. Reduced merchandise margins in our Fashion Bug
and Catherine's stores as a result of an increased level of promotional activity
during Fiscal 2002, and costs related to exiting the girls business in our
Fashion Bug stores, were partially offset by higher merchandise margins for our
Lane Bryant stores and to a lesser extent by close management of in-season
inventory levels. Cost of goods sold includes merchandise costs, net of
discounts and allowances, freight, and inventory shrinkage. Net merchandise
costs and freight are capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales increased 2.0%
in Fiscal 2002 as compared to Fiscal 2001. The increase in buying and occupancy
expenses as a percentage of net sales was primarily attributable to the lack of
leverage on relatively fixed occupancy costs as a result of the decline in
comparable store sales. Increased utilities expenses, relatively higher
occupancy expenses for new and relocated stores as compared to our existing
stores, and relatively higher occupancy expenses for our Lane Bryant stores also
contributed to the increase in buying and occupancy expenses as a percentage of
net sales. Buying expenses increased slightly as a percentage of net sales,
primarily as a result of buying costs for Lane Bryant stores, which are
relatively higher due to the product development and design process required to
support a 100% private-label business. Buying expenses include payroll, payroll
related costs, and operating expenses for our buying departments and warehouses.
Occupancy expenses include rent, real estate taxes, insurance, common area
maintenance, utilities, maintenance, and depreciation for our stores and
warehouse facilities and equipment. Buying and occupancy costs are treated as
period costs and are not capitalized as part of inventory.
Selling, General, and Administrative
Selling, general, and administrative expenses were $486.2 million in Fiscal
2002, an increase of 27.1% from $382.4 million in Fiscal 2001, principally
reflecting the acquisition of Lane Bryant. As a percentage of net sales, these
costs increased by 0.6% in Fiscal 2002 as compared to Fiscal 2001. Selling
expenses increased 0.8% as a percentage of net sales. The relative increase was
attributable to the lack of leverage on relatively fixed store payroll expenses
as a result of the decline in comparable store sales. An improvement in our
credit operations (a component of selling expenses) as a result of reduced
interest rates related to our asset securitization program was partially offset
by increased delinquencies in our proprietary credit card program during the
latter part of Fiscal 2002. General and administrative expenses decreased 0.2%
as a percentage of net sales in Fiscal 2002, primarily as a result of the
synergistic effect of a larger sales base on corporate administrative expenses
and the favorable impact of cost reduction initiatives. Selling, general, and
administrative expenses exclude goodwill amortization related to our acquisition
of Catherine's.
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<PAGE>
Other Income
Other income was $4.7 million in Fiscal 2002, a decrease of 43.0% from $8.3
million in Fiscal 2001. This decrease was primarily caused by a decrease in
interest income. Interest income decreased as a result of lower levels of
invested funds and a decrease in the average yield on investments during Fiscal
2002 as compared to Fiscal 2001. During Fiscal 2002, investments in marketable
securities were converted into cash and cash equivalents, and we used $83.0
million of cash and cash equivalents in connection with the acquisition of Lane
Bryant.
Interest Expense
Interest expense was $18.7 million in Fiscal 2002, an increase of 110.3%
from $8.9 million in Fiscal 2001. This increase was primarily the result of
short-term and long-term borrowings incurred in connection with the Lane Bryant
acquisition, and to a lesser extent, the result of additional long-term mortgage
borrowings and acquisitions of point-of-sale equipment under long-term capital
leases.
Income Tax Provision (Benefit)
The income tax benefit for Fiscal 2002 was $120 thousand resulting in a
(2.7)% effective tax rate, as compared to an income tax provision for Fiscal
2001 of $33.0 million, resulting in a 39% effective tax rate. The unusual Fiscal
2002 effective tax rate was a result of the effect of a $1.8 million provision
related to one of our employee insurance programs on a relatively small pre-tax
loss.
Comparison of Fourth Quarter 2003 to Fourth Quarter 2002
Net Sales
Net sales in the fourth quarter of Fiscal 2003 were $601.2 million, a
decrease of 7.1% from net sales of $647.1 million in the fourth quarter of
Fiscal 2002. The decrease in sales was primarily attributable to negative
comparative store sales at our Lane Bryant chain and a decrease in the number of
stores in operation during the Fiscal 2003 fourth quarter as a result of our
store closing initiative (see "Comparison of Fiscal 2003 to Fiscal 2002 -
Restructuring Charge/Credit" above). We experienced a quarter-over-quarter
decrease of 5% in overall comparable store sales in the fourth quarter of Fiscal
2003. Lane Bryant experienced a 12% decrease in comparable store sales as a
result of poor customer acceptance of, and fit and quality issues with, certain
of its products, which resulted in higher levels of promotional pricing. In
addition, certain basic products were under-stocked, resulting in missed sales
opportunities. Due to product lead times, these issues are expected to
negatively impact Lane Bryant results for the Fiscal 2004 first quarter, and
could negatively impact results for the Fiscal 2004 second quarter.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $451.3 million in
the fourth quarter of Fiscal 2003, a decrease of 6.4% from $482.1 million in the
fourth quarter of Fiscal 2002. As a percentage of net sales, these costs
increased by 0.6% in the fourth quarter of Fiscal 2003 as compared to the fourth
quarter of Fiscal 2002. Cost of goods sold, as a percentage of net sales,
decreased 0.3% in the fourth quarter of Fiscal 2003 as compared to the fourth
quarter of Fiscal 2002. Significantly improved margins in our Fashion Bug and
Catherine's stores were offset by reduced gross margins from the higher levels
of promotional pricing at our Lane Bryant stores. Cost of goods sold for the
fourth quarter of Fiscal 2003
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<PAGE>
included $5.1 million of costs related to the valuation of Lane Bryant
inventories. Cost of goods sold for the fourth quarter of Fiscal 2002 included
$3.0 million of costs related to the valuation of inventory for stores to be
closed during the first half of Fiscal 2003 as a result of the restructuring
plan announced on January 28, 2002. Buying and occupancy expenses, expressed as
a percentage of net sales, increased 0.9% in the fourth quarter of Fiscal 2003
as compared to the fourth quarter of Fiscal 2002. The increase in buying and
occupancy expenses was primarily attributable to the lack of leverage on
relatively fixed occupancy costs as a result of negative overall comparable
store sales, particularly at the Lane Bryant chain.
Selling, General, and Administrative
Selling, general, and administrative expenses were $144.6 million in the
fourth quarter of Fiscal 2003, a decrease of 10.6% from $161.7 million in the
fourth quarter of Fiscal 2002. As a percentage of net sales, these costs
decreased by 0.9% in the fourth quarter of Fiscal 2003 as compared to the fourth
quarter of Fiscal 2002. The decrease is primarily a result of cost efficiencies
from integration efforts and home office expense reductions at Lane Bryant,
partially offset by the lack of leverage from negative comparable store sales
and increases in employee benefit costs.
Interest Expense
Interest expense was $3.1 million in Fiscal 2003, a decrease of 56.9% from
$7.3 million in Fiscal 2002. The decrease was primarily the result of relatively
lower interest rates on borrowings and reduced levels of borrowings. During
Fiscal 2003, we replaced $96.0 million of 7.5% Convertible Subordinated Notes
due 2006 and a $67.5 million 11.5% term loan with $150.0 million of 4.75% Senior
Convertible Notes Due 2012 and paid down our short-term borrowings (see
"FINANCING" below).
RECENT DEVELOPMENTS
On March 18, 2003, we announced a cost reduction plan, designed to take
advantage of the centralization of all corporate administrative services
throughout the company and to realize efficiencies available to us, in order to
improve our profitability. We expect this cost reduction plan to improve
annualized pretax earnings by approximately $45 million, with an improvement of
approximately $18 million in pre-tax earnings during Fiscal 2004. We expect that
the full annual pre-tax benefit of $45 million will first be realized during the
fiscal year ending January 30, 2005. Execution of the cost reduction plan is
expected to result in a pre-tax charge of approximately $10 - $12 million in
Fiscal 2004. Components of the charge include a $7 - $8 million non-cash charge,
primarily for the write-down of distribution center fixed assets, and $3 - $4
million of cash items, primarily related to severance as a result of a reduction
in work force. We expect the execution of the plan to have no material after-tax
cash impact. The components of the cost reduction plan are as follows:
o Reduction in Corporate Operating Expenses. Our ability to realize
efficiencies by streamlining processes and gaining optimal pricing through
the consolidation of vendors will reduce costs. We will continue to
centralize finance, human resources, and other administrative functions in
order to leverage the efficiency of our shared services organization.
o Reduction in Corporate and Divisional Workforce. We implemented a workforce
reduction at our corporate and divisional home offices of 160 positions, or
approximately 14%.
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<PAGE>
o Consolidation of Distribution Center Operations. In September 2002, we
announced the purchase of a distribution center in White Marsh, Maryland,
to replace an existing distribution center in Columbus, Ohio, during Fiscal
2004 (see "FINANCIAL CONDITION - Liquidity and Capital Resources" below).
As part of the cost reduction plan, we will also consolidate our Memphis,
Tennessee distribution center in the White Marsh facility. This
consolidation is expected to result in a net workforce reduction of
approximately 50 positions.
o Consolidation of Credit Operations. We plan to consolidate our Hollywood,
Florida credit operations into our Milford, Ohio facility, which is
expected to result in a net workforce reduction of approximately 75
positions.
o Closing of 9 Monsoon/Accessorize stores which we operate under a joint
venture with Monsoon plc. In October 2000, we announced the signing of a
joint venture agreement with Monsoon plc, in order to bring the United
Kingdom's apparel and accessories concepts of MONSOON(R) and ACCESSORIZE(R)
stores to the United States. We tested the concept in the United States
during 2001 and 2002. The performance of the stores opened during the test
period did not meet our expectations. Higher than anticipated lease costs
led to our decision to discontinue the operation of these stores. We plan
to close the 9 Monsoon/ Accessorize stores during Fiscal 2004.
We are implementing these initiatives to position the Company for increased
profitability. While our strategic focus continues to be on increasing revenue
and margins, particularly at Lane Bryant, our immediate focus is to reduce our
cost structure and leverage our size through efficiencies in operations.
FINANCIAL CONDITION
Liquidity and Capital Resources
Our primary sources of working capital are cash flow from operations, our
proprietary credit card receivables securitization agreements, our investment
portfolio, and our credit facility described below. The following table
highlights certain information related to our liquidity and capital resources:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
(dollars in thousands) 2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Cash and cash equivalents................. $ 102,026 $ 36,640 $ 56,544
Long-term available-for-sale securities... 23,472 22,015 76,461
Cash provided by operating activities..... 206,084 142,865 93,269
Working capital........................... 196,725 145,047 208,389
Current ratio............................. 1.6 1.4 1.9
Long-term debt to equity ratio............ 36.2% 37.9% 23.0%
</TABLE>
Our net cash provided by operating activities increased $63.2 million in
Fiscal 2003 as compared to Fiscal 2002, from $142.9 million to $206.1 million.
The increase was primarily a result of an increase in net income before non-cash
write-downs of goodwill and capital assets, non-cash charges for depreciation
and amortization, and increases in prepaid and accrued expenses. In addition,
our investment in inventories, net of accounts payable, decreased during Fiscal
2003 as compared to Fiscal 2002 as a result of improved vendor terms from
conforming Lane Bryant's vendor terms to our corporate terms. These changes were
partially offset by a $19.8 million decrease in accrued restructuring costs
during Fiscal 2003.
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<PAGE>
Our cash provided by operating activities increased $49.6 million in Fiscal
2002 as compared to Fiscal 2001, from $93.3 million to $142.9 million. Excluding
the acquisition of Lane Bryant, our investment in inventories, net of accounts
payable, decreased $46.3 million in Fiscal 2002 as compared to Fiscal 2001 as a
result of certain inventory management initiatives. Accrued restructuring costs
increased $19.4 million in Fiscal 2002 as compared to a decrease of $7.8 million
in accrued restructuring costs during Fiscal 2001.
As a result of a decline in interest rates, a portion of our investments in
U. S. government agency bonds with early redemption provisions were called for
redemption during the first half of Fiscal 2002. The decrease in
available-for-sale securities during Fiscal 2002 was primarily a result of these
redemptions. We invested the proceeds from these early redemptions in cash
equivalents until we acquired Lane Bryant in August 2001.
Our capital expenditures were $74.3 million, $63.0 million, and $57.9
million in Fiscal 2003, 2002, and 2001, respectively. In Fiscal 2003, these
expenditures were primarily for the construction, remodeling, and fixturing of
new and existing retail stores, additions and improvements to our corporate
offices and distribution centers, the acquisition of a new distribution center
in White Marsh, Maryland (see below), and systems technology. In addition,
pursuant to a program to replace our existing point-of-sale ("POS") equipment,
we acquired $3.5 million, $24.7 million, and $14.9 million of point-of-sale
equipment for our Fashion Bug and Catherine's stores under capital leases in
Fiscal 2003, 2002, and 2001, respectively. These leases generally have an
initial lease term of 60 months and contain a bargain purchase option. During
Fiscal 2002, we re-negotiated the terms of certain of the capital leases. The
re-negotiated leases were combined into a new lease with a 60-month term and a
lower interest rate. The effect of the re-negotiation was a net (decrease)
increase in total lease payments as follows: Fiscal 2002 - ($25 thousand);
Fiscal 2003 - ($149 thousand); Fiscal 2004 - $235 thousand; Fiscal 2005 - $337
thousand; Fiscal 2006 - $6 thousand; Fiscal 2007 - $2.1 million.
On September 24, 2002, we acquired a 393,000 square foot distribution
center on 29 acres of land in White Marsh, Maryland at a cost of $17.3 million.
As a result of the use of automated sorting systems and improved facility design
in the White Marsh facility, we will be able to consolidate both the Memphis and
the Columbus facilities into the White Marsh facility (see "RECENT DEVELOPMENTS"
above). We plan to relocate the Memphis distribution center by June 2003 and the
Columbus distribution center by December 2003. In connection with our
acquisition of Lane Bryant from Limited Brands in August 2001, we entered into
an agreement with an affiliate of Limited Brands to use the Ohio distribution
center and receive related distribution services. The lease for the Columbus,
Ohio distribution center and the related logistics and transportation services
agreement, which were originally scheduled to terminate in August 2004, were
terminated effective as of December 31, 2003 in accordance with early
cancellation provisions of the lease and agreement.
In December 2002, we entered into two financing leases for the purchase of
material handling systems and related equipment and software for the White Marsh
distribution center. The lease terms provide for the availability of funds as
the equipment and related software is delivered and accepted. The first capital
lease obligation of $2.5 million is payable over a term of 60 months at an
interest rate of 6.77%, and contains a bargain purchase option. As of February
1, 2003, we had received all of the equipment under this lease. The second
capital lease obligation of $10 million is payable over a term of 60 months at
an interest rate of 7.35% and contains a bargain purchase option. We anticipate
that the delivery, installation, and acceptance of the equipment will be
completed by the middle of Fiscal 2004. As of February 1, 2003, we have acquired
approximately $1.0 million of equipment under this lease.
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<PAGE>
In addition to the capital leases for the White Marsh facility referred to
above, we anticipate capital expenditures of approximately $50 million during
Fiscal 2004. These expenditures will primarily be for construction and fixturing
of new stores, remodeling and fixturing of existing stores, investments in
management information systems technology, and improvements to our corporate
offices and distribution centers. We expect to finance these capital
expenditures principally through internally generated funds.
The following table sets forth information with respect to store activity
for Fiscal 2003 and planned store activity for Fiscal 2004:
<TABLE>
<CAPTION>
Fashion Monsoon/
Bug Lane Bryant Catherine's Accessorize Total
--- ----------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
Fiscal 2003:
Stores at February 2, 2002....... 1,252 647 538 9 2,446
----- --- --- -- -----
Stores opened.................... 7 25 24 1 57
Stores converted(1).............. (37) 36 (3) (4)
Stores closed.................... (139) (19) (92) (1) (251)
------ ---- ---- -- ------
Net changes in stores............ (169) 42 (71) 0 (198)
------ ---- ---- -- ------
Stores at February 1, 2003....... 1,083 689 467 9 2,248
===== === === === =====
Stores relocated during period... 17 4 11 -- 32
Stores remodeled during period... 4 6 9 -- 19
Fiscal 2004:
Planned store openings(2)........ 0-5 35 15 -- 50-55
Planned store relocations........ 20-25 20-25 15-20 -- 55-70
Planned store closings(2)........ 20-30 15 15 9 59-69
<FN>
- --------------------
(1) During Fiscal 2003, 9 Added Dimension stores were converted to Catherine's
stores and 3 Catherine's stores were converted to Lane Bryant stores. Of
the 37 Fashion Bug store conversions to Lane Bryant stores, 4 stores were
closed and are in the process of being converted as of February 1, 2003.
(2) Excludes conversion of 11 Fashion Bug stores or Catherine's stores to Lane
Bryant stores.
</FN>
</TABLE>
At February 1, 2003, our commitments for future principal payments under
our short-term and long-term debt obligations, and minimum lease payments under
our capital leases and operating leases, were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
(in millions) 2004 2005 2006 2007 2008 Thereafter
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Long-term debt...... $ 3.3 $ 4.6 $ 7.5 $ 2.0 $ 2.0 $164.5
Capital leases...... 13.2 12.3 10.3 7.0 2.9 0.0
Operating leases(1). 203.7 165.8 131.2 98.0 71.5 144.5
------ ------ ------ ------ ----- ------
Total............... $220.2 $182.7 $149.0 $107.0 $76.4 $309.0
====== ====== ====== ====== ===== ======
<FN>
- --------------------
(1) Commitments under operating leases include $78.3 million payable under the
Lane Bryant master sublease with Limited Brands, which we have guaranteed.
</FN>
</TABLE>
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<PAGE>
We have reached a preliminary settlement with the Internal Revenue Service
regarding its audit of our corporate-owned life insurance ("COLI") program. We
anticipate that the cost of the settlement will be approximately $23.5 million,
which includes $18.5 million of income taxes and $5.0 million of interest, net
of a tax benefit of $2.7 million. Of the $18.5 million of income taxes, $16.1
million will be satisfied through the use of existing operating loss and tax
credit carrybacks. The net cash payment under the settlement will be $7.4
million. The net liability for this settlement has been included in income taxes
payable in our consolidated balance sheet as of February 1, 2003. As part of the
proposed settlement, we will surrender the existing life insurance policies.
These policies have a cash surrender value of approximately $15.9 million, which
we will receive upon surrender of the policies. We have reclassified the cash
value of the policies from other non-current assets to other current assets in
our consolidated balance sheet as of February 1, 2003. Although the ultimate
outcome of this matter cannot be predicted with certainty, we do not believe
that settlement will have a material impact on our financial condition or
results of operations.
We have formed a trust called the Charming Shoppes Master Trust to which
Spirit of America National Bank, our credit card bank, has transferred, through
a special purpose entity, its interest in credit card receivables created under
our Fashion Bug proprietary credit card program. We, together with the trust,
have entered into various agreements under which the trust can sell, on a
revolving basis, interests in these receivables for a specified term. When the
revolving period terminates, an amortization period begins during which
principal payments are made to the parties with whom the trust has entered into
the securitization agreement. We securitized $384.2 million and $423.1 million
of credit card receivables in Fiscal 2003 and Fiscal 2002, respectively, and had
$301.3 million of securitized credit card receivables outstanding as of February
1, 2003. We held certificates and retained interests in our securitizations of
$50.2 million as of the end of Fiscal 2003, which were generally subordinated in
right of payment to certificates issued by the trust to third-party investors.
Our obligation to repurchase receivables sold to the trust is limited to those
receivables that, at the time of their transfer, fail to meet the trust's
eligibility standards under normal representations and warranties. To date, our
repurchases of receivables pursuant to this obligation have been insignificant.
On November 22, 2002, we issued $100.0 million of new five-year asset-
backed certificates in a private placement, of which $80.0 million have been
sold to investors to-date. To the extent that the remaining certificates are not
sold, we will hold them as a retained interest. The weighted average fixed
interest rate on the certificates sold is 4.68%. These certificates replaced an
$83.5 million securitization series that matured during the fourth quarter of
Fiscal 2003.
Charming Shoppes Receivables Corp. and Charming Shoppes Seller, Inc., our
consolidated wholly-owned indirect subsidiaries, are separate special purpose
entities created for the securitization program. At February 1, 2003, Charming
Shoppes Receivables Corp. held $38.1 million of Charming Shoppes Master Trust
certificates and retained interests and Charming Shoppes Seller, Inc. held
retained interests of $1.2 million (which are included in the $50.2 million of
retained interests we held at February 1, 2003). These assets are first and
foremost available to satisfy the claims of the respective creditors of these
separate corporate entities, including certain claims of investors in the
Charming Shoppes Master Trust.
We could be affected by certain events that would cause the trust to hold
proceeds of receivables within the trust as additional enhancement, which
proceeds would otherwise be available to be paid to us with respect to our
subordinated interests. For example, if either we or the trust fail to meet
certain financial performance standards, a credit enhancement condition would
occur and the trust would be required to retain amounts otherwise payable to us.
In addition, the failure to satisfy certain financial performance standards
could further cause the trust to stop using collections on trust assets to
purchase new receivables, and would require such collections to be used to repay
investors on a prescribed basis, as provided in the trust
34
<PAGE>
agreements. If this were to occur, it could result in our having insufficient
liquidity; however, we believe we should have sufficient notice to seek
alternative forms of financing through other third-party providers. As of
February 1, 2003, the trust was in compliance with all applicable financial
performance standards. Amounts placed into enhancement accounts, if not required
to be paid to the other certificate holders, will be available to us at the
termination of the securitization series. We have no obligation to directly fund
the enhancement account of the trust, other than for breaches of customary
representations, warranties, and covenants and for customary indemnities. These
representations, warranties, covenants, and indemnities do not protect the trust
or investors in the trust against credit-related losses on the receivables. The
providers of the credit enhancements and trust investors have no other recourse
to us.
These securitization agreements are intended to improve our overall
liquidity by providing short-term sources of funding. The agreements provide
that we will continue to service the credit card receivables and control credit
policies. This control allows us, absent certain adverse events, to fund
continued credit card receivable growth and to provide the appropriate customer
service and collection activities. Accordingly, our relationship with our credit
card customers is not affected by these agreements. See "CRITICAL ACCOUNTING
POLICIES - Asset Securitizations" above, "MARKET RISK" below, and "Item 8.
Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note 14. Asset Securitization" for further discussion of our asset
securitization program.
We also have non-recourse agreements under which third parties provide
accounts receivable proprietary credit card sales funding programs for both our
Catherine's and Lane Bryant stores. These funding programs expire in January
2005 for Catherine's and in January 2006 for Lane Bryant. Under these
agreements, the third parties reimburse us daily with respect to the proprietary
credit card sales generated by the respective store's credit card accounts.
Under the Catherine's agreement, we may be required to repurchase receivables
from the third party under certain conditions relating to a change in control.
Under the Lane Bryant agreement, we may be required to repurchase receivables
from the third party upon termination of the agreement. The net balances of
Catherine's accounts receivable held by the third party at February 1, 2003 and
February 2, 2002 were approximately $85.8 million and $98.4 million,
respectively. The net balances of Lane Bryant accounts receivable held by the
third party at February 1, 2003 and February 2, 2002 were approximately $195.3
million and $206.2 million, respectively.
We have not paid any dividends since 1995, and we do not expect to declare
or pay any dividends on our common stock in the foreseeable future. The payment
of future dividends is within the discretion of our Board of Directors and will
depend upon our future earnings, if any, our capital requirements, financial
condition and other relevant factors. Additionally, our existing credit facility
and one of our agreements with Limited Brands restrict the payment of dividends
on our common stock.
We believe that our capital resources and liquidity position are sufficient
to support our current operations. Our requirements for working capital, capital
expenditures, and repayment of debt and other obligations are expected to be
funded from operations, supplemented as needed by short-term or long-term
borrowings available under our credit facility, our proprietary credit card
receivables securitization agreements, leases, and other available financing
sources.
Financing
On May 28, 2002, we completed a private placement of $130.0 million of
4.75% Senior Convertible Notes due 2012 (the "Senior Notes"). On June 20, 2002,
the initial purchasers in the private placement exercised their option to
purchase an additional $20.0 million principal amount of the Senior Notes,
resulting in the private placement of Senior Notes in an aggregate principal
amount of $150.0 million. We registered
35
<PAGE>
the Senior Notes with the Securities and Exchange Commission for resale by the
initial purchasers during August 2002.
The Senior Notes will mature on June 1, 2012 and are convertible at any
time prior to maturity into shares of our common stock at a conversion price of
$9.88 per share, subject to adjustment upon certain events. The Senior Notes are
redeemable at our option, in whole or in part, at any time on or after June 4,
2007, at declining redemption prices, starting at 102.38% of principal and
decreasing to 100.48% on or after June 1, 2011. Under certain circumstances
involving a change in control of the Company, holders of the Senior Notes may
require us to repurchase all or a portion of the Senior Notes at 100% of the
principal amount plus any accrued and unpaid interest. Also, under such
circumstances we have the option of paying the repurchase price in shares of our
common stock, valued at 95% of the average of the closing prices of the common
stock for a five-day trading period immediately before and including the third
trading day preceding the repurchase date. There is no sinking fund for the
Senior Notes.
Net proceeds received from the issuance of the Senior Notes were $145.5
million. We used a portion of the net proceeds to repay in full our $67.5
million term loan due August 16, 2004, $3.5 million outstanding under our
revolving credit facility, and $6.9 million of the 7.5% Convertible Subordinated
Notes due 2006 called for redemption (see below). We also used a portion of the
proceeds to purchase 2,675,000 shares of our common stock at a cost of $18.3
million. The remaining proceeds ($49.3 million) were invested in cash and cash
equivalents and were subsequently used for the purchase of 9,525,993 shares of
our common stock from Limited Brands (see below). In addition, we wrote off $951
thousand of unamortized deferred financing costs related to the term loan. In
accordance with the early-application provisions of SFAS No. 145, the write-off
of the deferred financing costs is included in continuing operations in the
Fiscal 2003 Consolidated Statements of Operations (see "Item 8. Financial
Statements and Supplementary Data - Notes To Consolidated Financial Statements -
Note 1. Summary of Significant Accounting Policies - Impact of Recent Accounting
Pronouncements"). The term loan that was repaid had an 11.5% interest rate and
various financial covenants.
On May 29, 2002, we called our 7.5% Convertible Subordinated Notes due 2006
(the "Subordinated Notes") for redemption on June 28, 2002. The redemption price
was 102.5% of the principal amount of the Subordinated Notes, plus accrued and
unpaid interest up to the date of redemption. The Subordinated Notes had an
original maturity date of July 15, 2006, and could be converted into shares of
our common stock until the close of business on June 27, 2002 at a conversion
price of $7.46 per share. Between May 29, 2002 and June 27, 2002, the holders of
$89.1 million principal amount of the Subordinated Notes converted their
holdings into 11,944,338 shares of our common stock pursuant to the conversion
terms of the Subordinated Notes. Accrued interest expense of $2.0 million (net
of a tax benefit of $1.0 million) on the Subordinated Notes that were converted
was reclassified to additional paid-in capital. On June 28, 2002, the remaining
Subordinated Notes, with an aggregate principal amount of $6.9 million, were
redeemed for $7.4 million, including the 2.5% redemption premium and accrued
interest of $236 thousand to the date of redemption. In accordance with the
early-application provisions of SFAS No. 145, the redemption premium of $174
thousand is included in continuing operations in the Fiscal 2003 Consolidated
Statements of Operations and Comprehensive Income (Loss) (see "Item 8. Financial
Statements and Supplementary Data - Notes To Consolidated Financial Statements -
Note 1. Summary of Significant Accounting Policies - Impact of Recent Accounting
Pronouncements").
On August 28, 2002, we purchased 3,175,331 shares of our common stock from
Limited Brands for $21.3 million ($6.705 per share). On September 17, 2002, we
purchased an additional 6,350,662 shares of our common stock from Limited Brands
for $44.1 million ($6.95 per share). The transactions were financed through the
use of existing cash and proceeds from the issuance of our 4.75% Senior
Convertible Notes. We
36
<PAGE>
had previously issued 9,525,993 shares of our common stock to Limited Brands in
connection with our acquisition of Lane Bryant in August 2001. The purchased
shares are being held as treasury shares.
As of February 1, 2003, under authority granted by our Board of Directors
during prior fiscal years, we are authorized to repurchase approximately 5
million additional shares of our common stock. Our ability to exercise this
authority currently is restricted by the terms of our revolving credit facility
and an agreement with Limited Brands that we entered into in conjunction with
our acquisition of Lane Bryant. We are currently negotiating with all parties to
obtain consents that will permit us to purchase additional shares of our common
stock. Subject to obtaining such consents, and as conditions may allow, we may
acquire additional shares of our common stock. Such shares, if purchased, would
be held as treasury shares.
As of February 1, 2003, we had a $300.0 million revolving credit facility,
which provides for cash borrowings and enables us to issue up to $150.0 million
of letters of credit for overseas purchases of merchandise. As of February 1,
2003, there were no borrowings outstanding under the revolving credit facility.
The availability of borrowings under our revolving credit facility is subject to
limitations based on eligible inventory and the value of certain real property.
The credit facility is secured by our general assets, except for certain assets
related to our credit card securitization program, certain real properties and
equipment subject to other mortgages, our interest in our joint venture with
Monsoon plc, and the assets of our non-U.S. subsidiaries. The credit facility
expires on August 16, 2004, and can be renewed for an additional year at our
option.
The interest rate on borrowings under the revolving credit facility ranges
from Prime to Prime plus .75% per annum for Prime Rate Loans, and LIBOR plus
2.0% to LIBOR plus 2.75% per annum for Eurodollar Rate Loans, and is determined
quarterly, based on our Leverage Ratio or excess availability, as defined in the
credit facility. As of February 1, 2003, the interest rate on borrowings under
the revolving credit line was 4.25%.
The revolving credit facility includes limitations on sales and leasebacks,
the incurrence of additional liens and debt, capital lease financing, and other
limitations. The revolving credit facility also requires, among other things,
that we not pay dividends on our common stock and, under certain circumstances,
that we maintain an Adjusted Tangible Net Worth of $228.0 million (subject to
adjustment). As of the end of Fiscal 2003, we were not in violation of any of
the covenants included in the revolving credit facility. We had outstanding
letters of credit totaling $66.6 million as of February 1, 2003, and the excess
availability under the revolving credit facility was $149.8 million.
In November 2001, we borrowed $10.9 million under a 7.77% mortgage note.
The mortgage note has a ten-year term with 119 monthly installments of principal
and interest of $103 thousand commencing in January 2002, and a final payment of
any remaining unpaid principal and interest in December 2011. The mortgage note
is secured by land, buildings, and fixtures we own in Bensalem, Pennsylvania and
by leases and rents owned or received by us from tenants of the Bensalem
facility. The net proceeds from the mortgage note were used to repay a portion
of the borrowings outstanding under our revolving credit facility.
In December 2001, we borrowed $5.0 million under an 8.15% note. The note
has a three-year term with 35 monthly installments of principal and interest of
$126 thousand commencing in January 2002, and a final payment of any remaining
unpaid principal and interest in December 2004. The note is secured by our
equipment and fixtures in our distribution center in Greencastle, Indiana. The
net proceeds from the note were used to repay a portion of the borrowings
outstanding under our revolving credit facility.
37
<PAGE>
In October 2002, we borrowed $14.0 million under a 6.53% mortgage note. The
note has a ten-year term with 120 monthly installments of principal in the
amount of $117 thousand plus interest. The mortgage note is secured by land, a
building, and certain fixtures at the White Marsh, Maryland distribution center.
The net proceeds were used to finance a substantial portion of the White Marsh
acquisition.
In December 2002, we entered into two financing leases for the purchase of
material handling systems and related equipment and software for the White Marsh
distribution center (see "Liquidity and Capital Resources" above).
As part of the acquisition of Catherine's, we assumed a 7.5% mortgage note
of $6.9 million ($6.1 million of principal was outstanding on this note as of
February 1, 2003) and certain capital lease obligations totaling $2.8 million as
of the date of acquisition. The mortgage financing agreement provides for a
mortgage facility with a seven-year term and monthly payments based on a 20-year
amortization period. A final principal payment of $5.6 million is payable in
Fiscal 2006. The mortgage note is secured by land and buildings at our
Catherine's office and distribution center in Memphis, Tennessee. There is a
pre-payment penalty of 1% of the outstanding principal. If we sell the Memphis,
Tennessee distribution center in connection with our cost reduction plan, we may
be required to repay this mortgage in full. The capital leases are for data
processing and POS equipment. At the end of the initial lease term, we have the
option of purchasing the capital lease equipment at fair market value (or at $1
in the case of the POS equipment), renewing the leases, or returning the
equipment to the lessor.
MARKET RISK
We manage our Fashion Bug proprietary credit card program through various
operating entities that we own. The primary activity of these entities is to
service our proprietary credit card portfolio, the balances of which we sell
under a credit card securitization program. Under the securitization program, we
can be exposed to fluctuations in interest rates to the extent that the interest
rates charged to our customers vary from the rates paid on certificates issued
by the trust. Until November 2000, the credit card program billed finance
charges based on a fixed rate. As of November 2000, finance charges on all
accounts are billed using a floating rate index (the Prime lending rate),
subject to a floor and limited by legal maximums. As of February 1, 2003, a
portion of the certificates are at fixed rates. To the extent that interest
rates decline, we may be exposed to interest-rate risk on our fixed-rate
certificates. The floating rate index on our floating-rate certificates is
either one-month LIBOR or the commercial paper rate, depending on the issuance.
Consequently, we have reduced our exposure to fluctuations in interest rates.
However, we have exposure in the movement of basis risk between the floating
rate index on the certificates and the Prime rate. As of February 1, 2003, the
floating-rate finance charge rate was below the contractual floor rate, thus
exposing us to a portion of interest-rate risk. To the extent that short-term
interest rates were to increase by one percentage point by the end of Fiscal
2004, an increase of approximately $700 thousand in selling, general, and
administrative expenses would result.
As of February 1, 2003, there were no borrowings outstanding under our
revolving credit facility. To the extent that there are borrowings outstanding
under our revolving credit facility, such borrowings would be exposed to
variable interest rates. An increase in market interest rates would increase our
interest expense and decrease our cash flows. A decrease in market interest
rates would decrease our interest expense and increase our cash flows.
We are not subject to material foreign exchange risk, as our foreign
transactions are primarily U.S. Dollar-denominated and our foreign operations do
not constitute a material part of our business.
38
<PAGE>
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
See "Item 8. Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note 1. Summary of Significant Accounting
Policies - Impact of Recent Accounting Pronouncements."
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.
39
<PAGE>
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 February 1, 2003 and February 2, 2002, 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 February 1, 2003. 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 February 1, 2003 and February 2, 2002, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended February 1, 2003, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, in the
fiscal year ended February 1, 2003, the Company changed its method of accounting
for goodwill and indefinite-lived intangible assets, in accordance with SFAS No.
142, "Goodwill and Other Intangible Assets," and changed its method of
accounting for cash consideration received from vendors in accordance with EITF
Issue 02-16, "Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor." In the fiscal year ended February 3,
2001, the Company changed its method of accounting for sales returns and
allowances and layaway sales.
/S/ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 18, 2003
40
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 1, February 2,
(dollars in thousands, except per share amounts) 2003 2002
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................................. $ 102,026 $ 36,640
Available-for-sale securities, including fair value adjustments of
$0 as of February 1, 2003 and $24 as of February 2, 2002 .......... 50,286 48,351
Merchandise inventories .................................................. 286,472 300,407
Deferred taxes ........................................................... 11,726 21,228
Prepayments and other .................................................... 77,504 78,118
----------- -----------
Total current assets ..................................................... 528,014 484,744
----------- -----------
Property, equipment, and leasehold improvements - at cost ................ 668,168 657,067
Less accumulated depreciation and amortization ........................... 348,295 341,055
----------- -----------
Net property, equipment, and leasehold improvements ...................... 319,873 316,012
----------- -----------
Trademarks and other intangible assets ................................... 171,138 171,794
Goodwill ................................................................. 68,594 110,243
Available-for-sale securities, including fair value adjustments of $(134)
as of February 1, 2003 and $(39) as of February 2, 2002 ........... 23,472 22,015
Other assets ............................................................. 28,065 39,109
----------- -----------
Total assets ............................................................. $ 1,139,156 $ 1,143,917
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings..................................................... $ 0 $ 54,296
Accounts payable ......................................................... 147,952 107,891
Accrued expenses ......................................................... 163,598 148,373
Income taxes payable ..................................................... 7,144 0
Current portion - long-term debt ......................................... 12,595 9,379
Accrued restructuring costs .............................................. 0 19,758
----------- -----------
Total current liabilities ................................................ 331,289 339,697
----------- -----------
Deferred taxes and other non-current liabilities ......................... 42,867 44,927
Long-term debt ........................................................... 203,045 208,491
Minority interest in consolidated subsidiary ............................. 321 1,000
Stockholders' equity
Common stock $.10 par value
Authorized - 300,000,000 shares
Issued - 125,149,242 shares and 111,891,156 shares ................ 12,515 11,189
Additional paid-in capital ............................................... 200,040 103,267
Treasury stock at cost - 12,265,993 shares and 0 shares .................. (84,136) 0
Deferred employee compensation ........................................... (3,370) (3,741)
Accumulated other comprehensive (loss) income ............................ (550) (818)
Retained earnings ........................................................ 437,135 439,905
----------- -----------
Total stockholders' equity ............................................... 561,634 549,802
----------- -----------
Total liabilities and stockholders' equity ............................... $ 1,139,156 $ 1,143,917
=========== ===========
<FN>
Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
41
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Year Ended
February 1, February 2, February 3,
(in thousands, except per share amounts) 2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Net sales................................................................. $2,412,409 $1,993,843 $1,607,079
---------- ---------- ----------
Cost of goods sold, buying, and occupancy expenses........................ 1,721,052 1,455,601 1,134,554
Selling, general, and administrative expenses............................. 603,502 486,204 382,398
Restructuring charge (credit)............................................. (4,813) 37,708 0
Amortization of goodwill.................................................. 0 4,885 4,885
---------- ---------- ----------
Total operating expenses.................................................. 2,319,741 1,984,398 1,521,837
---------- ---------- ----------
Income from operations.................................................... 92,668 9,445 85,242
Other income, principally interest........................................ 2,328 4,730 8,304
Interest expense.......................................................... (20,292) (18,701) (8,894)
---------- ---------- ----------
Income (loss) before income taxes, minority interest, and cumulative
effect of accounting changes......................................... 74,704 (4,526) 84,652
Income tax provision (benefit)............................................ 29,055 (120) 33,014
---------- ---------- ----------
Income (loss) before minority interest and cumulative effect
of accounting changes................................................ 45,649 (4,406) 51,638
Minority interest in net loss of consolidated subsidiary.................. 679 0 0
---------- ---------- ----------
Income (loss) before cumulative effect of accounting changes.............. 46,328 (4,406) 51,638
Cumulative effect of accounting changes, net of income tax benefit
of $2,758 in 2003 and $334 in 2001................................... (49,098) 0 (540)
---------- ---------- ----------
Net income (loss)......................................................... (2,770) (4,406) 51,098
---------- ---------- ----------
Other comprehensive income (loss), net of tax:
Unrealized (losses) gains on available-for-sale securities, net of
income tax (expense) benefit of $46 in 2003, $(66) in 2002,
and $(718) in 2001.................................................. ( 73) 70 1,335
Reclassification of realized losses (gains) on available-for-sale
securities included in net income, net of income tax (benefit)
expense of $80 in 2002 and $(87) in 2001............................. 0 (151) 162
Unamortized deferred loss on termination of derivative, net of income tax
benefit of $621 in 2002.............................................. 0 (1,152) 0
Reclassification of amortization of deferred loss on termination of
derivative, net of income tax (benefit) of $(184) in 2003 and 2002... 341 341 0
---------- ---------- ----------
Total other comprehensive income (loss)................................... 268 (892) 1,497
---------- ---------- ----------
Comprehensive income (loss)............................................... $ (2,502) $ (5,298) $ 52,595
========== ========== ==========
Basic net income (loss) per share:
Before cumulative effect of accounting changes............................ $ .41 $(.04) $ .51
Cumulative effect of accounting changes................................... (.43) .00 (.01)
----- ----- -----
Net income (loss)......................................................... $(.02) $(.04) $ .50
===== ===== =====
Diluted net income (loss) per share:
Before cumulative effect of accounting changes............................ $ .39 $(.04) $ .49
Cumulative effect of accounting changes................................... (.37) .00 (.01)
----- ----- -----
Net income (loss)......................................................... $ .01(1) $(.04) $ .48
===== ===== =====
<FN>
(1) Results do not add due to rounding.
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
42
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Treasury Stock
(dollars in thousands) Shares Amount Capital Shares Amount
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Balance, January 29, 2000................... 109,639,425 $10,964 $ 76,125 (8,955,000) $(40,824)
Issued to employees......................... 224,141 22 1,020
Exercise of stock options................... 906,701 91 3,831
Shares withheld for payment of employee
payroll taxes due on shares issued
under employee stock plans............. (38,784) (4) (214)
Purchases of treasury stock................. (150,000) (713)
Tax benefit - employee stock programs....... 215
----------- ------- -------- ---------- --------
Balance, February 3, 2001................... 110,731,483 11,073 80,977 (9,105,000) (41,537)
Issued to employees......................... 467,113 47 3,532
Exercise of stock options................... 284,165 28 1,112
Shares withheld for payment of employee
payroll taxes due on shares issued
under employee stock plans............. (12,598) (1) (95)
Acquisition of Lane Bryant, Inc............. 420,993 42 17,721 9,105,000 41,537
Tax benefit - employee stock programs....... 20
----------- ------- -------- ---------- --------
Balance, February 2, 2002................... 111,891,156 11,189 103,267 0 0
Issued to employees......................... 189,266 19 1,329
Exercise of stock options................... 1,326,561 133 5,695
Shares withheld for payment of employee
payroll taxes due on shares issued
under employee stock plans............. (25,801) (2) (148)
Shares received in payment of stock
option exercises....................... (176,278) (18) (1,485)
Shares issued on conversion of
convertible debt....................... 11,944,338 1,194 89,877
Purchases of treasury stock................. (12,265,993) (84,136)
Tax benefit - employee stock programs....... 1,505
----------- ------- -------- ---------- --------
Balance, February 1, 2003................... 125,149,242 $12,515 $200,040 (12,265,993) $(84,136)
=========== ======= ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deferred Other
Employee Comprehensive Retained
Compensation Income (Loss) Earnings
------------ ------------- --------
<S> <C> <C> <C>
Balance, January 29, 2000....................... $(1,792) $(1,423) $393,213
Issued to employees............................. (785)
Amortization.................................... 948
Unrealized gains, net of income taxes of $805... 1,497
Net income...................................... 51,098
------- ------- --------
Balance, February 3, 2001....................... (1,629) 74 444,311
Issued to employees............................. (3,229)
Amortization.................................... 1,117
Unrealized losses, net of tax benefit of $450... (892)
Net loss........................................ (4,406)
------- ------- --------
Balance, February 2, 2002....................... (3,741) (818) 439,905
Issued to employees............................. (844)
Amortization.................................... 1,215
Unrealized gains, net of tax benefit of $139.... 268
Net loss........................................ (2,770)
------- ------- --------
Balance, February 1, 2003....................... $(3,370) $ (550) $437,135
======= ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
43
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
February 1, February 2, February 3,
(in thousands) 2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income (loss)...................................................... $ (2,770) $ (4,406) $ 51,098
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization..................................... 79,421 59,017 43,397
Amortization of goodwill.......................................... 0 4,885 4,885
Deferred income taxes, net of acquisitions........................ 5,327 9,212 10,375
Write-down of Catherine's goodwill................................ 43,975 0 0
Cumulative effect of capitalization of cash received from vendors. 7,881 0 0
Minority interest in net loss of consolidated affiliate........... (679) 0 0
Write-down of capital assets due to restructuring................. 0 17,763 0
Net loss from disposition of capital assets....................... 3,436 4,278 2,587
Capitalized interest on conversion of convertible notes........... 3,026 0 0
Tax benefit related to stock plans................................ 1,505 20 215
Net (gain) loss on sale of available-for-sale securities.......... 0 (231) 249
Changes in operating assets and liabilities, net of acquisitions:
Merchandise inventories....................................... 6,054 66,671 1,665
Accounts payable.............................................. 40,061 (12,541) 6,160
Prepayments and other......................................... 16,148 (10,832) (8,841)
Income taxes payable.......................................... 7,144 0 0
Accrued expenses.............................................. 15,313 (10,356) (10,716)
Accrued restructuring costs................................... (19,758) 19,385 (7,805)
---------- --------- ---------
Net cash provided by operating activities.............................. 206,084 142,865 93,269
---------- --------- ---------
Investing activities
Gross purchases of available-for-sale securities....................... (58,308) (51,902) (102,228)
Proceeds from sales of available-for-sale securities................... 54,797 106,950 94,840
Acquisition of Lane Bryant, Inc., net of cash acquired................. 0 (280,841) 0
Investment in capital assets........................................... (74,303) (63,046) (57,921)
Proceeds from sales of capital assets.................................. 801 0 833
Decrease (increase) in other assets and other non-current liabilities.. (4,677) 2,705 (6,444)
---------- --------- ---------
Net cash used in investing activities.................................. (81,690) (286,134) (70,920)
---------- --------- ---------
Financing activities
Proceeds from short-term borrowings.................................... 534,499 623,704 0
Repayments of short-term borrowings.................................... (588,795) (569,407) 0
Proceeds from long-term borrowings..................................... 164,000 90,950 0
Repayments of long-term borrowings..................................... (84,122) (16,251) (3,535)
Payments of deferred financing costs................................... (5,568) (7,991) 0
Purchases of treasury stock............................................ (84,136) 0 (713)
Proceeds from exercise of stock options................................ 5,114 2,360 3,144
Minority shareholder investment in joint venture....................... 0 0 1,000
---------- --------- ---------
Net cash provided by (used in) financing activities.................... (59,008) 123,365 (104)
---------- --------- ---------
Increase (decrease) in cash and cash equivalents....................... 65,386 (19,904) 22,245
Cash and cash equivalents, beginning of year........................... 36,640 56,544 34,299
---------- --------- ---------
Cash and cash equivalents, end of year................................. $ 102,026 $ 36,640 $ 56,544
========== ========= =========
Non-cash financing and investing activities
Common stock issued on conversion of convertible notes................. $ 89,105 $ 0 $ 0
========== ========= =========
Common stock issued for acquisition of Lane Bryant, Inc................ $ 0 $ 59,300 $ 0
========== ========= =========
Purchases of assets under capital leases............................... $ 6,997 $ 24,677 $ 14,896
========== ========= =========
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
44
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company operates retail specialty stores located throughout the
continental United States that merchandise plus-size, misses, and junior
sportswear, dresses, coats, and intimate apparel, as well as accessories and
casual footwear at a wide range of prices.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The Company has a
52 - 53 week fiscal year ending on the Saturday nearest to January 31. The
fiscal year ended February 3, 2001 consisted of 53 weeks. As used herein, the
terms "Fiscal 2003," "Fiscal 2002," and "Fiscal 2001" refer to the fiscal years
ended February 1, 2003, February 2, 2002, and February 3, 2001, respectively.
The term "Fiscal 2004" refers to the fiscal year which will end on January 31,
2004. The terms "the Company", "we", "us", and "our" refer to Charming Shoppes,
Inc., and, where applicable, its consolidated subsidiaries.
On October 26, 2000, we signed a joint venture agreement with Monsoon plc.
The joint venture is operated as a separate consolidated operating unit of the
Company. We invested $4.0 million, or 80% of the initial capital in the joint
venture, during Fiscal 2001. On March 18, 2003, we announced that we will be
discontinuing the operation of the 9 Monsoon/Accessorize stores operated under
the joint venture, and plan to close the stores during Fiscal 2004 (see
"Property and Equipment" below).
Foreign Operations
We use a December 31 fiscal year for our foreign subsidiaries in order to
expedite our year-end closing. There were no intervening events or transactions
with respect to our foreign subsidiaries during the period from January 1, 2003
to February 1, 2003 that would have a material effect on our financial position
or results of operations.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires our 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
We consider 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.
Available-for-Sale Securities
Our investments are classified as available for sale. Securities traded on
an established market 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.
Short-term investments consist primarily of our retained interests in our asset
securitization program (see "Note.
45
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
14. Asset Securitization" below). Long-term investments have an original
maturity of greater than one year, but are available on an as-needed basis to
support our working capital needs.
Inventories
We value our merchandise inventories at the lower of cost or market, as
determined by the retail inventory method (average cost basis). Under the retail
inventory method, the valuation of inventories at cost and the resulting gross
margins are adjusted in proportion to markdowns and shrinkage on retail
inventories. We accrue an estimate for markdowns not yet taken which are
necessary to sell aged inventory. Inventory shrinkage is based on periodic
physical inventories on a store-by-store basis, with supplemental observations
in locations exhibiting high shrinkage rates. Interim shrinkage estimates are
determined on a store-by-store basis, based on the most recent physical
inventory results.
Property and Depreciation
For financial reporting purposes, we compute depreciation and amortization
primarily using 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. We use accelerated depreciation methods for income tax
reporting purposes. Depreciation and amortization expense was $70,357,000,
$53,134,000, and $38,066,000 in Fiscal 2003, 2002, and 2001, respectively.
Depreciation and amortization expense includes amortization of equipment
acquired under capital leases.
Prior to Fiscal 2003, we evaluated the recoverability of our long-lived
assets in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." In Fiscal 2003, we adopted the provisions of SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 supersedes SFAS No. 121 and the accounting and reporting provisions of
Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions"
related to the disposal of a segment of a business. SFAS No. 144 also resolved
certain implementation issues related to SFAS No. 121. SFAS No. 144 retains the
fundamental provisions of SFAS No. 121 related to the recognition and
measurement of the impairment of long-lived assets to be held and used and
provides additional guidance on estimating cash flows when testing for
recoverability. SFAS No. 141 also requires that long-lived assets to be disposed
of other than by sale (such as by abandonment) be classified as held and used
until disposal, and establishes more restrictive criteria for classifying assets
as held for sale.
Under SFAS No. 144, we assess our long-lived assets for recoverability
whenever events or changes in circumstances indicate that the carrying amounts
of long-lived assets may not be recoverable. We consider historical performance
and future estimated results in our evaluation of potential impairment and then
compare the carrying amount of the asset to the estimated future undiscounted
cash flows expected to result from the use of the asset. If the estimated future
undiscounted cash flows are less than the carrying amount of the asset, we write
down the asset to its estimated fair value and recognize an impairment loss. Our
estimate of fair value is generally based on either appraised value or the
present value of future cash flows.
During Fiscal 2003, we recorded a $2,700,000 write-down of under-performing
assets related to our joint venture pursuant to SFAS No. 144. The amount of the
write-down, which is included in cost of goods sold, buying, and occupancy
expenses, is the same as what would have been recorded under SFAS No. 121.
46
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
Goodwill and Intangible Assets
In Fiscal 2002, we acquired trademarks, tradenames, internet domain names,
customer lists, and a covenant not to compete in connection with our acquisition
of Lane Bryant (see "Note 2. Lane Bryant Acquisition" below). The values of
these intangible assets were determined by an independent appraisal, using an
after-tax discounted cash flow method, based on the estimated future benefits to
be received from the assets. We have not amortized the trademarks, tradenames,
and internet domain names, which have indefinite useful lives. We are amortizing
the customer lists and covenant not to compete over their estimated useful life
of five years.
We have allocated the excess of the cost of the Lane Bryant acquisition
over the estimated fair value of the identifiable tangible and intangible net
assets acquired to goodwill. In accordance with the provisions of SFAS No. 142,
we are not amortizing the goodwill.
Prior to Fiscal 2003, we amortized goodwill related to our acquisition of
Catherines Stores, Inc. ("Catherine's") on a straight-line basis over 20 years.
We recognized $4,885,000 of amortization of Catherine's goodwill in Fiscal 2002
and 2001. As of the beginning of Fiscal 2003, we fully adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." In accordance with the transition
provisions of SFAS No. 142, we discontinued the amortization of Catherine's
goodwill, and we periodically review the value of the Lane Bryant and
Catherine's goodwill for impairment.
The pro forma effect of applying the non-amortization provisions of SFAS
No. 142 for Fiscal 2002 and 2001 is as follows:
<TABLE>
<CAPTION>
(in thousands, except per-share amounts) 2002 2001
---- ----
<S> <C> <C>
Net income (loss) as reported...................................... $(4,406) $51,098
Amortization of goodwill (1)....................................... 4,885 4,885
------- -------
Pro forma net income excluding goodwill amortization............... $ 479 $55,983
======== =======
Diluted net income per share as reported........................... $(.04) $.48
Pro forma per share effect of excluding goodwill amortization (1).. .05 .04
----- ----
Pro forma diluted net income per share............................. $ .00(2) $.53(2)
===== ====
<FN>
- --------------------
(1) The goodwill amortization is not deductible for tax purposes and therefore
has no related tax effect.
(2) Results do not add due to rounding.
</FN>
</TABLE>
In accordance with the transition provisions of SFAS No. 142, we performed
a review of our goodwill and other indefinite-lived intangible assets for
impairment. As a result, we determined that the carrying value of goodwill
related to our Catherine's acquisition (including the value of intangible assets
we did not separately account for at the date of the Catherine's acquisition)
exceeded the estimated fair value of the Catherine's goodwill under SFAS No.
142. We determined the estimated fair value of the Catherine's goodwill using
the present value of expected future cash flows associated with the Catherine's
assets, and we recorded a write-down, which is not deductible for income tax
purposes, of $43,975,000 to reduce the carrying value of the goodwill to its
estimated fair value. The majority of the write-down is attributable to the
value of unrecorded trademarks. We also evaluated our
47
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
goodwill, trademarks, tradenames, and internet domain names related to the Lane
Bryant acquisition as of February 3, 2002 in accordance with the provisions of
SFAS No. 142, and determined that there has been no impairment of these assets.
The write-down of the Catherine's goodwill has been presented as the cumulative
effect of an accounting change as of February 3, 2002 in our Consolidated
Statement of Operations and Comprehensive Income (Loss) for Fiscal 2003. The
calculation of the estimated fair value of the goodwill and other intangible
assets required estimates, assumptions, and judgments, and results might have
been materially different if different estimates, assumptions, and judgments had
been used.
In accordance with the provisions of SFAS No. 142, we are required to
re-evaluate goodwill and other indefinite-lived intangible assets at least
annually, or more frequently if there is an indication of possible impairment.
We performed this annual review during the fourth quarter of Fiscal 2003, and
determined that there has been no impairment of these assets.
Asset Securitization
Asset securitization involves the sale of Fashion Bug proprietary credit
card receivables by our credit card bank to a special purpose entity, which in
turn transfers the receivables to a qualified special purpose entity (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
remaining undivided interests retained by us. We include the remaining undivided
interests, and any other retained interests, in investment securities available
for sale in our accompanying consolidated balance sheet. The carrying value of
these retained interests approximates their fair value. The assets and
liabilities of the Trust are not included in our consolidated balance sheet.
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 and comprehensive income
(loss). We adopted the accounting requirements of SFAS No. 140 as of March 31,
2001, and we have applied these requirements to new beneficial interests issued
under our asset securitization program after that date. Adoption of the
accounting requirements of SFAS No. 140 did not have a material impact on our
results of operations or financial position for Fiscal 2003, 2002 or 2001. See
"Impact of Recent Accounting Pronouncements" for a discussion of FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities."
Deferred Debt Acquisition Costs
Debt acquisition costs are deferred and amortized over the life of the
related debt agreement.
Common Stock Plans
We account for stock-based compensation using the intrinsic value method,
in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related interpretations. We
amortize deferred compensation expense attributable to stock awards and stock
options having an exercise price less than the market price on the date of grant
over the vesting period of the award or option. We do not recognize compensation
expense for options having an exercise price equal to the market price on the
date of
48
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
grant or for shares purchased under our Employee Stock Purchase Plan. We have
adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation." In Fiscal 2003, we adopted the disclosure provisions of SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
The following table reconciles net income (loss) and net income (loss) per
share as reported, using the intrinsic value method under APB No. 25, to pro
forma net income (loss) and pro forma net income (loss) per share using the fair
value method under SFAS No. 123:
<TABLE>
<CAPTION>
(in thousands, except per-share data) 2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
As reported, using intrinsic value method:
Stock-based employee compensation cost, net of income taxes.. $ 790 $ 725 $ 616
Net income (loss)............................................ (2,770) (4,406) 51,098
Basic net income (loss) per share............................ (.02) (.04) .50
Diluted net income (loss) per share.......................... .01 (.04) .48
Pro forma, using fair value method:
Stock-based employee compensation cost, net of income taxes.. $ 5,864 $ 3,364 $ 2,529
Net income (loss)............................................ (7,844) (7,045) 49,185
Basic net income (loss) per share............................ (.07) (.07) .49
Diluted net income (loss) per share.......................... (.02) (.07) .47
</TABLE>
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, 3 to 5
years for stock award plans, and 3 to 7 years for stock option and stock
incentive plans; and the following risk-free interest rates:
<TABLE>
<CAPTION>
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Employee stock purchase plan....... 1.1% 1.7% 4.9%
Stock award plans.................. 3.1 3.8 4.8
Stock option and incentive plans... 3.1 5.0 5.1
</TABLE>
Revenue Recognition
Revenues from merchandise sales are net of returns and allowances, and
exclude sales tax. We adopted the provisions of Securities and Exchange
Commission Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition
in Financial Statements," effective as of the beginning of Fiscal 2001. As a
result of the adoption of SAB 101, we established a reserve for estimated future
sales returns based on an analysis of actual returns received and began
deferring recognition of layaway sales to the date of delivery. The cumulative
effect of the adoption of SAB 101 as of January 30, 2000 was a decrease in
income, net of taxes, of $540,000.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. The program grants discounts on customer purchases over a
twelve-month period upon payment of a $25 annual fee. Revenues from card fees
under the program are recognized as sales over the life of the membership as
discounts
49
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
are earned by the customer. If a customer does not earn discounts in an amount
that exceeds the card fee, the difference is recognized as revenue upon the
expiration of the annual period. Upon early cancellation of a loyalty card,
refunds of membership fees are reduced by the amount of any discounts granted to
the member under the program. Costs we incur in connection with administering
the program are recognized in cost of goods sold as incurred. As of December 1,
2002 we discontinued the issuance of new cards under this program and will
introduce a new customer loyalty card program during Fiscal 2004 that will be
operated under our proprietary credit card program.
Cost of Goods Sold, Buying, and Occupancy Expenses
Cost of goods sold includes merchandise costs, net of discounts and
allowances, freight, and inventory shrinkage. Net merchandise costs and freight
are capitalized as inventory costs. Cost of goods sold for Fiscal 2003 and 2002
includes costs incurred in connection with our Fashion Bug customer loyalty card
program (see "Revenue Recognition" above). Buying expenses include payroll,
payroll related costs, and operating expenses for our buying departments and
warehouses. Occupancy expenses include rent, real estate taxes, insurance,
common area maintenance, utilities, maintenance, and depreciation for our stores
and warehouse facilities and equipment. Buying and occupancy costs are treated
as period costs and are not capitalized as part of inventory.
Advertising Costs
We expense advertising costs as incurred. Advertising costs charged to
expense were $63,943,000, $47,310,000, and $39,529,000 in Fiscal 2003, 2002, and
2001, respectively.
Income Taxes
We use 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 basis differences.
We have not provided U.S. income taxes on undistributed earnings of foreign
subsidiaries accumulated prior to February 1, 2003 because we intend 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 and stock awards, using the treasury stock method. Common share
equivalents also include the effect of assumed conversions of our 7.5%
Convertible Subordinated Notes Due 2006 and our 4.75% Senior Notes Due 2012,
using the "if-converted" method, when the effect of such assumed conversions is
dilutive. Share equivalents are not included in the weighted-average shares
outstanding for determining net loss per share, as the result would be
anti-dilutive.
50
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
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 upon their realization.
Business Segments and Related Disclosures
Our Lane Bryant, Fashion Bug, and Catherine's stores operate within a
single segment - retail sales of women's apparel, and within a single geographic
area - the continental United States. Our foreign sourcing operations do not
constitute a material geographic segment.
Costs of Computer Software Developed or Obtained for Internal Use
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.
Derivative Instruments and Hedging Activities
We adopted the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," as of the beginning of Fiscal 2002.
Prior to the end of Fiscal 2001, we terminated an interest rate swap agreement
that we were using to limit our interest rate risk on certain assets related to
the management of our proprietary credit card program. Adoption of SFAS No. 133,
as amended by SFAS No. 137 and SFAS No. 138, did not have a material effect on
our financial position or results of operations.
Impact of Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002, and addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. We do not expect that adoption of SFAS No.
143 will have a material impact on our financial position or results of
operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 requires gains and losses on extinguishments of debt
to be classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS No. 4. Extraordinary
treatment will be required for certain extinguishments as provided in APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 145 also amends SFAS No. 13,
"Accounting for Leases" to require certain modifications to capital leases to be
treated as sale-leaseback transactions and modifies the accounting for
sub-leases when the original lessee remains a secondary obligor (or guarantor).
SFAS No. 145 also rescinded SFAS No. 44 "Accounting for Intangible Assets of
Motor Carriers," and made numerous technical corrections. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. Upon adoption of SFAS
No. 145, any gain or loss on extinguishment of debt previously classified as an
extraordinary item in prior periods that does not meet the criteria of APB
Opinion No.
51
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
30 for such classification should be reclassified to conform with the provisions
of SFAS No. 145. Earlier application of the provisions of SFAS No. 145 related
to the rescission of SFAS No. 4 is encouraged.
In May 2002, we repaid in full our $67,500,000 term loan due August 16,
2004. In connection with the repayment of the term loan, we wrote off $951,000
of unamortized deferred financing costs. In June 2002, we redeemed $6,942,000 of
our 7.5% Convertible Subordinated Notes due 2006 at a redemption premium of
$174,000 (see "Note 7. Debt" below). In accordance with the early-application
provisions of SFAS No. 145, we included the $951,000 write-off and the $174,000
redemption premium in income from continuing operations in the Consolidated
Statement of Operations and Comprehensive Income (Loss) for Fiscal 2003.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies FASB Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under SFAS No. 146, an
entity's commitment to a plan, by itself, does not create an obligation that
meets the definition of a liability. SFAS No. 146 also establishes fair value as
the objective for initial measurement of the liability. Severance pay would be
recognized over time rather than up front if the benefit arrangement requires
employees to render future service beyond a "minimum retention period." The
liability for severance pay would be recognized as employees render service over
the future service period, even if the benefit formula used to calculate an
employee's termination benefit is based on length of service. The provisions of
SFAS No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged.
We have traditionally recognized certain costs associated with
restructuring plans as of the date of commitment to the plan pursuant to EITF
Issue 94-3. Adoption of SFAS No. 146 could result in the deferral of recognition
of such costs for restructuring plans we initiate in periods subsequent to the
effective date of the statement from the date we commit to the plan to the date
that we incur the costs.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 amends SFAS No. 123 to
provide alternative transition methods for a voluntary change from the intrinsic
value method of accounting for stock-based compensation under APB Opinion No. 25
to the fair value method of accounting under SFAS No. 123. SFAS No. 148 also
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method
used in accounting for stock-based compensation and the effects of the method
used on reported results.
We have adopted the annual financial statement disclosure requirements of
SFAS No. 148 in Fiscal 2003 and will adopt the interim financial statement
disclosure requirements in the first quarter of Fiscal 2004. At the present
time, we do not intend to change from the intrinsic value method of accounting
for stock-based compensation to the fair value method.
52
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," which provides accounting guidance that addresses
when a company should include in its financial statements the assets,
liabilities, and results of operations of another entity. Variable interest
entities include, but are not limited to, special-purpose entities or
off-balance sheet structures. Our asset securitization program involves the sale
of proprietary credit card receivables by our credit card bank to a special
purpose entity, which in turn transfers the receivables to a Qualified Special
Purpose Entity ("QSPE") which is subject to the reporting requirements of SFAS
No. 140. Because QSPEs are exempt from consolidation under Interpretation No.
46, we are not subject to the scope of Interpretation No. 46.
EITF Issue 02-16, "Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor," addresses the accounting for cash
consideration given to a customer, including both a reseller of the vendor's
products and an entity that purchases the vendor's products, from a reseller.
The Issue provides accounting guidance on how a customer should characterize
cash consideration received from a vendor and when to recognize and how to
measure that consideration in its income statement.
On January 23, 2003, the EITF concluded that new arrangements, including
modifications of existing arrangements, entered into after December 31, 2002
should apply the treatment outlined in the Issue. If determinable, pro forma
disclosure of the impact of the consensus on prior periods presented is
encouraged. On March 20, 2003, the EITF concluded that entities that have not
issued financial statements should be permitted to report a change in accounting
as a result of adoption of EITF Issue 02-16 as a cumulative-effect adjustment in
accordance with the provisions of APB No. 20, "Accounting Changes," and SFAS No.
3, "Reporting Accounting Changes in Interim Financial Statements," when the
effect of applying the consensus of EITF Issue 02-16 on prior-period financial
statements results in a change in previously reported net income.
We elected to adopt the provisions of EITF Issue No. 02-16 as of the
beginning of Fiscal 2003. We recognized a charge of $5,123,000, net of income
taxes of $2,758,000, that represents the cumulative effect of the deferral of
cash received from vendors as of the beginning of Fiscal 2003. The impact of the
adoption of EITF 02-16 on the year ended February 1, 2003 was an increase in
cost of goods sold of $216,000. As of February 1, 2003, $8,097,000 of cash
received from vendors has been deferred into inventory and will be recognized as
inventory is sold.
Pro forma net income (loss) and diluted net income (loss) per share for
Fiscal 2002 and 2001, assuming the change in accounting for the deferral of cash
received from vendors was retroactively applied to the beginning of Fiscal 2001,
are as follows:
<TABLE>
<CAPTION>
(in thousands, except per-share amounts) 2002 2001
---- ----
<S> <C> <C>
Pro forma net income (loss).................... $(5,189) $51,309
Pro forma diluted net income (loss) per share.. (.05) .48
</TABLE>
53
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
NOTE 2. LANE BRYANT ACQUISITION
On August 16, 2001, we acquired 100% of the outstanding stock of Lane
Bryant, Inc. ("Lane Bryant") from a subsidiary of Limited Brands, Inc. ("Limited
Brands") for cash of $286,223,000, including direct costs of the acquisition of
$6,223,000, and 8,688,784 shares of our common stock, valued at $55,000,000. As
of the date of acquisition, Lane Bryant operated 651 retail apparel stores in 46
states, specializing in fashion apparel and related accessories for women
wearing plus-sizes 14 and greater. The cash paid for the acquisition was funded
with the use of approximately $83,000,000 of our existing cash and cash
equivalents, a $75,000,000 term loan, and revolving loans under a new credit
facility we obtained in connection with the acquisition (see "Note 7. Debt"
below). Based on the final determination of the value of the Lane Bryant net
assets acquired, on December 10, 2001, we issued to a subsidiary of Limited
Brands an additional 837,209 shares of our common stock valued at $4,300,000.
The aggregate total of 9,525,993 shares of common stock issued included
9,105,000 shares of treasury stock that we had re-acquired prior to the Lane
Bryant acquisition. During August and September 2002, we repurchased the
9,525,993 shares of our common stock issued in connection with the acquisition
of Lane Bryant (see "Note 8. Stockholders' Equity" below). The number of shares
of our common stock issued in connection with the acquisition was based on a
five-day average market value as defined in the purchase agreement.
Our acquisition of Lane Bryant complements our long-term growth strategy of
becoming a leader in the sale of plus-size specialty apparel. Lane Bryant is a
premier brand in the plus-size market with an established customer base and
proprietary brand names, and operates in multiple retail venues, primarily in
leading malls.
We accounted for the acquisition under the purchase method of accounting,
and we included the results of operations of Lane Bryant in our results of
operations from the date of acquisition. Prior-period results have not been
restated. Assets acquired and liabilities assumed have been recorded at their
estimated fair values. Concurrent with the acquisition of Lane Bryant, we began
a detailed evaluation of Lane Bryant's operations, resulting in a plan for the
closing of 14 under-performing Lane Bryant stores and the involuntary
termination of approximately 140 store employees. As of February 2, 2002, we
finalized the plan to close the under-performing stores and to terminate the
store employees. As a result, we recorded a liability of $3,762,000 as part of
the purchase price allocation, which was primarily for estimated lease
termination payments. In addition, we recorded an accrual of $390,000 for
severance of store employees. We closed 3 of the 14 under-performing stores
during Fiscal 2003 at a cost of $917,000, and expect to close the remaining 11
stores in Fiscal 2004. In connection with the acquisition, we entered into a
services agreement with Limited Brands and certain affiliates of Limited Brands
under which we received certain transitional services, including data center
processing of Lane Bryant business applications, such as store polling and
support of store systems, continuation of contract services with vendors for
voice and data networks, and conversion services, through October 2, 2002. We
have moved all of the Lane Bryant business applications and processes from the
Limited Brands platform to our platform as of the third quarter of Fiscal 2003.
In accordance with the provisions of SFAS No. 141, we recognized certain
intangible assets acquired, primarily trademarks, tradenames, and internet
domain names, separately from goodwill. In accordance with the provisions of
SFAS No. 142, the trademarks, tradenames, and internet domain names
($168,800,000) are not being amortized, but are subject to periodic reviews for
impairment. Other intangible assets acquired, consisting of customer lists
($2,700,000) and a covenant not to compete ($600,000), are being amortized over
their estimated useful life of five years. The excess of the cost of the
acquisition over the estimated fair value of the identifiable
54
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
net assets acquired has been allocated to goodwill. In accordance with the
requirements of SFAS No. 142, the goodwill is not being amortized, but is
subject to periodic reviews for impairment.
The following condensed balance sheet presents the financial position of
Lane Bryant as of August 16, 2001 after giving effect to the acquisition.
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Cash and cash equivalents............................. $ 5,382
Merchandise inventories............................... 107,951
Deferred income taxes................................. 20,099
Prepayments and other................................. 11,504
---------
Total current assets.................................. 144,936
Property, equipment, and leasehold improvements, net.. 79,884
Tradenames and other intangibles...................... 172,100
Goodwill.............................................. 23,038
---------
Total assets.......................................... $ 419,958
=========
Accounts payable...................................... $ 25,551
Accrued expenses...................................... 35,842
---------
Total current liabilities............................. 61,393
Deferred income taxes................................. 13,042
Total stockholders' equity............................ 345,523
---------
Total liabilities and equity.......................... $ 419,958
=========
</TABLE>
The following unaudited pro forma information is based on historical data,
and gives effect to our acquisition of Lane Bryant as if the acquisition had
occurred on January 30, 2000. The pro forma information includes adjustments
having a continuing impact on the consolidated company as a result of using the
purchase method of accounting for the acquisition. Pro forma adjustments consist
of additional depreciation from the step-up in value of property, equipment, and
leasehold improvements acquired, additional amortization expense related to
intangible assets acquired, additional interest expense and amortization of
deferred financing costs related to debt incurred to finance the acquisition
(see "Note 7. Debt" below), and a reduction in interest income from the use of
approximately $83,000,000 of our cash and cash equivalents to fund a portion of
the acquisition.
<TABLE>
<CAPTION>
(in thousands except per share amounts) 2002 2001
---- ----
<S> <C> <C>
Net sales.............................................. $2,486,178 $2,536,952
Income before cumulative effect of accounting changes.. 1,691 40,873
Net income............................................. 1,691 40,333
Net income per share:
Basic......................................... $.02 $.36
Diluted....................................... .02 .36
</TABLE>
55
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
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 January 30, 2000, and is not necessarily indicative of the
results that may be achieved in the future. The unaudited pro forma information
does not reflect adjustments for operating synergies that we have realized, or
may realize, as a result of the acquisition. We can give no assurances as to the
amount and timing of any financial benefits that we may ultimately realize as a
result of the acquisition.
In connection with the Lane Bryant acquisition, we recorded a liability of
$4,640,000 for estimated costs related to an unfavorable service contract.
During the first quarter of Fiscal 2003, we revised our estimate of costs
related to the contract to $2,292,000, which resulted in a decrease in the
goodwill recognized in connection with our Lane Bryant acquisition of
$1,435,000, net of deferred income taxes of $913,000. During the second quarter
of Fiscal 2003, we recorded a liability for severance in accordance with an
agreement entered into with an affiliate of Limited Brands at the time of the
acquisition to use the existing Lane Bryant distribution center and receive
related distribution services on a transition basis, which resulted in an
increase in Lane Bryant goodwill of $611,000, net of deferred income taxes of
$389,000. During the third quarter of Fiscal 2003, we reduced the acquisition
value assigned to equipment and leasehold improvements in the existing Lane
Bryant distribution center, which will be abandoned at the end of the transition
period as a result of our acquisition of a replacement distribution center in
White Marsh, Maryland, increased a liability for future claims related to Lane
Bryant's pre-acquisition operations, and decreased deferred tax assets as a
result of a correction of the effective tax rate used to determine deferred
taxes related to certain assets acquired, which resulted in an increase in Lane
Bryant goodwill of $3,715,000, including net deferred income taxes of $744,000.
During the fourth quarter of Fiscal 2003, we finalized the unfavorable service
contract and other liabilities, which resulted in a decrease in Lane Bryant
goodwill of $565,000, net of deferred income taxes of $175,000.
NOTE 3. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
<TABLE>
<CAPTION>
Lives
(dollars in thousands) (Years) 2003 2002
------- ---- ----
<S> <C> <C> <C>
Land.................................................... $ 5,630 $ 1,757
Buildings and improvements.............................. 10 to 40 73,285 60,141
Store fixtures.......................................... 5 to 10 124,474 142,392
Equipment............................................... 3 to 10 176,477 159,899
Equipment acquired under capital leases................. 7 48,452 45,847
Leasehold improvements.................................. 10 to 20 239,850 247,031
--------- ---------
Total at cost........................................... 668,168 657,067
--------- ---------
Less: Accumulated depreciation and amortization........ 331,629 329,053
Accumulated amortization of capital lease assets. 16,666 12,002
--------- ---------
Total accumulated depreciation and amortization......... 348,295 341,055
--------- ---------
Net property, equipment, and leasehold improvements..... $ 319,873 $ 316,012
========= =========
</TABLE>
56
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
NOTE 4. TRADEMARKS AND OTHER INTANGIBLE ASSETS
<TABLE>
<CAPTION>
Life
(dollars in thousands) (Years) 2003 2002
------- ---- ----
<S> <C> <C> <C>
Trademarks, tradenames, and internet domain names....... $168,800 $168,800
Customer lists and covenant not to compete.............. 5 3,300 3,300
-------- --------
Total at cost........................................... 172,100 172,100
Less: accumulated amortization of customer lists and
covenant not to compete.......................... 962 306
-------- --------
Net trademarks and other intangible assets.............. $171,138 $171,794
======== ========
</TABLE>
Total amortization of other intangible assets was $656,000 in Fiscal 2003
and $306,000 in Fiscal 2002. Estimated amortization of intangible assets for the
next five fiscal years is: 2004 through 2006 - $660,000 per year; 2007 -
$358,000; 2008 - $0.
The trademarks and other intangible assets were acquired during Fiscal 2002
in connection with our acquisition of Lane Bryant (see "Note 2. Lane Bryant
Acquisition" above). We determined the values of the intangible assets through
an independent appraisal, using an after-tax discounted cash flow method, based
on the estimated future benefits to be received from the assets. The trademarks,
tradenames, and internet domain names have indefinite useful lives, and are not
being amortized.
NOTE 5. AVAILABLE-FOR-SALE SECURITIES
<TABLE>
<CAPTION>
Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
February 1, 2003
Government agency bonds.......................... $15,414 $13 $(147) $ 15,280
Charming Shoppes Master Trust certificates and
retained interests(1)....................... 50,227 0 0 50,227
Low-income housing partnerships.................. 7,952 0 0 7,952
Other............................................ 299 0 0 299
-------- --- ----- ---------
$73,892 $13 $(147) $ 73,758
======= === ===== =========
February 2, 2002
Government agency bonds.......................... $14,862 $37 $(52) $ 14,847
Charming Shoppes Master Trust certificates and
retained interests(1)....................... 47,240 0 0 47,240
Low-income housing partnerships.................. 7,952 0 0 7,952
Other............................................ 327 0 0 327
-------- --- ----- ---------
$70,381 $37 $ (52) $ 70,366
======= === ===== =========
<FN>
- --------------------
(1) Includes Master Trust certificates of $38,132,000, Interest-only strip of
$9,570,000, and retained interests of $2,525,000 at February 1, 2003, and
Master Trust certificates of $38,460,000, Interest-only strip of
$5,979,000, and retained interests of $2,801,000 at February 2, 2002.
</FN>
</TABLE>
57
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
There were no realized gains or (losses) on available-for-sale securities
during Fiscal 2003. Gross realized gains and (losses) on available-for-sale
securities were $243,000 and ($12,000), respectively, during Fiscal 2002. Gross
realized gains and (losses) on available-for-sale securities were $43,000 and
($292,000), respectively, during Fiscal 2001.
Contractual maturities of available-for-sale securities at February 1, 2003
were:
<TABLE>
<CAPTION>
Estimated
(in thousands) Cost Fair Value
---- ----------
<S> <C> <C>
Due in one year or less..................... $50,286 $50,286
Due after one year and before five years.... 3,665 3,640
Due after five years and before ten years... 10,912 10,819
Due after ten years......................... 1,077 1,061
------- -------
65,940 65,806
Low-income housing partnerships............. 7,952 7,952
------- -------
$73,892 $73,758
======= =======
</TABLE>
NOTE 6. INCOME TAXES
Income (loss) before income taxes, minority interest, and cumulative effect
of accounting changes:
<TABLE>
<CAPTION>
(in thousands) 2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Domestic......... $71,479 $(7,166) $80,831
Foreign.......... 3,225 2,640 3,821
------- ------- -------
$74,704 $(4,526) $84,652
======= ======= =======
</TABLE>
Income tax provision (benefit):
<TABLE>
<CAPTION>
(in thousands) 2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Current:
Federal.......... $ 2,346 $(6,037) $17,735
State............ 1,265 1,296 1,683
Foreign.......... 418 288 493
------- ------- -------
4,029 (4,453) 19,911
Deferred(1)...... 25,026 4,333 13,103
------- ------- -------
$29,055 $ (120) $33,014
======= ======= =======
<FN>
Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
- --------------------
(1) Primarily Federal
</FN>
</TABLE>
58
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
We made income tax payments of $5,624,000 and $20,041,000 during Fiscal
2003 and 2001, respectively, and received an income tax refund of $2,902,000
during Fiscal 2002.
Included in "Prepayments and other" in the accompanying consolidated
balance sheets is an income tax receivable of $11,633,000 at February 2, 2002.
Reconciliation of the effective tax rate with the statutory Federal income
tax rate:
<TABLE>
<CAPTION>
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax (benefit) rate. 35.0% (35.0)% 35.0%
State income tax, net of Federal income tax. 2.4 18.6 1.9
Foreign income.............................. (1.0) (14.1) (1.0)
Employee benefits........................... 1.9 21.1 2.5
Amortization of goodwill.................... 0.0 37.8 2.0
Other, net.................................. 0.6 (31.1) (1.4)
---- ----- ----
38.9% (2.7)% 39.0%
==== ===== ====
</TABLE>
Components of deferred tax assets and liabilities:
<TABLE>
<CAPTION>
Net Current Net Long-Term
Assets Assets
(in thousands) (Liabilities) (Liabilities)
----------- -----------
<S> <C> <C>
February 1, 2003
Property, equipment, and leasehold improvements.. $(13,367)
Tax net operating loss and credit carryforwards.. 7,075
Prepaid and accrued expenses..................... $ 1,941
Inventory........................................ 7,163
Deferred compensation............................ 4,122
Intangible assets................................ (18,962)
Investments...................................... (9,286)
Deferred rent.................................... 2,880
Other............................................ (258) (1,736)
------- --------
$11,726 $(32,154)
======= ========
</TABLE>
59
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
Components of deferred tax assets and liabilities (continued):
<TABLE>
<CAPTION>
Net Current Net Long-Term
Assets Assets
(in thousands) (Liabilities) (Liabilities)
----------- -----------
<S> <C> <C>
February 2, 2002
Property, equipment, and leasehold improvements. $ (3,892)
Tax net operating loss and credit carryforwards. 6,879
Prepaid and accrued expenses.................... $ 5,392
Inventory....................................... 1,278
Deferred compensation........................... 4,104
Intangible assets............................... (14,809)
Accrued restructuring expense................... 14,864
Investments..................................... (5,137)
Deferred rent................................... 2,098
Employee insurance program...................... (15,900)
Other........................................... (2,404) (4,932)
------- --------
$21,228 $(33,687)
======= ========
</TABLE>
We have reached a preliminary settlement with the Internal Revenue Service
regarding its audit of our corporate-owned life insurance ("COLI") program. We
anticipate that the cost of the settlement will be approximately $23,500,000,
which includes $18,477,000 of income taxes and $5,023,000 of interest, net of a
tax benefit of $2,705,000. Of the $18,477,000 of income taxes, $16,125,000 will
be satisfied through the use of existing operating loss and tax credit
carrybacks. The net cash payment under the settlement will be $7,375,000. The
net liability for this settlement has been included in income taxes payable in
the accompanying consolidated balance sheet as of February 1, 2003. As part of
the proposed settlement, we will surrender the existing life insurance policies.
These policies have a cash surrender value of approximately $15,900,000, which
we will receive upon surrender of the policies. We have reclassified the cash
value of the policies from other non-current assets to other current assets in
the accompanying consolidated balance sheet as of February 1, 2003. Although the
ultimate outcome of this matter cannot be predicted with certainty, we do not
believe that settlement will have a material impact on our financial condition
or results of operations.
60
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
NOTE 7. DEBT
Long-term debt at year end:
<TABLE>
<CAPTION>
(in thousands) 2003 2002
---- ----
<C> <C> <C> <C>
4.75% Senior Convertible Notes Due 2012....... $150,000 $ 0
7.5% Convertible Subordinated Notes Due 2006.. 0 96,047
Term loan due August 16, 2004................. 0 67,500
Capital lease obligations..................... 31,703 32,256
6.53% mortgage note........................... 13,650 0
7.77% mortgage note........................... 10,478 10,885
8.15% note.................................... 3,750 4,908
7.5% mortgage note............................ 6,059 6,261
Other......................................... 0 13
-------- --------
Total long-term debt.......................... 215,640 217,870
Less current portion.......................... 12,595 9,379
-------- --------
$203,045 $208,491
======== ========
</TABLE>
On May 28, 2002, we completed a private placement of $130,000,000 of 4.75%
Senior Convertible Notes due 2012 (the "Senior Notes"). On June 20, 2002, the
initial purchasers in the private placement exercised their option to purchase
an additional $20,000,000 principal amount of the Senior Notes, resulting in the
private placement of Senior Notes in an aggregate principal amount of
$150,000,000. We registered the Senior Notes with the Securities and Exchange
Commission for resale by the initial purchasers during August 2002.
The Senior Notes will mature on June 1, 2012 and are convertible at any
time prior to maturity into shares of our common stock at a conversion price of
$9.88 per share, subject to adjustment upon certain events. The Senior Notes are
redeemable at our option, in whole or in part, at any time on or after June 4,
2007, at declining redemption prices, starting at 102.38% of principal and
decreasing to 100.48% on or after June 1, 2011. Under certain circumstances
involving a change in control of the Company, holders of the Senior Notes may
require us to repurchase all or a portion of the Senior Notes at 100% of the
principal amount plus accrued and unpaid interest, if any. Also, under such
circumstances we have the option of paying the repurchase price in shares of our
common stock, valued at 95% of the average of the closing prices of the common
stock for the five-day trading period immediately before and including the third
trading day preceding the repurchase date. There is no sinking fund for the
Senior Notes.
Net proceeds received from the issuance of the Senior Notes were
$145,500,000. We used a portion of the net proceeds to repay in full our
$67,500,000 term loan due August 16, 2004, $3,486,000 outstanding under our
revolving credit facility, and $6,942,000 of the 7.5% Convertible Subordinated
Notes due 2006 called for redemption (see below). We also used a portion of the
proceeds to purchase 2,740,000 shares of our common stock at a cost of
$18,708,000. The remaining proceeds ($48,864,000) were invested in cash and cash
equivalents and were subsequently used for the purchase of 9,525,993 shares of
our common stock from Limited Brands (see "Note 2. Lane Bryant Acquisition"
above and "Note 8. Stockholders' Equity" below). In addition, we wrote off
$951,000 of unamortized deferred financing costs related to the term loan (see
"Note 1. Summary Of Significant Accounting Policies - Impact of Recent
Accounting Pronouncements" above). The term loan that was repaid had an 11.5%
interest rate and various financial covenants.
61
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
On May 29, 2002, we called our 7.5% Convertible Subordinated Notes due 2006
(the "Subordinated Notes") for redemption on June 28, 2002. The redemption price
was 102.5% of the principal amount of the Subordinated Notes, plus accrued and
unpaid interest to the date of redemption. The Subordinated Notes had an
original maturity date of July 15, 2006, and could be converted into shares of
our common stock until the close of business on June 27, 2002 at a conversion
price of $7.46 per share. Between May 29, 2002 and June 27, 2002, $89,105,000
principal amount of the Subordinated Notes were converted into 11,944,338 shares
of our common stock pursuant to the conversion terms of the Notes. Accrued
interest expense of $1,967,000, net of income taxes of $1,059,000, on the
Subordinated Notes that were converted was reclassified to additional paid-in
capital. On June 28, 2002, the remaining Subordinated Notes, with an aggregate
principal amount of $6,942,000, were redeemed for $7,351,000, including the 2.5%
redemption premium and accrued interest of $236,000 to the date of redemption.
The redemption premium of $174,000 has been included in continuing operations in
the Consolidated Statement of Operations and Comprehensive Income (Loss) for
Fiscal 2003 (see "Note 1. Summary Of Significant Accounting Policies - Impact of
Recent Accounting Pronouncements" above).
As of February 1, 2003, we had a $300,000,000 revolving credit facility
(the "Facility") which we obtained in connection with the Lane Bryant
acquisition on August 16, 2001, pursuant to a loan and security agreement of the
same date (the "Agreement"). The Facility provides for cash borrowings and
enables us to issue up to $150,000,000 of letters of credit for overseas
purchases of merchandise. The availability of borrowings under the Facility is
subject to limitations based on eligible inventory and the value of certain real
property. The Facility is secured by our general assets, except for certain
assets of our credit card securitization program, certain of our real properties
and equipment subject to other mortgages, our interest in our joint venture with
Monsoon plc, and assets of our non-U.S. subsidiaries. The Facility expires on
August 16, 2004, and can be renewed for an additional year at our option.
The interest rate on borrowings under the revolving credit facility ranges
from Prime to Prime plus .75% per annum for Prime Rate Loans, and LIBOR plus 2%
to LIBOR plus 2.75% per annum for Eurodollar Rate Loans, and is determined
quarterly, based on our Leverage Ratio or excess availability, as defined in the
Agreement. As of February 1, 2003, the interest rate on borrowings under the
revolving credit line was 4.25%. There were no borrowings outstanding under the
Facility as of February 1, 2003. There is a fee of 1.5% per annum on outstanding
documentary letters of credit, a fee of 2% per annum on outstanding stand-by
letters of credit, a fee of .375% per annum on the unused portion of the
revolving credit facility, and annual servicing fees totaling $96,000. We
incurred approximately $7,991,000 of costs in obtaining the Facility. We have
deferred these debt acquisition costs and are amortizing them over the life of
the Agreement as interest expense.
The Agreement includes limitations on sales and leasebacks, the incurrence
of additional liens and debt, capital lease financing, the repurchase of our
common stock, and other limitations. The Agreement also requires, among other
things, that we not pay dividends on our common stock and, under certain
circumstances, maintain an Adjusted Tangible Net Worth (as defined in the
Agreement) of $228,000,000 (subject to adjustment). As of February 1, 2003, we
were not in default with respect to any of the Agreement's covenants. We had
outstanding letters of credit totaling $66,555,000 as of February 1, 2003, and
the unused availability under the revolving credit facility was $149,774,000.
62
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
In October 2002, we borrowed $14,000,000 under a 6.53% mortgage note. The
note has a ten-year term with 120 monthly installments of principal in the
amount of $117,000 plus interest. The mortgage note is secured by land, a
building, and certain fixtures we own at our distribution center in White Marsh,
Maryland, which we acquired on September 24, 2002. The net proceeds were used to
finance a substantial portion of the White Marsh acquisition.
The 7.77% mortgage note, dated November 1, 2001, has a ten-year term with
119 monthly installments of principal and interest of $103,000 commencing in
January 2002 and a final payment of any remaining unpaid principal and interest
in December 2011. The mortgage note is secured by land, buildings, and fixtures
we own at our offices in Bensalem, Pennsylvania and by leases and rents we own
or receive from tenants of the Bensalem facility. The net proceeds of
$10,851,000 from the mortgage note were used to repay a portion of the
borrowings outstanding under the $300,000,000 revolving credit facility,
discussed above.
In December 2001, we borrowed $5,000,000 under an 8.15% note. The note has
a three-year term with 35 monthly installments of principal and interest of
$126,000 commencing in January 2002, and a final payment of any remaining unpaid
principal and interest in December 2004. The note is secured by our equipment
and fixtures at our Greencastle, Indiana distribution center. The net proceeds
from the note were used to repay a portion of the borrowings outstanding under
the $300,000,000 credit facility, discussed above.
During Fiscal 2003, 2002, and 2001, we acquired $6,997,000, $24,677,000,
and $14,896,000, respectively, of point-of-sale ("POS") equipment for our
Fashion Bug and Catherine's stores under capital leases. These leases generally
have an initial lease term of 60 months and contain a bargain purchase option.
During Fiscal 2002, we re-negotiated the terms of certain of our existing
capital leases. The re-negotiated leases were combined into a new lease with a
60-month term and a lower interest rate. The effect of the re-negotiation was a
net (decrease) increase in total lease payments as follows: Fiscal 2002 -
($25,000); Fiscal 2003 - ($149,000); Fiscal 2004 - $235,000; Fiscal 2005 -
$337,000; Fiscal 2006 - $6,000; Fiscal 2007 - $2,072,000. As of February 1,
2003, the imputed interest rates on the capital leases ranged from 4.48% to
10.87%.
In December 2002, we entered into two financing leases for the purchase of
material handling systems and related equipment and software for the White Marsh
distribution center. The lease terms provide for the availability of funds as
the equipment and software is delivered and accepted. The first capital lease
obligation of $2,500,000 is payable over a term of 60 months at an interest rate
of 6.77%, and contains a bargain purchase option. We have received all of the
equipment under this lease as of February 1, 2003. The second capital lease
obligation of $10,000,000 is payable over a term of 60 months at an interest
rate of 7.35% and contains a bargain purchase option. We anticipate that the
delivery, installation, and acceptance of the equipment and related software
will be completed by the middle of Fiscal 2004. As of February 1, 2003, we have
acquired $1,002,000 of equipment under this lease.
We assumed a 7.5% Mortgage Note and $2,753,000 of capital lease obligations
in January 2000 in connection with our Catherine's acquisition. The mortgage
financing agreement provides for a $6,919,000 mortgage facility with a
seven-year term and monthly payments based on a 20-year amortization period. The
mortgage includes a final principal payment of $5,585,000 in Fiscal 2006. The
mortgage is secured by land and buildings at our Catherine's office and
distribution center in Memphis, Tennessee. There is a pre-payment penalty of 1%
of the outstanding principal. If we sell the Memphis, Tennessee distribution
center, we may be required to repay this mortgage in full. The capital leases
are for data processing and POS equipment. At the end of the initial lease term,
63
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
we have the option of purchasing the capital lease equipment at fair market
value (or at $1 in the case of the POS equipment), renewing the leases, or
returning the equipment to the lessor.
During Fiscal 2003, 2002, and 2001, we made interest payments of
$12,859,000, $17,657,000, and $8,712,000, respectively. Interest expense
capitalized during Fiscal 2003 was immaterial. No interest expense was
capitalized during Fiscal 2002 or 2001.
Aggregate maturities of long-term debt during the next five fiscal years
are:
<TABLE>
<CAPTION>
(in thousands) 2004 2005 2006 2007 2008
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Capital lease obligations... $ 9,281 $ 9,242 $ 7,705 $4,623 $ 853
Mortgage notes.............. 3,314 4,605 7,518 1,955 1,999
------- ------- ------- ------ ------
$12,595 $13,847 $15,223 $6,578 $2,852
======= ======= ======= ====== ======
</TABLE>
Minimum lease payments under capital leases for the next five fiscal years
are: 2004 - $13,232,000; 2005 - $12,344,000; 2006 - $10,260,000; 2007 -
$6,990,000; 2008 - $2,858,000. These minimum lease payments include anticipated
payments for equipment not yet received as of February 1, 2003 under the
$10,000,000 financing lease for the purchase of material handling systems and
related software for the White Marsh distribution center (see above). Included
in these minimum lease payments is aggregate imputed interest of $5,544,000.
NOTE 8. STOCKHOLDERS' EQUITY
Our 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.
During the fiscal years ended January 31, 1998 and January 30, 1999, our
Board of Directors authorized the repurchase of up to 20,000,000 shares of our
common stock. As of February 3, 2001, we had repurchased an aggregate total of
9,105,000 shares of our common stock at an aggregate cost of $41,537,000. The
shares repurchased were held as treasury stock. In August 2001, these treasury
shares were re-issued to Limited Brands in connection with our acquisition of
Lane Bryant (see "Note 2. Lane Bryant Acquisition" above).
During August and September 2002, we repurchased 9,525,993 shares of our
common stock issued in connection with our acquisition of Lane Bryant from
Limited Brands for $65,428,000. During Fiscal 2003, pursuant to the
authorization of our Board of Directors, we also repurchased an aggregate total
of 2,740,000 shares of our common stock on the open market for $18,708,000. The
transactions were financed through the use of existing cash and proceeds from
the issuance of our 4.75% Senior Convertible Notes (see "Note 7. Debt" above).
The repurchased shares are being held as treasury shares.
64
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
NOTE 9. STOCK OPTION AND STOCK INCENTIVE PLANS
Our Board of Directors adopted the 2000 Associates' Stock Incentive Plan on
January 27, 2000. The plan provides for the grant of options, stock appreciation
rights, restricted stock awards, deferred stock, or other stock-based awards to
purchase up to 5,000,000 shares of our common stock. The form of the grants,
exercise price, and maximum term, where applicable, are at the discretion of the
Board of Directors and the Stock Option Committee of the Board of Directors. As
of February 1, 2003 and February 2, 2002, 711,630 options and 352,160 options,
respectively, were exercisable under this plan. During Fiscal 2003 and 2002,
111,000 shares and 166,175 shares, respectively, were granted as restricted
stock awards under this plan. The weighted average market value at date of grant
for the Fiscal 2003 and 2002 awards was $5.98 and $6.54 per share, respectively.
During Fiscal 2003, 30,545 shares granted as restricted stock awards under this
plan were issued and awards totaling 35,180 shares were canceled. During Fiscal
2002, 1,960 shares granted as restricted stock awards under this plan were
issued and awards totaling 20,650 shares were canceled. As of February 1, 2003,
restricted stock awards totaling 188,840 shares were outstanding under this
plan.
Our 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 may not be less than the fair market value of
the stock on the date of grant. As of February 1, 2003, February 2, 2002, and
February 3, 2001, 180,000 options, 88,000 options, and 28,000 options,
respectively, 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 2003, Fiscal 2002, and Fiscal 2001, 0 shares, 0 shares, and 10,000
shares, respectively, were granted and issued as one-time grants under this
program. The weighted average market value at date of grant for shares granted
in Fiscal 2001 was $5.13. As of February 1, 2003, restricted stock awards
totaling 3,334 shares were outstanding under this plan. In June 2002, this plan
was amended to provide for annual grants of 3,000 restricted stock units ("RSU")
to each non-employee director. Each RSU represents a right to receive one share
of common stock, or cash of equal value at the Company's option, at the date of
vesting, or, if deferred by the director, at a later date after termination of
service. The RSUs generally vest in full one year after grant. During Fiscal
2003, RSUs representing 24,000 shares were granted under this program and were
outstanding as of February 1, 2003. The weighted average market value of common
stock as date of grant for the RSUs was $8.04.
Our 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 our 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 February 1, 2003, February 2,
2002, and February 3, 2001, 250,800 options, 245,200 options, and 127,500
options, respectively, were exercisable under this plan.
Our 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
us 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 our 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 February 1, 2003, February 2, 2002, and
February 3, 2001, 4,681,587 options, 4,931,030 options, and 4,380,640 options,
respectively, were exercisable under
65
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
this plan. During Fiscal 2003, 2002, and 2001, 54,500 shares, 394,800 shares and
88,000 shares, respectively, were granted as restricted stock awards under this
plan. The weighted average market value at date of grant for the Fiscal 2003,
2002, and 2001 awards was $6.34, $5.73, and $6.81 per share, respectively.
During Fiscal 2003, 95,278 shares granted as restricted stock awards under this
plan were issued and awards totaling 2,400 shares were canceled. During Fiscal
2002, 198,822 shares granted as restricted stock awards under this plan were
issued and awards totaling 17,759 shares were canceled. During Fiscal 2001,
38,308 shares granted as restricted stock awards under this plan were issued and
awards totaling 10,300 shares were canceled. As of February 1, 2003, restricted
stock awards totaling 560,740 shares were outstanding under this plan.
Our 1988 Key Employee Stock Option Plan provides for the grant of options
to purchase up to 3,000,000 shares of common stock to our key employees. The
exercise price of options granted under this plan is $1.00 per share. As of
February 1, 2003, February 2, 2002, and February 3, 2001, 60,982 options, 53,702
options, and 92,937 options, respectively, were exercisable under this plan.
Our 1990 Employees' Stock Incentive Plan provided for the grant of options
to purchase common stock to our key employees. The exercise price of such
options could 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, we no longer
intend to issue options under this plan. As of February 1, 2003, February 2,
2002, and February 3, 2001, 0 options, 144,000 options, and 144,000 options,
respectively, were exercisable under this plan.
Our 1989 Non-Employee Director Stock Option Plan provided for the grant of
options to purchase up to 30,000 shares of common stock to each member of our
Board of Directors who is not an employee of the Company. The exercise price of
such options could not be less than the fair market value of the stock on the
date of grant. As of February 1, 2003, February 2, 2002, and February 3, 2001,
49,000 options, 78,000 options, and 66,000 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, we no longer intend to
issue options under this plan.
66
<PAGE>
The table below summarizes the activity in all Stock Option Plans:
<TABLE>
<CAPTION>
Average Option
Option Option Prices
Shares Price Per Share
------ ----- ---------
<S> <C> <C> <C>
Outstanding at January 29, 2000................ 8,456,859 $5.400 $ .500 - $16.875
Granted - option price equal to market price... 2,192,050 6.633 5.000 - 6.813
Granted - option price less than market price.. 37,700 1.000 1.000 - 1.000
Canceled/forfeited............................. (682,035) 6.225 1.000 - 16.875
Exercised...................................... (906,701) 4.326 .500 - 6.188
---------- ------- ----------------
Outstanding at February 3, 2001................ 9,097,873 5.724 .500 - 15.813
Granted - option price equal to market price... 2,661,200 6.380 4.730 - 6.710
Granted - option price less than market price.. 22,800 1.000 1.000 - 1.000
Canceled/forfeited............................. (427,578) 6.253 1.000 - 16.875
Exercised...................................... (284,165) 4.015 .500 - 6.000
---------- ------- ----------------
Outstanding at February 2, 2002................ 11,070,130 5.895 .500 - 15.813
Granted - option price equal to market price... 3,029,500 6.295 4.351 - 8.460
Granted - option price less than market price.. 11,100 1.000 1.000 - 1.000
Canceled/forfeited............................. (681,571) 8.156 1.000 - 15.813
Exercised...................................... (1,326,561) 4.393 .500 - 6.813
---------- ------- ----------------
Outstanding at February 1, 2003................ 12,102,598 $6.028 $1.000 - $15.813
========== ====== ================
</TABLE>
Weighted average grant date fair value for options granted, using Black-
Scholes model and assumptions described under "Note 1. Summary Of Significant
Accounting Policies - Common Stock Plans" above:
<TABLE>
<CAPTION>
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Option price equal to market price...... $2.34 $3.16 $2.35
Option price less than market price..... 6.23 5.96 5.32
</TABLE>
67
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
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 February 1, 2003 for the ranges of
exercise prices shown:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Average Remaining
Option Option Life
Ranges of Option Prices Shares Price (Years)
------ ----- -----
<S> <C> <C> <C>
$0.00 - $1.00:
Options outstanding....... 118,321 $1.000 5.6
Options exercisable....... 60,982 1.000
$1.01 - $5.00:
Options outstanding....... 3,300,957 $4.042 4.4
Options exercisable....... 2,572,757 4.078
$5.01 - $10.00:
Options outstanding....... 8,017,870 $6.360 5.2
Options exercisable....... 2,634,810 6.330
$10.01 - $15.81:
Options outstanding....... 665,450 $12.772 0.7
Options exercisable....... 665,450 12.772
</TABLE>
At February 1, 2003, 1,404,545 shares were available for grant under the
2000 Associates' Stock Incentive Plan, 36,327 shares were available for grant
under the Amended and Restated Non-Employee Directors Program, 266,800 shares
were available for grant under the 1999 Associates' Stock Incentive Plan,
758,203 shares were available for grant under the 1993 Employees' Stock
Incentive Plan, and 165,678 shares were available for grant under the 1988 Key
Employee Stock Option Plan.
Our 1998 Restricted Stock Award Program provided for the grant of rights to
receive shares of our common stock subject to attainment of specified
performance goals for Fiscal 2000. During Fiscal 2001, 77,450 shares were issued
under this plan and rights to receive 33,605 shares were canceled. Associates
paid no cash consideration for shares received under the plan. We do not intend
to grant further awards under this plan.
Our Board of Directors adopted the Restricted Stock Award Plan for
Associates on January 26, 1995. The plan provided 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 paid no
cash consideration for restricted stock received under an award. During Fiscal
2001, 5,500 shares were issued under this plan. We do not intend to grant
further awards under this plan.
The shares issued and options granted under the above plans are subject to
forfeiture if the employees do not remain employed by us for a specified period
of time. Under the 1989 Non-Employee Director Stock Option Plan 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 or
voluntary termination.
68
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
NOTE 10. EMPLOYEE STOCK PURCHASE PLAN
Our 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 our 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 2003,
2002, and 2001, 109,269 shares, 82,184 shares, and 57,527 shares, respectively,
were purchased under the plan. The weighted average grant date market value for
shares purchased during Fiscal 2003, 2002, and 2001 was $7.13, $5.52, and $5.41
per share, respectively. At February 1, 2003, 1,482,511 shares were available
for future purchases under this plan.
NOTE 11. SHAREHOLDER RIGHTS PLAN
On April 12, 1999, pursuant to a Rights Agreement between the Company and
American Stock Transfer & Trust Company, as Rights Agent, our Board of Directors
declared a dividend distribution of one Right for each outstanding share of our
common stock, payable upon the close of business on April 26, 1999. Each Right
entitles the registered holder to purchase from us one three-hundredth of a
share of Series A Junior Participating Preferred Stock, or, under certain
circumstances, a combination of securities and assets of equivalent value, at a
purchase price of $20.00, subject to adjustment. The purchase price may be paid
in cash or, if we permit, by the delivery of Rights under certain circumstances.
The description and terms of the Rights are set forth in the Rights Agreement.
Initially, ownership of the Rights will be evidenced by the certificates
representing shares of common stock then outstanding, and no separate Rights
certificates will be distributed. The Rights will separate from the common stock
and a "Distribution Date" will occur upon the earlier of (i) 10 days following a
public announcement that a person or group of affiliated or associated persons
(an "Acquiring Person") has acquired, or obtained the right to acquire,
beneficial ownership of 20% or more of our outstanding common stock (the "Stock
Acquisition Date"), or (ii) the close of business on such date as may be fixed
by the our Board of Directors after the commencement of a tender offer or
exchange offer that would result in a person or group beneficially owning 20% or
more of our outstanding common stock. Until the Distribution Date, (i) the
Rights will be evidenced by the certificates representing shares of common stock
and will be transferred with and only with such certificates, (ii) certificates
issued after April 26, 1999 will contain a notation incorporating the Rights
Agreement by reference, and (iii) the surrender for transfer of any certificates
for our common stock outstanding will also constitute the transfer of the Rights
associated with the common stock represented by such certificate.
In the event that at any time following the Distribution Date a person
becomes an Acquiring Person, each holder of a Right will thereafter have the
right to receive, upon exercise, our common stock (or, in certain circumstances,
cash, property, or other securities of the Company) having a value equal to two
times the exercise price of the Right. In lieu of requiring payment of the
purchase price upon exercise of the Rights following any such event, we may
permit the holders simply to surrender the Rights under certain circumstances,
in which event they will be entitled to receive our common stock (and other
property, as the case may be) with a value of 50% of what could be purchased by
payment of the full purchase price. Notwithstanding any of the foregoing, all
Rights that are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by the Acquiring Person
69
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
will be null and void. Rights are not exercisable until such time as the Rights
are no longer redeemable by us as set forth in the Rights Agreement.
In the event that, at any time following the Stock Acquisition Date, (i) we
are acquired in a merger or other business combination transaction in which we
are not the surviving corporation (other than a merger that is described in, or
that follows a tender offer or exchange offer described above), or (ii) 50% or
more of our assets or earning power is sold or transferred, each holder of a
Right (except Rights that previously have been voided as set forth above) shall
thereafter have the right to receive, upon exercise, common shares of the
acquiring company having a value equal to two times the exercise price of the
Right. Again, provision is made to permit surrender of the Rights in exchange
for one-half of the value otherwise purchasable. The events set forth in this
paragraph and above are referred to as the "Triggering Events."
The purchase price payable, and the number of shares of our common stock,
or other securities or property issuable, upon exercise of the Rights are
subject to certain anti-dilution adjustments. With certain exceptions, no
adjustment in the purchase price will be required until cumulative adjustments
amount to at least 1% of the purchase price. No fractional shares of our common
stock will be issued and, in lieu thereof, an adjustment in cash will be made
based on the market price of our common stock on the last trading date prior to
the date of exercise.
At any time until ten days following the Stock Acquisition Date, we may
redeem the Rights in whole, but not in part, at a redemption price of $.01 per
Right, subject to adjustment. The ten-day period may be extended by our Board of
Directors so long as the Rights are still redeemable. Immediately upon the
action of our Board of Directors ordering redemption of the Rights, the Rights
will terminate and the only right of the holders of Rights will be to receive
the redemption price. Until a Right is exercised, the holder thereof, as such,
will have no rights as a shareholder of the Company, including, without
limitation, the right to vote or to receive dividends.
NOTE 12. NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
(in thousands) 2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Basic weighted average common shares outstanding................... 113,810 105,842 101,119
Dilutive effect of assumed conversion of convertible notes......... 15,655 0 12,875
Dilutive effect of stock options................................... 1,472 0 1,033
------- ------- -------
Diluted weighted average common shares and equivalents outstanding. 130,937 105,842 115,027
======= ======= =======
Income (loss) before cumulative effect of accounting changes....... $46,328 $(4,406) $51,638
Decrease in interest expense from assumed conversion of notes,
net of income taxes........................................... 4,700 0 4,455
------- ------- -------
Income (loss) before cumulative effect of accounting changes
used to determine diluted earnings per share.................. 51,028 (4,406) 56,093
Cumulative effect of accounting changes, net of income taxes....... (49,098) 0 (540)
------- ------- -------
Net income (loss) used to determine diluted earnings per share..... $ 1,930 $(4,406) $55,553
======= ======= =======
</TABLE>
70
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
Options with weighted average exercise price greater than market price,
excluded from computation of diluted earnings per share:
<TABLE>
<CAPTION>
(in thousands, except per-share amounts) 2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Number of shares........................... 4,583 5,805 3,762
Weighted average exercise price per share.. $7.66 $7.43 $8.06
</TABLE>
The effect of an assumed conversion of our Convertible Notes into 12.9
million shares of our common stock was excluded from the computation of diluted
net loss per share for Fiscal 2002 because the effect would have been
anti-dilutive. All options to purchase shares of our common stock at February 2,
2002, were excluded from the calculation of diluted net loss per share because
the effect would have been anti-dilutive.
Grants of stock awards under our restricted stock award programs generally
require continuing employment for a specified period of time as a condition for
vesting of the award. Grants that have not vested and are subject to a risk of
forfeiture are included in the calculation of diluted earnings per share using
the treasury stock method if the impact of the award is dilutive. Upon vesting,
shares issued under these award programs are included in the calculation of
basic earnings per share.
NOTE 13. EMPLOYEE RETIREMENT BENEFIT PLAN
We provide a comprehensive retirement benefit program for our employees.
This program provides for a noncontributory profit-sharing plan which covers
substantially all full-time employees who meet age and service requirements.
Contributions to this plan are completely discretionary and are determined by
our Board of Directors on an annual basis.
The program also includes a 401(k) employee savings plan under which
eligible participating employees may elect to contribute up to 80% 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. Company matching
contributions are made in cash, and the available trust investment options do
not include investment in our own common stock.
The total expense for the above plans amounted to $2,582,000, $2,089,000,
and $2,137,000 for Fiscal 2003, 2002, and 2001, respectively.
As of the date of acquisition, Lane Bryant (through Limited Brands)
provided a retirement plan for its employees with benefits substantially the
same as our plan. Lane Bryant participant accounts in Limited Brands' plan have
been transferred to our plan, and participants in the Lane Bryant plan retain
credited years of service earned under that plan. As of the date of acquisition,
we also assumed an unfunded liability of $4,244,000 for supplemental retirement
benefits for certain Lane Bryant employees.
71
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
We also provide a non-qualified deferred compensation plan to officers and
certain key executives. Under this plan, participants may contribute up to 77%
of their base compensation and 100% of bonus compensation.
NOTE 14. ASSET SECURITIZATION
We record gains or losses on the securitization of our 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 we have retained over the estimated outstanding period
of the receivables. This excess cash flow essentially represents an
"interest-only" ("I/O") strip, consisting of the present value of the finance
charges and late fees in excess of the amounts paid to certificate holders,
credit losses, and service fees. During Fiscal Years 2003, 2002, and 2001, we
recognized additions to the I/O strip of $18,447,000, $14,074,000, and
$11,973,000, respectively. Amortization and valuation adjustments in each year
were $14,856,000, $12,763,000, and $13,143,000, respectively. The value of the
I/O strip was $9,570,000, $5,979,000, and $4,668,000 as of the end of Fiscal
2003, 2002, and 2001, respectively. In addition, we recognized a servicing
liability of $2,496,000, $3,950,000, and $3,864,000 in Fiscal Years 2003, 2002,
and 2001, respectively, and of those balances, $3,375,000, $3,993,000, and
$3,260,000 were amortized in each respective fiscal year. The value of the
servicing liability was $1,180,000, $2,059,000, and $2,102,000 as of the end of
Fiscal 2003, 2002, and 2001, respectively. We amortize additions to the I/O
strip and servicing liability on a straight-line basis over the expected life of
the credit card receivables, which is generally less than one year. We compute
the expected life using a 12-month rolling average of principal payments as a
percent of outstanding trust receivables sold.
Proceeds from the sale of new loans to the Trust were approximately
$384,162,000, $423,089,000, and $437,697,000 for Fiscal Years 2003, 2002, and
2001, respectively. At February 1, 2003 and February 2, 2002, approximately
$301,300,000 and $303,659,000, respectively, of investor certificates remained
outstanding. The investor certificates mature as follows: $51,300,000 in the
fiscal year ending January 31, 2004, $150,000,000 in the fiscal year ending
January 29, 2005, $63,500,000 in the fiscal year ending February 2, 2008, and
$36,500,000 in the fiscal year ending January 31, 2009. Our certificates and
retained interests in our securitizations, which aggregated $50,227,000 and
$47,240,000 at February 1, 2003 and February 2, 2002, respectively, are
generally subordinated in right of payment to certificates issued by the Trust
to third-party investors. Our obligation to repurchase receivables sold to the
Trust is limited to those receivables that, at the time of their transfer, fail
to meet the Trust's eligibility standards under normal representations and
warranties. To date, our repurchases of receivables pursuant to this obligation
have been insignificant.
On November 22, 2002, we issued $100,000,000 of new five-year asset-backed
certificates in a private placement, of which $80,000,000 have been sold to
investors to-date. To the extent that the remaining certificates are not sold,
we will hold them as a retained interest. The weighted average fixed interest
rate on the certificates sold is 4.68%. These certificates replaced an
$83,500,000 securitization series that matured during the fourth quarter of
Fiscal 2003.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," a
replacement of SFAS No. 125. We adopted the disclosure provisions of SFAS No.
140 as of Fiscal 2001, and have adopted the accounting requirements of SFAS No.
140 to the extent that we have issued new beneficial interests after March 31,
2001. Our management uses key valuation assumptions
72
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
in determining the fair value of our I/O strip. Key valuation assumptions relate
to the average lives of the receivables sold and anticipated credit losses, as
well as the appropriate market discount rate. We estimate the average lives of
the receivables and the anticipated credit losses using a rolling average of the
past twelve months' experience, adjusted as necessary for the future impact of
these key assumptions. The key assumptions used at February 1, 2003 for the
following sensitivities were a loan payment rate of 13.0%, a discount rate of
9.8% and a credit loss percentage of 13.0%. The average life of the receivables
sold is approximately 0.6 years. The key assumptions used at February 2, 2002
were a loan payment rate of 13.5%, a discount rate of 12.0%, a credit loss
percentage of 12.7%, and an average life of the receivables sold of
approximately 0.6 years. A 10% and 20% adverse change in the loan payment rate
would impact the fair value of the I/O strip by $787,000 and $1,381,000,
respectively. A 10% and 20% adverse change in the discount rate would impact the
fair value of the I/O strip receivable by $25,000 and $50,000, respectively. A
10% and 20% adverse change in the credit loss percentage would impact the fair
value of the I/O strip receivable by $1,236,000 and $2,472,000, respectively.
These adverse changes are hypothetical in nature and are presented for
analytical purposes in accordance with SFAS No. 140.
Collections reinvested in revolving-period securitizations were
$450,363,000 and $468,919,000 for Fiscal 2003 and 2002, respectively. Cash flows
received on retained interests were $45,708,000 and $38,992,000 for Fiscal 2003
and 2002, respectively. Servicing fees received were $5,723,000 and $6,003,000
for Fiscal 2003 and 2002, respectively. We are the servicer of the Master Trust,
and we receive a servicing fee of approximately 2% of the investor interest.
Total net credit losses were $39,312,000 and $38,878,000 for Fiscal 2003 and
2002, respectively, and credit card accounts that were 90 or more days
delinquent at February 1, 2003 were $13,102,000.
Charming Shoppes Receivables Corp. and Charming Shoppes Seller, Inc., our
consolidated wholly-owned indirect subsidiaries, are separate special purpose
entities created for the securitization program. At February 1, 2003, Charming
Shoppes Receivables Corp. had $38,132,000 of Charming Shoppes Master Trust
certificates and Charming Shoppes Seller, Inc. held retained interests of
$1,225,000 (which are included in the $50,227,000 of certificates and retained
interests at February 1, 2003 - see "Note 5. Available-For-Sale Securities"
above). These assets will be first and foremost available to satisfy the claims
of the respective creditors of these separate corporate entities, including
certain claims of investors in the Charming Shoppes Master Trust.
We also have non-recourse agreements pursuant to which third parties
provide accounts receivable proprietary credit card sales funding programs for
our Catherine's and Lane Bryant stores. These funding programs expire in January
2005 for Catherine's and in January 2006 for Lane Bryant. Under these
agreements, the third parties reimburse us daily with respect to the proprietary
credit card sales generated by the respective store's credit card accounts.
Under the Catherine's agreement, we may be required to repurchase receivables
from the third party under certain conditions relating to a change in control.
Under the Lane Bryant agreement, we may be required to repurchase receivables
from the third party upon termination of the agreement. Net funding received
from sales of Catherine's receivables for Fiscal 2003 and 2002 was approximately
$113,526,000 and $129,098,000, respectively. The net balance of Catherine's
accounts receivable held by the third party at February 1, 2003 and February 2,
2002 was approximately $85,754,000 and $98,388,000, respectively. Net funding
received from sales of Lane Bryant receivables for Fiscal 2003 and 2002
(subsequent to the date of acquisition) was approximately $251,619,000 and
$128,947,000, respectively. The net balance of Lane Bryant accounts receivable
held by the third party at February 1, 2003 and February 2, 2002 was
approximately $195,326,000 and $206,247,000, respectively.
73
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
Although we securitize credit card receivables from our Fashion Bug
proprietary credit card program in a non-consolidated master trust, we are
exposed to fluctuations in interest rates. On September 15, 1999, we entered
into an interest rate swap transaction with a notional amount of $50,000,000
that limited our exposure to rising interest rates should the one-month LIBOR
rate increase to a rate above the agreement's specified rate of 6.51%. During
Fiscal 2001, we terminated the swap agreement. In Fiscal 2002, we recognized the
deferred loss related to this termination in comprehensive income. We are
amortizing this deferred loss to selling, general, and administrative expenses
over 44 months (the remaining life of the original swap period) in accordance
with SFAS No. 133.
NOTE 16. LEASES
We lease substantially all of our stores under non-cancelable operating
lease agreements. Generally, these leases have initial periods of 5 to 20 years
and contain provisions for co-tenancies, renewal options, additional rentals
based on a percentage of sales, and payment of real estate taxes and common area
charges. We also lease certain other buildings and equipment.
Our rental expense was:
<TABLE>
<CAPTION>
(in thousands) 2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Minimum rental..... $203,105 $158,878 $117,824
Contingent rental.. 32,179 26,201 18,901
-------- -------- --------
$235,284 $185,079 $136,725
======== ======== ========
</TABLE>
Minimum annual rental commitments for all non-cancelable leases for the
next five fiscal years and thereafter are: Fiscal 2004 - $203,660,000; Fiscal
2005 - $165,750,000; Fiscal 2006 - $131,160,000; Fiscal 2007 - $98,029,000;
Fiscal 2008 - $71,482,000; Thereafter - $144,549,000.
Rental expense includes charges from Limited Brands for office and
distribution center space in Columbus, Ohio under agreements which expire in
December 2007 for the office space, and December 2003 for the distribution
center space, with the right to terminate the agreement for the office space
earlier upon notice. These charges approximate market rates. The minimum annual
rental commitments shown above include $3,925,000, $1,811,000, $1,875,000,
$1,940,000, and $1,841,000 for Fiscal 2004 through 2008, respectively, to be
paid under these agreements. On September 24, 2002, we acquired a distribution
center in White Marsh, Maryland which will replace the existing distribution
center in Columbus, Ohio by December 2003.
Lane Bryant has subleased 207 properties from Limited Brands pursuant to a
Master Sublease. The properties subject to the Master Sublease were operated as
Lane Bryant stores prior to our acquisition of Lane Bryant. We have guaranteed
the obligations of Lane Bryant under the Master Sublease, and, in connection
with such guaranty, we have entered into an agreement with Limited Brands that
requires us to comply with certain financial covenants restricting the
incurrence of additional debt and payments to shareholders, and the repurchase
of our common stock. The minimum annual rental commitments shown above include
amounts payable under the
74
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
Lane Bryant master sublease with Limited Brands which we have guaranteed, as
follows: Fiscal 2004 - $24,428,000; Fiscal 2005 - $19,165,000; Fiscal 2006 -
$12,187,000; Fiscal 2007 - $8,384,000; Fiscal 2008 - $5,700,000; Thereafter -
$8,440,000.
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of the carrying amounts and estimated fair
values of our financial instruments:
<TABLE>
<CAPTION>
February 1, 2003 February 2, 2002
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents....................... $102,026 $102,026 $36,640 $ 36,640
Available-for-sale securities................... 73,758 73,758 70,366 70,366
Liabilities:
4.75% Senior Convertible Notes due 2012......... 150,000 112,920 0 0
7.5% Convertible Subordinated Notes due 2006.... 0 0 96,047 101,089
Term loan due August 15, 2004................... 0 0 67,500 67,500
6.53% mortgage note............................. 13,650 13,650 0 0
7.77% mortgage note............................. 10,478 10,625 10,885 10,885
8.15% note...................................... 3,750 3,827 4,908 4,908
7.5% mortgage note.............................. 6,059 6,365 6,261 6,261
Other long-term debt............................ 0 0 13 13
</TABLE>
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 low-income housing partnerships that have no
available bid/ask or sales prices as they are not traded in the open market. The
carrying amount of these low-income housing partnerships ($7,952,000 at February
1, 2003 and February 2, 2002) was used to approximate fair value. The fair
values of our convertible notes are based on quoted market prices for the
securities. The fair values of the term loan, mortgage notes, and other
long-term debt are based on estimated current interest rates that we could
obtain on similar borrowings.
NOTE 18. RESTRUCTURING CHARGE (CREDIT)
On January 28, 2002, we announced a restructuring plan, including a number
of initiatives designed to position the Company for increased profitability and
growth in the plus-size businesses. The major components of the plan included
(1) the closing of The Answer/Added Dimensions chain of 77 stores and the
conversion of approximately 20% of the Added Dimensions stores to Catherine's
stores, (2) the closing of 130 under-performing Fashion Bug stores, and (3) the
conversion of 44 Fashion Bug store locations to Lane Bryant stores. The
restructuring plan resulted in a pre-tax charge of $37,708,000 in the fourth
quarter of Fiscal 2002.
75
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
The restructuring charge included a $17,763,000 non-cash write-down of
fixed assets (primarily store fixtures and improvements) in the stores to be
closed, $18,500,000 of anticipated payments to landlords for the early
termination of existing store leases, $829,000 for severance costs, and $616,000
for sign removal and other costs. The fixtures and improvements had no
alternative use or salvage value, and we scrapped them at the time the stores
were closed. The estimated net after-tax cash cost of the restructuring was
approximately $6,747,000. The fixed asset write-down and the accrued lease
termination, severance, and other costs were reflected in our consolidated
balance sheet at February 2, 2002.
During Fiscal 2003, we closed 124 Fashion Bug stores, converted 30 Fashion
Bug stores to Lane Bryant stores), closed 65 Catherine's/Added Dimensions
stores, and converted 12 Added Dimensions stores to Catherine's stores, in
connection with the restructuring plan. Upon completion of the closing and
conversion of The Answer/ Added Dimensions stores in the third quarter of Fiscal
2003, we recognized a pre-tax restructuring credit of $1,351,000. Upon
completion of the closing of the Fashion Bug stores in the fourth quarter of
Fiscal 2003, we recognized a pre-tax restructuring credit of $3,462,000. These
restructuring credits were primarily a result of our ability to negotiate lease
terminations on terms more favorable than our original estimates. As of the end
of Fiscal 2003 we have completed the restructuring plan.
The following is a summary of restructuring costs accrued in connection
with the plan and amounts charged against the accrual during Fiscal 2003:
<TABLE>
<CAPTION>
Accrued At Revision Accrued At
February 2, of Cost February 1,
(in thousands) 2002 Settlements Estimate 2003
---- ----------- -------- ----
<S> <C> <C> <C> <C>
Lease terminations............. $18,500 $(14,013) $(4,487) $0
Severance...................... 829 (717) (112) 0
Sign removal and other costs... 429 (215) (214) 0
------- -------- ------- ---
$19,758 $(14,945) $(4,813) $0
======= ======== ======= ==
</TABLE>
76
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 1, 2003
(Continued)
NOTE 19. QUARTERLY FINANCIAL INFORMATION (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
(in thousands, except per share amounts) Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal 2003(1)
Net sales................................. $630,616 $638,307 $542,332 $601,154
Gross profit.............................. 193,381 196,931 151,285 149,760
Income (loss) before cumulative effect
of accounting changes................ 17,272 25,470 (292) 3,878
Net income (loss)......................... (31,826)(1)(2) 25,470 (292)(3) 3,878(4)
Basic net income (loss) per share......... (.28)(1)(2) .22 .00 .03
Diluted net income (loss) per share....... (.24)(1)(2) .20 .00 .03
Fiscal 2002(5)
Net sales................................. $394,761 $402,700 $549,295 $647,087
Gross profit.............................. 109,185 110,819 153,269 164,969
Net income (loss)......................... 8,368 14,860 160 (27,794)(6)
Basic net income (loss) per share......... .08 .15 .00 (.25)
Diluted net income (loss) per share....... .08 .14 .00 (.25)
<FN>
- --------------------
(1) In the fourth quarter of Fiscal 2003, we elected to adopt the provisions of
FASB EITF 02-16, "Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor," effective as of the beginning of
Fiscal 2003, and restated our results of operations for Fiscal 2003. Net
income for the Fiscal 2003 First Quarter includes $(5,123) $(.05) per basic
share and $(.04) per diluted share), net of income taxes, for the
cumulative effect of the adoption of EITF 02-16. Quarterly financial data
for Fiscal 2003 as previously reported, prior to restatement for the
adoption of EITF 02-16, are as follows:
First Second Third
(in thousands, except per share amounts) Quarter Quarter Quarter
------- ------- -------
Net sales................................. $630,616 $638,307 $542,332
Gross profit.............................. 191,808 197,061 152,584
Income before cumulative effect of
accounting changes.................... 16,311 25,549 502
Net income (loss)......................... (27,664) 25,549 502
Basic net income (loss) per share......... (.25) .22 .00
Diluted net income (loss) per share....... (.21) .20 .00
(2) Includes cumulative effect of accounting change of $(43,975) ($(.39) per
basic share and $(.35) per diluted share) for impairment of goodwill
related to our Catherine's acquisition, in accordance with the transition
provisions of SFAS No. 142.
(3) Net income includes pre-tax restructuring credit of $1,351 ($825
after-tax).
(4) Net income includes pre-tax restructuring credit of $3,462 ($2,116
after-tax).
(5) Results of operations for the third and fourth quarters of Fiscal 2002
include the results of Lane Bryant Inc. from August 16, 2001 (the date of
acquisition).
(6) Net loss includes an after-tax restructuring charge of $24,510.
</FN>
</TABLE>
77
<PAGE>
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
There are no matters that are required to be reported under this Item 9.
78
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding our directors and executive officers is included
under the captions "Directors Standing for Election", "Biographies of
Directors", "Corporate Governance at Charming Shoppes", "Compensation of
Directors", and "Section 16(a) Beneficial Ownership Reporting Compliance" in our
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days of the end of our fiscal year, which is incorporated
herein by reference. Information regarding Executive Officers is included under
"Additional Part I Information - Our Executive Officers," 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", in our
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days of the end of our fiscal year, which is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information regarding the security ownership of certain beneficial owners
and management and securities authorized for issuance under equity compensation
plans is included under the captions "Equity Compensation Plan Information" and
"Principal Shareholders and Management Ownership" in our definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days of the end of our fiscal year, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is
included under the captions "Certain Relationships and Related Transactions" and
"Compensation Committee Interlocks and Insider Participation" in our definitive
proxy statement to be filed with the Securities and Exchange Commission within
120 days of the end of our fiscal year, which is incorporated herein by
reference.
Item 14. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in reports we file under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized,
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), as appropriate and in such a manner as to
allow timely decisions regarding required disclosure. We have established a
Disclosure Committee, which is made up of several key management employees and
reports directly to the CEO and CFO, to centralize and enhance these controls
and procedures and assist our manage-
79
<PAGE>
ment, including our CEO and CFO, in fulfilling their responsibilities for
establishing and maintaining such controls and procedures and providing
accurate, timely, and complete disclosure.
Within the 90-day period prior to the filing of this report on Form 10-K
(the "Evaluation Date"), our Disclosure Committee, under the supervision and
with the participation of management, including our CEO and CFO, carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our management, including our
CEO and CFO, has concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective. Furthermore, there have been no
significant changes in our internal controls or in other factors (including any
corrective actions with regard to significant deficiencies or material
weaknesses in internal controls) that could significantly affect those controls
subsequent to the date of their most recent evaluation.
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<PAGE>
PART IV
Item 15. 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:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................. 40
Consolidated Balance Sheets - February 1, 2003 and February 2, 2002........ 41
Consolidated Statements of Operations and Comprehensive Income (Loss) -
years ended February 1, 2003, February 2, 2002, and February 3, 2001....... 42
Consolidated Statements of Stockholders' Equity - years ended
February 1, 2003, February 2, 2002, and February 3, 2001................... 43
Consolidated Statements of Cash Flows - years ended
February 1, 2003, February 2, 2002, and February 3, 2001................... 44
Notes to Consolidated Financial Statements................................. 45
</TABLE>
(a)(2) Financial Statement Schedules
All schedules required by Rule 5-04 of Regulation S-X have been omitted as
they are not applicable, not required, or the information is included in the
consolidated financial statements or notes thereto included in Part II, Item 8
of this Report on Form 10-K.
(b) Reports on Form 8-K
On November 21, 2002, we filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure" an excerpt of financial
information included in the text of a press release we issued on November 21,
2002. The press release reported our earnings and sales for the third quarter
ended November 2, 2002 and re-projected earnings guidance for the fourth quarter
and fiscal year ending February 1, 2003.
(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.
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<PAGE>
Plan of Acquisition, Reorganization, Arrangement, Liquidation, or Succession
2.1 Stock Purchase Agreement, dated as of July 9, 2001, among Charming
Shoppes, Inc., Venice Acquisition Corporation, LFAS, Inc. and Limited
Brands, Inc., incorporated by reference to Form 8-K of the Registrant
dated August 16, 2001, filed on August 31, 2001. (Exhibit 2.1).
2.2 Services Agreement, dated as of August 16, 2001, between LBH, Inc. and
Limited Brands, Inc., incorporated by reference to Form 8-K of the
Registrant dated August 16, 2001, filed on August 31, 2001. (Exhibit
2.2).
2.3 Covenant Agreement, dated as of August 16, 2001, between Charming
Shoppes, Inc. and Limited Brands, Inc., incorporated by reference to
Form 8-K of the Registrant dated August 16, 2001, filed on August 31,
2001. (Exhibit 2.3).
2.4 Master Sublease, dated as of August 16, 2001, between Limited Brands,
Inc. and Lane Bryant, Inc., incorporated by reference to Form 8-K of the
Registrant dated August 16, 2001, filed on August 31, 2001. (Exhibit
2.4).
2.5 Lease Agreement, dated as of August 16, 2001, by and between
Distribution Land Corp. and Lane Bryant, Inc., incorporated by reference
to Form 8-K of the Registrant dated August 16, 2001, filed on August 31,
2001. (Exhibit 2.5).
2.6 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 on November 19, 1999. (Item 11(c)(1)).
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. (File
No. 000-07258, 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).
Instruments Defining the Rights of Security Holders, Including Indentures
4.1 Amended and Restated Rights Agreement, dated as of February 1, 2001,
between Charming Shoppes, Inc. and American Stock Transfer & Trust
Company, as Rights Agent, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended February 3, 2001. (Exhibit 4.1).
4.2 Registration Agreement, dated as of August 16, 2001, between Charming
Shoppes, Inc. and Limited Brands, Inc., incorporated by reference to
Form 8-K of the Registrant dated August 16, 2001, filed on August 31,
2001. (Exhibit 4.1).
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<PAGE>
4.3 Loan and Security Agreement, dated as of August 16, 2001, by and among
Charming Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI
Industries, Inc., Catherine Stores Corporation, Lane Bryant, Inc. and FB
Apparel, Inc., as Borrowers, Charming Shoppes of Delaware, Inc., as
Borrowers' Agent, Congress Financial Corporation, as Administrative
Agent, Collateral Agent, Joint Lead Arranger and Joint Bookrunner, J.P.
Morgan Business Credit Corp., as Co-Agent, Joint Lead Arranger and Joint
Bookrunner and The Financial Institutions named therein, as Lenders,
incorporated by reference to Form 8-K of the Registrant dated August 16,
2001, filed on August 31, 2001. (Exhibit 4.3).
4.4 Amendment No. 1, dated January 12, 2002, to Loan and Security Agreement
dated as of August 16, 2001 by and among Charming Shoppes, Inc.,
Charming Shoppes of Delaware, Inc., CSI Industries, Inc., Catherine
Stores Corporation, Lane Bryant, Inc. and FB Apparel, Inc., as
Borrowers, Charming Shoppes of Delaware, Inc., as Borrowers' Agent,
Congress Financial Corporation, as Administrative Agent, Collateral
Agent, Joint Lead Arranger and Joint Bookrunner, J.P. Morgan Business
Credit Corp., as Co-Agent, Joint Lead Arranger and Joint Bookrunner and
The Financial Institutions named therein, as Lenders, incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended
February 2, 2002. (Exhibit 4.4).
4.5 Indenture, dated as of May 28, 2002, between Charming Shoppes, Inc. and
Wachovia Bank, National Association, incorporated by reference to Form
10-Q of the Registrant for the quarter ended May 4, 2002. (Exhibit 4.1).
4.6 Registration Rights Agreement, dated as of May 28, 2002, by and among
Charming Shoppes, Inc., as Issuer, and J. P. Morgan Securities, Inc.,
Bear Stearns & Co., Inc., First Union Securities, Inc., Lazard Freres &
Co., LLC, and McDonald Investments, Inc., as Initial Purchasers,
incorporated by reference to Form 10-Q of the Registrant for the quarter
ended May 4, 2002. (Exhibit 4.2).
4.7 Amendment No. 2, dated May 17, 2002, to Loan and Security Agreement
dated as of August 16, 2001 by and among Charming Shoppes, Inc.,
Charming Shoppes of Delaware, Inc., CSI Industries, Inc., Catherine
Stores Corporation, Lane Bryant, Inc. and FB Apparel, Inc., as
Borrowers, Charming Shoppes of Delaware, Inc., as Borrowers' Agent,
Congress Financial Corporation, as Administrative Agent, Collateral
Agent, Joint Lead Arranger and Joint Bookrunner, J.P. Morgan Business
Credit Corp., as Co-Agent, Joint Lead Arranger and Joint Bookrunner and
The Financial Institutions named therein, as Lenders, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended May 4,
2002. (Exhibit 4.3).
4.8 Amendment No. 1, dated July 25, 2002, to Amendment No. 2, dated May 17,
2002, to Loan and Security Agreement dated as of August 16, 2001 by and
among Charming Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI
Industries, Inc., Catherine Stores Corporation, Lane Bryant, Inc. and FB
Apparel, Inc., as Borrowers, Charming Shoppes of Delaware, Inc., as
Borrowers' Agent, Congress Financial Corporation, as Administrative
Agent, Collateral Agent, Joint Lead Arranger and Joint Bookrunner, J.P.
Morgan Business Credit Corp., as Co-Agent, Joint Lead Arranger and Joint
Bookrunner and The Financial Institutions named therein, as Lenders,
incorporated by reference to Form 10-Q of the Registrant for the quarter
ended August 3, 2002. (Exhibit 4.4).
4.9 Amendment No. 3, dated July 29, 2002, effective as of August 16, 2001,
to Loan and Security Agreement dated as of August 16, 2001 by and among
Charming Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI
Industries, Inc., Catherine Stores Corporation, Lane Bryant, Inc. and FB
Apparel, Inc., as Borrowers, Charming Shoppes of Delaware, Inc., as
Borrowers' Agent, Congress Financial Corporation, as Administrative
Agent, Collateral Agent, Joint Lead Arranger and Joint Bookrunner, J.P.
Morgan Business Credit Corp., as Co-Agent, Joint Lead Arranger and Joint
Bookrunner and The Financial Institutions named therein, as Lenders,
incorporated by reference to Form 10-Q of the Registrant for the quarter
ended August 3, 2002. (Exhibit 4.5).
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<PAGE>
4.10 Amendment No. 4, dated September 23, 2002, to Loan and Security
Agreement dated as of August 16, 2001 by and among Charming Shoppes,
Inc., Charming Shoppes of Delaware, Inc., CSI Industries, Inc.,
Catherine Stores Corporation, Lane Bryant, Inc. and FB Apparel, Inc., as
Borrowers, Charming Shoppes of Delaware, Inc., as Borrowers' Agent,
Congress Financial Corporation, as Administrative Agent, Collateral
Agent, Joint Lead Arranger and Joint Bookrunner, J.P. Morgan Business
Credit Corp., as Co-Agent, Joint Lead Arranger and Joint Bookrunner and
The Financial Institutions named therein, as Lenders, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended November
2, 2002. (Exhibit 4.3).
4.11 Amendment No. 5, dated February 12, 2003, to Loan and Security Agreement
dated as of August 16, 2001 by and among Charming Shoppes, Inc.,
Charming Shoppes of Delaware, Inc., CSI Industries, Inc., Catherine
Stores Corporation, Lane Bryant, Inc. and FB Apparel, Inc., as
Borrowers, Charming Shoppes of Delaware, Inc., as Borrowers' Agent,
Congress Financial Corporation, as Administrative Agent, Collateral
Agent, Joint Lead Arranger and Joint Bookrunner, J.P. Morgan Business
Credit Corp., as Co-Agent, Joint Lead Arranger and Joint Bookrunner and
The Financial Institutions named therein, as Lenders.
4.12 Amendment No. 6, dated March 13, 2003, to Loan and Security Agreement
dated as of August 16, 2001 by and among Charming Shoppes, Inc.,
Charming Shoppes of Delaware, Inc., CSI Industries, Inc., Catherine
Stores Corporation, Lane Bryant, Inc. and FB Apparel, Inc., as
Borrowers, Charming Shoppes of Delaware, Inc., as Borrowers' Agent,
Congress Financial Corporation, as Administrative Agent, Collateral
Agent, Joint Lead Arranger and Joint Bookrunner, J.P. Morgan Business
Credit Corp., as Co-Agent, Joint Lead Arranger and Joint Bookrunner and
The Financial Institutions named therein, as Lenders.
Our miscellaneous long-term debt instruments and credit facility
agreements, under which the underlying authorized debt is equal to less than 10%
of the total assets of us and our subsidiaries on a consolidated basis, may not
be filed as exhibits to this report. We agree to furnish to the Commission, upon
request, copies of any such unfiled instruments.
Material Contracts
10.1.1 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).
10.1.2 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 Master Trust and Charming Shoppes Receivables
Corp., (No. 333-71757) dated July 22, 1999. (Exhibit No. 4.1).
10.1.3 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 Master Trust and Charming Shoppes
Receivables Corp., (No. 333-71757) dated July 22, 1999. (Exhibit No.
4.2).
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<PAGE>
10.1.4 Receivables Purchase Agreement, dated as of May 28, 1999, among Charming
Shoppes Seller, 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, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended February 2, 2002. (Exhibit 10.1.4).
10.1.5 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, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended January 29, 2000.
(Exhibit 10.1.23).
10.1.6 Series 2000-VFC Supplement, dated as of November 9, 2000, to Second
Amended and Restated Pooling and Service Agreement, dated as of November
25, 1997, among Charming Shoppes Receivables Corp., as Seller, Spirit of
America, Inc., as Servicer, and First Union National Bank, as Trustee,
on behalf of the Series 2000-VFC Certificateholders, for up to
$60,122,700 Charming Shoppes Master Trust Series 2000-VFC, incorporated
by reference to Form 10-K of the Registrant for the fiscal year ended
February 3, 2001. (Exhibit 10.1.16).
10.1.7 Certificate Purchase Agreement, dated as of November 9, 2000, among
Charming Shoppes Receivables Corp. as Seller and as the Class B
Purchaser, Spirit of America, Inc. as Servicer, Monte Rosa Capital
Corporation as the Conduit Purchaser, and ING Baring (U.S.) Capital
Markets LLC as Administrator for the Conduit Purchaser, incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended
February 3, 2001. (Exhibit 10.1.17).
10.1.8 Merchant Services Agreement, between Hurley State Bank and Catherines,
Inc., incorporated by reference to Form 10-Q of Catherines Stores Corp.
for the quarter ended May 1, 1999. (File No. 000-19372, Item 6. (A)(1)).
10.1.9 Credit Card Processing Agreement, among World Financial Network National
Bank, Lane Bryant, Inc. and Sierra Nevada Factoring, Inc., dated as of
January 31, 1996, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended February 2, 2002. (Exhibit 10.1.9).
10.1.10 Purchase and Sale Agreement, among Spirit of America National Bank, as
Seller, and Charming Shoppes Receivables Corp., as Purchaser, dated as
of November 25, 1997, incorporated by reference to Form S-1/A of
Charming Shoppes Receivables Corp. (No. 333-71757) (Exhibit 10.1(a)).
10.1.11 First Amendment to Purchase and Sale Agreement, among Spirit of America
National Bank, as Seller, and Charming Shoppes Receivables Corp., as
Purchaser, dated as of July 22, 1999, incorporated by reference to Form
8-K of Charming Shoppes Receivables Corp. (No. 333-71757) (Exhibit
10.1).
10.1.12 Series 2002-1 Supplement, dated as of November 20, 2002, to Second
Amended and Restated Pooling and Service Agreement, dated as of November
25, 1997, as amended on July 22, 1999 and on May 8, 2001, among Charming
Shoppes Receivables Corp., as Seller, Spirit of America, Inc., as
Servicer, and Wachovia Bank, National Association, as Trustee, for
$100,000,000 Charming Shoppes Master Trust Asset-Backed Certificates
Series 2002-1, incorporated by reference to Form 10-Q of the Registrant
for the quarter ended November 2, 2002. (Exhibit 10.1).
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10.1.13 Charming Shoppes Master Trust $63,500,000 Fixed Rate Class A Asset
Backed Certificates, Series 2002-1 and $16,500,000 Fixed Rate Class B
Asset Backed Certificates, Series 2002-2 Certificate Purchase Agreement,
dated as of November 22, 2002, incorporated by reference to Form 10-Q of
the Registrant for the quarter ended November 2, 2002. (Exhibit 10.2).
10.1.14 Certificate Purchase Agreement, dated as of November 22, 2002, among
Wachovia Bank, National Association, as Trustee, Charming Shoppes
Receivables Corp., as Seller, Spirit of America, Inc., as Servicer, and
The Class C Holders described therein, incorporated by reference to Form
10-Q of the Registrant for the quarter ended November 2, 2002. (Exhibit
10.3).
10.1.15 Certificate Purchase Agreement, dated as of November 22, 2002, among
Wachovia Bank, National Association, as Trustee, Charming Shoppes
Receivables Corp., as Seller, Spirit of America, Inc., as Servicer, and
The Class D Holders described therein, incorporated by reference to Form
10-Q of the Registrant for the quarter ended November 2, 2002. (Exhibit
10.4).
10.1.16 $14,000,000 Promissory Note, dated October 2002, between White Marsh
Distribution, LLC., as Borrower, and General Electric Capital Business
Asset Funding Corporation, as Payee and Holder, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended November
2, 2002. (Exhibit 10.5).
10.1.17 Commercial Deed of Trust, Security Agreement, Assignment of Leases and
Rents, and Fixture Filing, made as of October 2002, among the Grantor,
White Marsh Distribution, LLC, as Borrower, in favor of James M. Smith,
as Trustee, for the benefit of the Beneficiary, General Electric Capital
Business Asset Funding Corporation, as Lender, incorporated by reference
to Form 10-Q of the Registrant for the quarter ended November 2, 2002.
(Exhibit 10.6).
Management Contracts and Compensatory Plans and Arrangements
10.2.1 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. (File No. 000-07258, Exhibit
10.2.3).
10.2.2 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. (File No.
000-07258, Exhibit 10.2.5).
10.2.3 Non-Employee Directors' 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. (File No. 000-07258, Exhibit
10.2.6).
10.2.4 The Charming Shoppes, Inc. Non-Employee Directors Compensation Program,
incorporated by reference to Registration Statement on Form S-8 of the
Registrant, dated February 25, 1997. (Registration No. 333-22323,
Exhibit 4.1).
10.2.5 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).
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10.2.6 The Charming Shoppes, Inc. Non-Employee Directors Compensation Program,
As Amended and Restated at June 27, 2002.
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 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. (File No. 000-07258, Exhibit 10.2.10).
10.2.10 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Restricted Stock Agreement, dated as of February 11, 2002, incorporated
by reference to Form 10-K of the Registrant for the fiscal year ended
February 2, 2002. (Exhibit 10.2.8).
10.2.11 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. (File No. 000-07258, Exhibit 10.2.10).
10.2.12 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. (File No. 000-07258, Exhibit 10.2.11).
10.2.13 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. (File No. 000-07258, Exhibit 10.2.12).
10.2.14 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. (File No.
000-07258, Exhibit 10.2.13).
10.2.15 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).
10.2.16 First Amendment, dated as of February 6, 2003, to Employment Agreement,
dated as of October 12, 1999, by and between Charming Shoppes, Inc. and
Dorrit J. Bern.
10.2.17 Employment Agreement, dated as of March 12, 2003, by and between
Charming Shoppes, Inc. and Erna Zint.
10.2.18 The 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).
10.2.19 The 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).
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10.2.20 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).
10.2.21 The Charming Shoppes, Inc. Amended and Restated 2000 Associates' Stock
Incentive Plan, incorporated by reference to Form 10-K of the Registrant
for the fiscal year ended February 3, 2001. (Exhibit 10.2.29).
10.2.22 The Charming Shoppes, Inc. 2000 Associates' Stock Incentive Plan Stock
Option Agreement, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended January 29, 2000. (Exhibit
10.2.32).
10.2.23 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan Stock
Option Agreement (regular vesting schedule), incorporated by reference
to Form 10-K of the Registrant for the fiscal year ended February 2,
2002. (Exhibit 10.2.20).
10.2.24 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan Stock
Option Agreement (accelerated vesting schedule), incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended
February 2, 2002. (Exhibit 10.2.21).
10.2.25 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Performance-Accelerated Stock Option Agreement, incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended
February 2, 2002. (Exhibit 10.2.22).
10.2.26 The Charming Shoppes, Inc. Amended and Restated 2000 Associates' Stock
Incentive Plan Stock Option Agreement (regular vesting schedule) ,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended February 2, 2002. (Exhibit 10.2.23).
10.2.27 The Charming Shoppes, Inc. Amended and Restated 2000 Associates' Stock
Incentive Plan Stock Option Agreement (accelerated vesting schedule),
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended February 2, 2002. (Exhibit 10.2.24).
10.2.28 The Charming Shoppes, Inc. Amended and Restated 2000 Associates' Stock
Incentive Plan Restricted Stock Agreement, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended February 2, 2002.
(Exhibit 10.2.25).
10.2.29 Forms of Executive Severance Agreements by and between Charming Shoppes,
Inc., the named executive officers in the company's Proxy Statement for
the Annual Meeting held on June 15, 2000, and certain other executive
officers and officers of Charming Shoppes, Inc. and its subsidiaries,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended January 29, 2000. (Exhibit 10.2.33).
10.2.30 Forms of First Amendment, dated as of February 6, 2003, to Forms of
Executive Severance Agreements, dated July 15, 1999, by and between
Charming Shoppes, Inc., and the executive officers and officers named in
the Agreements.
10.2.31 Form of Executive Severance Agreement, dated February 6, 2003, by and
between Charming Shoppes, Inc. and certain executive officers and
officers of Charming Shoppes, Inc. and its subsidiaries.
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Other Exhibits
21 Subsidiaries of Registrant
23 Consent of independent auditors
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350), executed by the Chief Executive Officer of the
Company.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350), executed by the Chief Financial Officer of the
Company.
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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.
Date: April 15, 2003 /S/ DORRIT J. BERN
-------------------
By: Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Charming
Shoppes, Inc. and in the capacities and on the dates indicated:
/S/ DORRIT J. BERN /S/ ERIC M. SPECTER
- ------------------ -------------------
Dorrit J. Bern Eric M. Specter
Chairman of the Board Executive Vice President
President and Chief Executive Officer Chief Financial Officer
April 15, 2003 April 15, 2003
/S/ JOHN J. SULLIVAN /S/ JOSEPH L. CASTLE II
- -------------------- -----------------------
John J. Sullivan Joseph L. Castle II
Vice President, Corporate Controller Director
Chief Accounting Officer April 15, 2003
April 15, 2003
/S/ ALAN ROSSKAMM
- ----------------- -----------------------
Alan Rosskamm Marvin L. Slomowitz
Director Director
April 15, 2003
/S/ MARJORIE MARGOLIES-MEZVINSKY
- -------------------------------- -----------------
Marjorie Margolies-Mezvinsky Pamela S. Lewis
Director Director
April 15, 2003
/S/ KENNETH S. OLSHAN /S/ CHARLES T. HOPKINS
- --------------------- ----------------------
Kenneth S. Olshan Charles T. Hopkins
Director Director
April 15, 2003 April 15, 2003
/S/ KATHERINE M. HUDSON
- -----------------------
Katherine M. Hudson
Director
April 15, 2003
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Certification By Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Dorrit J. Bern, Principal Executive Officer of Charming Shoppes, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Charming Shoppes,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2003 /S/DORRIT J. BERN
-----------------
Dorrit J. Bern
Chairman of the Board
President and Principal Executive Officer
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Certification By Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Eric M. Specter, Principal Financial Officer of Charming Shoppes, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Charming Shoppes,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2003 /S/ERIC M. SPECTER
------------------
Eric M. Specter
Executive Vice President
Principal Financial Officer
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Exhibit Index
Exhibit No. Item
- ---------- ----
2.1 Stock Purchase Agreement, dated as of July 9, 2001, among Charming
Shoppes, Inc., Venice Acquisition Corporation, LFAS, Inc. and
Limited Brands, Inc., incorporated by reference to Form 8-K of the
Registrant dated August 16, 2001, filed on August 31, 2001.
(Exhibit 2.1).
2.2 Services Agreement, dated as of August 16, 2001, between LBH, Inc.
and Limited Brands, Inc., incorporated by reference to Form 8-K of
the Registrant dated August 16, 2001, filed on August 31, 2001.
(Exhibit 2.2).
2.3 Covenant Agreement, dated as of August 16, 2001, between Charming
Shoppes, Inc. and Limited Brands, Inc., incorporated by reference
to Form 8-K of the Registrant dated August 16, 2001, filed on
August 31, 2001. (Exhibit 2.3).
2.4 Master Sublease, dated as of August 16, 2001, between Limited
Brands, Inc. and Lane Bryant, Inc., incorporated by reference to
Form 8-K of the Registrant dated August 16, 2001, filed on August
31, 2001. (Exhibit 2.4).
2.5 Lease Agreement, dated as of August 16, 2001, by and between
Distribution Land Corp. and Lane Bryant, Inc., incorporated by
reference to Form 8-K of the Registrant dated August 16, 2001,
filed on August 31, 2001. (Exhibit 2.5).
2.6 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 on November 19, 1999. (Item
11(c)(1)).
3.1 Restated Articles of Incorporation, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended January 29,
1994. (File No. 000-07258, 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).
4.1 Amended and Restated Rights Agreement, dated as of February 1,
2001, between Charming Shoppes, Inc. and American Stock Transfer &
Trust Company, as Rights Agent, incorporated by reference to Form
10-K of the Registrant for the fiscal year ended February 3, 2001.
(Exhibit 4.1).
4.2 Registration Agreement, dated as of August 16, 2001, between
Charming Shoppes, Inc. and Limited Brands, Inc., incorporated by
reference to Form 8-K of the Registrant dated August 16, 2001,
filed on August 31, 2001. (Exhibit 4.1).
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4.3 Loan and Security Agreement, dated as of August 16, 2001, by and
among Charming Shoppes, Inc., Charming Shoppes of Delaware, Inc.,
CSI Industries, Inc., Catherine Stores Corporation, Lane Bryant,
Inc. and FB Apparel, Inc., as Borrowers, Charming Shoppes of
Delaware, Inc., as Borrowers' Agent, Congress Financial
Corporation, as Administrative Agent, Collateral Agent, Joint Lead
Arranger and Joint Bookrunner, J.P. Morgan Business Credit Corp.,
as Co-Agent, Joint Lead Arranger and Joint Bookrunner and The
Financial Institutions named therein, as Lenders, incorporated by
reference to Form 8-K of the Registrant dated August 16, 2001,
filed on August 31, 2001. (Exhibit 4.3).
4.4 Amendment No. 1, dated January 12, 2002, to Loan and Security
Agreement dated as of August 16, 2001 by and among Charming
Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI Industries,
Inc., Catherine Stores Corporation, Lane Bryant, Inc. and FB
Apparel, Inc., as Borrowers, Charming Shoppes of Delaware, Inc., as
Borrowers' Agent, Congress Financial Corporation, as Administrative
Agent, Collateral Agent, Joint Lead Arranger and Joint Bookrunner,
J.P. Morgan Business Credit Corp., as Co-Agent, Joint Lead Arranger
and Joint Bookrunner and The Financial Institutions named therein,
as Lenders, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended February 2, 2002. (Exhibit
4.4).
4.5 Indenture, dated as of May 28, 2002, between Charming Shoppes, Inc.
and Wachovia Bank, National Association, incorporated by reference
to Form 10-Q of the Registrant for the quarter ended May 4, 2002.
(Exhibit 4.1).
4.6 Registration Rights Agreement, dated as of May 28, 2002, by and
among Charming Shoppes, Inc., as Issuer, and J. P. Morgan
Securities, Inc., Bear Stearns & Co., Inc., First Union Securities,
Inc., Lazard Freres & Co., LLC, and McDonald Investments, Inc., as
Initial Purchasers, incorporated by reference to Form 10-Q of the
Registrant for the quarter ended May 4, 2002. (Exhibit 4.2).
4.7 Amendment No. 2, dated May 17, 2002, to Loan and Security Agreement
dated as of August 16, 2001 by and among Charming Shoppes, Inc.,
Charming Shoppes of Delaware, Inc., CSI Industries, Inc., Catherine
Stores Corporation, Lane Bryant, Inc. and FB Apparel, Inc., as
Borrowers, Charming Shoppes of Delaware, Inc., as Borrowers' Agent,
Congress Financial Corporation, as Administrative Agent, Collateral
Agent, Joint Lead Arranger and Joint Bookrunner, J.P. Morgan
Business Credit Corp., as Co-Agent, Joint Lead Arranger and Joint
Bookrunner and The Financial Institutions named therein, as
Lenders, incorporated by reference to Form 10-Q of the Registrant
for the quarter ended May 4, 2002. (Exhibit 4.3).
4.8 Amendment No. 1, dated July 25, 2002, to Amendment No. 2, dated May
17, 2002, to Loan and Security Agreement dated as of August 16,
2001 by and among Charming Shoppes, Inc., Charming Shoppes of
Delaware, Inc., CSI Industries, Inc., Catherine Stores Corporation,
Lane Bryant, Inc. and FB Apparel, Inc., as Borrowers, Charming
Shoppes of Delaware, Inc., as Borrowers' Agent, Congress Financial
Corporation, as Administrative Agent, Collateral Agent, Joint Lead
Arranger and Joint Bookrunner, J.P. Morgan Business Credit Corp.,
as Co-Agent, Joint Lead Arranger and Joint Bookrunner and The
Financial Institutions named therein, as Lenders, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended
August 3, 2002. (Exhibit 4.4).
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4.9 Amendment No. 3, dated July 29, 2002, effective as of August 16,
2001, to Loan and Security Agreement dated as of August 16, 2001 by
and among Charming Shoppes, Inc., Charming Shoppes of Delaware,
Inc., CSI Industries, Inc., Catherine Stores Corporation, Lane
Bryant, Inc. and FB Apparel, Inc., as Borrowers, Charming Shoppes
of Delaware, Inc., as Borrowers' Agent, Congress Financial
Corporation, as Administrative Agent, Collateral Agent, Joint Lead
Arranger and Joint Bookrunner, J.P. Morgan Business Credit Corp.,
as Co-Agent, Joint Lead Arranger and Joint Bookrunner and The
Financial Institutions named therein, as Lenders, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended
August 3, 2002. (Exhibit 4.5).
4.10 Amendment No. 4, dated September 23, 2002, to Loan and Security
Agreement dated as of August 16, 2001 by and among Charming
Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI Industries,
Inc., Catherine Stores Corporation, Lane Bryant, Inc. and FB
Apparel, Inc., as Borrowers, Charming Shoppes of Delaware, Inc., as
Borrowers' Agent, Congress Financial Corporation, as Administrative
Agent, Collateral Agent, Joint Lead Arranger and Joint Bookrunner,
J.P. Morgan Business Credit Corp., as Co-Agent, Joint Lead Arranger
and Joint Bookrunner and The Financial Institutions named therein,
as Lenders, incorporated by reference to Form 10-Q of the
Registrant for the quarter ended November 2, 2002. (Exhibit 4.3).
4.11 Amendment No. 5, dated February 12, 2003, to Loan and Security
Agreement dated as of August 16, 2001 by and among Charming
Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI Industries,
Inc., Catherine Stores Corporation, Lane Bryant, Inc. and FB
Apparel, Inc., as Borrowers, Charming Shoppes of Delaware, Inc., as
Borrowers' Agent, Congress Financial Corporation, as Administrative
Agent, Collateral Agent, Joint Lead Arranger and Joint Bookrunner,
J.P. Morgan Business Credit Corp., as Co-Agent, Joint Lead Arranger
and Joint Bookrunner and The Financial Institutions named therein,
as Lenders. . 4.12 Amendment No. 6, dated March 13, 2003, to Loan
and Security Agreement dated as of August 16, 2001 by and among
Charming Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI
Industries, Inc., Catherine Stores Corporation, Lane Bryant, Inc.
and FB Apparel, Inc., as Borrowers, Charming Shoppes of Delaware,
Inc., as Borrowers' Agent, Congress Financial Corporation, as
Administrative Agent, Collateral Agent, Joint Lead Arranger and
Joint Bookrunner, J.P. Morgan Business Credit Corp., as Co-Agent,
Joint Lead Arranger and Joint Bookrunner and The Financial
Institutions named therein, as Lenders.
10.1.1 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).
10.1.2 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 Master
Trust and Charming Shoppes Receivables Corp., (No. 333-71757) dated
July 22, 1999. (Exhibit No. 4.1).
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10.1.3 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 Master Trust and Charming Shoppes Receivables
Corp., (No. 333-71757) dated July 22, 1999. (Exhibit No. 4.2).
10.1.4 Receivables Purchase Agreement, dated as of May 28, 1999, among
Charming Shoppes Seller, 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, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended February 2,
2002. (Exhibit 10.1.4).
10.1.5 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, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended January 29, 2000. (Exhibit
10.1.23).
10.1.6 Series 2000-VFC Supplement, dated as of November 9, 2000, to Second
Amended and Restated Pooling and Service Agreement, dated as of
November 25, 1997, among Charming Shoppes Receivables Corp., as
Seller, Spirit of America, Inc., as Servicer, and First Union
National Bank, as Trustee, on behalf of the Series 2000-VFC
Certificateholders, for up to $60,122,700 Charming Shoppes Master
Trust Series 2000-VFC, incorporated by reference to Form 10-K of
the Registrant for the fiscal year ended February 3, 2001. (Exhibit
10.1.16).
10.1.7 Certificate Purchase Agreement, dated as of November 9, 2000, among
Charming Shoppes Receivables Corp. as Seller and as the Class B
Purchaser, Spirit of America, Inc. as Servicer, Monte Rosa Capital
Corporation as the Conduit Purchaser, and ING Baring (U.S.) Capital
Markets LLC as Administrator for the Conduit Purchaser,
incorporated by reference to Form 10-K of the Registrant for the
fiscal year ended February 3, 2001. (Exhibit 10.1.17).
10.1.8 Merchant Services Agreement, between Hurley State Bank and
Catherines, Inc., incorporated by reference to Form 10-Q of
Catherines Stores Corp. for the quarter ended May 1, 1999. (File
No. 000-19372, Item 6. (A)(1)).
10.1.9 Credit Card Processing Agreement, among World Financial Network
National Bank, Lane Bryant, Inc. and Sierra Nevada Factoring, Inc.,
dated as of January 31, 1996, incorporated by reference to Form
10-K of the Registrant for the fiscal year ended February 2, 2002.
(Exhibit 10.1.9).
10.1.10 Purchase and Sale Agreement, among Spirit of America National Bank,
as Seller, and Charming Shoppes Receivables Corp., as Purchaser,
dated as of November 25, 1997, incorporated by reference to Form
S-1/A of Charming Shoppes Receivables Corp. (No. 333-71757)
(Exhibit 10.1(a)).
96
<PAGE>
10.1.11 First Amendment to Purchase and Sale Agreement, among Spirit of
America National Bank, as Seller, and Charming Shoppes Receivables
Corp., as Purchaser, dated as of July 22, 1999, incorporated by
reference to Form 8-K of Charming Shoppes Receivables Corp. (No.
333-71757) (Exhibit 10.1).
10.1.12 Series 2002-1 Supplement, dated as of November 20, 2002, to Second
Amended and Restated Pooling and Service Agreement, dated as of
November 25, 1997, as amended on July 22, 1999 and on May 8, 2001,
among Charming Shoppes Receivables Corp., as Seller, Spirit of
America, Inc., as Servicer, and Wachovia Bank, National
Association, as Trustee, for $100,000,000 Charming Shoppes Master
Trust Asset-Backed Certificates Series 2002-1, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended
November 2, 2002. (Exhibit 10.1).
10.1.13 Charming Shoppes Master Trust $63,500,000 Fixed Rate Class A Asset
Backed Certificates, Series 2002-1 and $16,500,000 Fixed Rate Class
B Asset Backed Certificates, Series 2002-2 Certificate Purchase
Agreement, dated as of November 22, 2002, incorporated by reference
to Form 10-Q of the Registrant for the quarter ended November 2,
2002. (Exhibit 10.2).
10.1.14 Certificate Purchase Agreement, dated as of November 22, 2002,
among Wachovia Bank, National Association, as Trustee, Charming
Shoppes Receivables Corp., as Seller, Spirit of America, Inc., as
Servicer, and The Class C Holders described therein, incorporated
by reference to Form 10-Q of the Registrant for the quarter ended
November 2, 2002. (Exhibit 10.3).
10.1.15 Certificate Purchase Agreement, dated as of November 22, 2002,
among Wachovia Bank, National Association, as Trustee, Charming
Shoppes Receivables Corp., as Seller, Spirit of America, Inc., as
Servicer, and The Class D Holders described therein, incorporated
by reference to Form 10-Q of the Registrant for the quarter ended
November 2, 2002. (Exhibit 10.4).
10.1.16 $14,000,000 Promissory Note, dated October 2002, between White
Marsh Distribution, LLC., as Borrower, and General Electric Capital
Business Asset Funding Corporation, as Payee and Holder,
incorporated by reference to Form 10-Q of the Registrant for the
quarter ended November 2, 2002. (Exhibit 10.5).
10.1.17 Commercial Deed of Trust, Security Agreement, Assignment of Leases
and Rents, and Fixture Filing, made as of October 2002, among the
Grantor, White Marsh Distribution, LLC, as Borrower, in favor of
James M. Smith, as Trustee, for the benefit of the Beneficiary,
General Electric Capital Business Asset Funding Corporation, as
Lender, incorporated by reference to Form 10-Q of the Registrant
for the quarter ended November 2, 2002. (Exhibit 10.6).
10.2.1 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. (File No.
000-07258, Exhibit 10.2.3).
10.2.2 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. (File
No. 000-07258, Exhibit 10.2.5).
97
<PAGE>
10.2.3 Non-Employee Directors' 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. (File No.
000-07258, Exhibit 10.2.6).
10.2.4 The Charming Shoppes, Inc. Non-Employee Directors Compensation
Program, incorporated by reference to Registration Statement on
Form S-8 of the Registrant, dated February 25, 1997. (Registration
No. 333-22323, Exhibit 4.1).
10.2.5 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).
10.2.6 The Charming Shoppes, Inc. Non-Employee Directors Compensation
Program, As Amended and Restated at June 27, 2002.
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 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. (File No. 000-07258, Exhibit
10.2.10).
10.2.10 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Restricted Stock Agreement, dated as of February 11, 2002,
incorporated by reference to Form 10-K of the Registrant for the
fiscal year ended February 2, 2002. (Exhibit 10.2.8).
10.2.11 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. (File No. 000-07258,
Exhibit 10.2.10).
10.2.12 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. (File No.
000-07258, Exhibit 10.2.11).
10.2.13 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. (File No. 000-07258, Exhibit
10.2.12).
10.2.14 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. (File
No. 000-07258, Exhibit 10.2.13).
10.2.15 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).
98
<PAGE>
10.2.16 First Amendment, dated as of February 6, 2003, to Employment
Agreement, dated as of October 12, 1999, by and between Charming
Shoppes, Inc. and Dorrit J. Bern.
10.2.17 Employment Agreement, dated as of March 12, 2003, by and between
Charming Shoppes, Inc. and Erna Zint.
10.2.18 The 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).
10.2.19 The 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).
10.2.20 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).
10.2.21 The Charming Shoppes, Inc. Amended and Restated 2000 Associates'
Stock Incentive Plan, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended February 3, 2001. (Exhibit
10.2.29).
10.2.22 The Charming Shoppes, Inc. 2000 Associates' Stock Incentive Plan
Stock Option Agreement, incorporated by reference to Form 10-K of
the Registrant for the fiscal year ended January 29, 2000. (Exhibit
10.2.32).
10.2.23 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Stock Option Agreement (regular vesting schedule), incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended
February 2, 2002. (Exhibit 10.2.20).
10.2.24 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Stock Option Agreement (accelerated vesting schedule), incorporated
by reference to Form 10-K of the Registrant for the fiscal year
ended February 2, 2002. (Exhibit 10.2.21).
10.2.25 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Performance-Accelerated Stock Option Agreement, incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended
February 2, 2002. (Exhibit 10.2.22).
10.2.26 The Charming Shoppes, Inc. Amended and Restated 2000 Associates'
Stock Incentive Plan Stock Option Agreement (regular vesting
schedule) , incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended February 2, 2002. (Exhibit
10.2.23).
10.2.27 The Charming Shoppes, Inc. Amended and Restated 2000 Associates'
Stock Incentive Plan Stock Option Agreement (accelerated vesting
schedule), incorporated by reference to Form 10-K of the Registrant
for the fiscal year ended February 2, 2002. (Exhibit 10.2.24).
10.2.28 The Charming Shoppes, Inc. Amended and Restated 2000 Associates'
Stock Incentive Plan Restricted Stock Agreement, incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended
February 2, 2002. (Exhibit 10.2.25).
99
<PAGE>
10.2.29 Forms of Executive Severance Agreements by and between Charming
Shoppes, Inc., the named executive officers in the company's Proxy
Statement for the Annual Meeting held on June 15, 2000, and certain
other executive officers and officers of Charming Shoppes, Inc. and
its subsidiaries, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended January 29, 2000. (Exhibit
10.2.33).
10.2.30 Forms of First Amendment, dated as of February 6, 2003, to Forms of
Executive Severance Agreements, dated July 15, 1999, by and between
Charming Shoppes, Inc., and the executive officers and officers
named in the Agreements.
10.2.31 Form of Executive Severance Agreement, dated February 6, 2003, by
and between Charming Shoppes, Inc. and certain executive officers
and officers of Charming Shoppes, Inc. and its subsidiaries.
21 Subsidiaries of Registrant
23 Consent of independent auditors
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350), executed by the Chief Executive Officer of
the Company.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. 1350), executed by the Chief Financial Officer of
the Company.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4
<SEQUENCE>4
<FILENAME>exh411.txt
<DESCRIPTION>AMENDMENT NO. 5 TO LOAN AND SECURITY AGREEMENT
<TEXT>
EXHIBIT 4.11
2/12/03
AMENDMENT NO. 5 TO FINANCING AGREEMENTS
AMENDMENT No. 5, dated February 12, 2003, by and among Congress Financial
Corporation, a Delaware corporation, in its capacity as Administrative Agent,
Collateral Agent, Joint Lead Arranger and Joint Bookrunner (in such capacity,
"Agent") for the financial institutions from time to time party to the Loan
Agreement (as hereinafter defined) as lenders (each individually, a "Lender" and
collectively, "Lenders"), Charming Shoppes, Inc., a Pennsylvania corporation
("Parent"), Charming Shoppes of Delaware, Inc., a Pennsylvania corporation ("CS
Delaware"), CSI Industries, Inc., a Delaware corporation ("CSI"), FB Apparel,
Inc., an Indiana corporation ("FB Apparel"), Catherines Stores Corporation, a
Tennessee corporation ("Catherines") and Lane Bryant, Inc., a Delaware
corporation ("LB", and, together with Parent, CS Delaware, CSI, FB Apparel and
Catherines hereinafter referred to each individually, as a "Borrower" and
collectively, as "Borrowers"), and CS Delaware, in its capacity as agent for
itself as a Borrower and for the other Borrowers ("Borrowers' Agent").
W I T N E S S E T H :
-------------------
WHEREAS, Agent, J.P. Morgan Business Credit Corp, a Delaware corporation,
in its capacity as Co-Agent, Joint Lead Arranger and Joint Bookrunner under the
Loan Agreement (in such capacity, "Co-Agent"), Lenders, Borrowers and Borrowers'
Agent have entered into financing arrangements pursuant to which Lenders have
made and may make loans and advances and provide other financial accommodations
to Borrowers as set forth in the Loan and Security Agreement, dated August 16,
2001, by and among Lenders, Agent, Co-Agent, Borrowers and Borrowers' Agent, as
amended by Amendment No. 1, dated as of January 12, 2002, Amendment No. 2, dated
as of May 17, 2002, Amendment No. 3, dated as of July 29, 2002 (effective as of
August 16, 2001), Amendment No. 4, dated September 23, 2002 (and as may
hereafter be further amended, modified, supplemented, extended, renewed,
restated or replaced, the "Loan Agreement", and together with all agreements,
documents and instruments at any time executed and/or delivered in connection
therewith or related thereto, as from time to time amended, modified,
supplemented, extended, renewed, restated or replaced, collectively, the
"Financing Agreements");
WHEREAS, Borrowers and Borrowers' Agent have requested that Agent agree to
make certain amendments to the Financing Agreements and Agent is willing to
agree to such amendments, subject to the terms and conditions contained herein;
and
WHEREAS, by this Amendment No. 5, Agent, Borrowers and Borrowers' Agent
desire and intend to evidence such amendments.
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
and covenants contained herein, and subject to the satisfaction of the
conditions set forth in Section 6 hereof, the parties hereto agree as follows:
1. Definitions.
(a) Additional Definition. As used herein, the following term shall
have the meaning given to it below and the Loan Agreement shall be deemed
and is hereby amended to include, in addition and not in limitation of, the
following definition:
"Amendment No. 5" shall mean this Amendment No. 5 to Financing
Agreements by and among Agent, Borrowers' Agent and Borrowers, as the
same now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated, or replaced, and the Loan Agreement shall
be deemed and is hereby amended to include, in addition and not in
limitation, such definition.
(b) Amendment to Definitions. All references to the term "Financing
Agreements" in the Loan Agreement shall be deemed and each such reference
is hereby amended to include, in addition and not in limitation, this
Amendment No. 5 and all other agreements, documents and instruments at any
time executed and/or delivered by any Borrower, Borrowers' Agent or any
other person in connection herewith, as the same now exist or may hereafter
be amended, modified, supplemented, extended, renewed, restated or
replaced.
(c) Interpretation. All capitalized terms used herein shall have the
meanings assigned thereto in the other Financing Agreements, unless
otherwise defined herein. All references to the plural herein shall also
mean the singular and all references to the singular herein shall also mean
the plural, in each case unless otherwise required by the context of the
use thereof.
2. Investment Property. Subject to the terms and conditions hereof and
notwithstanding anything to the contrary contained in the Loan Agreement, Agent
hereby agrees and Agent shall instruct the securities intermediary, commodity
intermediary or other person who has custody, control or possession of any
investment property (collectively, "Intermediary") of any Borrower or Obligor
subject to an Investment Property Control Agreement to comply with entitlement
orders issued or originated by such Borrower or Obligor (to the extent such
entitlement orders do not conflict with instructions issued by Agent to such
Intermediary) concerning the investment property account until such time as
Agent delivers a written notice to such Intermediary which states Agent is
thereby exercising exclusive control over such investment property account.
Agent will only send such notices of exclusive control to the Intermediaries at
any time upon and after the occurrence of a Cash Dominion Event.
<PAGE>
3. Representations, Warranties and Covenants. In addition to the continuing
representations, warranties and covenants heretofore or hereafter made by
Borrowers and Borrowers' Agent to Agent, Co-Agent and Lenders pursuant to the
Financing Agreements, Borrowers and Obligors hereby jointly and severally
represent, warrant and covenant with and to Agent, and Lenders as follows (which
representations, warranties and covenants are continuing and shall survive the
execution and delivery hereof and shall be incorporated into and made a part of
the Financing Agreements):
(a) No Event of Default exists on the date of this Amendment No. 5
(after giving effect to the amendments to the Financing Agreements made by
this Amendment No. 5);
(b) This Amendment No. 5 has been duly executed and delivered by
Borrowers, Obligors and Borrowers' Agent and this Amendment No. 5 and the
other Financing Agreements are in full force and effect as of the date
hereof, and the agreements and obligations of Borrowers, Obligors and
Borrowers' Agent contained herein and therein constitute legal, valid and
binding obligations of Borrowers and Borrowers' Agent enforceable against
Borrowers, Obligors and Borrowers' Agent in accordance with their
respective terms;
(c) All of the representations and warranties set forth in the Loan
Agreement as amended hereby, and the other Financing Agreements, are true
and correct in all material respects, except to the extent any such
representation or warranty is made as of a specified date, in which case
such representation or warranty shall have been true and correct as of such
date.
4. Conditions Precedent. The consents and amendments to the Loan Agreement
set forth herein shall be effective only upon the satisfaction of each of the
following conditions in a manner satisfactory to Agent:
(a) receipt by Agent of an original of this Amendment, duly
authorized, executed and delivered by each of the parties hereto;
(b) receipt by Agent of evidence, in form and substance satisfactory
to Agent, that all required consents or approvals of any persons other than
Agent to the arrangements contemplated herein have been obtained;
(c) all representations and warranties contained herein and in the
Loan Agreement shall be true and correct in all material respects; and
(d) after giving effect to the amendments to the Loan Agreement
provided in this Amendment, no Event of Default shall exist or have
occurred and no event, act or condition shall have occurred or exist which
with notice or passage of time or both would constitute an Event of
Default.
<PAGE>
5. Effect of this Amendment No. 5 This Amendment No. 5 and the instruments
and agreements delivered pursuant hereto constitute the entire agreement of the
parties with respect to the subject matter hereof and thereof, and supersede all
prior oral or written communications, memoranda, proposals, negotiations,
discussions, term sheets and commitments with respect to the subject matter
hereof and thereof. Except as expressly consented to and amended pursuant
hereto, no other changes or modifications to the Financing Agreements or waivers
of or consents under any provisions thereof are intended or implied, and in all
other respects the Financing Agreements are hereby specifically ratified,
restated and confirmed by all parties hereto as of the effective date hereof. To
the extent that any provision of the Loan Agreement or any of the other
Financing Agreements are inconsistent with the provisions of this Amendment No.
5, the provisions of this Amendment No. 5 shall control.
6. Further Assurances. Borrowers and Borrowers' Agent shall execute and
deliver such additional documents and take such additional action as may be
reasonably requested by Agent to effectuate the provisions and purposes of this
Amendment No. 5.
7. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the internal laws of the State of New York without regard to principles of
conflicts of laws, but excluding any rule of law that would cause the
application of the law of any jurisdiction other that the laws of the State of
New York.
8. Binding Effect. This Amendment No. 5 shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.
9. Counterparts. This Amendment No. 5 may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment No. 5, it shall not be
necessary to produce or account for more than one counterpart thereof signed by
each of the parties hereto. Delivery of an executed counterpart of this
Amendment No. 5 via telecopier shall have the same force and effect as delivery
of an original executed counterpart of this Amendment No. 5. Any party
delivering an executed counterpart of this Amendment No. 5 via telecopier also
shall deliver an original executed counterpart of this Amendment No. 5, but the
failure to deliver an original executed counterpart shall not affect the
validity, enforceability, and binding effect of this Amendment No. 5 as to such
party or any other party.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 5 to
be duly executed and delivered by their authorized officers on the date and year
first above written.
BORROWERS
CHARMING SHOPPES, INC.
By: ____________________
Eric M. Specter
Executive Vice President
CHARMING SHOPPES OF DELAWARE, INC.
By: ____________________
Eric M. Specter
Vice President
CSI INDUSTRIES, INC.
By: _____________________
Eric M. Specter
President
FB APPAREL, INC.
By: ____________________
Eric M. Specter
President
LANE BRYANT, INC.
By: _____________________
Eric M. Specter
Vice President
[SIGNATURES CONTINUED ON NEXT PAGE]
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
CATHERINES STORES CORPORATION
By: _____________________
Eric M. Specter
Vice President
BORROWERS' AGENT
CHARMING SHOPPES OF DELAWARE, INC.,
as Borrowers' Agent
By: ___________________________
Eric M. Specter
Vice President
AGENT
CONGRESS FINANCIAL CORPORATION,
as Administrative Agent
By: _______________________________
Title:______________________________
[SIGNATURES CONTINUED ON NEXT PAGE]
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
CONSENTED TO:
By Each of the Obligors
on Exhibit A Annexed Hereto
___________________________
Its: In the capacity set forth on Exhibit A
By Each of the Obligors
on Exhibit B Annexed Hereto
___________________________
Its: Vice President
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4
<SEQUENCE>5
<FILENAME>exh412.txt
<DESCRIPTION>AMENDMENT NO. 6 TO LOAN AND SECURITY AGREEMENT
<TEXT>
EXHIBIT 4.12
AMENDMENT NO. 6 TO FINANCING AGREEMENTS
AMENDMENT No. 6, dated as of March 13, 2003, by and among Congress
Financial Corporation, a Delaware corporation, in its capacity as Administrative
Agent, Collateral Agent, Joint Lead Arranger and Joint Bookrunner (in such
capacity, "Agent") for the financial institutions from time to time party to the
Loan Agreement (as hereinafter defined) as lenders (each individually, a
"Lender" and collectively, "Lenders"), and Charming Shoppes, Inc., a
Pennsylvania corporation ("Parent"), Charming Shoppes of Delaware, Inc., a
Pennsylvania corporation ("CS Delaware"), CSI Industries, Inc., a Delaware
corporation ("CSI"), FB Apparel, Inc., an Indiana corporation ("FB Apparel"),
Catherines Stores Corporation, a Tennessee corporation ("Catherines") and Lane
Bryant, Inc., a Delaware corporation ("LB", and, together with Parent, CS
Delaware, CSI, FB Apparel and Catherines hereinafter referred to each
individually, as a "Borrower" and collectively, as "Borrowers"), CS Delaware, in
its capacity as agent for itself as a Borrower and for the other Borrowers
("Borrowers' Agent").
W I T N E S S E T H :
---------------------
WHEREAS, Agent, J.P. Morgan Business Credit Corp, a Delaware corporation,
in its capacity as Co-Agent, Joint Lead Arranger and Joint Bookrunner under the
Loan Agreement (in such capacity, "Co-Agent"), Lenders, Borrowers and Borrowers'
Agent have entered into financing arrangements pursuant to which Lenders have
made and may make loans and advances and provide other financial accommodations
to Borrowers as set forth in the Loan and Security Agreement, dated August 16,
2001, by and among Lenders, Agent, Co-Agent, Borrowers and Borrowers' Agent (as
the same was amended by Amendment No. 1, dated as of January 12, 2002, Amendment
No. 2, dated as of May 17, 2002, Amendment No. 3, dated as of July 29, 2002
(effective as of August 16, 2001), Amendment No. 4, dated September 23, 2002,
and Amendment No.5 dated February 12, 2003, and may hereafter be further
amended, modified, supplemented, extended, renewed, restated or replaced, the
"Loan Agreement", and together with all agreements, documents and instruments at
any time executed and/or delivered in connection therewith or related thereto,
as from time to time amended, modified, supplemented, extended, renewed,
restated or replaced, collectively, the "Financing Agreements");
WHEREAS, Borrowers and Borrowers' Agent have requested that Agent agree to
amend Section 9.11 of the Loan Agreement to permit repurchases of Parent's
Capital Stock and Agent on behalf of itself and the Required Lenders is willing
to agree to such amendments, subject to the terms and conditions contained
herein; and
WHEREAS, by this Amendment No. 6, Agent, and Borrowers and Borrowers' Agent
desire and intend to evidence such amendments.
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
and covenants contained herein, and subject to the satisfaction of the
conditions set forth in Section 8 hereof, the parties hereto agree as follows:
<PAGE>
1. Definitions.
(a) Additional Definitions. As used herein, the following terms shall have
the respective meanings given to them below and the Loan Agreement shall be
deemed and is hereby amended to include, in addition and not in limitation of,
each of the following definitions:
(i) "Amendment No. 6" shall mean this Amendment No. 6 to Financing
Agreements by and among Agent and Borrowers, as the same now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated,
or replaced, and the Loan Agreement shall be deemed and is hereby amended
to include, in addition and not in limitation, such definition.
(b) Amendment to Definitions. All references to the term "Financing
Agreements" in the Loan Agreement shall be deemed and each such reference is
hereby amended to include, in addition and not in limitation, this Amendment No.
6 and all other agreements, documents and instruments at any time executed
and/or delivered by any Borrower, Borrowers' Agent or any other person in
connection herewith, as the same now exist or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
(c) Interpretation. All capitalized terms used herein shall have the
meanings assigned thereto in the other Financing Agreements, unless otherwise
defined herein. All references to the plural herein shall also mean the singular
and all references to the singular herein shall also mean the plural, in each
case unless otherwise required by the context of the use thereof.
2. Use of Proceeds. Section 6.7 of the Loan Agreement is hereby amended by
adding the following clause at the end thereof, immediately after the phrase
"with Section 2 of Amendment No. 2":
" and, except, that, Parent may use proceeds of Revolving Loans until March
31, 2004 to purchase shares of the Capital Stock of Parent so long as any
such purchase (a) does not constitute or otherwise cause a violation of
Regulation U and (b) is otherwise is in compliance with Section 9.11
hereof."
3. Dividends and Redemptions. Section 9.11 of the Loan Agreement is hereby
deleted and the following is substituted therefor:
<PAGE>
" No Borrower, Obligor or any other Subsidiary of Parent shall, directly or
indirectly, declare or pay any dividends in cash or other of its assets on
account of any shares of any class of capital stock of such Borrower,
Obligor or any other Subsidiary of Parent now or hereafter outstanding, or
set aside or otherwise deposit or invest any sums for such purpose, or
redeem, retire, defease, purchase or otherwise acquire any shares of any
class of capital stock (or set aside or otherwise deposit or invest any
sums for such purpose) for any consideration other than common stock or
apply or set apart any sum, or make any other distribution (by reduction of
capital or otherwise) in respect of any such shares or agree to do any of
the foregoing, except, that,
(a) dividends may be paid by a Borrower (other than Parent), Obligor,
or any other Subsidiary of Parent directly or indirectly to Parent or
to any other Borrower or Obligor of which it is a Subsidiary, and
(b) (i) at Parent's option, Parent may redeem or repurchase all or any
of the Subordinated Notes outstanding as of the date of Amendment
No.2, using a portion of the proceeds of the Convertible 2002 Senior
Notes and the proceeds of Revolving Loans, and (ii) Parent may
repurchase its Capital Stock using a portion of the proceeds received
by Parent from the issuance of the Convertible 2002 Senior Notes, and
the proceeds of Revolving Loans, provided, that, (A) the maximum
aggregate amount paid to repurchase Capital Stock of Parent and retire
the Subordinated Notes (including amounts paid with the proceeds of
Revolving Loans) shall not exceed $100,000,000, (B) at the time of
each such purchase of any Capital Stock or any Subordinated Note, and
after giving effect thereto, no Event of Default, or act, condition or
event which with notice or passage of time or both would constitute an
Event of Default shall exist or have occurred and be continuing, and
(C) no repurchases of Capital Stock of Parent or redemptions of
Subordinated Notes pursuant to this Section 9.11(b) shall be made
after March 1, 2003, and
<PAGE>
(c) Parent may repurchase its Capital Stock consisting of common stock
after March 1, 2003 provided, that, as to any such repurchase, each of
the following conditions is satisfied: (i) as of the date of the
payment for such repurchase and after giving effect thereto, no Event
of Default or any act, condition or event which, with notice or
passage of time or both, would constitute an Event of Default, shall
exist or have occurred and be continuing, (ii) such repurchase shall
be paid in cash with funds legally available therefor (which funds may
include proceeds of Revolving Loans), (iii) such repurchase shall not
violate any law or regulation or the terms of any indenture, agreement
or undertaking to which any Borrower is a party or by which any
Borrower or its property is bound, (iv) Excess Availability shall have
been at least $50,000,000, as of the close of business for each of the
thirty (30) consecutive day period immediately preceding such
repurchase and as of the date of any such payment for such repurchase
and after giving effect thereto, Excess Availability shall be not less
than $50,000,000, (v) the aggregate amount of all payments for such
repurchases shall not exceed $35,000,000 and the amount paid by Parent
per share of common stock shall not exceed $5.00 per share, (vi) the
aggregate number of shares of common stock of Parent repurchased shall
not exceed 8,100,000 shares of common stock , and (vii) no repurchases
shall be made after March 31, 2004."
4. Additional Covenants. In addition to the continuing representations,
warranties and covenants heretofore or hereafter made by Borrowers and
Borrowers' Agent to Agent and Lenders pursuant to the Financing Agreements,
Borrowers hereby, jointly and severally, agree in favor of Agent, and Lenders
that (a) Parent, has as of the date hereof, either purchased (or converted into
common stock of Parent) all of the Subordinated Notes that were outstanding as
of date of Amendment No.2, and (b) no payments permitted to be made in
accordance with Section 9.11 (c) of the Agreement will be used to purchase
Subordinated Notes.
5. Conditions to Effectiveness. The amendments to the Loan Agreement set
forth herein shall be effective only upon the satisfaction of each of the
following conditions in a manner satisfactory to Agent (the "Effective Date"):
(a) Agent shall have received an original of this Amendment No. 6,
duly authorized, executed and delivered by Borrowers, Obligors and
Borrowers' Agent; and
(b) as of the date hereof, and after giving effect to the provisions
of this Amendment No. 6, no Event of Default or act, condition or event
which with notice or passage of time or both, would constitute an Event of
Default, shall exist or have occurred and be continuing.
<PAGE>
6. Effect of this Amendment No. 6. This Amendment No.6 and the instruments
and agreements delivered pursuant hereto constitute the entire agreement of the
parties with respect to the subject matter hereof and thereof, and supersede all
prior oral or written communications, memoranda, proposals, negotiations,
discussions, term sheets and commitments with respect to the subject matter
hereof and thereof. Except as expressly consented to and amended pursuant
hereto, no other changes or modifications to the Financing Agreements or waivers
of or consents under any provisions thereof are intended or implied, and in all
other respects the Financing Agreements are hereby specifically ratified,
restated and confirmed by all parties hereto as of the effective date hereof. To
the extent that any provision of the Loan Agreement or any of the other
Financing Agreements, including without limitation Amendment No. 2, are
inconsistent with the provisions of this Amendment No. 6, the provisions of this
Amendment No. 6 shall control.
7. Further Assurances. Borrowers and Borrowers' Agent shall execute and
deliver such additional documents and take such additional action as may be
reasonably requested by Agent to effectuate the provisions and purposes of this
Amendment No. 6.
8. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the internal laws of the State of New York (without giving effect to
principles of conflicts of laws that would apply any other law).
9. Binding Effect. This Amendment No. 6 shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.
10. Counterparts. This Amendment No. 6 may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment No. 6, it shall not be
necessary to produce or account for more than one counterpart thereof signed by
each of the parties hereto. Delivery of an executed counterpart of this
Amendment No. 6 by telefacsimile shall have the same force and effect as
delivery of an original executed counterpart of this Amendment No. 6. Any party
delivering an executed counterpart of this Amendment No.6 by telefacsimile also
shall deliver an original executed counterpart of this Amendment No. 6, but the
failure to deliver an original executed counterpart shall not affect the
validity, enforceability, and binding effect of this Amendment No.6 as to such
party or any other party.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 6 to
be duly executed and delivered by their authorized officers as of the date and
year first above written.
BORROWERS
CHARMING SHOPPES, INC.
By: ____________________
Eric M. Specter
Executive Vice President
CHARMING SHOPPES OF DELAWARE, INC.
By: ____________________
Eric M. Specter
Vice President
CSI INDUSTRIES, INC.
By: _____________________
Eric M. Specter
President
FB APPAREL, INC.
By: ____________________
Eric M. Specter
President
LANE BRYANT, INC.
By: _____________________
Eric M. Specter
President
[SIGNATURES CONTINUED ON NEXT PAGE]
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
CATHERINES STORES CORPORATION
By: _____________________
Eric M. Specter
Vice President
BORROWERS' AGENT
CHARMING SHOPPES OF DELAWARE, INC.,
as Borrowers' Agent
By: _____________________
Eric M. Specter
Vice President
AGENT
CONGRESS FINANCIAL CORPORATION,
as Administrative Agent
By: _______________________________
Title:______________________________
[SIGNATURES CONTINUED ON NEXT PAGE]
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
CONSENTED TO:
By Each of the Obligors
on Exhibit A Annexed Hereto
___________________________
Its:_______________________
By Each of the Obligors
on Exhibit B Annexed Hereto
___________________________
Its:_______________________
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>6
<FILENAME>exh1026.txt
<DESCRIPTION>NON-EMPLOYEE DIRECTOR COMPENSATION PROGRAM
<TEXT>
EXHIBIT 10.2.6
CHARMING SHOPPES, INC.
NON-EMPLOYEE DIRECTORS COMPENSATION PROGRAM
As Amended and Restated at June 27, 2002
<PAGE>
CHARMING SHOPPES, INC.
Non-Employee Directors Compensation Program
As Amended and Restated at June 27, 2002
1. General Authorization.
(a) Amendment and Restatement of the Program. The Board of Directors has
approved this Non-Employee Directors Compensation Program (the "Program") of
Charming Shoppes, Inc. (the "Company") as an amendment and restatement of the
Non-Employee Directors Compensation Program adopted by the Board on August 21,
1996 and amended and restated effective July 1, 1999 (the "Prior Program").
Compensation of non-employee directors from and after June 27, 2002 (the
"Effective Date") shall be governed by the Program. Such compensation before the
Effective Date was governed by the Prior Program and other policies of the
Company then in effect, except that the modified terms of Section 13
("Definitions Relating to Change in Control") shall apply to all outstanding
awards under the Prior Program. Accordingly:
(i) The Prior Program and any resolutions of the Board relating thereto,
insofar as they set forth the form, amount, and other terms of
options, awards, and deferrals under the Prior Program after the
Effective Date, are hereby superseded and of no further force and
effect, but otherwise the Prior Program and resolutions relating
thereto remain in full force and effect;
(ii) Compensation authorized under the Company's Compensation Program for
the Non-Employee Chairman of the Board of Directors (the "Chairman's
Program") remains suspended; and
(iii) Automatic grants of options under the Company's 1989 Directors Stock
Option Plan remain suspended;
provided, however, that the Board reserves the right to modify this Program or
reinstate the compensation authorized under the suspended plans.
(b) Purpose. The purpose of the Program is to advance the interests of the
Company and its shareholders by providing for fair and adequate compensation of
non-employee directors in order to attract and retain high quality persons to
serve as such and to enable such persons to increase their proprietary interest
in the Company. In furtherance of this purpose, the Program provides for payment
of cash fees, annual grants of options and RSUs, an initial grant to each newly
elected or appointed director of Restricted Stock, and the opportunity for a
director to elect deferred and alternative forms of compensation in lieu of cash
fees for service as a director, including Deferred Shares and deferred cash.
2. Definitions. In addition to the terms defined in Section 1, the
following terms shall be defined as set forth below:
(a) "Account" means the account established and maintained by the Company
for RSUs granted under Section 9 and Deferred Shares and deferred cash credited
under Section 10. A subaccount for RSUs and a subaccount for such Deferred
Shares and deferred cash may be designated within the Account. The Account and
RSUs, Deferred Shares and deferred cash credited thereto will be maintained
solely as bookkeeping entries by the Company to evidence unfunded obligations of
the Company.
<PAGE>
(b) "Administrator" means the individual or committee specified in Section
3(b) to whom the Board has delegated authority to administer the Program.
(c) "Beneficiary" means the person(s) or trust(s) which have been
designated by a Participant in his or her most recent written beneficiary
designation filed with the Administrator to receive the benefits specified under
the Program upon such Participant's death. If, upon a Participant's death, there
is no designated Beneficiary or surviving designated Beneficiary, then the term
Beneficiary means the person(s) or trust(s) entitled by will or the laws of
descent and distribution to receive such benefits.
(d) "Board" means the Board of Directors of the Company.
(e) "Change in Control" and related terms are defined in Section 13.
(f) "Code" means the Internal Revenue Code of 1986, as amended, including
regulations thereunder and successor provisions and regulations thereto.
(g) "Deferred Share" means a Share Unit credited to a Participant's Account
under Section 10 as a result of deferral of cash fees.
(h) "Director Compensation" means annual retainer fees payable to a
director in his or her capacity as such for service on the Board and service as
chairman of any Board committee, and any other fees payable to a director in his
or her capacity as such for attending meetings and other service on the Board
and Board committees. Reimbursement of expenses does not constitute Director
Compensation.
(i) "Disability" means a Participant's termination of service as a director
of the Company due to a physical or mental incapacity of long duration which
renders the Participant unable to perform the duties of a director of the
Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as amended,
including rules thereunder and successor provisions and rules thereto.
(k) "Fair Market Value," means, with respect to Shares, the fair market
value of such Shares determined by such methods or procedures as shall be
established from time to time by the Board. Unless otherwise determined by the
Board, the Fair Market Value of a Share as of any given date means the closing
sale price of a Share reported on the Nasdaq National Market (or, if Shares are
then principally traded on a national securities exchange, in the table
reporting "composite transactions" for such exchange) in the Wall Street Journal
for such date, or, if no Shares were traded on that date, on the next preceding
day on which there was such a trade.
(l) "Mandatory Retirement" means the termination of a directors' service in
accordance with any mandatory retirement policy adopted by the Board of
Directors and then in effect.
(m) "Option" means the right, granted to a Participant under Section 9, to
purchase a specified number of Shares at the specified exercise price for a
specified period of time under the Program. All Options will be non-qualified
stock options.
<PAGE>
(n) "Participant" means any person who has been granted an Option which
remains outstanding, has RSUs, Deferred Shares or deferred cash credited to his
or her Account, or has elected to defer receipt of Director Compensation in the
form of Deferred Shares or deferred cash under the Program.
(o) "Program Year" means, with respect to a Participant, the period
commencing at the time of election of the director at an annual meeting of
shareholders (or the election of a class of directors if the Company then has a
classified Board of Directors), or the director's initial appointment to the
Board if not at an annual meeting of shareholders, and continuing until the
close of business of the day preceding the next annual meeting of shareholders.
(p) "Restricted Stock" means Shares granted under Section 7, subject to a
risk of forfeiture and restrictions on transfer for a specified period.
(q) "RSU" or "Restricted Share Unit" means a Share Unit credited to a
Participant's Account as a grant under Section 8, which is subject to a risk of
forfeiture for a specified period.
(r) "Shares" means shares of common stock of the Company and such other
securities as may be substituted or resubstituted for Shares pursuant to Section
14(b).
(s) "Share Unit" means a right to receive, at a specified settlement date,
either a cash payment of the Fair Market Value of one Share or delivery of one
Share, subject to the terms and conditions of the Program; provided, however,
that, if and to the extent shareholders of the Company have approved an
additional authorization of Shares under the Plan after the effective date by a
vote satisfying applicable requirements of the Nasdaq National Market, (i) only
actual Shares will be delivered in settlement of RSUs granted at or after the
date of such shareholder approval, and (ii) the Board of Directors may determine
that only actual Shares will be delivered in settlement of RSUs and/or Deferred
Shares (granted on or after June 27, 2002) outstanding at the time of such
shareholder approval or in settlement of Deferred Shares granted at or after the
date of such shareholder approval, which determination will be irrevocable.
Share Units in the form of RSUs shall be subject to a risk of forfeiture, but
Share Units in the form of Deferred Shares will be at all times non-forfeitable.
(t) "Valuation Date" shall mean the close of business on the last business
day of each calendar quarter and, in the case of any final distribution of
deferred cash from a Participant's Account, the day as of which such
distribution is made; provided, however, that the Administrator may specify a
different Valuation Date in order to coordinate the Participant's deferred cash
balance with any actual investment by which the deferred cash balance is to be
measured.
3. Administration.
(a) Authority. Both the Board and the Administrator (subject to the ability
of the Board to restrict the Administrator) shall administer the Program in
accordance with its terms, and shall have all powers necessary to accomplish
such purpose, including the power and authority to construe and interpret the
Program, to define the terms used herein, to prescribe, amend and rescind rules
and regulations, agreements, forms, and notices relating to the administration
of the Program, and to make all other determinations necessary or advisable for
the administration of the Program. The Administrator may perform any function of
the Board under the Program, except for establishing the form and amount of
compensation under any provision, adopting material amendments to the Program
under Section 14(e), and any other function from time to time specifically
reserved by the Board to itself. Any actions of the Board or the Administrator
with respect to the Program shall be final, conclusive, and binding upon all
persons interested in the Program, except that any action of the Administrator
will not be binding on the Board. The Board and Administrator may each appoint
agents and delegate thereto powers and duties under the Program, except as
otherwise limited by the Program.
(b) Administrator. The Administrator shall be the Executive Vice President,
General Counsel and Secretary of the Company, or, if that officer is
unavailable, the Executive Vice President, Chief Financial Officer, or, if that
officer is unavailable, the Executive Vice President and Director of Human
Resources; provided, however, that the Board may designate a different
individual or committee to serve as Administrator. In any case in which a
director is a member of the Administrator, such director shall not act on or
decide any matter relating solely to himself or herself or any of his or her
rights or benefits under the Program. No bond or other security need be required
of the Administrator or any member thereof in any jurisdiction.
(c) Limitation of Liability. Each member of the Board and the Administrator
shall be entitled to, in good faith, rely or act upon any report or other
information furnished to him or her by any officer or other employee of the
Company or any subsidiary, the Company's independent certified public
accountants, or any executive compensation consultant, legal counsel, or other
professional retained by the Company to assist in the administration of the
Program. No member of the Board or the Administrator, nor any person to whom
ministerial duties under the Program have been delegated, shall be personally
liable for any action, determination, or interpretation taken or made in good
faith with respect to the Program, and any such person shall, to the extent
permitted by law, be fully indemnified and protected by the Company with respect
to any such action, determination, or interpretation.
4. Shares Available Under the Program. The total number of Shares reserved
and available for delivery under the Program (including the Prior Program) shall
be 700,000 less the number of Shares issued under the Chairman's Program,
subject to adjustment as provided in Section 14(b). Shares that may be delivered
under the Program may consist, in whole or in part, of authorized and unissued
Shares, treasury Shares or Shares acquired in the market for the account of a
Participant. For purposes of the Program, if an Option expires for any reason
without having been exercised in full, or if Restricted Stock is forfeited or
cancelled, or if an RSU designated as settleable by delivery of a Share is
forfeited or canceled, the Shares subject to the unexercised portion of such
Option or to the forfeited or cancelled RSUs or Restricted Stock will again be
available for delivery under the Program, and Shares will not be considered
deliverable or delivered in connection with RSUs and Deferred Shares settleable
or settled only in cash.
5. Eligibility. Each non-employee director of the Company may participate
in the Program, subject to the terms hereof. No person other than those
specified in this Section 5 will be eligible to participate in the Program. The
Administrator will notify each person of his or her eligibility to participate
in an elective feature of the Program not later than 15 days (or such other
period as may be determined by the Administrator) prior to any deadline for
filing an election form.
6. Cash Fees. Each non-employee director shall be paid an annual cash
retainer fee and meeting fees, and each non-employee director serving as a
chairperson of a committee of the Board shall be paid an additional annual cash
retainer fee, in amounts to be determined by the Board from time to time, and
such other fees as may be authorized by the Board. The policy with respect to
these fees from and after the Effective Date and continuing until modified or
revoked by the Board, shall be as follows:
(i) Annual cash retainer fee for service as non-employee director:
$30,000;
(ii) Annual cash retainer fee for service as chairperson of Board
committee: $5,000; and
<PAGE>
(iii) Meeting fees: $1,500 per meeting of the Board attended, and $1,000
per meeting of any Board committee attended. Such meeting fees will be
paid for attendance by conference telephone or in any other manner
that constitutes lawful participation in the meeting.
Such fees shall be payable in installments in accordance with current practice
of the Company, unless otherwise determined by the Board. Reasonable expenses of
non-employee directors incurred in connection with attendance at meetings and
the performance of a director's duties shall be reimbursed if authorized by and
in accordance with policies established by the Board from time to time.
7. Initial Grant of Restricted Stock. If, at the date of a person's initial
election or appointment as a member of the Board after the Effective Date, such
person is a non-employee director eligible to participate in the Program, he or
she shall be granted 10,000 Shares of Restricted Stock, subject to adjustment as
provided in Section 14(b). Restricted Stock granted under this Section 7 shall
be subject to the following terms and conditions:
(a) Vesting and Forfeiture. An award granted under this Section 7, if not
previously forfeited, shall become vested and non-forfeitable as to one-third of
the number of Shares of Restricted Stock at the close of business on June 1 of
each of the three calendar years following the date of grant of such award,
rounded to the nearest number of whole Shares. In the event of a Change in
Control or termination of the Participant's service as a director due to death
or Disability, the award, if not previously vested or forfeited, shall
immediately vest and become non-forfeitable in full. In the event of termination
of the Participant's service as a director due to Mandatory Retirement by the
Participant, the award, if not previously vested or forfeited, shall immediately
vest and become non-forfeitable as to that number of Shares of Restricted Stock
as would have vested and become non-forfeitable if the Participant had continued
to serve as a director through the anticipated date of the next annual meeting
of shareholders. Unless otherwise determined by the Board, an award of
Restricted Stock that has not vested at or before the time of termination of the
Participant's service as a director (this would include all unvested Restricted
Stock in the event of a director's removal from service) as provided herein will
cease to vest and will be forfeited upon such termination.
(b) Dividends on Restricted Stock. Dividends on Restricted Stock declared
and paid prior to the lapse of the risk of forfeiture on such Restricted Stock
shall be automatically reinvested in additional Shares of Restricted Stock,
which shall be subject to the same terms, including risk of forfeiture, as the
Restricted Stock on which the dividend was paid; provided, however, that such
dividends may instead be paid in cash, subject to such terms as the
Administrator may determine, if reinvestment of dividends is determined by the
Administrator to be administratively burdensome.
(c) Awards Nontransferable. Restricted Stock shall be nontransferable by
the Participant at any time that the award remains subject to a risk of
forfeiture.
<PAGE>
(d) Other Matters. Restricted Stock shall be settled by delivery of a Share
certificate representing whole Shares, with cash paid in lieu of any fractional
Share. The foregoing notwithstanding, the Administrator may deliver Shares upon
lapse of restrictions in any other manner deemed appropriate by the
Administrator. Restricted Stock granted under the Program may be evidenced in
such manner as the Administrator shall determine. Unless otherwise determined by
the Administrator, if certificates representing Restricted Stock are registered
in the name of the Participant, such certificates shall bear an appropriate
legend referring to the terms, conditions, and restrictions applicable to such
Restricted Stock, the Company shall retain physical possession of the
certificate, and the Participant shall have delivered a stock power to the
Company, endorsed in blank, relating to the Restricted Stock.
8. Annual Grants of RSUs. If, at the date of an annual meeting of
shareholders at which a director is elected or reelected as a member of the
Board (or at which members of another class of directors are elected or
reelected, if the Company then has a classified Board), a director is a
non-employee director eligible to participate in the Program at the close of
business on that date, he or she shall be granted 3,000 RSUs, subject to
adjustment as provided in Section 14(b). RSUs granted under this Section 8 shall
be subject to the following terms and conditions:
(a) Vesting and Forfeiture. An award granted under this Section 8, if not
previously forfeited, shall become vested and non-forfeitable as to all RSUs at
the close of business on June 1 of the calendar year following the date of grant
of such award. In the event of a Change in Control or termination of the
Participant's service as a director due to death or Disability, the award, if
not previously vested or forfeited, shall immediately vest and become
non-forfeitable in full. In the event of termination of the Participant's
service as a director due to a voluntary termination of service or Mandatory
Retirement by the Participant, the award, if not previously vested or forfeited,
shall immediately vest and become non-forfeitable as to that number of RSUs
equal to the total number of RSUs multiplied by a fraction the numerator of
which is the number of days from the date of grant to the date of termination of
service and the denominator of which is the number of days from the date of
grant until June 1 of the calendar year following the date of grant of such
award (such fraction in no event will exceed one). Unless otherwise determined
by the Board, an award of RSUs that has not vested at or before the time of
termination of the Participant's service as a director (this would include all
unvested RSUs in the event of a director's removal from service) as provided
herein will cease to vest and will be forfeited upon such termination.
(b) Dividend Equivalents on RSUs. Dividend Equivalents will be credited on
RSUs in accordance with Section 11(a), with the resulting additional RSUs
subject to the same terms, including risk of forfeiture, as the RSUs on which
the dividend equivalent was paid; provided, however, that such dividend
equivalents may instead be paid in cash, subject to such terms as the
Administrator may determine, if reinvestment of dividends is determined by the
Administrator to be administratively burdensome.
(c) Settlement of RSUs. RSUs shall be settled at the time the risk of
forfeiture on such RSUs lapses under Section 8(a), provided, however, that a
director may elect to defer settlement of RSUs by filing an election with the
Company by the end of the month following the grant of the RSUs or by such other
deadline, prior to the lapse of the risk of forfeiture under Section 8(a), as
may be specified by the Administrator, provided that any date so specified shall
ensure effective deferral of taxation and otherwise comply with applicable laws.
(i) Effect and Irrevocability of Elections. Elections relating to RSUs
shall become irrevocable at the specified deadline for the filing of
such elections, unless the Administrator specifies a different time.
Elections may be modified or revoked by filing a new election prior to
the time the election to be modified or revoked has become
irrevocable. The latest election filed with the Administrator shall be
deemed to revoke all prior inconsistent elections that remain
revocable at the time of filing of the latest election.
<PAGE>
(ii) Matters To Be Elected. The Administrator will provide a form or forms
of election which will permit a director to make appropriate elections
with respect to all relevant matters under this Section 8. This
election form may be included in the document evidencing the grant of
RSUs.
(iii) Permitted Elections as to Settlement. Elections as to the time of
settlement of deferred RSUs shall conform to the terms of Section
11(c).
A validly deferred RSU will remain forfeitable until the risk of forfeiture
lapses in accordance with Section 8(a). Thereafter, although it will still be
referred to as an RSU for purposes of the Program, it will be non-forfeitable.
9. Annual Grants of Options. If, at the date of an annual meeting of
shareholders at which a director is elected or reelected as a member of the
Board (or at which members of another class of directors are elected or
reelected, if the Company then has a classified Board), a director is a
non-employee director eligible to participate in the Program at the close of
business on that date, he or she shall be granted an Option to purchase 6,500
Shares, subject to adjustment as provided in Section 14(b).
(a) Exercise Price. The exercise price per Share purchasable under an
Option will be equal to 100% of the Fair Market Value of a Share on the date of
grant of the Option.
(b) Option Term. Options, to the extent not previously forfeited, shall
expire at the earlier of (i) ten years after the date of grant, or (ii) one year
after the Participant ceases to serve as a director of the Company for any
reason except that, in the case of a termination due to Mandatory Retirement,
any portion of the Option that vests and becomes exercisable at a date following
the Mandatory Retirement, as provided in Section 9(c), shall expire one year
after the date such portion vests and becomes exercisable. (Note: Portions of
any Option that were vested and exercisable at the date of Mandatory Retirement
will expire one year after such Mandatory Retirement, but in no event later than
ten years after the date of grant).
(c) Vesting and Exercisability. Options granted in 2002 and not previously
forfeited shall vest and become exercisable by a Participant as to one-fifth of
the number of Shares at the close of business on June 1 of each of the five
calendar years following the date of grant of such award, rounded to the nearest
number of whole Shares, and Options granted after 2002 and not previously
forfeited shall vest and become exercisable by a Participant in full at the
close of business on June 1 of the year following the date of grant of such
award; provided, however, that:
(i) If such Option has not previously vested or been forfeited, it shall
vest and become exercisable in full upon a Change in Control, upon the
Participant's death, or upon the termination of the Participant's
service as a director due to Disability;
(ii) If such Option has not previously vested or been forfeited, it shall
vest and become exercisable as to the "Pro Rata Shares" upon a
termination of the Participant's service as a director due to a
voluntary termination of service (i.e., excluding termination due to
Disability or Mandatory Retirement). For purposes of this Section
9(c)(ii), the "Pro Rata Shares" shall be the number of Shares
determined by multiplying (A) the number of Shares as to which the
Option would have vested and become exercisable if the Participant had
continued to serve as a director through the anticipated date of the
next annual meeting of shareholders by (B) a fraction the numerator of
which is the number of days from the date of the latest annual meeting
of shareholders through the date of the Participant's termination and
the denominator of which is 365 (rounded up to the next whole share);
and
<PAGE>
(iii) Any portion of an Option that has not vested and become exercisable
at the date of a director's Mandatory Retirement shall remain
outstanding and vest and become exercisable at the time(s) specified
in the first sentence of this Section 9(c), provided that such Option
shall vest and become exercisable in full upon a Change in Control or
the death of the director, and each such portion of the Option that
vests after such Mandatory Retirement shall expire at the end of the
one-year period following the date it becomes vested and exercisable
as provided in Section 9(b).
Except in the case of a Mandatory Retirement or as otherwise determined by the
Board, any portion of a Participant's Option that has not vested and become
exercisable at or before the time of termination of the Participant's service as
a director (this would include the entire unvested Option in the event of a
director's removal from service) as provided herein will cease to vest and will
be forfeited upon such termination.
(d) Payment. The exercise price of an Option shall be paid to the Company
either in cash or by the surrender of Shares, or any combination thereof, or in
such other form or manner as may be established by the Administrator; provided,
however, that, unless otherwise determined by the Administrator, Shares shall
not be surrendered in payment of the exercise price if such surrender would
result in additional accounting expense to the Company.
10. Deferral of Fees In Deferred Shares and Deferred Cash. Each director of
the Company who is eligible under Section 5 may elect, in accordance with
Section 10(a), to defer receipt of Director Compensation in the form of Deferred
Shares under Section 10(b) or deferred cash under Section 10(c).
(a) Elections. A director shall elect to participate in the deferral
feature under this Section 10 and the terms of such participation by filing an
election with the Company prior to the beginning of a Program Year (Program
Years generally will begin at each annual meeting of shareholders or, in the
case of a new director, upon initial appointment) or at such other date as may
be specified by the Administrator, provided that any date so specified shall
ensure effective deferral of taxation and otherwise comply with applicable laws.
(i) Effect and Irrevocability of Elections. Elections shall be deemed
continuing, and therefore applicable to Program Years after the
initial Program Year covered by the election, until the election is
modified or superseded by the Participant. Elections other than those
subject to Section 11(c) shall become irrevocable at the commencement
of the Program Year to which an election relates, unless the
Administrator specifies a different time. Elections relating to the
time of settlement of an Account shall become irrevocable at the time
specified in Section 11(c). Elections may be modified or revoked by
filing a new election prior to the time the election to be modified or
revoked has become irrevocable. The latest election filed with the
Administrator shall be deemed to revoke all prior inconsistent
elections that remain revocable at the time of filing of the latest
election.
(ii) Matters To Be Elected. The Administrator will provide a form or forms
of election which will permit a director to make appropriate elections
with respect to all relevant matters under this Section 10 and Section
11.
(iii) Time of Filing Elections. An election must be received by the
Administrator prior to the deadline specified by the Administrator.
Under no circumstances may a Participant defer compensation to which
the Participant has attained, at the time of deferral, a legally
enforceable right to current receipt of such compensation.
<PAGE>
(b) Deferral of Director Compensation in the Form of Deferred Shares. If a
Participant has elected to defer receipt of a specified amount of Director
Compensation in the form of Deferred Shares, a number of Deferred Shares shall
be credited to the Participant's Account, as of the date such Director
Compensation otherwise would have been payable to the Participant but for such
election to defer, equal to (i) such amount otherwise payable divided by (ii)
the Fair Market Value of a Share at that date. Deferred Shares credited under
this Section 10(b) shall be subject to the terms and conditions of Deferred
Shares specified in Sections 11(a), 11(b), and 11(c). The right and interest of
each Participant in Deferred Shares credited to the Participant's Account under
this Section 10(b) at all times will be nonforfeitable.
(c) Deferral of Director Compensation in the Form of Deferred Cash. If a
Participant has elected to defer receipt of a specified amount of Director
Compensation in the form of deferred cash, an amount equal to such specified
amount shall be credited to the Participant's Account as of the date such
Director Compensation otherwise would have been payable to the Participant but
for such election to defer. Deferred cash credited to a Participant's Account
may be invested in such investment vehicles, other than an investment vehicle
relating to the Company's stock, as may be designated from time-to-time by the
Board or Board committee. The terms of any such investment (including relating
to timing, crediting of earnings and losses, and reallocation among investment
vehicles) shall be subject to such rules, regulations and determinations as may
be adopted by the Administrator. Unless otherwise determined by the Board, one
investment alternative will provide that interest may be credited with respect
to cash balances in a Participant's Account at each Valuation Date in an amount
equal to the average daily cash balance in such Account since the last Valuation
Date multiplied by the interest rate as specified by the Board and applicable to
the period since the last Valuation Date. The initial policy with respect to the
interest rate under this Section 10(c), effective as of the Effective Date and
continuing until modified or revoked by the Board, shall be to credit interest
at the prime interest rate plus one percent, using for this purpose the prime
interest rate of First Union Bank effective on the date of the latest annual
meeting of shareholders of the Company. The Company may link the earnings and
losses under designated investment vehicles to the returns of actual investments
in such vehicles, which investments may be made directly by the Company or
through a rabbi trust or other intermediary; provided, however, that the
Participant shall have no rights with respect to any specific assets that would
cause the Participant to be other than an unsecured creditor of the Company or
to be otherwise in constructive receipt of any cash or property. The right and
interest of each Participant relating to deferred cash credited to his or her
Account at all times will be nonforfeitable.
(d) Cessation of Service as a Director. If any Director Compensation
otherwise subject to an election would be paid to a Participant after he or she
has ceased to serve as a director, such payment shall not be subject to deferral
under this Section 10, but shall instead be paid in accordance with the
Company's regular non-employee director compensation policies.
11. Other Terms of Accounts.
(a) Dividend Equivalents on Share Units. Dividend equivalents will be
credited on Share Units (i.e., RSUs and Deferred Shares) credited to a
Participant's Account as follows:
<PAGE>
(i) Cash and Non-Share Dividends. If the Company declares and pays a
dividend on Shares in the form of cash or property other than Shares,
then a number of additional Share Units shall be credited to a
Participant's Account as of the payment date for such dividend equal
to (i) the number of Share Units credited to the Account as of the
record date for such dividend, multiplied by (ii) the amount of cash
plus the Fair Market Value of any property other than Shares actually
paid as a dividend on each Share at such payment date, divided by
(iii) the Fair Market Value of a Share at such payment date.
(ii) Share Dividends and Splits. If the Company declares and pays a
dividend on Shares in the form of additional Shares, or there occurs a
forward split of Shares, then a number of additional Share Units shall
be credited to the Participant's Account as of the payment date for
such dividend or forward Share split equal to (i) the number of Share
Units credited to the Account as of the record date for such dividend
or split multiplied by (ii) the number of additional Shares actually
paid as a dividend or issued in such split in respect of each Share.
(b) Reallocation of Accounts. A Participant shall have no right to have
amounts credited as cash in his or her Account reallocated or switched to Share
Units in such Account or amounts credited as Share Units in such Account
reallocated or switched to deferred cash in such Account, unless otherwise
determined by the Board. The foregoing notwithstanding, in the event of a Change
in Control, unless otherwise specifically elected by the Participant prior to
the Change in Control, the Participant's Share Unit balance in his or her
Account shall be automatically converted into deferred cash based on the Fair
Market Value of Shares as of the close of business on the day of the Change in
Control (or, if no Shares remain outstanding at that time, as of the close of
business on the day preceding the Change in Control). If and to the extent
authorized under Section 10(c), amounts of deferred cash may be reallocated
among investment alternatives made available for cash deferrals under the Plan.
(c) Elections as to Settlement. Each Participant, while still a director of
the Company, shall file an election with the Administrator specifying the time
or times at which the Participant's Account will be settled, following the
Participant's termination of service as a director of the Company, and whether
distribution will be in a single lump sum or in a number of annual installments
not exceeding ten; provided, however, that, if no valid election has been filed
as to the time of settlement of a Participant's Account or any portion thereof,
such Account or portion thereof shall be distributed in a single lump sum on the
first business day of the year following the year in which the Participant
ceases to serve as a director. If installments are elected, such installments
must be annual installments commencing not later than the first year following
the year in which the Participant ceases to serve as a director (on such annual
installment date as may be specified by the Administrator) and extending over a
period not to exceed ten years.
(i) Matters Covered by Election. Subject to the terms of the Program, the
Administrator shall determine whether all deferrals under the Program
must be subject to a single election as to the time or times of
settlement, or whether settlement elections may relate to deferrals
relating to a specified Program Year. If the Administrator permits
elections to relate to a specified Program Year, such election shall
apply to the amounts originally credited in respect of such Program
Year and to any additional amounts credited as dividend equivalents or
interest in respect of such originally credited amounts and previously
credited additional amounts.
<PAGE>
(ii) Modifying Elections. A Participant may modify a prior election as to
the time at which a Participant's Account (or portion thereof) will be
settled at any time prior to the time the Participant ceases to serve
as a director of the Company, subject to such requirements as may be
specified by the Administrator. Such modification shall be made by
filing a new election with the Administrator. The foregoing
notwithstanding, elections under this Section 11(c) shall not be
permitted, including elections which would have the effect of
advancing the time of settlement of any portion of the Account, if
permitting such an election would result in constructive receipt by
the Participant of compensation in respect of the Participant's
Account prior to the actual settlement of such Account.
(d) Statements. The Administrator will furnish statements to each
Participant reflecting the amounts credited to a Participant's Account,
transactions therein, and other related information no less frequently than once
each calendar year. Statements may be combined with other information, including
information with respect to other compensation plans, being provided to the
Participant.
(e) Fractional Shares. The amount of Share Units credited to an Account
shall include fractional Shares calculated to at least three decimal places.
12. Settlement of Accounts. The Company will settle a Participant's Account
by making one or more distributions to the Participant (or his or her
Beneficiary, following Participant's death) at the time or times, in a lump sum
or installments, as specified in the Participant's election(s) filed in
accordance with Sections 8(c) and 11(c);provided, however, that an Account will
be settled at times earlier than those specified in such election in accordance
with Sections 12(b), 12(c) or 12(d); and provided further, that RSUs as to which
no valid election to defer has been filed will be settled in accordance with
Section 8(a).
(a) Form of Distribution. Distributions in settlement of a Participant's
Account shall be made only in cash, except that Share Units shall be settled in
Shares to the extent provided under Section 2(s). A Participant will have no
right to elect to receive an actual Share in settlement of a Share Unit to be
settled in cash under Section 2(s) or to elect to receive cash in settlement of
a Share Unit to be settled in actual Shares under Section 2(s).
(b) Death or Disability. If a Participant ceases to serve as a director due
to death or Disability or dies prior to distribution of all amounts from his or
her Account, the Company shall make a single lump-sum distribution to the
Participant or his or her Beneficiary. Any such distribution shall be made as
soon as practicable following notification to the Company of the Participant's
death or Disability.
(c) Financial Emergency and Other Payments. Other provisions of the Program
notwithstanding, if, upon the written application of a Participant, the Board
determines that the Participant has a financial emergency of such a substantial
nature and beyond the Participant's control that payment of amounts previously
deferred under the Program is warranted, the Board may direct the payment to the
Participant of all or a portion of the balance of an Account and the time and
manner of such payment.
(d) Distribution Upon a Change in Control. Upon a Change in Control, the
Company shall make a single lump-sum distribution to the Participant in
settlement of his or her Account as promptly as practicable following the Change
in Control.
13. Definitions Relating to Change in Control. For purposes of this
Program, the following definitions shall apply:
(a) "Beneficial Owner," "Beneficially Owns," and "Beneficial Ownership"
shall have the meanings ascribed to such terms for purposes of Section 13(d) of
the Exchange Act and the rules thereunder, except that, for purposes of this
Section 13, "Beneficial Ownership" (and the related terms) shall include Voting
Securities that a Person has the right to acquire pursuant to any agreement, or
upon exercise of conversion rights, warrants, options or otherwise, regardless
of whether any such right is exercisable within 60 days of the date as of which
Beneficial Ownership is to be determined.
<PAGE>
(b) "Change in Control" means and shall be deemed to have occurred if,
after the Effective Date,
(i) any Person, other than the Company or a Related Party, acquires
directly or indirectly the Beneficial Ownership of any Voting Security
of the Company and immediately after such acquisition such Person has,
directly or indirectly, the Beneficial Ownership of Voting Securities
representing 20 percent or more of the total voting power of all the
then-outstanding Voting Securities; or
(ii) those individuals who as of the Effective Date constitute the Board or
who thereafter are elected to the Board and whose election, or
nomination for election, to the Board was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who
either were directors as of the Effective Date or whose election or
nomination for election was previously so approved, cease for any
reason to constitute a majority of the members of the Board; or
(iii) there is consummated a merger, consolidation, recapitalization or
reorganization of the Company, a reverse stock split of outstanding
Voting Securities, or an acquisition of securities or assets by the
Company (a "Transaction"), other than a Transaction which would result
in the holders of Voting Securities having at least 80 percent of the
total voting power represented by the Voting Securities outstanding
immediately prior thereto continuing to hold Voting Securities or
voting securities of the surviving entity having at least 60 percent
of the total voting power represented by the Voting Securities or the
voting securities of such surviving entity outstanding immediately
after such Transaction and in or as a result of which the voting
rights of each Voting Security relative to the voting rights of all
other Voting Securities are not altered; or
(iv) there is implemented or consummated a plan of complete liquidation of
the Company or a sale or disposition by the Company of all or
substantially all of the Company's assets other than any such
transaction which would result in Related Parties owning or acquiring
more than 50 percent of the assets owned by the Company immediately
prior to the transaction.
(c) "Person" shall have the meaning ascribed for purposes of Section 13(d)
of the Exchange Act and the rules thereunder.
<PAGE>
(d) "Related Party" means (i) a majority-owned subsidiary of the Company;
or (ii) a trustee or other fiduciary holding securities under an employee
benefit plan of the Company or any majority-owned subsidiary of the Company; or
(iii) a corporation owned directly or indirectly by the shareholders of the
Company in substantially the same proportion as their ownership of Voting
Securities; or (iv) if, prior to any acquisition of a Voting Security which
would result in any Person Beneficially Owning more than ten percent of any
outstanding class of Voting Security and which would be required to be reported
on a Schedule 13D or an amendment thereto, the Board approved the initial
transaction giving rise to an increase in Beneficial Ownership in excess of ten
percent and any subsequent transaction giving rise to any further increase in
Beneficial Ownership; provided, however, that such Person has not, prior to
obtaining Board approval of any such transaction, publicly announced an
intention to take actions which, if consummated or successful (at a time such
Person has not been deemed a "Related Party"), would constitute a Change in
Control.
(e) "Voting Securities" means any securities of the Company which carry the
right to vote generally in the election of directors.
14. General Provisions.
(a) Limits on Transferability. Restricted Stock prior to the lapse of
restrictions, Options, RSUs, Deferred Shares, deferred cash, and all other
rights under the Program will not be transferable by a Participant except by
will or the laws of descent and distribution, or to a Beneficiary in the event
of a Participant's death, and will not otherwise be subject to alienation,
anticipation, encumbrance, garnishment, attachment, levy, execution or other
legal or equitable process, nor subject to the debts, contracts, liabilities or
engagements, or torts of any Participant or his or her Beneficiary. Any attempt
to alienate, sell, transfer, assign, pledge, garnish, attach or take any other
action subject to legal or equitable process or encumber or dispose of any
interest in the Program shall be void. The foregoing notwithstanding, the
Administrator may permit a Participant to transfer Options and related rights to
one or more trusts, partnerships, or family members during the lifetime of the
Participant solely for estate planning purposes, but only if and to the extent
then consistent with the registration of any offer and sale of Shares related
thereto on Form S-8, Form S-3, or such other registration form of the Securities
and Exchange Commission as may then be permitted to be filed with respect to the
Program. The Company may rely upon the beneficiary designation last filed in
accordance with this Section 14(a).
(b) Adjustments. In the event that any large, special and non-recurring
dividend or other distribution in the form of cash or other property,
recapitalization, forward or reverse split, Share dividend, reorganization,
merger, consolidation, spin-off, combination, repurchase, share exchange,
liquidation, dissolution or other similar corporate transaction or event affects
the Shares such that an adjustment is determined by the Board to be appropriate
in order to prevent dilution or enlargement of a Participant's rights under the
Program, then the Board shall, in such manner as it may deem equitable, adjust
any or all of (i) the number and kind of Shares reserved and available for
delivery under the Program and to be subject to Restricted Stock, Options, RSUs
and Deferred Shares thereafter granted or credited, (ii) the number of Shares
subject to Restricted Stock, Options and RSUs automatically granted under
Sections 7, 8 and 9, (iii) the number and kind of Shares outstanding as
Restricted Stock, (iv) the number and kind of Shares deliverable upon exercise
of outstanding Options, and the exercise price per Share thereof (provided that
no fractional Shares will be delivered upon exercise of any Option), and (v) the
number and kind of Shares then credited as RSUs and Deferred Shares (taking into
account any Share Units credited as dividend equivalents under Section 11(a))
and by reference to which RSUs and Deferred Shares are valued under the Program.
(c) Receipt and Release. Payments (in any form) to any Participant or
Beneficiary in accordance with the provisions of the Program shall, to the
extent thereof, be in full satisfaction of all claims for the compensation
deferred and relating to the Account to which the payments relate against the
Company, the Board, or the Administrator, and the Administrator may require such
Participant or Beneficiary, as a condition to such payments, to execute a
receipt and release to such effect. In the case of any payment under the Program
of less than all amounts then credited to an Account in the form of RSUs or
Deferred Shares, the amounts paid shall be deemed to relate to the Deferred
Shares credited to the Account at the earliest time.
<PAGE>
(d) Compliance. The Company shall have no obligation to settle any Account
of a Participant (in any form) until all legal and contractual obligations of
the Company relating to establishment of the Program and such settlement shall
have been complied with in full. In addition, the Company shall impose such
restrictions on Shares delivered to a Participant hereunder and any other
interest constituting a security as it may deem advisable in order to comply
with the Securities Act of 1933, as amended, the requirements of the Nasdaq
National Market or any other stock exchange or automated quotation system upon
which the Shares are then listed or quoted, any state securities laws applicable
to such a transfer, any provision of the Company's Articles of Incorporation or
By-Laws, or any other law, regulation, or binding contract to which the Company
is a party.
(e) Changes to the Program and Awards. The Board may amend, suspend,
discontinue, or terminate the Program, the authority to grant awards under the
Program, or any outstanding award (and any agreement relating thereto) without
the consent of any other party, including shareholders or Participants;
provided, however, that any amendment shall be subject to shareholder approval
if and to the extent then required under applicable rules of the Nasdaq National
Market or any other stock exchange or automated quotation system upon which the
Shares may then be listed or quoted; and provided further, that, without the
consent of an affected Participant, no such action may materially impair the
rights of such Participant under any award theretofore granted. The foregoing
notwithstanding, the Board, in its sole discretion, may terminate the Program
(in whole or in part) and may distribute to any Participant (in whole or in
part, and whether or not in connection with a termination of the Program) the
amounts credited to the Participant's Account.
(f) Unfunded Status of Program; Creation of Trusts. The Program is intended
to constitute an "unfunded" Program for deferred compensation and Participants
shall rely solely on the unsecured promise of the Company for payment hereunder
(except insofar as Shares are issued in connection with Restricted Stock). With
respect to any payment not yet made to a Participant under the Program, nothing
contained in the Program shall give a Participant any rights that are greater
than those of a general unsecured creditor of the Company; provided, however,
that the Board may authorize the creation of trusts or make other arrangements
to meet the Company's obligations under the Program, which trusts or other
arrangements shall be consistent with the "unfunded" status of the Program
unless the Board otherwise determines with the consent of each affected
Participant. The establishment and maintenance of, or allocations and credits
to, the Account of any Participant shall not vest in any Participant any right,
title or interest in and to any Program assets or benefits except at the time or
times and upon the terms and conditions and to the extent expressly set forth in
the Program and in accordance with the terms of any trust.
(g) Other Participant Rights. No Participant shall have any of the rights
or privileges of a stockholder of the Company under the Program, including as a
result of the grant of an Option or crediting of RSUs. Deferred Shares or other
amounts to an Account, or the creation of any Trust and deposit of Shares
therein, except at such time as such Option may have been duly exercised or
Shares may be actually delivered in settlement of an Account (in whole or in
part); provided, however, that a Participant granted Restricted Stock shall have
rights of a stockholder except to the extent that those rights are limited by
the terms of the Program and the agreement relating to the Restricted Stock. No
provision of the Program, document relating to the Program, or transaction
hereunder shall confer upon any Participant any right to continue to serve as a
director of the Company or in any other capacity with the Company or a
subsidiary or to be nominated for reelection as a director, or interfere in any
way with the right of the Company to increase or decrease the amount of any
compensation payable to such Participant. Subject to the limitations set forth
in Section 14(a), the Program shall inure to the benefit of, and be binding
upon, the parties hereto and their successors and assigns.
<PAGE>
(h) Continued Service as an Employee. If a Participant ceases to serve as a
director and, immediately thereafter, is employed by the Company or any
subsidiary, then such Participant will not be deemed to have ceased to serve as
a director at that time, and his or her continued employment by the Company or
any subsidiary will be deemed to be continued service as a director; provided,
however, that, for purposes of Section 5, such former director will not be
deemed to be a non-employee director eligible for further grants of awards.
(i) Governing Law. The validity, construction, and effect of the Program,
any rules and regulations under the Program, and any agreement under
the Program shall be determined in accordance with the Pennsylvania
Business Corporation Law, to the extent applicable, other laws
(including those governing contracts) of the Commonwealth of
Pennsylvania, without giving effect to principles of conflicts of
laws, and applicable federal law.
(j) Limitation. A Participant and his or her Beneficiary shall assume all
risk in connection with any decrease in value of Restricted Stock, Options, RSUs
or Deferred Shares, and neither the Company, the Board nor the Administrator
shall be liable or responsible therefor.
(k) Severability. In the event that any provision of the Program shall be
declared illegal or invalid for any reason, said illegality or invalidity shall
not affect the remaining provisions of the Program but shall be fully severable,
and the Program shall be construed and enforced as if said illegal or invalid
provision had never been inserted herein.
(l) Nonexclusivity of the Program. The adoption of the Program by the Board
shall not be construed as creating any limitation on the power of the Board to
adopt such other compensatory arrangements for directors as it may deem
desirable.
(m) Effective Date and Program Termination. The Program, as amended and
restated herein, shall be effective as of the Effective Date. Unless earlier
terminated by action of the Board, the Program will remain in effect until such
time as no Shares remain available for delivery under the Program and the
Company has no further rights or obligations under the Program with respect to
outstanding Options or other awards under the Program.
Approved by the Board of Directors on June 27, 2002
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>7
<FILENAME>exh10216.txt
<DESCRIPTION>FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
<TEXT>
EXHIBIT 10.2.16
CEO Agreement
- --------------------------------------------------------------------------------
First Amendment to the
Charming Shoppes, Inc. Employment Agreement for Dorrit J. Bern
WHEREAS, you entered into an Employment Agreement dated as of October 12, 1999
(the Agreement) with Charming Shoppes, Inc. (the "Company"); and
WHEREAS, pursuant to Section 13.2 of the Agreement, no provision of the
Agreement may be modified unless such modification is signed by you and the
Company;
WHEREAS, the Company wishes to amend the Agreement to ensure proper treatment of
the split-dollar life insurance benefit and so that any excise taxes incurred
under the Agreement will be grossed-up rather than capped as currently drafted.
NOW THEREFORE, IT IS RESOLVED, that Section 5.6(b) of the Agreement is deleted
replaced with the following language:
"(b) With regard to the Collateral Assignment Split-Dollar Insurance Agreement
between the Company and Susan Maxwell, or her successors, Trustees of the Bern
Family GST Trust dated January 21, 2000 (as the same may be amended from time to
time) (the "Split-Dollar Agreement") under which the Executive and her spouse
are insured, the Corporation acknowledges the provisions of Article VII(b) of
the Split-Dollar Agreement shall apply if the Executive is entitled to
CIC-Severance Benefits pursuant to this Agreement.
IT IS FURTHER RESOLVED, that the current Section 8.4 of the Agreement be deleted
and replaced with the following language:
"8.4 Excise Tax Equalization Payment. In the event a Change in Control
occurs and the Executive becomes entitled to any benefits or payments under
this Agreement, or any other plan, arrangement, or agreement with the
Company (the "Total Payments"), and such benefits or payments will be
subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code
(or any similar tax that may hereafter be imposed), the Company shall pay
to the Executive in cash an additional amount (the "Gross-Up Payment") such
that the net amount to be retained by the Executive after deduction of any
Excise Tax upon the Total Payments and any Federal, state and local income
tax and
<PAGE>
Excise Tax upon the Gross-Up Payment provided for by this Section 5.1
(including FICA), shall be equal to the Total Payments. Such payment shall
be made by the Company to the Executive as soon as practical following the
effective date of termination, but in no event beyond thirty (30) days from
such date, or in the event Excise Tax is due without regard to a
termination, within thirty (30) days of the due date for payment of such
Excise Tax.
(a) Tax Computation. In determining the potential impact of the Excise
Tax, the Company may rely on any advice it deems appropriate,
including, but not limited to, the counsel of its independent
auditors. For purposes of determining whether any of the Total
Payments will be subject to the Excise Tax and the amounts of such
Excise Tax:
(i) Any other payments or benefits received or to be received by
the Executive in connection with a Change in Control of the Company or
the Executive's termination of employment (whether pursuant to the
terms of this Agreement or any other plan, arrangement, or agreement
with the Company, or with any Person whose actions result in a Change
in Control of the Company or any Person affiliated with the Company or
such Persons) shall be treated as "parachute payments" within the
meaning of Section 280G(b)(2) of the Code, and all "excess parachute
payments" within the meaning of Section 280G(b)(1) shall be treated as
subject to the Excise Tax, unless in the opinion of the Company's
advisors, including, but not limited to, its independent auditors, any
portion of the Total Payments do not constitute parachute payments by
reason of Section 280G(b)(4)(A)-(B) of the Code or are otherwise not
subject to the Excise Tax;
(ii) The amount of the Total Payments which shall be treated as
subject to the Excise Tax shall be equal to the amount of excess
parachute payments within the meaning of Section 280G(b)(1) of the
Code (after applying clause (i) above); and
(iii) The value of any noncash benefits or any deferred or
accumulated payment or benefit shall be determined by the Company's
independent auditors in accordance with the principles of Sections
280G(d)(3) and (4) of the Code.
For purposes of determining the amount of the Gross-Up Payment, the
Executive shall be deemed to pay Federal income taxes at the highest
marginal rate of Federal income taxation in the calendar year in which
the Gross-Up Payment is to be made, and state and local income taxes
at the highest marginal rate of taxation in the state and locality of
the Executive's residence on the Effective Date of
<PAGE>
Termination, net of the maximum reduction in Federal income taxes
which could be obtained from deduction of such state and local taxes.
(b) Subsequent Recalculation. In the event the Internal Revenue
Service proposes to increase the amount of Excise Tax payable by the
Executive in excess of the computation of the Company under Section
8.4 herein so that the Executive did not receive the greatest net
benefit, the Company shall reimburse the Executive for the full amount
necessary to make the Executive whole, plus a market rate of interest,
as determined by the Committee; provided, however, that the Executive
follow the procedures set forth in this Section 8.4.
The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than ten (10)
business days after the later of either: (i) the date the Executive
has actual knowledge of such claim, or (ii) ten (10) days after the
Internal Revenue Service issues to the Executive either a written
report proposing imposition of the Excise Tax or a statutory notice of
deficiency with respect thereto, and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to
be paid. The Executive shall not pay such claim prior to the
expiration of the thirty (30) day period following the date on which
it gives such notice to the Company (or such shorter period ending on
the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the
Executive shall:
(i) Give the Company any information reasonably requested by the
Company relating to such claim;
(ii) Take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company;
(iii) Cooperate with the Company in good faith in order effectively to
contest such claim; and
(iv) Permit the Company to participate in any proceedings relating to
such claims.
Provided, however, that the Company shall directly bear and pay all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
<PAGE>
the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax, including interest and penalties with respect thereto,
imposed and payment of costs and expenses. Without limitation of the
foregoing provisions of this Section 8.4, the Company shall control
all proceedings taken in connection with such contest and, at its sole
option, may pursue or forego any and all administrative appeals,
proceedings, hearings, and conferences with the taxing authority in
respect of such claim.
If the Company does not notify the Executive in writing prior to the
expiration of such thirty (30) day period that it desires to contest
such claim, the Company shall reimburse the Executive for the full
amount necessary to make the Executive whole, plus a market rate of
interest, as determined by the Committee, all as contemplated by this
Section 8.4.
If, after the receipt by the Executive of an amount advanced by the
Company pursuant to this Section 8.4, the Executive receives a refund
with respect to such claim due to an overpayment of Excise Tax,
including interest and penalties with respect thereto, the Executive
shall (subject to the Company's complying with the requirements of
this Section 8.4) promptly pay to the Company the amount of such
refund (together with any interest paid or credited thereon after
taxes applicable thereto)."
Such Amendment to the Agreement shall be effective as of February 6, 2003.
Executive:
______________________ ___________________
Dorrit J. Bern Date
Charming Shoppes, Inc.:
By:____________________________ ___________________
Name: Anthony A. DeSabato Date
Title: Executive Vice President
Attest:
By:____________________________
Colin D. Stern, Secretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>8
<FILENAME>exh10217.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT
<TEXT>
EXHIBIT 10.2.17
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") dated as of March 12, 2003 between
Charming Shoppes, Inc., a Pennsylvania corporation (the "Company") and Erna Zint
("Executive").
1. Employment. The Company hereby employs Executive and Executive hereby
accepts such employment and agrees to perform her duties and
responsibilities hereunder, in accordance with the terms and conditions
hereinafter set forth.
1.1 Employment Term. The term of this Agreement (the "Employment Term") shall
commence April 1, 2003 and shall continue until and end on March 31, 2004,
unless terminated prior thereto in accordance with Section 8 hereof.
1.2 Duties and Responsibilities.
(a) During the Employment Term, Executive shall serve as Executive Vice
President - Sourcing of the Company and shall perform all duties and accept
all responsibilities incidental to such position or as may be assigned to
her by the Company's Chief Executive Officer or its Board of Directors, and
she shall cooperate fully with the Board of Directors and other executive
officers of the Company. During the Employment Term, Executive shall also
be available to perform the aforementioned duties and responsibilities for
subsidiaries or divisions of the Company as assigned by the Chief Executive
Officer. Executive will be assigned to perform these duties outside the
United States and will be assigned initially to perform these duties in
Hong Kong.
(b) Executive represents to the Company that she is not subject or a party
to any employment agreement, non-competition covenant, non-disclosure
agreement or other agreement, covenant, understanding or restriction which
would prohibit Executive from executing this Agreement and performing her
duties and responsibilities hereunder, or which would in any manner,
directly or indirectly, limit or affect the duties and responsibilities
which may now or in the future be assigned to Executive by the Company or
the scope of assistance to which she may now or in the future provide to
subsidiaries or divisions of the Company.
1.3 Extent of Service. During the Employment Term, Executive agrees to use her
best efforts to carry out her duties and responsibilities under Section 1.2
hereof and to devote her full time, attention and energy thereto. Except as
provided in Section 7 hereof, the foregoing shall not be construed as
preventing Executive
<PAGE>
from making investments in other businesses or enterprises in compliance
with Business Conduct Policies that may be issued by the Company from time
to time (a copy of the Company's current Business Conduct Policy is
attached hereto as Exhibit "A") provided that Executive agrees not to
become engaged in any other business activity which may interfere with her
ability to discharge her duties and responsibilities to the Company.
Executive further agrees not to work either on a part time or independent
contracting basis for any other business or enterprise during the
Employment Term without the prior written consent of the Chief Executive
Officer of the Company.
1.4 Base Compensation. For all the services rendered by Executive hereunder,
the Company shall pay Executive an annual salary at the rate of Four
Hundred Thousand U.S. Dollars ($400,000.00) for each full year of the
Employment Term, plus such additional amounts, if any, as may be approved
by the Company's Board of Directors, less withholding required by law or
agreed to by Executive, payable in installments at such times as the
Company customarily pays its other senior officers (but in any event no
less often than monthly). The Company agrees that the Executive's salary
will be reviewed at least annually by the Company's Board of Directors to
determine if an increase is appropriate, which increase shall be in the
sole discretion of the Company's Board of Directors.
1.5 Performance Compensation. In addition to annual base salary, beginning with
the fiscal year commencing February 3, 2003, Executive shall be eligible to
receive additional compensation ("Performance Compensation") within ninety
(90) days of the end of each of the Company's fiscal years during the term
of this Agreement, including fiscal year ending January 31, 2004, if the
Company achieves certain performance criteria established under the
Company's Executive Incentive Plan ("EIP"). The formula and standards for
determining Executive's Performance Compensation shall be determined by the
Compensation Committee of the Board of Directors but may not exceed 100% of
Executive's annual base salary for the applicable year.
1.6 Executive Benefits. During the Executive's employment by the Company:
(a) Vacation and Holidays: Executive shall be eligible for at least four
(4) weeks paid vacation per year (20 days) and shall be eligible for time
off with pay for all public holidays in Hong Kong or in such other location
into which the principal place of business of the Company's sourcing
operation may be relocated;
(b) Housing Allowance: The Company will pay Executive a housing allowance
of Fifteen Thousand Three Hundred Thirty Three and 33/100 U.S. Dollars
($15,333.33) per month during Executive's employment by the Company;
<PAGE>
(c) Car: The Company will provide for Executive's use an automobile, the
make and year to be agreed upon by the Company and the Executive, and will
defray all operating costs regarding same including annual license fees,
business parking charges, gasoline, tunnel fees, maintenance, repairs and
insurance;
(d) Club Fees: The Company will pay Executive's membership fees to the
Royal Hong Kong Jockey Club and The Ladies Recreation Club or any other
club which Executive chooses to substitute therefore with prior approval by
the Company;
(e) Medical, Dental and Disability Insurance: Executive shall be eligible
to participate in the Company's medical plans and disability insurance
programs available to other Company associates in the Company's sourcing
operation. If Executive opts out of medical plan coverage, the Company will
contribute to the cost Executive incurs for individual health care coverage
to the same extent the Company would have contributed to the cost of group
insurance
(f) Life Insurance: Executive shall be eligible to participate in the
Company's life insurance program;
(g) Retirement Plans: Executive shall have the right to participate in any
retirement plans (qualified and non-qualified), 401(k) plan, profit sharing
plan, or any other pension plan adopted by the Company pursuant to the
terms of any such plan;
(h) Travel Insurance: Executive shall be covered by the Company's travel
insurance policy at the level of One Million U.S. Dollars ($1,000,000.00);
(i) Home Leave: The Company will provide Executive with one first-class
round-trip airline ticket per year to Europe or the United States in
connection with Annual Leave, which, when possible, shall coincide with a
business trip;
(j) Business Expenses: The Company will reimburse Executive for all
reasonable business expenses incurred by Executive in the performance of
her assigned duties and responsibilities;
(k) Tax Preparation: The Company will provide Executive with outside tax
counsel at the Company's expense to assist in preparing Executive's tax
returns.
(l) Relocation Expenses: The Company will reimburse Executive for
repatriation expenses of Executive, including a single air ticket and
expenses for insuring and shipping household goods to her home country,
following any termination of Executive's employment hereunder for whatever
reason except any termination by the Company for cause.
<PAGE>
2. Termination of Employment and Severance. The Company may terminate this
Agreement and Executive's employment without liability to Executive at any
time during the term hereof upon immediate written notice to Executive for
cause, which for the purposes of this Agreement shall mean: (i) a material
breach by Executive of the provisions of this Agreement; (ii) the
commission by Executive of fraud against the Company or the conviction of
Executive for aiding or abetting, or the commission of, a felony or of a
fraud or a crime involving moral turpitude or a business crime; or (iii)
the possession or use of illegal drugs or prohibited substances, the
excessive drinking of alcoholic beverages, or the appearance (reasonably
determined) during hours of employment of being under the influence of such
drugs, substances or alcohol, which materially impairs Executive's ability
to perform her duties hereunder.
The Company may terminate this Agreement and Executive's employment at any
time during the term hereof upon prior written notice to Executive for any
reason that does not constitute cause as defined above provided that the
Company pays to Executive the lesser of the amount to be paid during the
remainder of the term hereof or one year's base salary (severance) at the
rate in effect on the date of any such termination, such sum to be paid in
equal weekly, monthly or quarterly installments or in one installment
within thirty (30) days of any such termination, at the Company's
discretion, and continues those benefits to be paid to Executive by the
Company under Section 1.6, paragraphs (a) through (l) above for the amount
of time covered by said severance.
3. In the event of the death of Executive during the term hereof, this
Agreement and the employment of Executive hereunder shall terminate and
come to an end on the date of the death of the Executive. The estate of
Executive shall be entitled to receive, and the Company agrees to pay, the
base salary of Executive computed up to the end of the month in which death
occurred and an amount equal to all other expenses incurred by the
Executive for which the Company is responsible pursuant to Section 1.6.
4. In the event that Executive shall, because of illness or incapacity,
physical or mental, be unable to perform the duties and services to be
performed by her hereunder for a consecutive period of more than four (4)
months, the Company shall not be obligated to pay the compensation of
Executive during the period of illness or incapacity in excess of four (4)
months and may terminate this Agreement without liability after the
expiration of such four (4) month period.
5. Developments. All developments, including inventions, whether patentable or
otherwise, trade secrets, discoveries, improvements, ideas and writings
which either directly or indirectly relate to or may be useful in the
business of the Company or any of its affiliates (the "Developments") which
Executive, either by herself or in conjunction with any other person or
persons, has conceived, made, developed, acquired or acquired knowledge of
during her employment by the Company or which Executive, either by herself
or in conjunction with any other person or persons, shall conceive, make,
develop, acquire or acquire knowledge
<PAGE>
of during the Employment Term or at any time thereafter during which she is
employed by the Company, shall become and remain the sole and exclusive
property of the Company.
Executive hereby assigns, transfers and conveys and agrees to assign,
transfer and convey, all of her right, title and interest in and to any and
all such Developments and to disclose fully as soon as practicable, in
writing, all such Developments to the Chief Executive Officer of the
Company. At any time and from time to time, upon the request and at the
expense of the Company, Executive will execute and deliver any and all
instruments, documents and papers, give evidence and do any and all other
acts which, in the opinion of counsel for the Company, are or may be
necessary or desirable to document such transfer or to enable the Company
to file and prosecute applications for and to acquire, maintain and enforce
any and all patents, trademark registrations or copyrights under United
States or foreign law with respect to any such Developments or to obtain
any extension, validation, re-issue, continuance or renewal of any such
patent, trademark or copyright. The Company will be responsible for the
preparation of any such instruments, documents and papers and for the
prosecution of any such proceedings and will reimburse Executive for all
reasonable expenses incurred by her in compliance with the provisions of
this Section.
6. Confidential Information. Executive recognizes and acknowledges that by
reason of her employment and service to the Company, she has had and will
continue to have access to confidential information of the Company and its
affiliates, including, without limitation, information and knowledge
pertaining to products and services offered, inventions, innovations,
designs, ideas, plans, trade secrets, proprietary information,
manufacturing, packaging, advertising, distribution and sales methods and
systems, sales and profit figures, customer and client lists, and
relationships between the Company and its affiliates and dealers,
distributors, wholesalers, customers, clients, suppliers and others who
have business dealings with the Company and its affiliates ("Confidential
Information"). Executive acknowledges that such Confidential Information is
a valuable and unique asset and covenants that she will not, either during
or after the Employment Term of this Agreement, disclose any such
Confidential Information to any person for any reason whatsoever (except as
her duties as Executive Vice President - Sourcing may require ) without the
prior written authorization of the Company's Chief Executive Officer,
unless such information is in the public domain through no fault of
Executive or except as may be required by law.
7. Non-Competition.
(a) During the Employment Term, Executive will not, unless acting pursuant
hereto or with the prior written consent of the Chief Executive
Officer of
<PAGE>
the Company, directly or indirectly, own, manage, operate, join,
control, finance or participate in the ownership, management,
operation, control or financing of, or be connected as an officer,
director, employee, partner, principal, agent, representative,
consultant or otherwise with or use or permit her name to be used in
connection with, any business or enterprise in competition with the
Company;
(b) The foregoing restriction shall not be construed to prohibit the
ownership by Executive of not more than five (5%) percent of any class
of securities of any corporation which is engaged in any of the
foregoing businesses having a class of securities registered pursuant
to the Securities Exchange Act of 1934, provided that such ownership
represents a passive investment and that neither Executive nor any
group of persons including Executive in any way, either directly or
indirectly, manages or exercises control of any such corporation,
guarantees any of its financial obligations, otherwise takes any part
in its business, other than exercising her rights as a shareholder, or
seeks to do any of the foregoing.
8. No Solicitation. Executive agrees that, for a period of one (1) year after
the employment of Executive by the Company or any of its affiliates or
subsidiaries has ended (whether or not such employment is pursuant to this
Agreement), she will not, either directly or indirectly, solicit the
employment of any person who was employed by the Company or any of its
affiliates or subsidiaries on a full or part-time basis at the time of the
Executive's termination unless such person was involuntarily discharged by
the Company or such affiliate or subsidiary, without the prior written
consent of the Company's Executive Vice President - Human Resources.
9. Termination. This Agreement shall terminate on March 31, 2004 unless
terminated earlier under Sections 2, 3 or 4 above.
10. Governing Law. This Agreement shall be governed and interpreted under the
laws of the Commonwealth of Pennsylvania without giving effect to any
conflicts of law provisions.
11. Notices. All notices and other communications required or permitted
hereunder or necessary or convenient in connection herewith shall be in
writing and shall be deemed to have been given when hand delivered or
within seven (7) days of mailing by registered or certified mail, as
follows (provided that notice of change of address shall be deemed given
only when received): If to the Company, to :
Dorrit Bern
President/Chief Executive Officer
Charming Shoppes, Inc.
450 Winks Lane
Bensalem, PA 19020
<PAGE>
With a required copy to: Anthony A. DeSabato, Esquire
Executive Vice President - Human Resources
Charming Shoppes, Inc.
450 Winks Lane
Bensalem, PA 19020
If to Executive, to Erna Zint
Apt. PH23B, House 23, Forest Hill
31 Lo Fai Road
Tai Po, N.T.
Hong Kong
With a required copy to: T.C. Parkes
c/o Herbert Smith
Exchange House
Primrose Street
London EC2A 2Hs
or to such other names or addresses as the Company or Executive, as the case may
be, shall designate by notice to each other person entitled to receive notices
in the manner specified in this Section.
12. Contents of Agreement; Amendment and Assignment. Executive Severance
Agreement
(a) This Agreement supersedes all prior agreements between the parties
except for the Charming Shoppes, Inc. Executive Severance Agreement
between the parties dated July 15, 1999 attached hereto as Exhibit
"B", which is incorporated herein and sets forth the entire
understanding among the parties hereto with respect to the subject
matter hereof and cannot be changed, modified, extended or terminated
except upon written amendment approved by the Board of Directors of
the Company and executed on its behalf by a duly authorized officer.
Without limitation, nothing in this Agreement shall be construed as
giving Executive any right to be retained in the employ of the Company
beyond the expiration of the Employment Term until such time (if at
all) that Executive enters into a new written Employment Agreement
with the Company, and Executive specifically acknowledges that she
shall be an employee-at-will of the Company thereafter, and thus
subject to discharge by the Company with or without cause and without
compensation of any nature;
(b) Executive acknowledges that from time to time, the Company may
establish, maintain and distribute employee manuals or handbooks or
personnel policy manuals, and officers or other representatives of the
<PAGE>
Company may make written or oral statements relating to personnel
policies and procedures. Such manuals, handbooks and statements are
intended only for general guidance. No policies, procedures or
statements of any nature by or on behalf of the Company (whether
written or oral, and whether or not contained in any employee manual
or handbook or personnel policy manual), and no acts or practices of
any nature, shall be construed to modify this Agreement or to create
express or implied obligations of any nature to Executive.
(c) All of the terms and provisions of this Agreement shall be binding
upon and inure to the benefit of and be enforceable by the respective
heirs, executors, administrators, legal representatives, successors
and assigns of the parties hereto, except that the duties and
responsibilities of Executive hereunder are of a personal nature and
shall not be assignable or delegatable in whole or in part by
Executive.
13. Severability. If any provision of this Agreement or application thereof to
anyone or under any circumstance is adjudicated to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforcability shall
not affect any other provision or application of this Agreement which can
be given effect without the invalid or unenforceable provision or
application and shall not invalidate or render unenforceable such provision
or application in any other jurisdiction.
14. Miscellaneous. All section headings are for convenience only. This
Agreement may be executed in several counterparts, each of which is an
original. It shall not be necessary in marking proof of this Agreement or
any counterpart to produce or account for any of the other counterparts.
<PAGE>
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement as of the date first above written.
FOR THE COMPANY: FOR THE EXECUTIVE:
__________________________________________ __________________________
Anthony A. DeSabato Erna Zint
Executive Vice President - Human Resources
Date: _______________________ Date: ___________________
WITNESS: WITNESS:
_____________________________ __________________________
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>9
<FILENAME>exh10230.txt
<DESCRIPTION>FORMS OF FIRST AMEND. TO EXEC. SEVERANCE AGREE.
<TEXT>
EXHIBIT 10.2.30(a)
Executive Severance Agreement
- --------------------------------------------------------------------------------
First Amendment to the
Executive Severance Agreement for [NAME]
WHEREAS, you entered into the Executive Severance Agreement as of July 15, 1999
(the Agreement) with Charming Shoppes, Inc. (the "Company"); and
WHEREAS, pursuant to Section 10.4 of the Agreement, no provision of the
Agreement may be modified unless such modification is signed by you and a member
of the Compensation Committee of the Board of Directors (as such terms are
defined in the Agreement); and
WHEREAS, the Company wishes to amend the Agreement so that any excise taxes
incurred under the Agreement will be grossed-up rather than capped as currently
drafted.
NOW THEREFORE, intending to be legally bound hereby, and for other good and
valuable consideration, the Company and the Executive agree as follows:
1. Article 5 of the Agreement is hereby amended and restated in its
entirety as follows:
"Article 5 Excise Tax Treatment
5.1 Excise Tax Equalization Payment. In the event a Change in Control
occurs and the Executive becomes entitled to any benefits or payments under
this Agreement, or any other plan, arrangement, or agreement with the
Company (the "Total Payments"), and such benefits or payments will be
subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code
(or any similar tax that may hereafter be imposed), the Company shall pay
to the Executive in cash an additional amount (the "Gross-Up Payment") such
that the net amount to be retained by the Executive after deduction of any
Excise Tax upon the Total Payments and any Federal, state and local income
tax and Excise Tax upon the Gross-Up Payment provided for by this Section
5.1 (including FICA), shall be equal to the Total Payments. Such payment
shall be made by the Company to the Executive as soon as practical
following the effective date of termination, but in no event beyond thirty
(30) days from such date, or in the event Excise Tax is due without regard
to a termination, within thirty (30) days of the due date for payment of
such Excise Tax.
5.2 Tax Computation. In determining the potential impact of the Excise Tax,
the Company may rely on any advice it deems appropriate, including, but not
limited to, the counsel of its
<PAGE>
independent auditors. For purposes of determining whether any of the Total
Payments will be subject to the Excise Tax and the amounts of such Excise
Tax:
(a) Any other payments or benefits received or to be received by the
Executive in connection with a Change in Control of the Company or the
Executive's termination of employment (whether pursuant to the terms of
this Agreement or any other plan, arrangement, or agreement with the
Company, or with any Person whose actions result in a Change in Control of
the Company or any Person affiliated with the Company or such Persons)
shall be treated as "parachute payments" within the meaning of Section
280G(b)(2) of the Code, and all "excess parachute payments" within the
meaning of Section 280G(b)(1) shall be treated as subject to the Excise
Tax, unless in the opinion of the Company's advisors, including, but not
limited to, its independent auditors, any portion of the Total Payments do
not constitute parachute payments by reason of Section 280G(b)(4)(A)-(B) of
the Code or are otherwise not subject to the Excise Tax;
(b) The amount of the Total Payments which shall be treated as subject
to the Excise Tax shall be equal to the amount of excess parachute payments
within the meaning of Section 280G(b)(1) of the Code (after applying clause
(a) above); and
(c) The value of any noncash benefits or any deferred or accumulated
payment or benefit shall be determined by the Company's independent
auditors in accordance with the principles of Sections 280G(d)(3) and (4)
of the Code.
For purposes of determining the amount of the Gross-Up Payment, the
Executive shall be deemed to pay Federal income taxes at the highest
marginal rate of Federal income taxation in the calendar year in which the
Gross-Up Payment is to be made, and state and local income taxes at the
highest marginal rate of taxation in the state and locality of the
Executive's residence on the Effective Date of Termination, net of the
maximum reduction in Federal income taxes which could be obtained from
deduction of such state and local taxes.
5.3 Subsequent Recalculation. In the event the Internal Revenue Service
proposes to increase the amount of Excise Tax payable by the Executive in
excess of the computation of the Company under Section 5.2 herein so that
the Executive did not receive the greatest net benefit, the Company shall
reimburse the Executive for the full amount necessary to make the Executive
whole, plus a market rate of interest, as determined by the Committee;
provided, however, that the Executive follow the procedures set forth in
this Section 5.3.
The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the
<PAGE>
payment by the Company of the Gross-Up Payment. Such notification shall be
given as soon as practicable but no later than ten (10) business days after
the later of either: (i) the date the Executive has actual knowledge of
such claim, or (ii) ten (10) days after the Internal Revenue Service issues
to the Executive either a written report proposing imposition of the Excise
Tax or a statutory notice of deficiency with respect thereto, and shall
apprise the Company of the nature of such claim and the date on which such
claim is requested to be paid. The Executive shall not pay such claim prior
to the expiration of the thirty (30) day period following the date on which
it gives such notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(a) Give the Company any information reasonably requested by the Company
relating to such claim;
(b) Take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such
claim by an attorney reasonably selected by the Company;
(c) Cooperate with the Company in good faith in order effectively to
contest such claim; and
(d) Permit the Company to participate in any proceedings relating to such
claims.
Provided, however, that the Company shall directly bear and pay all costs
and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax,
including interest and penalties with respect thereto, imposed and payment
of costs and expenses. Witho