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<SEC-DOCUMENT>0000019353-04-000070.txt : 20040413
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ACCESSION NUMBER: 0000019353-04-000070
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 9
CONFORMED PERIOD OF REPORT: 20040131
FILED AS OF DATE: 20040413
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: 04730773
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
</SEC-HEADER>
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<TYPE>10-K
<SEQUENCE>1
<FILENAME>form10k.txt
<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 January 31, 2004
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) IdentificationNo.)
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]
================================================================================
<PAGE>
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 of the
registrant held by non-affiliates as of August 2, 2003 (the last day of the
registrant's most recently completed second fiscal quarter), based on the
closing price on August 1, 2003, was approximately $576,208,000.
As of April 1, 2004, 114,495,415 shares of the registrant's 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.
2004 FORM 10-K ANNUAL REPORT
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I Page
<S> <C>
Item 1 Business
General.......................................................... 1
Stores........................................................... 2
Merchandising and Buying......................................... 3
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...................................... 7
Executive Offices................................................ 8
Available Information............................................ 8
Item 2 Properties....................................................... 8
Item 3 Legal Proceedings................................................ 9
Item 4 Submission of Matters to a Vote of Security Holders.............. 9
Additional Part I Information - Our Executive Officers..................... 10
PART II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters.......................................... 11
Item 6 Selected Financial Data.......................................... 12
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Forward-Looking Statements....................................... 14
Overview......................................................... 16
Critical Accounting Policies..................................... 17
Results of Operations............................................ 23
Financial Condition.............................................. 32
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.................................... 81
Item 9A Controls and Procedures.......................................... 81
PART III
Item 10 Directors and Executive Officers of the Registrant............... 82
Item 11 Executive Compensation........................................... 82
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters............................. 82
Item 13 Certain Relationships and Related Transactions................... 83
Item 14 Principal Accountant Fees and Services........................... 83
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 84
SIGNATURES................................................................. 92
</TABLE>
<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(R), FASHION
BUG(R), and CATHERINES Plus Sizes(R). During the year ended January 31, 2004
("Fiscal 2004"), the sale of plus-size apparel represented approximately 77% of
our total net sales. 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 January 31, 2004, we
operated 2,227 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 WOMANTM chain of 136 stores, which specialized in plus-size women's
apparel. In January 2000, we acquired the CATHERINES(R) chain of 436 stores,
which also specialized in plus-size women's apparel. We have since converted the
MODERN WOMAN chain into CATHERINES stores. In August 2001, we acquired the Lane
Bryant chain of 651 stores. 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(R) and CACIQUE(R) (a line
of intimate apparel), LANE BRYANT offers fashionable and sophisticated
apparel in plus-sizes 14 - 28, including wear-to-work and casual
sportswear, as well as accessories for the plus-size customer. LANE BRYANT
has a loyal customer base, generally ranging in age from 25 to 45 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 710 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
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 1,051 FASHION BUG stores are located in 45 states, primarily in
strip shopping centers, and average approximately 9,000 square feet.
FASHION BUG currently operates a marketing website offering fashion
advisories, promotional information, and a store locator. We plan to
introduce e-commerce operations on this website during the fiscal year
ending January 29, 2005 ("Fiscal 2005").
CATHERINES PLUS SIZES. CATHERINES specializes in plus-sizes and is
particularly known for extended sizes (over size 28) and petite plus-sizes.
CATHERINES offers classic apparel and accessories for wear-to-work and
casual lifestyles. CATHERINES 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 466 CATHERINES stores are located in
44 states, primarily in strip shopping centers in the Southeast,
Mid-Atlantic, and Eastern Central regions of the United States, and average
approximately 4,100 square feet. In March 2002, we began e-commerce
operations on our CATHERINES website.
1
<PAGE>
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 certain efficiencies, in order to improve
our profitability. During Fiscal 2004, we realized cost reductions of more than
$30 million as a result of this plan. We expect this cost reduction plan to
improve annualized pre-tax earnings by a total of approximately $45 million.
Execution of the cost reduction plan resulted in a pre-tax charge of $11.5
million in Fiscal 2004. Components of the charge included a $4.2 million
non-cash charge, primarily for accelerated depreciation of the net book value of
the assets at our Memphis, Tennessee distribution center, and $7.3 million of
cash items, primarily related to lease termination costs and severance. The
costs related to the plan did not have a material after-tax cash impact in
Fiscal 2004. Additional details of the plan are included in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations; Results of Operations; Comparison of Fiscal 2004 to Fiscal 2003;
Expenses Related to Cost Reduction Plan" and "Item 8. Financial Statements and
Supplementary Data; Notes to Consolidated Financial Statements; Note 14.
Expenses Related to Cost Reduction Plan" below.
Stores
Our 2,227 stores (as of January 31, 2004) are primarily located in suburban
areas and small towns. Approximately 70% 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 CATHERINES 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. Approximately 20% of our LANE BRYANT stores are currently
located in strip shopping centers.
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 expand both LANE BRYANT and CATHERINES 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.
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 that are 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 approximately 55 stores during
Fiscal 2005. The breakdown by brand is approximately: 35 LANE BRYANT stores, 15
CATHERINES stores, and 5 FASHION BUG stores. Additionally, we currently plan to
relocate approximately 55 stores during Fiscal 2005.
2
<PAGE>
Our store openings and closings and number of locations over the past five
fiscal years are set forth in the following table:
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------
Jan. 31, Feb. 1, Feb. 2, Feb. 3, Jan. 29,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Store Activity:
Number of stores open at beginning of period 2,248 2,446 1,755 1,740 1,135
Opened during period ....................... 50 57 125 106 75
Acquired during period ..................... 0 0 651 0 572
Closed during period ....................... (71) (255) (85) (91) (42)
------ ------ ------ ------ ------
(2)
Number of stores open at end of period ..... 2,227 2,248 2,446 1,755 1,740
====== ====== ====== ====== ======
Number of Stores by Brand:
FASHION BUG and FASHION BUG PLUS ........... 1,051 1,083 1,252 1,230 1,185
LANE BRYANT ................................ 710 689 647 0 0
CATHERINES ................................. 466 467 461 414 452(3)
THE ANSWER(R)/ADDED DIMENSIONS(R) .......... 0 0 77 110 103
MONSOON/ACCESSORIZE(4) ..................... 0 9 9 1 0
------ ------ ------ ------ ------
Number of stores open at end of period ..... 2,227 2,248 2,446 1,755 1,740
====== ====== ====== ====== ======
- --------------------
<FN>
(1) Includes 124 FASHION BUG stores and 68 ADDED DIMENSIONS stores that were
closed in connection with a restructuring plan announced on January 28,
2002.
(2) Includes 35 MODERN WOMAN stores that were closed in connection with the
conversion of MODERN WOMAN stores into CATHERINES stores during the year
ended February 3, 2001.
(3) Includes 122 MODERN WOMAN stores that were closed or converted to the
CATHERINES formats during the year ended February 3, 2001.
(4) We closed 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 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 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. Separate merchandise
groups for each of our brands conduct merchandise purchasing, using buyers
supervised by one or more merchandise managers. We believe that specialization
of buyers within our brands enhances the distinctiveness of 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.
3
<PAGE>
We continually refine our merchandise assortments to reflect the needs and
demands of our diverse customer groups and the demographics of each store
location. At LANE BRYANT, we offer a combination of fashion basics, seasonal
fashions, and high fashion in casual and wear-to-work merchandise, intimate
apparel, and accessories. We strive to translate current trends into plus-sizes
and to be first to market with our merchandise. At FASHION BUG, we offer an
assortment of both casual and wear-to-work apparel, in plus, misses, junior, and
girls sizes as well as maternity, 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 well-recognized third-party national brands. At CATHERINES, 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. CATHERINES features
sportswear, dresses, intimate apparel, suits, and accessories in a variety of
plus-sizes, including petites and extended sizes. CATHERINES 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.
For stores that are identified as having certain profiles, we have
distribution systems in place that can stock the stores with products
specifically targeted to such profiles. Our merchandising staffs obtain store
and brand-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.
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.
Our stores experience a normal seasonal sales pattern for the retail
apparel industry, with peak sales occurring during the spring and Christmas
seasons. We generally build inventory levels before these peak sales 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 2004, as a percent of
total sales, were 24.7%, 26.5%, 23.2%, and 25.6%, respectively.
During the second half of Fiscal 2003 and the first half of Fiscal 2004,
LANE BRYANT experienced 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 during the
second half of Fiscal 2003, resulting in missed sales opportunities. As a result
of these issues, we initiated a plan to re-establish growth at LANE BRYANT. Due
to product lead times, these issues negatively affected LANE BRYANT results into
the first half of Fiscal 2004. Although LANE BRYANT continued to experience
negative comparable store sales during Fiscal 2004, the brand experienced
quarter-to-quarter improvement in comparable store sales. LANE BRYANT
4
<PAGE>
comparable store sales increased 1% in the fourth quarter of Fiscal 2004, as
compared to comparable store sales decreases in the first three quarters of
Fiscal 2004.
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 29 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 brand 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 CATHERINES
brands that provide information regarding current fashions and promotions. Our
LANE BRYANT website enjoys more than 900,000 unique visitors per month and an
established on-line community. In March 2002, we began e-commerce operations on
our CATHERINES website, and in March 2003, we began e-commerce operations on our
LANE BRYANT website. We plan to introduce e-commerce operations on our FASHION
BUG website during Fiscal 2005.
During Fiscal 2004, we launched FIGURE(TM) magazine, a periodic fashion and
lifestyle magazine for women. The magazine features clothing and fashions from
our LANE BRYANT, FASHION BUG, and CATHERINES brands, and also covers beauty,
health and fitness, home, food and entertaining, relationships, social, and
community issues. The magazine is available by subscription, and is also sold in
all of our stores and at selected newsstands and supermarkets, including certain
national booksellers. Since its inception in August 2003, the magazine has grown
to a circulation of more than 400,000 copies.
We offer our customers various loyalty card programs. Customers that join
these programs are entitled to various benefits, including discounts and rebates
on purchases during the membership period. Customers generally join these
programs by paying an annual membership fee. Additional information on our
loyalty card programs is included in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations; Critical Accounting
Policies; Revenue Recognition" below.
Proprietary Credit Card Programs
We seek to encourage sales through the promotion of our 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.
Our FASHION BUG credit card program accounted for approximately 27% of
FASHION BUG retail sales in Fiscal 2004, and has approximately two million
active accounts. We control credit policies and service the FASHION BUG
proprietary credit card file, and, through various agreements, we securitize and
sell the credit card receivables generated by this program.
Our LANE BRYANT and CATHERINES brands also offer customers the convenience
of proprietary credit card programs. The LANE BRYANT credit card program
accounted for approximately 29% of LANE BRYANT retail sales during Fiscal 2004,
and has approximately one million active accounts. The CATHERINES credit card
program accounted for approximately 30% of CATHERINES retail sales during Fiscal
2004, and has approximately 500,000 active accounts. We use third-party banks to
finance and service the LANE BRYANT and CATHERINES credit card programs. These
third-party banks provide new account approval, credit authorization, billing,
and
5
<PAGE>
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 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations; Financial Condition; Off-Balance-Sheet Arrangements" and "Item 8.
Financial Statements and Supplementary Data: Notes to Consolidated Financial
Statements; Note 16. Asset Securitization" below.
Sourcing
To meet the demands of our customers, we access both the domestic wholesale
and overseas apparel markets 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 2004, we
purchased merchandise from approximately 1,000 suppliers and factories located
throughout the world. We use our overseas sourcing operations, which generally
require longer lead times, primarily to purchase fashion-basic merchandise. In
Fiscal 2004, overseas sourcing accounted for approximately 19% of consolidated
merchandise purchases. Overseas sourcing as a percent of merchandise purchases
by brand, was approximately 26% for FASHION BUG, 13% for LANE BRYANT, and 12%
for CATHERINES. During Fiscal 2004, we purchased a portion of LANE BRYANT
merchandise from Mast Industries, Inc. ("Mast"). Mast, a contract manufacturer
and apparel importer, is a wholly-owned subsidiary of Limited Brands, Inc.
("Limited Brands"). These purchases from Mast accounted for approximately 17% of
our total merchandise purchases and approximately 40% of merchandise purchases
for LANE BRYANT during Fiscal 2004. No other vendor accounted for more than 4%
of total merchandise purchases during Fiscal 2004.
We pay for merchandise purchases outside the United States using 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 operate two 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 LANE BRYANT stores and CATHERINES stores, we
operate a distribution center in White Marsh, Maryland. Located on 29 acres of
land, the White Marsh facility contains a building of approximately 393,000
square feet, which is currently designed to service up to approximately 1,400
stores.
We acquired the 393,000 square foot White Marsh distribution center during
Fiscal 2003 at a cost of $17.3 million to replace LANE BRYANT's leased
distribution center in Columbus, Ohio. We completed the relocation of the
Columbus distribution center to our White Marsh distribution center in February
2004. The lease for the Columbus, Ohio distribution center and a related
logistics and transportation services agreement were terminated effective as of
February 29, 2004 in accordance with early cancellation provisions of the lease
and agreement. As a result of the use of automated sorting systems and improved
facility design in the White Marsh facility, we were also able to consolidate
our 213,000 square foot Memphis, Tennessee distribution center into the White
Marsh facility during Fiscal 2004. We relocated the Memphis distribution center
in June 2003. We are currently evaluating alternative uses for the Memphis
facility. The consolidation of the Memphis distribution center into the
6
<PAGE>
White Marsh facility was part of a cost reduction plan announced in March 2003.
See "General" above, and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations; Results of Operations; Comparison
of Fiscal 2004 to Fiscal 2003; Expenses Related to Cost Reduction Plan" and
"Item 8. Financial Statements and Supplementary Data; Notes to Consolidated
Financial Statements; Note 14. Expenses Related to Cost Reduction Plan" below
for details of the cost reduction plan.
Substantially all of our merchandise purchases are received at our
distribution facilities, where they are prepared for distribution to our stores.
Automated sorting systems in the distribution centers 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.
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, fit, 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, announced on March 18,
2003 as part of our cost reduction plan, to discontinue the operation of these
stores. We closed our nine MONSOON/ACCESSORIZE stores during Fiscal 2004. See
"General" above, and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations; Results of Operations; Comparison of Fiscal
2004 to Fiscal 2003; Expenses Related to Cost Reduction Plan" and "Item 8.
Financial Statements and Supplementary Data; Notes to Consolidated Financial
Statements; Note 14. Expenses Related to Cost Reduction Plan" below for details
of the cost reduction plan.
Employees
As of the end of Fiscal 2004, we employed approximately 25,000 associates,
which included approximately 16,000 part-time employees. In addition, we hire a
number of temporary employees during the Christmas season. Approximately 25 of
our employees are represented by unions. We believe that overall our
relationship with these unions, and our employees in general, is satisfactory.
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)", "BUNDLE OF JOY(TM)", "FIGURE
(TM)", "L.A. BLUES(R)", "CATHERINES(R)", "CATHERINES PLUS SIZES(R)", "C.S.T.
STUDIO(R)", "C.S.T. SPORT(R)", "MAGGIE BARNES(R)", "ANNA MAXWELL(R)", "LIZ &
ME(R)", "SERENADA(R)", "CAPISTRANO(R)", "LANE BRYANT(R)", "VENEZIA(R)", "VENEZIA
JEANS CLOTHING CO.(R)", "CACIQUE(R)", "ELEMENTAL STRETCH(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.
7
<PAGE>
We also own the following domain name registrations: charming.com,
charmingshoppes.com, fashionbug.com, fashionbugplus.com, fashionbugcard.com,
catherines.com, lanebryant.com, figuremagazine.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. See
"PART III; Item 10. Directors and Executive Officers of the Registrant" below
for additional information that is available on our Internet website.
Item 2. Properties
We lease all our stores, with the exception of four stores that 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 January 31, 2004, 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>
2004 68(1)
2005 - 2009 794
2010 - 2014 386
2015 - 2019 323
2020 - 2024 459
2025 - 2029 154
Thereafter 39
- ---------------
<FN>
(1) Includes 32 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 393,000 square
foot distribution center in White Marsh, Maryland that services our LANE BRYANT
and CATHERINES stores. We acquired the White Marsh distribution center during
Fiscal 2003 to replace our leased distribution center in Columbus, Ohio. We
relocated the Columbus distribution center in February 2004. The lease for the
Columbus, Ohio distribution center and a related logistics and transportation
services agreement were terminated effective as of February 29, 2004 in
accordance with early
8
<PAGE>
cancellation provisions of the lease and agreement. As a result of the use of
automated sorting systems and improved facility design in the White Marsh
facility, we were also able to consolidate our 213,000 square foot Memphis,
Tennessee distribution center into the White Marsh facility. We relocated the
Memphis distribution center in June 2003. We are currently evaluating
alternative uses for the Memphis facility.
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 63,000 square foot facility in Memphis,
Tennessee that houses our CATHERINES corporate offices. We also lease 130,000
square feet of office space near Columbus, Ohio that houses our LANE BRYANT
corporate offices. Our credit operations, including Spirit of America National
Bank, our wholly-owned credit card bank subsidiary, occupy 30,000 square feet of
leased office space in Miami Township, Ohio. We also maintain offices in New
York City that 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 December 22, 2003, the Superior Court of California, County of Los
Angeles dismissed a suit filed on April 17, 2003 by Donald Brown, Thomas Lamore,
and Sau Yeung against 109 entities, including Lane Bryant, Inc. The named
plaintiffs purported to represent a class of applicants for employment against
the 109 defendants, alleging, among other things, violations of California state
laws regarding the questioning of job applicants about certain illegal
drug-related criminal convictions.
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. This case was settled on March 17,
2004, and did not have a material impact on our results of operations for the
year ended January 31, 2004.
There have been no other material developments in legal proceedings
involving the Company or its subsidiaries since those reported in our Quarterly
Reports on Form 10-Q for the quarters ended May 3, 2003 and November 1, 2003.
Other than ordinary routine litigation incidental to our business, there
are no other pending material legal proceedings that we or any of our
subsidiaries are a party to, 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.
9
<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, 53, 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, 56, has served as Executive Vice President and Chief
Operating Officer since March 2002. Before 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.
Michel Bourlon, 44, has served as Executive Vice President - Sourcing since
March 2004. Before that, he served as Managing Director of Eddie Bauer
International (Hong Kong) Ltd., from September 1997 to February 2004.
Anthony A. DeSabato, 55, has served as Executive Vice President - Corporate
and Labor Relations, Business Ethics, and Loss Prevention since July 2003.
Before that, he 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, 46, 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, 55, 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.
Gale H. Varma, 53, has served as Executive Vice President - Human Resources
since July 2003. Before that, she served as Division Vice President - Human
Resources and Ethics Officer for the Prudential Institutional Employee Benefits
division of Prudential Financial Services, a division of Prudential Insurance
Company of America, from September 1997 to April 2003.
Erna Zint, 60, has served as Executive Vice President - Sourcing since
January 1996, and will assume the position of Executive Vice President - Quality
Assurance/Control and Technical Design in June 2004.
Jonathon Graub, 45, has served as Senior Vice President - Real Estate,
since December 1999, and he has been employed by us since 1981.
John J. Sullivan, 57, has served as Vice President - Corporate Controller
since October 1998.
10
<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 ("NASDAQ") under the symbol "CHRS," and is listed and
traded on the Chicago Board Options Exchange ("CBOE") under the symbol "QSR."
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 2004 Fiscal 2003
----------- -----------
High Low High Low
<S> <C> <C> <C> <C>
1st Quarter.... $4.75 $2.70 $9.14 $5.46
2nd Quarter.... 5.72 3.94 8.90 5.74
3rd Quarter.... 6.80 4.89 7.42 3.86
4th Quarter.... 6.85 5.09 5.47 3.30
</TABLE>
The approximate number of holders of record of our common stock as of April
1, 2004 was 2,259. 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 near 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; Long-term Debt and Equity Financing" and "Item
8. Financial Statements and Supplementary Data; Notes to Consolidated Financial
Statements; Note 7. Debt" below).
11
<PAGE>
Item 6. Selected Financial Data
The following table presents selected financial data for each of our five
fiscal years ended as of January 29, 2000 through January 31, 2004. 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
Year Ended
----------------------------------------------------------------
Jan. 31, Feb. 1, Feb. 2, Feb. 3, Jan. 29,
(Dollars in thousands, except per share amounts) 2004 2003 2002(1) 2001(1)(2) 2000(1)
---- ---- ------ --------- ------
<S> <C> <C> <C> <C> <C>
Operating Statement Data:
Net sales...................................... $2,285,680 $2,412,409 $1,993,843 $1,607,079 $1,196,529
---------- ---------- ---------- ---------- ----------
Cost of goods sold, buying, and occupancy
expenses................................... 1,642,065 1,721,052 1,455,601 1,134,554 854,774
Selling, general, and administrative expenses.. 554,884 603,502 486,204 382,398 281,637
Amortization of goodwill....................... 0 0 4,885 4,885 0
Expenses related to cost reduction plan........ 11,534(3) 0 0 0 0
Restructuring charge (credit).................. 0 (4,813)(4) 37,708(4) 0 (3,471)(5)
Non-recurring gain from demutualization of
insurance company.......................... 0 0 0 0 (6,700)(6)
---------- ---------- ---------- ---------- ----------
Total operating expenses....................... 2,208,483 2,319,741 1,984,398 1,521,837 1,126,240
---------- ---------- ---------- ---------- ----------
Income from operations......................... 77,197 92,668 9,445 85,242 70,289
Other income, principally interest............. 2,050 2,328 4,730 8,304 9,594(7)
Interest expense............................... (15,609) (20,292) (18,701) (8,894) (7,308)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes, minority
interest, and cumulative effect of
accounting changes......................... 63,638 74,704 (4,526) 84,652 72,575
Income tax provision (benefit)................. 23,141 29,055 (120) 33,014 27,516(7)
---------- ---------- ---------- ---------- ----------
Income (loss) before minority interest and
cumulative effect of accounting changes.... 40,497 45,649 (4,406) 51,638 45,059
Minority interest in net loss of consolidated
subsidiary................................. 142 679 0 0 0
Cumulative effect of accounting changes,
net of tax................................. 0 c (49,098)(8) 0 (540)(9) 0
---------- ---------- ---------- ---------- ----------
Net income (loss).............................. $ 40,639 $ (2,770) $ (4,406) $ 51,098 $ 45,059
========== ========== ========== ========== ==========
Basic net income (loss) per share:
Before cumulative effect of accounting
changes............................... $ .36 $ .41 $(.04) $ .51 $ .46
Net income (loss).......................... .36 (.02) (.04) .50 .46
Basic weighted average common shares
outstanding............................... 112,491 113,810 105,842 101,119 98,609
Net income (loss) per share, assuming dilution:
Before cumulative effect of accounting
changes............................... $ .35 $ .39 $(.04) $ .49 $ .43
Net income (loss).......................... .35 .01 (.04) .48 .43
Diluted weighted average common shares and
equivalents outstanding.................... 128,558 130,937 105,842 115,027 115,888
Balance Sheet Data(10):
Total assets................................... $1,164,879 $1,131,886 $1,137,147 $846,772 $779,612
Current portion - long-term debt............... 17,278 12,595 9,379 4,954 1,920
Long-term debt................................. 202,819 203,045 208,491 113,540 105,213
Working capital................................ 271,915 193,517 141,839 208,389 161,376
Stockholders' equity........................... 605,085 561,634 549,802 493,269 436,263
</TABLE>
12
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY
(Continued)
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------------
Jan. 31, Feb. 1, Feb. 2, Feb. 3, Jan. 29,
2004 2003 2002(1) 2001(1)(2) 2000(1)
---- ---- ------ --------- -------
<S> <C> <C> <C> <C> <C>
Performance Data:
Including cumulative effect of accounting changes:
Net return on average stockholders' equity.. 7.0% (0.5)% (0.8)% 11.0% 11.0%
Net return on average total assets.......... 3.6 (0.2) (0.4) 6.3 6.2
Before cumulative effect of accounting changes:
Net return on average stockholders' equity.. 6.4% 7.9% (0.8)% 11.1% 11.0%
Net return on average total assets.......... 3.4 3.9 (0.4) 6.4 6.2
- --------------------
<FN>
(1) Includes the results of operations of Lane Bryant, Inc., acquired August
16, 2001; 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 March 2003, we announced a cost reduction plan designed to take
advantage of the centralization of corporate administrative services and to
realize certain efficiencies, in order to improve profitability. For
details of the program, see "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations; Results of Operations;
Comparison of Fiscal 2004 to Fiscal 2003; Expenses Related to Cost
Reduction Plan" and "Item 8. Financial Statements and Supplementary Data;
Notes to Consolidated Financial Statements; Note 14. Expenses Related to
Cost Reduction Plan" below.
(4) In January 2002, our Board of Directors approved a restructuring plan that
included the closing of THE ANSWER/ADDED DIMENSIONS chain of 77 stores; the
conversion of approximately 20% of the ADDED DIMENSIONS stores to
CATHERINES stores; the closing of 130 under-performing FASHION BUG stores;
and the conversion of 44 FASHION BUG stores to LANE BRYANT stores. This
restructuring plan 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.
(5) 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. 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 connection with the consolidation of the
MODERN WOMAN chain of stores into the CATHERINES brand.
(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.
13
<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 CATHERINES 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, we
recognized a charge of $5,123,000, net of income taxes of $2,758,000, 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." This charge 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:
</FN>
</TABLE>
<TABLE>
<CAPTION>
Year Ended
-----------------------------
Feb. 2, Feb. 3, Jan. 29,
(In thousands, except per share amounts) 2002 2001 2000
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss)........................ $(5,189) $51,309 $44,600
Basic net income (loss) per share.................. (.05) .51 .45
Net income (loss) per share, assuming dilution..... (.05) .48 .43
</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.
(10) Certain prior-year amounts reflect reclassifications to conform to the
current-year presentation.
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 ("MD&A") 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 2004," "Fiscal 2003," and "Fiscal 2002" refer to
our fiscal years ended January 31, 2004, February 1, 2003, and February 2, 2002,
respectively. The term "Fiscal 2005" refers to our fiscal year which will end on
January 29, 2005.
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, cost reductions, capital expenditures, liquidity, financing needs or
plans, and plans for future operations, 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.
14
<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 A slowdown in the United States economy and an uncertain economic outlook
could lead to reduced consumer demand for our apparel and accessories 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-size women's apparel
business.
o Our business plan is largely dependent upon the continued growth in the
plus-size 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 generally associated with doing business in foreign markets and
importing merchandise from abroad. Such risks include (but are not
necessarily limited to) political instability, imposition of, or changes
in, 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.
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 during the months preceding such
periods, could have a material adverse effect on our business. In addition,
extreme or unseasonable weather conditions may have a negative impact on
our sales.
o War, acts of terrorism, or the threat of either may negatively impact
availability of merchandise and customer traffic to our stores, or
otherwise adversely affect our business.
o We may be unable to obtain adequate insurance for our operations at a
reasonable cost.
o We may be unable to protect our trademarks and other intellectual property
rights, which are important to our success and our competitive position.
15
<PAGE>
o We may be unable to hire and retain a sufficient number of 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 implement our plan to re-establish growth
and improve merchandise assortments in our LANE BRYANT brand.
o The carrying amount and/or useful life of intangible assets related to
acquisitions are subject to periodic valuation tests. An adverse change in
interest rates or other factors could have a significant impact on the
results of the valuation tests, resulting in a write-down of the carrying
value or acceleration of amortization of acquired intangible assets.
OVERVIEW
We are a specialty apparel retailer primarily focused on serving the
plus-size woman through three distinct brands: LANE BRYANT, FASHION BUG, and
CATHERINES PLUS SIZES. We currently represent 40% of the women's plus-size
specialty retail apparel market, and are the third largest specialty apparel
retailer in the United States based on store count. Through our varied plus-size
fashion concepts, we cater to customers from a broad range of socioeconomic,
demographic, and cultural profiles. As of January 31, 2004, we operated 2,227
stores in 48 states.
The apparel industry is highly competitive and is continuously faced with
new and existing competitors seeking areas of growth to expand their business.
Our strategy of focusing on the growing plus-size market through our three
brands has allowed us to gain increased market share in the women's plus-size
apparel market. Americans continue to gain weight in all age groups, with an
estimated 65% of American adults being overweight and half of American women
wearing size 14 or larger. Through our three brands, we offer plus-size women's
apparel to all age groups, with varied fashion tastes and income levels, in
multiple shopping venues. By focusing on the plus-size market, we believe that
we are well-positioned to meet the demands of this growing segment. Our plans
are to increase our store base at our LANE BRYANT and CATHERINES brands through
expansion into under-penetrated markets, focusing primarily on strip and
lifestyle center formats. An important challenge for us will be to maintain and
increase our market share through growth in our store base as well as to extend
into other direct-to-consumer channels to reach our customers. We are further
challenged by competitors that enter into the plus-size market and offer similar
apparel at lower prices. We believe that our fit initiative will differentiate
us from our competitors. The goal of this initiative is to be the fit
specialists for plus-size women by offering products with improved fit.
Our sales performance over the last three years has been negatively
affected by the general slowdown in the U. S. economy, reduced levels of
consumer confidence, and the unstable geopolitical climate. In addition, sales
performance at our LANE BRYANT brand during the second half of Fiscal 2003 and
the first half of Fiscal 2004 was negatively affected by a combination of poor
customer acceptance of, and fit and quality issues with, certain of its
products, and under-stocking of certain basic products. As a result, we had to
maintain higher levels of promotional pricing during those periods. We
implemented a plan in Fiscal 2003 to improve merchandise
16
<PAGE>
assortments at LANE BRYANT, which began to show a positive impact in Fiscal
2004, with a 1.0% increase in comparable store sales in the fourth quarter,
following six quarters of negative comparable store sales performance. In
addition, we experienced increased unit sales and improved sales performance at
Lane Bryant during the latter half of Fiscal 2004. Our challenge will be to
continue improvements at LANE BRYANT in Fiscal 2005.
We also expect the deflationary pricing environment to continue to impact
the apparel industry. In addition, the anticipated elimination of quota on
imports in 2005 may create further downward pressure on retail prices.
In addition to our continued focus on controlling expenses, two other areas
of focus for us in Fiscal 2005 are maintaining control over inventories while
improving gross margins at our three brands.
We estimate that our cost reduction initiative, which began in 2003, will
save us a total of approximately $45 million of expenses on an annualized basis.
The success of this initiative enabled us to reduce operating expenses by over
$30 million in Fiscal 2004. The expense savings from our cost reduction
initiative coupled with other cost control related savings enabled us to offset
declines in sales that we experienced in Fiscal 2004. We expect to achieve the
remaining $15 million of cost savings in Fiscal 2005. Of the remaining $15
million, approximately $8 million of the savings are anticipated from
efficiencies we expect to gain from the consolidation of our CATHERINES and LANE
BRYANT distribution centers into our new White Marsh distribution center, which
we completed in February 2004.
We offer e-commerce at our CATHERINES and LANE BRYANT websites and plan to
offer e-commerce at our FASHION BUG website during Fiscal 2005. Our Fiscal 2005
plan is to double our Fiscal 2004 e-commerce sales volume through continuing to
broaden category offerings at our websites. Our e-commerce sales in Fiscal 2004
and our planned e-commerce sales in Fiscal 2005 are less than one percent of our
consolidated net sales. Our websites currently offer basic merchandise, and we
see opportunities to offer and provide expanded product offerings on our
websites, such as intimate apparel and hard-to-find sizes. This provides us
opportunities to offer more merchandise categories than we are able to provide
in our 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 our 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 and related
assumptions 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. Revenues from our e-commerce business include shipping and
handling fees billed to customers. We record a reserve for estimated future
sales returns based on an analysis of actual returns and we defer recognition of
layaway sales to
17
<PAGE>
the date of delivery. A change in our actual rates of sales returns and layaway
sales experience would affect the level of revenue recognized.
We offer our customers various loyalty card programs. Customers that join
these programs are entitled to various benefits, including discounts and rebates
on purchases during the membership period. Customers generally join these
programs by paying an annual membership fee. We recognize revenue from these
loyalty programs as sales over the life of the membership period based on when
the customer earns the benefits and when the fee is no longer refundable. Costs
we incur in connection with administering these programs are recognized in cost
of goods sold as incurred.
During Fiscal 2004, we introduced a new FASHION BUG customer loyalty card
program that we operate under our FASHION BUG proprietary credit card program.
This program provides customers with the option to cancel their membership
within 90 days, entitling them to a full refund of their annual fee.
Additionally, after 90 days, customers that cancel their membership are entitled
to a pro rata fee refund based on the number of months remaining on the annual
membership. Accordingly, we recognize 25% of the annual membership fee as
revenue after 90 days, with the remaining fee recognized on a pro rata basis
over nine months.
Under a previous FASHION BUG customer loyalty card program, we recognized
revenues from annual membership fees as sales over the life of the membership
based on discounts earned by the customer. For customers who did not earn
discounts during the membership period that exceeded the card fee, the
difference between the membership fee and discounts earned was recognized as
revenue upon the expiration of the annual membership period. Upon early
cancellation of the loyalty card, refunds of membership fees were reduced by the
amount of any discounts granted to the member under the program. We discontinued
the issuance of new cards under this program in December 2002, and we terminated
the program during the second quarter of Fiscal 2004.
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 is 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 the resulting gross margins. Events such as store
closings, liquidations, and a weak general economic environment for retail
apparel sales could result in an increase in the level of markdowns. Such an
increase in the level of markdowns could result in lower inventory values and
increases to cost of goods sold as a percentage of net sales in future periods
under the RIM. Also, 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 2004 and Fiscal 2003, in addition to markdowns
that had been recorded in inventory, an additional $10.1 million and $9.6
million, respectively, of markdowns representing markdowns not yet taken on aged
inventory was recorded in order to properly reflect inventory at the lower of
cost or market.
In connection with our restructuring plan announced on January 28, 2002
(see "RESULTS OF OPERATIONS; Comparison of Fiscal 2003 to Fiscal 2002;
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 THE ANSWER/ADDED DIMENSIONS stores that we closed
during the first half of Fiscal 2003.
18
<PAGE>
We elected to adopt the provisions of Financial Accounting Standards Board
("FASB") Emerging Issues Task Force ("EITF") Issue No. 02-16 (see "Accounting
for Cash Consideration Received From a Vendor" below) as of the beginning of
Fiscal 2003. As of January 31, 2004 and February 1, 2003, $9.5 million and $8.1
million, respectively, of cash received from vendors was deferred into inventory
to 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 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 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.
In accordance with the provisions of SFAS No. 144, we recorded a $2.7
million write-down of under-performing assets related to our consolidated
MONSOON joint venture during Fiscal 2003. The write-down is included in
occupancy expenses in our consolidated statement of operations. The amount of
the write-down was the same as what we would have 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;
Comparison of Fiscal 2003 to Fiscal 2002; 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
were 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 CATHERINES acquisition (which included the value of
intangible assets we did not separately account for at the date of the
CATHERINES acquisition) exceeded the estimated fair value of the goodwill under
SFAS No. 142. We determined the estimated fair value of the CATHERINES goodwill
using the present value of expected future cash flows associated with the
CATHERINES assets. We recorded a write-down, which was 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 was attributable to the
value of unrecorded trademarks. We also evaluated our goodwill, trademarks,
tradenames, and internet domain names related to our LANE BRYANT acquisition
19
<PAGE>
as of February 3, 2002 in accordance with the provisions of SFAS No. 142, and
determined that there was no impairment of those assets. We have included the
write-down of the CATHERINES goodwill 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. Our 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. We believe that
the estimates and assumptions we used were reasonable and appropriate.
In accordance with the provisions of SFAS No. 142, we re-evaluate goodwill
and other intangible assets for impairment at least annually or more frequently
if there is an indication of possible impairment. We performed this annual
review during the fourth quarters of Fiscal 2003 and Fiscal 2004, and determined
that there has been no additional impairment of these assets.
Acquisitions - Purchase Price Allocation
We account for acquisitions in accordance with the provisions of SFAS No.
141, "Business Combinations." 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, if any, 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 amount 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.
Asset Securitization
Asset securitization is a practice commonly used in the retail industry
that allows companies with proprietary credit card programs to finance credit
card receivables at attractive rates. Asset securitization primarily involves
the sale of proprietary credit card receivables to a special purpose entity,
which in turn transfers the receivables to a trust (the "Trust") that is a
qualified special purpose entity ("QSPE") and is administered by an independent
trustee. We use asset securitization 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. Because
the Trust qualifies as a QSPE, its assets and liabilities are not consolidated
in our balance sheet.
Investors purchase various forms of certificates or credit card receivable
interests (the "Certificates") issued by the Trust that represent undivided
interests in the Trust's underlying assets. The Trust pays to the Certificate
holders a portion of future scheduled cash flows from the credit card
receivables under preset terms and conditions. Payments to Certificate holders
are dependent upon actual cash flows generated by the underlying Trust assets.
We retain certain subordinated interests in each securitization transaction
that effectively serve as a form of credit enhancement to the Certificates sold
to outside investors. To the extent that cash flows to the Trust from the credit
card receivables remain available after repayment of the outside investors'
interests, such 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.
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<PAGE>
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 we expect to receive over the period
the receivables are outstanding. These cash flows essentially represent finance
charges and late fees in excess of amounts paid to Certificate holders, credit
losses, and service fees, and are referred to as the interest-only strip ("I/O
strip"). In addition to the I/O strip, we recognize a servicing liability, since
the servicing fees we expect to receive from the securitizations do not provide
adequate compensation for servicing the receivables. The servicing liability
represents the present value of the excess of the costs of servicing over the
servicing fees we expect to receive, and is recorded at estimated fair value.
Since quoted market prices are generally not available, we determine the fair
value of the costs of servicing by calculating all costs associated with
billing, collecting, maintaining, and providing customer service during the
expected life of the securitized credit card receivable balances. We discount
the costs in excess of the servicing fees we expect to collect over the
estimated life of the receivables sold. The discount rate and estimated life
assumptions used in valuing the servicing liability are equivalent to those used
in valuing the I/O strip. We amortize the I/O strip and the servicing liability
on a straight-line basis over the expected life of the credit card receivables.
We use certain key valuation assumptions related to the average life of the
receivables sold, the finance charges net of interest to be earned by
certificate holders, and anticipated credit losses, as well as the appropriate
market discount rate in determining the estimated value of the I/O strip and the
servicing liability. We estimate the values for these assumptions using
historical data, the impact of the current economic environment on the
performance of the receivables sold, and the impact of the potential volatility
of the current market for similar instruments in assessing the fair value of the
retained interests. Changes in the average life of the receivables sold,
discount rate, and credit-loss percentage could cause actual results to differ
materially from the estimates, and changes in circumstances could result in
significant future changes to the assumptions currently being used. The
following table presents the decrease in our I/O strip receivable that would
result from hypothetical adverse changes of 10% and 20% in the assumptions used
to determine the fair value of the I/O strip:
<TABLE>
<CAPTION>
(In millions) 10% Change 20% Change
---------- ----------
<S> <C> <C>
Payment rate............................ $0.7 $1.3
Residual cash flows discount rate....... 0.1 0.2
Credit loss percentage.................. 1.1 2.3
</TABLE>
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
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, we are required to recognize liabilities for
costs associated with an exit or disposal activity initiated after December 31,
2002 when the liabilities are incurred. Commitment to a plan, by itself, does
not create an obligation that meets the definition of a liability. Under SFAS
No. 146, we are 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 is
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 results in the deferral
of recognition of certain costs for restructuring plans
21
<PAGE>
initiated subsequent to December 31, 2002, from the date of commitment 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 RESULTS OF OPERATIONS; Comparison of Fiscal 2004 to Fiscal 2003; Expenses
Related to Cost Reduction Plan" below). Costs incurred in connection with the
implementation of this plan are being 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. We
adopted 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, for 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 January 31, 2004 and February 1, 2003, $9.5 million and $8.1
million, respectively, 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 that 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 on a straight-line
basis 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. For purposes of determining our pro forma disclosures
of the effect of adopting the fair value method, we use the Black-Scholes
option-pricing model and various assumptions that 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 use of different option-pricing models and different estimates
or assumptions could result in materially different estimates of compensation
expense under the fair value method.
22
<PAGE>
Insurance Liabilities
We use a combination of third-party insurance and/or self-insurance for
certain risks, including workers' compensation, medical, dental, automobile, and
general liability claims. Our insurance liabilities are a component of "Accrued
expenses" on our consolidated balance sheet, and represent our estimate of the
ultimate cost of uninsured claims incurred as of the balance sheet date. In
estimating our self-insurance liabilities, we use independent actuarial
estimates of expected losses, which are based on statistical analyses of
historical data. Loss estimates are adjusted based upon actual claim settlements
and reported claims. Although we do not expect the amounts ultimately paid to
differ significantly from our estimates, self-insurance liabilities could be
affected if future claim experience differs significantly from the historical
trends and the actuarial assumptions. We evaluate the adequacy of these
liabilities on a regular basis, modifying our assumptions as necessary, updating
our records of historical experience, and adjusting our liabilities as
appropriate.
RESULTS OF OPERATIONS
Financial Summary
The following table shows our results of operations 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
2004 2003 2002 2004-2003 2003-2002
---- ---- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0% (5.3)% 21.0%
Cost of goods sold, buying, and occupancy...... 71.8 71.3 73.0 (4.6) 18.2
Selling, general, and administrative........... 24.3 25.0 24.4 (8.1) 24.1
Expenses related to cost reduction plan........ 0.5 -- -- -- --
Restructuring charge (credit).................. -- (0.2) 1.9 ** **
Amortization of goodwill....................... -- -- 0.2 -- (100.0)
Income from operations......................... 3.4 3.8 0.5 (16.7) 881.1
Other income, principally interest............. 0.1 0.1 0.2 (11.9) (50.8)
Interest expense............................... 0.7 0.8 0.9 (23.1) 8.5
Income tax provision (benefit)................. 1.0 1.2 -- (20.4) **
Minority interest in net loss of subsidiary.... 0.0 0.0 -- (79.1) **
Cumulative effect of accounting changes........ -- (2.0) -- ** **
Net income (loss).............................. 1.8 (0.1) (0.2) ** (37.1)
- --------------------
<FN>
** Not meaningful
Results may not add due to rounding
</FN>
</TABLE>
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<PAGE>
The following table shows our net sales by store brand:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 31, 2004 February 1, 2003 February 2, 2002
---------------- ---------------- ----------------
Fiscal Fourth Fiscal Fourth Fiscal Fourth
(In millions) Year Quarter Year Quarter Year Quarter
---- ------- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C>
FASHION BUG........................... $1,057.1 $259.2 $1,156.0 $288.9 $1,164.0 $303.4
LANE BRYANT........................... 903.6 251.0 906.9 236.1 445.3(1) 254.1
CATHERINES(2)......................... 323.3 75.5 345.2 74.6 381.7 88.0
MONSOON/ACCESSORIZE(3)................ 1.7 0.0 4.3 1.5 2.8 1.6
-------- ------ -------- ------ -------- ------
Total net sales....................... $2,285.7 $585.7 $2,412.4 $601.1 $1,993.8 $647.1
======== ====== ======== ====== ======== ======
- --------------------
<FN>
(1) Sales from the date of acquisition on August 16, 2001.
(2) Includes sales of ADDED DIMENSIONS stores, which were closed or converted
to CATHERINES stores during the first half of Fiscal 2003.
(3) The MONSOON/ACCESSORIZE stores were closed during the first half of Fiscal
2004.
</FN>
</TABLE>
The following table shows additional information related to changes in our
net sales:
<TABLE>
<CAPTION>
Year Ended Year Ended
January 31, 2004 February 1, 2003
---------------- ----------------
Fiscal Fourth Fiscal Fourth
Year Quarter Year Quarter
<S> <C> <C> <C> <C>
(Decrease) increase in comparable store sales(1):
Consolidated Company...................................... (2)% (1)% (2)% (5)%
FASHION BUG............................................... 0 (4) 0 1
CATHERINES(2)............................................. (1) 0 0 0
LANE BRYANT(3)............................................ (6) 1 (6) (12)
Sales from new stores as a percentage of total consolidated
prior-period sales:
FASHION BUG............................................... 1 1 2 1
CATHERINES(2)............................................. 1 1 2 1
LANE BRYANT............................................... 3 2 25 2
Prior-period sales from closed stores as a percentage of
total consolidated prior-period sales:
FASHION BUG............................................... (4) (3) (3) (4)
CATHERINES(2)............................................. (2) 0 (4) (3)
LANE BRYANT............................................... (1) (1) (0) (1)
Increase (decrease) in total sales............................. (5)% (3)% 21% (7)%
- --------------------
<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) Includes sales of ADDED DIMENSIONS stores, which were closed or converted
to CATHERINES stores during the first half of Fiscal 2003.
(3) Comparable store sales for LANE BRYANT for fiscal year ended February 1,
2003 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.
</FN>
</TABLE>
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<PAGE>
The following table sets forth information with respect to store activity
for Fiscal 2004 and planned store activity for Fiscal 2005:
<TABLE>
<CAPTION>
FASHION LANE MONSOON/
BUG BRYANT CATHERINES ACCESSORIZE Total
<S> <C> <C> <C> <C> <C>
Fiscal 2004:
Stores at February 1, 2003 ... 1,083 689 467 9 2,248
------ ------ ------ ------ ------
Stores opened ................ 2 34 10 0 46
Stores converted(1) .......... (2) 8 (2) 0 4
Stores closed ................ (32) (21) (9) (9) (71)
------ ------ ------ ------ ------
Net changes in stores ........ (32) 21 (1) (9) (21)
------ ------ ------ ------ ------
Stores at January 31, 2004 ... 1,051 710 466 0 2,227
====== ====== ====== ====== ======
Stores relocated during period 19 21 16 -- 56
Stores remodeled during period 3 10 1 -- 14
Fiscal 2005:
Planned store openings ....... 5 35 15 -- 55
Planned store relocations .... 20 20 15 -- 55
Planned store closings ....... 25 10 15 -- 50
- --------------------
<FN>
(1) Four FASHION BUG stores that were converted to LANE BRYANT stores during
Fiscal 2004 were closed during Fiscal 2003.
</FN>
</TABLE>
Comparison of Fiscal 2004 to Fiscal 2003
Net Sales
The decrease in net sales from Fiscal 2003 to Fiscal 2004 resulted
primarily from a decrease in the number of operating stores at our FASHION BUG
brand and the closing of our THE ANSWER/ADDED DIMENSIONS stores following our
Fiscal 2003 store restructuring initiative, and negative comparable store sales
results at our LANE BRYANT brand. We operated 2,227 retail stores at the end of
Fiscal 2004, as compared to 2,248 stores at the end of Fiscal 2003.
FASHION BUG stores experienced mixed results in comparable store sales
during Fiscal 2004, with flat comparable store sales for the year. The average
number of transactions and average number of units sold per customer ("UPC")
increased 1% and 3%, respectively, in our FASHION BUG stores, while the average
dollar sale and average retail value per unit sold decreased 1% and 3%,
respectively. FASHION BUG stores experienced increases in sales of plus
sportswear, accessories, intimate apparel, and footwear, which were partially
offset by decreases in sales of junior sportswear and dresses.
CATHERINES stores also experienced mixed results in comparable store sales
during Fiscal 2004, with a 1% decrease in comparable store sales for the year.
The average dollar sale and average UPC each increased 3% in our CATHERINES
stores, while the average number of transactions and average retail value per
unit sold decreased 2% and 1%, respectively. Increased sales of denim, which
performed strongly as a result of the brand's fit initiative, and intimate
apparel were offset by decreases in sales of dresses, career sportswear, suits,
sweaters, and hosiery.
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<PAGE>
Although LANE BRYANT stores experienced quarter-over-quarter improvements
in comparable store sales during Fiscal 2004, they experienced an overall
decrease of 6% in comparable store sales for the year. Although the average UPC
increased 11% for LANE BRYANT stores, the average dollar sale and average retail
value per unit sold decreased 4% and 14% respectively, reflecting the brand's
higher level of promotional pricing. The average number of transactions at LANE
BRYANT stores decreased 3%. For LANE BRYANT, decreases in sales of sweaters,
casual woven tops, and denim separates were partially offset by increases in
sales of knit and active separates, intimate apparel, and casual woven
separates. The LANE BRYANT brand experienced poor customer acceptance of, and
fit and quality issues with, certain of its products during the second half of
Fiscal 2003 and the first half of Fiscal 2004, resulting in higher levels of
promotional pricing. In addition, certain basic products were under-stocked
during the second half of Fiscal 2003, resulting in missed sales opportunities.
Improved merchandise assortments resulted in increased unit sales and improved
sales performance for the LANE BRYANT brand during the second half of Fiscal
2004.
Cost of Goods Sold, Buying, and Occupancy
The decrease in cost of goods sold, buying, and occupancy expenses from
Fiscal 2003 to Fiscal 2004 principally reflects the decrease in net sales. Cost
of goods sold as a percentage of net sales was unchanged from Fiscal 2003 to
Fiscal 2004. Improvements in merchandise margins in our FASHION BUG brand were
offset by lower merchandise margins in our LANE BRYANT and CATHERINES brands.
Higher levels of promotional activity and poor customer acceptance of certain
LANE BRYANT products, as discussed above, also negatively affected merchandise
margins in both years. Cost of goods sold for Fiscal 2003 included $5.1 million
of costs related to the valuation of LANE BRYANT inventories. The $5.1 million
related to markdowns for inventory on hand as a result of the poor customer
acceptance of, and fit and quality issues with, certain of LANE BRYANT's
products, which resulted in higher levels of promotional pricing to liquidate
the product. Cost of goods sold includes merchandise costs net of discounts and
allowances, freight, inventory shrinkage, and shipping and handling costs
associated with our e-commerce business. Net merchandise costs and freight are
capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales increased 0.5%
in Fiscal 2004 as compared to Fiscal 2003. 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, particularly in our LANE BRYANT brand. Occupancy expenses for
Fiscal 2003 included a $2.7 million write-down of under-performing assets
related to our MONSOON/ACCESSORIZE stores. 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
The decrease in selling, general, and administrative expenses from Fiscal
2003 to Fiscal 2004 was primarily a result of reductions in store payroll and
the realization of cost reduction initiatives, including improved management of
controllable expenses (see "Expenses Related to Cost Reduction Plan" below).
Selling expenses decreased 0.2% as a percentage of net sales. General and
administrative expenses decreased 0.5% as a percentage of net sales. General and
administrative expenses for Fiscal 2003 were negatively affected by costs
associated with transitional service agreements related to the LANE BRYANT
acquisition. We completed the integration of LANE BRYANT's information systems
during Fiscal 2003.
26
<PAGE>
Expenses Related to Cost Reduction Plan
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 certain efficiencies, in order to improve
profitability. See "Item 8. Financial Statements and Supplementary Data; Notes
to Consolidated Financial Statements; NOTE 14. EXPENSES RELATED TO COST
REDUCTION PLAN" below for details of this program. The cost reduction plan was
substantially completed during Fiscal 2004. We did not experience a material
after-tax cash impact from execution of this plan. e expect this cost reduction
plan to improve annualized pre-tax earnings by a total of approximately $45
million. During Fiscal 2004, we realized cost reductions of more than $30
million as a result of this plan. We expect to realize the remaining benefits of
the cost reduction plan by the end of Fiscal 2005.
Expenses incurred in connection with the plan, payments/settlements of
those expenses for Fiscal 2004, and the remaining accrual at January 31, 2004,
were as follows:
<TABLE>
<CAPTION>
Year Ended Accrued at
January 31, Payments/ January 31,
(In millions) 2004 Settlements 2004
---- ----------- ----
<S> <C> <C> <C>
Workforce reduction costs............ $ 3.0 $(3.0) $0.0
Lease termination and related costs.. 3.7 (1.1) 2.6
Accelerated depreciation costs
(non-cash charge)............... 4.2 (4.2) 0.0
Other facility closure costs......... 0.6 (0.6) 0.0
----- ----- ----
Total................................ $11.5 $(8.9) $2.6
===== ===== ====
</TABLE>
Workforce reduction costs represent involuntary termination benefits and
retention bonuses. Employees affected by the plan were notified during the first
quarter of Fiscal 2004. During Fiscal 2004, we terminated 349 employees in
connection with workforce reductions at our corporate and divisional home
offices and the closing of our Memphis, Tennessee distribution center, our
Hollywood, Florida credit operations, and our remaining MONSOON stores. We
accrued the severance benefit in accordance with SFAS No. 146 and recognized
retention bonuses ratably over the employees' remaining service period. Lease
termination and related costs mainly represent the estimated fair value of the
remaining lease obligations at the Hollywood, Florida facility, reduced by
estimated sublease income. In accordance with SFAS No. 146, we recognized the
present value of the remaining lease obligation less estimated sublease income
related to the Hollywood, Florida facility in June 2003 when we closed the
facility. Accelerated depreciation costs represent the acceleration of
depreciation of the net book value of the assets at our Memphis distribution
center and our Hollywood credit operations, which were closed in June 2003, to
their estimated net realizable values.
During the first quarter of Fiscal 2004, we made the decision to sell the
Memphis, Tennessee distribution center, and began accelerating the depreciation
of the asset to its estimated net realizable value as of its then-expected
cease-use date of June 2003. During the third quarter of Fiscal 2004, we began
to evaluate alternative uses for the facility, and began to depreciate the
then-current carrying amount of the asset over its estimated useful life.
Other Income/Interest Expense
The decrease in other income from Fiscal 2003 to Fiscal 2004 resulted from
a $0.8 million decrease in interest income. Interest income decreased as a
result of a decrease in the average yield on investments during Fiscal 2004 as
compared to Fiscal 2003. The decrease in interest expense from Fiscal 2003 to
Fiscal 2004 resulted primarily from lower interest rates on borrowings during
Fiscal 2004 as compared to Fiscal 2003. Interest expense for Fiscal 2003 also
included a write-off of $1.0 million of unamortized deferred financing costs
related to a $67.5
27
<PAGE>
million term loan that was repaid during Fiscal 2003. During Fiscal 2003, we
replaced a $67.5 million 11.5% term loan and $96.0 million of 7.5% Convertible
Subordinated Notes with $150.0 million of 4.75% Senior Convertible Notes (see
"Financing" below).
Income Tax Provision
The effective income tax rate was 36.4% in Fiscal 2004 as compared to 38.9%
in Fiscal 2003. The lower effective tax rate in Fiscal 2004 was due primarily to
changes in previously estimated full-year amounts, including our tax liability
related to insurance programs.
Comparison of Fiscal 2003 to Fiscal 2002
Net Sales
The increase in net sales from Fiscal 2002 to Fiscal 2003 was primarily a
result of our acquisition of LANE BRYANT in August 2001. We operated 2,248
stores at the end of Fiscal 2003, as compared to 2,446 stores at the end of
Fiscal 2002. 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.
In Fiscal 2003, LANE BRYANT stores experienced comparable store sales
decreases in sweaters, denim, and intimate apparel. In particular, the LANE
BRYANT brand 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 at
LANE BRYANT were under-stocked, resulting in missed sales opportunities. Due to
product lead times, these issues negatively affected LANE BRYANT results into
the first half of Fiscal 2004 (see "Comparison of Fiscal 2004 to Fiscal 2003;
Net Sales" above). 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 CATHERINES
stores, comparable store sales increases in casual sportswear were offset by
declines in other merchandise categories. During Fiscal 2003, we discontinued
the ADDED DIMENSIONS brand, closed the remaining ADDED DIMENSIONS stores, and
liquidated the remaining ADDED DIMENSIONS store inventory.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses increased from Fiscal
2002 to Fiscal 2003, primarily as a result of the increase in net sales, but
decreased as a percentage of net sales. 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 CATHERINES brands and benefits from our restructuring plan (see
"Restructuring Charge/Credit" below), partially offset by declining margins in
the LANE BRYANT brand. 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 for Fiscal 2003 included
$5.1 million of costs related to the valuation of LANE BRYANT inventories. The
$5.1 million related to markdowns for inventory on hand as a result of the poor
customer acceptance of, and fit and quality issues with, certain of LANE
BRYANT's products, which resulted in higher levels of promotional pricing to
liquidate the product. Cost of goods sold includes merchandise costs net of
discounts and allowances, freight, inventory shrinkage, and shipping and
handling costs associated with our e-commerce business. Net merchandise costs
and freight are capitalized as inventory costs.
28
<PAGE>
Buying and occupancy expenses increased as a percentage of net sales from
Fiscal 2002 to Fiscal 2003, primarily as a result of the lack of leverage on
relatively fixed occupancy costs caused by 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 as compared to our other brands and a $2.7 million write-down of
under-performing assets related to our MONSOON/ACCESSORIZE stores contributed to
the increase in occupancy expenses as a percentage of net sales. Buying expenses
increased 0.1% as a percentage of sales from Fiscal 2002 to Fiscal 2003. 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
The increase in selling, general, and administrative expenses from Fiscal
2002 to Fiscal 2003 was principally a result of the acquisition of LANE BRYANT.
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 CATHERINES and LANE BRYANT brands. General and
administrative expenses increased 0.2% as a percentage of net sales in Fiscal
2003, primarily as a result of increased employee benefits 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.
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 restructuring plan included the
closing or conversion of our THE ANSWER/ADDED DIMENSIONS stores, the closing of
130 under-performing FASHION BUG stores, and 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.
The restructuring charge also included $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.
We completed the restructuring plan and recognized a pre-tax restructuring
credit of $4.8 million during Fiscal 2003. The restructuring credit was
primarily a result of our ability to negotiate lease terminations on terms more
favorable than those used in 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 was not realized until Fiscal 2004.
Amortization of Goodwill
During Fiscal 2002, we recognized $4.9 million of amortization of goodwill
related to our CATHERINES acquisition. We adopted the provisions of SFAS No. 142
as of February 3, 2002, and discontinued the amortization of the CATHERINES
goodwill. However, the CATHERINES 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).
29
<PAGE>
Other Income/Interest Expense
The decrease in other income from Fiscal 2002 to Fiscal 2003 resulted
primarily from a $2.1 million decrease in interest income. The decrease in
interest income resulted from a lower average yield on investments during Fiscal
2003 as compared to Fiscal 2002. Interest expense increased primarily as a
result of amortization of fees related to our credit facility, and to a lesser
extent as a result of additional long-term mortgage borrowings and acquisitions
of point-of-sale equipment under long-term capital leases. In addition, interest
expense in Fiscal 2003 included a write-off of $1.0 million of unamortized
deferred financing costs related to a $67.5 million term loan that was repaid
during the period (see "Financing" below). These increases were partially offset
by reduced interest expense in Fiscal 2003 as a result of relatively lower
interest rates on borrowings and reduced levels of borrowings. During Fiscal
2003, we replaced the $67.5 million 11.5% term loan and $96.0 million of 7.5%
Convertible Subordinated Notes with $150.0 million of 4.75% Senior Convertible
Notes (see "Financing" below).
Income Tax Provision
The effective tax rate for Fiscal 2003 was 38.9%, as compared to a (2.7)%
effective tax rate for Fiscal 2002. The unusual effective tax rate in Fiscal
2002 resulted from 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 fully adopted the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets" as of February 3, 2002. In accordance with the transition
provisions of SFAS No. 142, we tested goodwill related to our CATHERINES
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 Fiscal 2003 results of operations. See "Impairment of Long-Lived Assets"
and "Accounting for Cash Consideration Received From a Vendor" in "CRITICAL
ACCOUNTING POLICIES" above for additional discussion of these items.
Comparison of Fourth Quarter 2004 to Fourth Quarter 2003
Net Sales
Net sales in the fourth quarter of Fiscal 2004 were $585.7 million, a
decrease of 2.6% from net sales of $601.2 million in the fourth quarter of
Fiscal 2003. Overall, comparable store sales decreased 1% in the fourth quarter
of Fiscal 2004. The decrease in sales was primarily attributable to a decrease
in the number of FASHION BUG operating stores following our Fiscal 2003 store
restructuring initiative and a 4% decrease in FASHION BUG comparable store
sales. As a result of lower levels of promotional activity in comparison to
competitors in the early part of the Christmas season, FASHION BUG stores
experienced comparable store sales decreases in all major product categories
except for accessories. Although the average number of units sold per customer
("UPC") at FASHION BUG increased 4%, the number of transactions, average retail
price per unit, and average dollars per sale decreased during the fourth quarter
of Fiscal 2004. LANE BRYANT stores experienced a 1% increase in comparable store
sales for the quarter, with comparable store sales increases in accessories,
intimate apparel, and casual sportswear, which were partially offset by
comparable store sales decreases in other product categories. For LANE BRYANT
stores, a 10% increase in both UPC and average dollars per sale were partially
offset by decreases
30
<PAGE>
in the average retail price per unit and the number of transactions. CATHERINES
stores experienced flat comparable store sales for the quarter, with comparable
store sales increases in casual sportswear and intimate apparel offset by
decreases in other product categories. For CATHERINES stores, a 2% increase in
UPC was offset by slight decreases in the average retail price per unit and the
number of transactions, while average dollars per sale was flat.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $437.0 million in
the fourth quarter of Fiscal 2004, a decrease of 3.2% from $451.4 million in the
fourth quarter of Fiscal 2003. As a percentage of net sales, these costs
decreased by 0.5% in the fourth quarter of Fiscal 2004 as compared to the fourth
quarter of Fiscal 2003. Cost of goods sold, as a percentage of net sales,
decreased 0.9% in the fourth quarter of Fiscal 2004 as compared to the fourth
quarter of Fiscal 2003. Significantly improved margins in our LANE BRYANT stores
were partially offset by reduced gross margins in our CATHERINES stores. Cost of
goods sold for the fourth quarter of Fiscal 2003 included $5.1 million of costs
related to the valuation of LANE BRYANT inventories. The $5.1 million related to
markdowns for inventory on hand as a result of the poor customer acceptance of,
and fit and quality issues with, certain LANE BRYANT products, which resulted in
higher levels of promotional pricing in order to liquidate the product. Buying
and occupancy expenses, expressed as a percentage of net sales, increased 0.4%
in the fourth quarter of Fiscal 2004 as compared to the fourth quarter of Fiscal
2003. The increase in buying and occupancy expenses as a percent of sales was
primarily attributable to the lack of leverage on relatively fixed occupancy
costs as a result of negative overall comparable store sales.
Selling, General, and Administrative
Selling, general, and administrative expenses were $131.0 million in the
fourth quarter of Fiscal 2004, a decrease of 9.4% from $144.6 million in the
fourth quarter of Fiscal 2003. As a percentage of net sales, these costs
decreased by 1.7% in the fourth quarter of Fiscal 2004 as compared to the fourth
quarter of Fiscal 2003. The decrease is primarily a result of the realization of
cost reduction initiatives, including improved management of controllable
expenses (see "Comparison of Fiscal 2004 to Fiscal 2003; Expenses Related to
Cost Reduction Plan" above). General and administrative expenses for the fourth
quarter of Fiscal 2004 also benefited from reduced medical benefits costs, as a
result of reduced medical claims by employees covered by our self-insured
employee benefit program.
Other Income/Interest Expense
Other income in the fourth quarter of Fiscal 2004 was $0.7 million as
compared to $0.5 million for the fourth quarter of Fiscal 2003. Interest expense
was $3.8 million in the fourth quarter of Fiscal 2004, an increase from $3.1
million in the fourth quarter of Fiscal 2003.
Income Tax Provision
The effective income tax rate was 27.5% in Fiscal 2004 as compared to 37.7%
in Fiscal 2003. The lower effective tax rate in Fiscal 2004 was due primarily to
changes in previously estimated full-year amounts, including our tax liability
related to insurance programs.
31
<PAGE>
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) 2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Cash and cash equivalents................... $123,781 $102,026 $ 36,640
Long-term available-for-sale securities(1).. 14,521 16,202 15,245
Cash provided by operating activities....... 90,286 205,992 143,831
Working capital............................. 271,915 193,517 141,839
Current ratio............................... 1.9 1.6 1.4
Long-term debt to equity ratio.............. 33.5% 36.2% 37.9%
- --------------------
<FN>
(1) At January 31, 2004, long-term liabilities related to our share of losses
in our low-income housing partnerships were reclassified as a reduction of
the cost of the investment in the partnerships. Prior-year amounts reflect
reclassifications to conform to the current-year presentation.
</FN>
</TABLE>
Cash Provided by Operating Activities
Our net cash provided by operating activities in Fiscal 2004 was $90.3
million, a decrease of $115.7 million from $206.0 million in Fiscal 2003. The
decrease was primarily a result of a $81.8 million increase in our investment in
inventories, net of accounts payable. Net cash provided by operating activities
also decreased as a result of a $10.7 million decrease in net income before
non-cash charges and the cumulative effect of accounting changes, a $29.8
million net change in prepaid and accrued expenses and other liabilities, and a
$13.2 million change in income taxes payable. These decreases were partially
offset by a $19.8 million decrease in accrued restructuring costs during Fiscal
2003.
The increase in the net investment in inventories was primarily a result of
a combination of slightly higher levels of store inventories at the end of
Fiscal 2004 due to lower-than-planned sales in the fourth quarter of Fiscal 2004
and a one-time benefit from improved vendor terms received during Fiscal 2003
from conforming LANE BRYANT's vendor terms to our corporate terms. During Fiscal
2004, we reached a settlement with the Internal Revenue Service regarding its
audit of our corporate-owned life insurance ("COLI") program (see below). The
settlement resulted in a decrease in income taxes payable during Fiscal 2004
that more than offset accrued taxes payable for the period. The change in
prepaid and accrued expenses and other liabilities was primarily a result of the
timing of certain payments.
Net cash provided by operating activities increased $62.2 million from
$143.8 million in Fiscal 2002 to $206.0 million in Fiscal 2003. The increase was
primarily a result of an increase in net income before non-cash charges and the
cumulative effect of accounting changes. 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 the $19.8 million decrease in accrued restructuring costs during
Fiscal 2003.
32
<PAGE>
During Fiscal 2004, we reached a settlement with the Internal Revenue
Service regarding its audit of our corporate-owned life insurance ("COLI")
program. The settlement included $18.5 million of income taxes and $4.0 million
of interest, net of a tax benefit of $2.2 million. Of the $18.5 million of
income taxes, $16.1 million was satisfied through the use of existing operating
losses and tax credits. As part of the settlement, we surrendered our existing
life insurance policies and received their cash surrender value of $16.3
million. The settlement had no impact on our current results of operations, as
we had previously provided for taxes to cover the settlement. The settlement had
a net positive impact of approximately $7.8 million on our Fiscal 2004 cash
flows. The utilization of the operating losses and tax credits to satisfy income
taxes related to the COLI settlement resulted in a decrease in net deferred tax
assets.
Capital Expenditures
Our capital expenditures were $45.0 million, $74.3 million, and $63.0
million in Fiscal 2004, 2003, and 2002, respectively. In Fiscal 2004, these
expenditures were primarily for the construction, remodeling, and fixturing of
new and existing retail stores and corporate systems technology. In addition,
pursuant to a program to replace point-of-sale ("POS") equipment in our FASHION
BUG stores and, in Fiscal 2004 our LANE BRYANT stores, we acquired $8.5 million,
$3.5 million, and $24.7 million of POS equipment under capital leases in Fiscal
2004, 2003, and 2002, 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 these capital leases. The re-negotiated
leases were combined into a new lease with a 60-month term and a lower interest
rate. We also acquired $9.0 million and $3.5 million of material handling
systems and related equipment and software for our White Marsh, Maryland
distribution center under capital leases in Fiscal 2004 and 2003, respectively.
These capital leases generally have an initial lease term of 60 months and
contain a bargain purchase option. Total investments in property, equipment, and
leasehold improvements, including cash expenditures and capital lease financing,
were $62.5 million, $81.3 million, and $87.7 million in Fiscal 2004, 2003, and
2002, respectively.
During Fiscal 2003, we acquired the 393,000 square foot White Marsh
distribution center at a cost of $17.3 million to replace our leased
distribution center in Columbus, Ohio. We relocated the Columbus distribution
center in February 2004. The lease for the Columbus, Ohio distribution center
and a related logistics and transportation services agreement were terminated
effective as of February 29, 2004 in accordance with early cancellation
provisions of the lease and agreement. As a result of the use of automated
sorting systems and improved facility design in the White Marsh facility, we
were also able to consolidate our 213,000 square foot Memphis, Tennessee
distribution center into the White Marsh facility during Fiscal 2004. We
relocated the Memphis distribution center in June 2003. We are currently
evaluating alternative uses for the Memphis facility. The consolidation of the
Memphis distribution center into the White Marsh facility was part of a cost
reduction plan announced in March 2003. See "RESULTS OF OPERATIONS; Comparison
of Fiscal 2004 to Fiscal 2003; Expenses Related to Cost Reduction Plan" above
and "Item 8. Financial Statements and Supplementary Data; Notes to Consolidated
Financial Statements; NOTE 14. EXPENSES RELATED TO COST REDUCTION PLAN" below
for details of the cost reduction plan.
We anticipate capital expenditures of approximately $70 million during
Fiscal 2005. These expenditures will primarily be for construction and fixturing
of new stores, remodeling and fixturing of existing stores, and improvements in
information technology and point-of-sale infrastructure. We expect to finance
these capital expenditures principally through internally generated funds and
capital lease financing.
33
<PAGE>
Long-term Debt, Lease, Dividend, and Purchase Commitments
At January 31, 2004, our commitments for future payments under our
long-term debt obligations, minimum lease payments under our capital leases and
operating leases, and payments due under our revolving credit facility, letters
of credit, long-term deferred compensation plans, and purchase obligations were
as follows:
<TABLE>
<CAPTION>
Payments Due by Period
-----------------------------------------------------
Less One to Three More
Than Three to Five Than Five
(In millions) Total One Year Years Years Years
----- -------- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Long-term debt, including current
portion(1)..................... $ 192.2 $ 6.9 $ 12.6 $ 6.6 $166.1
Capital leases...................... 42.5 14.6 21.6 6.2 0.1
Operating leases(2)................. 768.1 202.1 282.5 163.4 120.1
Revolving credit facility(3)........ 0.0 0.0 0.0 0.0 0.0
Letters of credit(3)................ 70.7 70.7 0.0 0.0 0.0
Stand-by letters of credit(3)....... 4.5 4.5 0.0 0.0 0.0
Long-term deferred compensation(4).. 3.2 1.1 1.1 0.7 0.3
Purchase commitments(5)............. 457.8 457.8 0.0 0.0 0.0
-------- ------ ------ ------ ------
Total............................... $1,539.0 $757.7 $317.8 $176.9 $286.6
======== ====== ====== ====== ======
- --------------------
<FN>
(1) Amounts represent the expected cash payments of our long-term debt
(including our convertible debt through maturity) and do not include any
fair value adjustments, bond premiums, discounts or revolving credit
facilities.
(2) Commitments under operating leases include $50.5 million payable under the
LANE BRYANT master sublease with Limited Brands, which we have guaranteed.
(3) We currently have a $300 million revolving credit facility that expires on
August 15, 2008, which provides for cash borrowings and the ability to
issue up to $150 million of letters of credit. At January 31, 2004, there
were no borrowings under this facility.
(4) Long term compensation consists of our non-qualified deferred compensation
plan and supplemental retirement plan, which are included in "Deferred
taxes and other non-current liabilities" on our consolidated balance
sheets. We have developed estimates of projected payment obligations for
participant planned in-service distributions of the deferred compensation
plan liability as of January 31, 2004. We have excluded $12.8 million of
retirement/termination benefit distribution obligations as of January 31,
2004 from the above estimates. This amount has been excluded because the
value of the obligation and the timing of payments may vary annually due to
changes in the fair value of the plan assets and/or assumptions for
participant retirement/termination.
(5) Purchase commitments include agreements to purchase goods or services in
the ordinary course of business.
</FN>
</TABLE>
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.
Off-Balance-Sheet Arrangements
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 $331.7 million and $384.2 million
of credit card receivables in Fiscal 2004 and Fiscal 2003, respectively, and had
$269.4 million
34
<PAGE>
of securitized credit card receivables outstanding as of January 31, 2004. We
held certificates and retained interests in our securitizations of $55.4 million
as of the end of Fiscal 2004, 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 as of January 31, 2004. 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. On January 21, 2004, we closed a new conduit credit card
securitization facility of $132.0 million that will provide additional funding
of up to $100.0 million for a term of up to two years, subject to an annual
renewal. As of January 31, 2004, no credit card receivables were funded under
this facility. Subsequent to January 31, 2004, we sold to investors an
additional $9.5 million of certificates under the $100.0 million facility that
we were holding as a retained interest. As of January 31, 2004, these
certificates were included in short-term available-for-sale securities. To the
extent that remaining certificates under the $100.0 million facility are not
sold, we will hold them as a retained interest.
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 January 31, 2004, Charming
Shoppes Receivables Corp. held $28.8 million of Charming Shoppes Master Trust
certificates and retained interests and Charming Shoppes Seller, Inc. held
retained interests of $9.2 million (which are included in the $55.7 million of
short-term available-for-sale securities we held at January 31, 2004). 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, which would otherwise be available to be paid to us
with respect to our subordinated interests, within the trust as additional
enhancement. For example, if we fail or the trust fails 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 agreements. If this
were to occur, it could result in our having insufficient liquidity; however, we
believe we would have sufficient notice to seek alternative forms of financing
through other third-party providers. As of January 31, 2004, the trust was in
compliance with all applicable financial performance standards. Amounts placed
into enhancement accounts, if any, that are not required for payment to 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 16. Asset Securitization" below for additional discussion of
our asset securitization program.
35
<PAGE>
We also have non-recourse agreements under which third parties provide
proprietary credit card sales accounts receivable funding programs for both our
CATHERINES and LANE BRYANT brands. These funding programs expire in January 2005
for CATHERINES and in January 2006 for LANE BRYANT. Under these agreements, the
third parties reimburse us daily for sales generated by the respective brand's
proprietary credit card accounts. Under the CATHERINES agreement, we may be
required to repurchase receivables from the third party under certain conditions
relating to a change in control of the Company. 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 CATHERINES accounts receivable
held by the third party at January 31, 2004 and February 1, 2003 were
approximately $70.4 million and $85.8 million, respectively. The net balances of
LANE BRYANT accounts receivable held by the third party at January 31, 2004 and
February 1, 2003 were approximately $198.3 million and $195.3 million,
respectively.
On January 28, 2004, in accordance with the terms of the Merchant Services
Agreement pursuant to which the CATHERINES proprietary credit cards are issued,
we gave notification of termination and election to purchase the CATHERINES
credit card portfolio to the third-party provider. In accordance with the terms
of the agreement, the purchase option required us to provide one year's notice
in order to terminate the agreement and to purchase the portfolio, subject to
the negotiation of the final purchase agreement.
We lease substantially all of our operating stores under non-cancelable
operating lease agreements. Additional details on these leases, including
minimum lease commitments, are included in "Liquidity and Capital Resources"
above, and in "Item 8. Financial Statements and Supplementary Data; Notes to
Consolidated Financial Statements; Note 17. Leases" below.
Financing
Revolving Credit Facility
On January 29, 2004, we amended and restated our existing $300.0 million
revolving credit facility that was scheduled to expire on August 16, 2004 and
extended the facility to August 15, 2008. The amended $300.0 million Facility
(the "Facility") provides for cash borrowings and enables us to issue up to
$150.0 million of letters of credit for purchases of merchandise and for standby
letters of credit. As of January 31, 2004, there were no borrowings outstanding
under the Facility. The availability of borrowings under the Facility is subject
to limitations based on eligible inventory and, under certain circumstances,
credit card receivables and in-transit cash. The Facility is secured by our
general assets, except for (i) all assets related to our credit card
securitization program, (ii) all real property, (iii) certain equipment subject
to other mortgages or capital leases, (iv) the assets of our non-U.S.
subsidiaries, and (v) certain other assets. As of January 31, 2004, we had $4.0
million of unamortized deferred debt acquisition costs related to the original
revolving credit facility and the amended and restated facility. We are
amortizing these deferred debt acquisition costs on a straight-line basis over
the life of the amended and restated facility as interest expense.
The interest rate on borrowings under the Facility ranges from Prime to
Prime plus .50% per annum for Prime Rate Loans, and LIBOR plus 1.5% to LIBOR
plus 2.00% per annum for Eurodollar Rate Loans. The interest rate is determined
quarterly, based on our average excess and suppressed availability, as defined
in the Facility. As of January 31, 2004, the interest rate on borrowings under
the Facility was 4.00% for Prime Rate Loans and 2.60% for Eurodollar Rate Loans.
The Facility includes limitations on sales and leasebacks, the incurrence
of additional liens and debt, capital lease financing, and other limitations.
The Facility also requires, among other things, that we not pay dividends on our
common stock and, if our excess and suppressed availability (as defined in the
Facility) is less than $50.0 million
36
<PAGE>
at any time within a fiscal quarter, that we maintain consolidated 12-month
earnings before interest, taxes, depreciation, and amortization ("EBITDA")
(excluding non-recurring, non-cash charges as defined in the Facility), of
$115.0 million. As of January 31, 2004, the excess and suppressed availability,
including excess cash, under the revolving credit facility was $202.4 million.
We had outstanding letters of credit totaling $75.2 million as of January 31,
2004. As of the end of Fiscal 2004, we were not in violation of any of the
covenants included in the Facility.
Long-term Debt and Equity Financing
During Fiscal 2003, we completed a private placement of $150.0 million of
4.75% Senior Convertible Notes due 2012 (the "Senior Notes"). We registered the
Senior Notes with the Securities and Exchange Commission for resale by the
initial purchasers during August 2002. 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 11.5% term loan due August 16, 2004, $3.5
million outstanding under our revolving credit facility, and $6.9 million of our
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 $18.7 million. The remaining proceeds ($48.9 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).
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% of principal 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.
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.
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 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.
37
<PAGE>
As of January 31, 2004, 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 is currently subject to certain restrictions 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. Subject to obtaining
consent, and as conditions may allow, we may from time to time acquire
additional shares of our common stock. Such shares, if purchased, would be held
as treasury shares.
In November 2001, we borrowed $10.9 million under a 7.77% mortgage note,
which 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, which is secured by
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 our revolving credit facility. In October 2002, we borrowed
$14.0 million under a 6.53% mortgage note, which 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 CATHERINES, we assumed a 7.5% mortgage note
of $6.9 million ($5.8 million of principal was outstanding on this note as of
January 31, 2004), which is secured by land and buildings at our CATHERINES
office and distribution center in Memphis, Tennessee. There is a pre-payment
penalty of 1% of the outstanding principal.
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 receivables 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. The finance charges on most of our proprietary
credit card accounts are billed using a floating rate index (the Prime lending
rate), subject to a floor and limited by legal maximums. The certificates issued
under the securitization include both floating and fixed interest rate
certificates. The floating rate certificates are based on an index of either
one-month LIBOR or the commercial paper rate, depending on the issuance.
Consequently, we have basis risk exposure to the extent that the movement of the
floating rate index on the certificates varies from the movement of the Prime
rate. Additionally, as of January 31, 2004, the floating finance charge rate on
the credit cards was below the contractual floor rate, thus exposing us to
interest rate risk on the portion of certificates that are funded at floating
rates. To the extent that short-term interest rates were to increase by one
percentage point by the end of Fiscal 2005, an increase of approximately $750
thousand in selling, general, and administrative expenses would result.
As of January 31, 2004, 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 January 31, 2004 and February 1, 2003, and
the related consolidated statements of operations and comprehensive income
(loss), stockholders' equity, and cash flows for each of the three fiscal years
in the period ended January 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Charming
Shoppes, Inc. and subsidiaries at January 31, 2004 and February 1, 2003, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended January 31, 2004, 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."
/S/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 17, 2004
40
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, February 1,
(Dollars in thousands, except share amounts) 2004 2003
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents..................................................... $ 123,781 $ 102,026
Available-for-sale securities ................................................ 55,688 50,286
Merchandise inventories ...................................................... 309,995 286,472
Deferred taxes ............................................................... 19,902 11,726
Prepayments and other ........................................................ 57,494 74,296
----------- -----------
Total current assets ......................................................... 566,860 524,806
----------- -----------
Property, equipment, and leasehold improvements - at cost .................... 705,257 671,376
Less accumulated depreciation and amortization ............................... 386,633 348,295
----------- -----------
Net property, equipment, and leasehold improvements .......................... 318,624 323,081
----------- -----------
Trademarks and other intangible assets ....................................... 170,478 171,138
Goodwill ..................................................................... 66,956 68,594
Available-for-sale securities, including fair value adjustments of $(390)
as of January 31, 2004 and $(134) as of February 1, 2003 .............. 14,521 16,202
Other assets ................................................................. 27,440 28,065
----------- -----------
Total assets ................................................................. $ 1,164,879 $ 1,131,886
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ............................................................. $ 135,777 $ 147,952
Accrued expenses ............................................................. 138,166 163,598
Income taxes payable ......................................................... 1,128 7,144
Current portion - long-term debt ............................................. 17,278 12,595
Accrued expenses related to cost reduction plan .............................. 2,596 0
----------- -----------
Total current liabilities .................................................... 294,945 331,289
----------- -----------
Deferred taxes and other non-current liabilities ............................. 62,030 35,918
Long-term debt ............................................................... 202,819 203,045
Stockholders' equity
Common stock $.10 par value
Authorized - 300,000,000 shares
Issued - 125,526,573 shares and 125,149,242 shares .................... 12,553 12,515
Additional paid-in capital ................................................... 201,798 200,040
Treasury stock at cost - 12,265,993 shares ................................... (84,136) (84,136)
Deferred employee compensation ............................................... (2,539) (3,370)
Accumulated other comprehensive income (loss) ................................ (365) (550)
Retained earnings ............................................................ 477,774 437,135
----------- -----------
Total stockholders' equity ................................................... 605,085 561,634
----------- -----------
Total liabilities and stockholders' equity ................................... $ 1,164,879 $ 1,131,886
=========== ===========
<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
---------------------------------------
January 31, February 1, February 2,
(In thousands, except per share amounts) 2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Net sales ..................................................................... $ 2,285,680 $ 2,412,409 $ 1,993,843
----------- ----------- -----------
Cost of goods sold, buying, and occupancy expenses ............................ 1,642,065 1,721,052 1,455,601
Selling, general, and administrative expenses ................................. 554,884 603,502 486,204
Expenses related to cost reduction plan ....................................... 11,534 0 0
Restructuring charge (credit) ................................................. 0 (4,813) 37,708
Amortization of goodwill ...................................................... 0 0 4,885
----------- ----------- -----------
Total operating expenses ...................................................... 2,208,483 2,319,741 1,984,398
----------- ----------- -----------
Income from operations ........................................................ 77,197 92,668 9,445
Other income, principally interest ............................................ 2,050 2,328 4,730
Interest expense .............................................................. (15,609) (20,292) (18,701)
----------- ----------- -----------
Income (loss) before income taxes, minority interest, and cumulative
effect of accounting changes ............................................. 63,638 74,704 (4,526)
Income tax provision (benefit) ................................................ 23,141 29,055 (120)
----------- ----------- -----------
Income (loss) before minority interest and cumulative effect
of accounting changes .................................................... 40,497 45,649 (4,406)
Minority interest in net loss of consolidated subsidiary ...................... 142 679 0
----------- ----------- -----------
Income (loss) before cumulative effect of accounting changes .................. 40,639 46,328 (4,406)
Cumulative effect of accounting changes, net of income tax benefit of $2,758 .. 0 (49,098) 0
----------- ----------- -----------
Net income (loss) ............................................................. 40,639 (2,770) (4,406)
----------- ----------- -----------
Other comprehensive income (loss), net of tax:
Unrealized (losses) gains on available-for-sale securities, net of income tax
(expense) benefit of $100 in 2004, $46 in 2003, and $(66) in 2002 ....... (156) (73) 70
Reclassification of realized gains on available-for-sale securities
included in net income, net of income tax expense of $80 in 2002 ......... 0 0 (151)
Unamortized deferred loss on termination of derivative, net of income tax
benefit of $621 in 2002 .................................................. 0 0 (1,152)
Reclassification of amortization of deferred loss on termination of derivative,
net of income tax benefit of $184 in 2004, 2003, and 2002 ................ 341 341 341
----------- ----------- -----------
Total other comprehensive income (loss) ....................................... 185 268 (892)
----------- ----------- -----------
Comprehensive income (loss).................................................... $ 40,824 $ (2,502) $ (5,298)
=========== =========== ===========
Basic net income (loss) per share:
Before cumulative effect of accounting changes................................. $ .36 $ .41 $(.04)
Cumulative effect of accounting changes........................................ .00 (.43) .00
----- ----- -----
Net income (loss).............................................................. $ .36 $(.02) $(.04)
===== ===== =====
Diluted net income (loss) per share:
Before cumulative effect of accounting changes................................. $ .35 $ .39 $(.04)
Cumulative effect of accounting changes........................................ .00 (.37) .00
----- ----- -----
Net income (loss).............................................................. $ .35 $ .01(1) $(.04)
===== ===== =====
<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>
Common Stock Additional Treasury Stock
------------------ Paid-in ---------------------
(Dollars in thousands) Shares Amount Capital Shares Amount
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
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)
Issued to employees......................... 179,506 18 991
Exercise of stock options................... 220,459 22 834
Shares withheld for payment of employee
payroll taxes due on shares issued
under employee stock plans............. (22,634) (2) (90)
Tax benefit - employee stock programs....... 23
----------- ------- -------- ---------- --------
Balance, January 31, 2004................... 125,526,573 $12,553 $201,798 (12,265,993) $(84,136)
=========== ======= ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deferred Other
Employee Comprehensive Retained
Compensation Income (Loss) Earnings
------------ ------------- --------
<S> <C> <C> <C>
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 income taxes of $139... 268
Net loss........................................ (2,770)
------- ----- --------
Balance, February 1, 2003....................... (3,370) (550) 437,135
Issued to employees............................. (600)
Amortization.................................... 1,431
Unrealized gains, net of income taxes of $84.... 185
Net income...................................... 40,639
------- ----- --------
Balance, January 31, 2004....................... $(2,539) $(365) $477,774
======= ===== ========
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
43
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------
January 31, February 1, February 2,
(In thousands) 2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income (loss) ..................................................... $ 40,639 $ (2,770) $ (4,406)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization .................................... 76,347 79,421 63,902
Deferred income taxes, net of acquisitions ....................... 12,049 5,327 9,212
Write-down of Catherine's goodwill ............................... 0 43,975 0
Cumulative effect of capitalization of cash received from vendors 0 7,881 0
Write-down of capital assets due to restructuring ................ 0 0 17,763
Net loss from disposition of capital assets ...................... 1,537 3,436 4,278
Capitalized interest on conversion of convertible notes .......... 0 3,026 0
Tax benefit related to stock plans ............................... 23 1,505 20
Other, net ....................................................... (142) (679) (231)
Changes in operating assets and liabilities, net of acquisitions:
Merchandise inventories ...................................... (23,523) 6,054 66,671
Accounts payable ............................................. (12,175) 40,061 (12,541)
Prepayments and other ........................................ 16,802 16,583 (9,866)
Income taxes payable ......................................... (6,016) 7,144 0
Accrued expenses and other ................................... (17,851) 14,786 (10,356)
Accrued expenses related to cost reduction plan .............. 2,596 0 0
Accrued restructuring costs .................................. 0 (19,758) 19,385
--------- --------- ---------
Net cash provided by operating activities ............................. 90,286 205,992 143,831
--------- --------- ---------
Investing activities
Gross purchases of available-for-sale securities ...................... (35,440) (58,308) (51,902)
Proceeds from sales of available-for-sale securities .................. 31,463 54,797 106,950
Acquisition of Lane Bryant, Inc., net of cash acquired ................ 0 0 (280,841)
Investment in capital assets .......................................... (45,014) (74,303) (63,046)
Proceeds from sales of capital assets ................................. 500 801 0
Decrease (increase) in other assets ................................... (6,704) (4,150) 2,705
--------- --------- ---------
Net cash used in investing activities ................................. (55,195) (81,163) (286,134)
--------- --------- ---------
Financing activities
Proceeds from short-term borrowings ................................... 221,423 534,499 623,704
Repayments of short-term borrowings ................................... (221,423) (588,795) (569,407)
Proceeds from long-term borrowings .................................... 1,557 164,000 90,950
Repayments of long-term borrowings .................................... (14,566) (84,122) (16,251)
Payments of deferred financing costs .................................. (1,500) (5,568) (7,991)
Purchases of treasury stock ........................................... 0 (84,136) 0
Proceeds from issuances of common stock ............................... 1,173 4,679 1,394
--------- --------- ---------
Net cash provided by (used in) financing activities ................... (13,336) (59,443) 122,399
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ...................... 21,755 65,386 (19,904)
Cash and cash equivalents, beginning of year .......................... 102,026 36,640 56,544
--------- --------- ---------
Cash and cash equivalents, end of year ................................ $ 123,781 $ 102,026 $ 36,640
========= ========= =========
Non-cash financing and investing activities
Common stock issued on conversion of convertible notes ................ $ 0 $ 89,105 $ 0
========= ========= =========
Common stock issued for acquisition of Lane Bryant, Inc. .............. $ 0 $ 0 $ 59,300
========= ========= =========
Purchases of assets under capital leases .............................. $ 17,466 $ 6,997 $ 24,677
========= ========= =========
<FN>
Certain prior-year amounts have been reclassified to conform to the current-year
presentation. See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
44
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
We operate 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 Charming
Shoppes, Inc. and our wholly-owned and majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. We have
a 52 - 53 week fiscal year ending on the Saturday nearest to January 31. As used
herein, the terms "Fiscal 2004," "Fiscal 2003," and "Fiscal 2002" refer to the
fiscal years ended January 31, 2004, February 1, 2003, and February 2, 2002,
respectively. The term "Fiscal 2005" refers to the fiscal year which will end on
January 29, 2005. The terms "the Company," "we," "us," and "our" refer to
Charming Shoppes, Inc., and, where applicable, our consolidated subsidiaries.
During Fiscal 2001, we entered into a joint venture agreement with MONSOON
plc. to open and operate MONSOON/ACCESSORIZE stores in the United States. We
invested $4,000,000 for an 80% controlling interest in the joint venture. We
began operating the joint venture as a consolidated operating unit and accounted
for MONSOON plc.'s investment as a minority interest. On March 18, 2003, we
announced that we would discontinue the operation of the 9 MONSOON/ACCESSORIZE
stores operated under the joint venture, and we closed the stores during Fiscal
2004 (see "Property and Depreciation" 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, 2004
to January 31, 2004 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 that our management
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. We adjust the cost
of these investments for amortization of premiums and the accretion of discounts
to maturity where applicable. Such adjustments are included in interest income.
We include interest income and realized gains and losses from investments in
other income. The cost of securities sold is based on the specific
identification method. Short-term available-for-sale securities include
investments with an original maturity of greater than three months and a
remaining maturity of less than one year, and consist primarily of retained
interests in our asset securitization program (see "Note 16. Asset
Securitization" below). Long-term available-for-sale securities include
45
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
investments that 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, using
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 currently taken and shrinkage on the retail
value of inventories. In addition to markdowns that have been taken (i.e.,
selling price permanently reduced on the selling floor), we accrue an estimate
for markdowns not yet recorded that we believe will be necessary to sell
end-of-season inventory on hand at the end of the period. We purchase inventory
by season and distinguish aged inventory by tracking inventory quantities on
hand by season. We liquidate aged seasonal inventory through markdowns or sale
to liquidators. We base our inventory shrinkage on periodic physical inventories
on a store-by-store basis, with supplemental observations in locations
exhibiting high shrinkage rates. We determine interim shrinkage estimates on a
store-by-store basis, based on our 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 of property, equipment
(including equipment acquired under capital leases), and leasehold improvements
was $68,354,000, $70,357,000, and $53,134,000 in Fiscal 2004, 2003, and 2002,
respectively.
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," which
superseded SFAS No. 121 and resolved certain implementation issues related to
SFAS No. 121. SFAS No. 144 also superseded 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
retained 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 the classification of long-lived
assets to be disposed of other than by sale (such as by abandonment) 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 when evaluating an asset for potential impairment,
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.
46
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
Pursuant to SFAS No. 144, we recorded a $2,700,000 write-down of
under-performing assets related to our consolidated MONSOON joint venture during
Fiscal 2003. The amount of the write-down is included in occupancy expenses.
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. The LANE BRYANT trademarks, tradenames, and
internet domain names are well-recognized in the plus-size apparel market. We
expect to renew and protect these trademarks, tradenames, and internet domain
names indefinitely, and expect that they will generate positive cash flows for
the Company for the foreseeable future. Therefore, the appraised value of the
trademarks, tradenames, and internet domain names are not being amortized. We
periodically review the trademarks, tradenames, and internet domain names for
indicators of a limited useful life. We are amortizing the customer lists and
covenant not to compete over their estimated useful life of five years.
We have allocated to goodwill the excess of the cost of the LANE BRYANT
acquisition over the estimated fair value of the identifiable tangible and
intangible net assets acquired. 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. ("CATHERINES") on a straight-line basis over 20 years.
We recognized $4,885,000 of amortization of CATHERINES goodwill in Fiscal 2002.
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 CATHERINES goodwill, and we review
the value of the LANE BRYANT and CATHERINES goodwill for impairment on an annual
basis.
The pro forma effect of applying the non-amortization provisions of SFAS
No. 142 for Fiscal 2002 is as follows:
<TABLE>
<CAPTION>
(In thousands, except per-share amounts) 2002
----
<S> <C>
Net loss as reported.............................................. $(4,406)
Amortization of goodwill (1)...................................... 4,885
-------
Pro forma net income excluding goodwill amortization.............. $ 479
=======
Diluted net income per share as reported.......................... $(.04)
Pro forma per share effect of excluding goodwill amortization (1). .05
-----
Pro forma diluted net income per share............................ $ .00(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>
47
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
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 during Fiscal 2003. As a result, we determined that the carrying
value of goodwill related to our CATHERINES acquisition (including the value of
intangible assets we did not separately account for at the date of the
CATHERINES acquisition) exceeded the estimated fair value of the CATHERINES
goodwill under SFAS No. 142. We determined the estimated fair value of the
CATHERINES goodwill using the present value of expected future cash flows
associated with the CATHERINES assets. We recorded a write-down (which was 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 the
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 had been no impairment of these assets.
The write-down of the CATHERINES goodwill is 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 annually, or
more frequently if there is an indication of possible impairment. We performed
this annual review during the fourth quarters of Fiscal 2003 and Fiscal 2004,
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. The Trust issues certificates which are sold to investors, and
we retain any undivided interests that remain unsold. We include these remaining
undivided interests, and any other retained interests, in short-term
available-for-sale securities 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 our
accompanying consolidated statements of operations and comprehensive income
(loss). We have 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. See "Impact of Recent Accounting
Pronouncements" below for a discussion of Financial Accounting Standards Board
("FASB") Interpretation No. 46, "Consolidation of Variable Interest Entities."
Deferred Debt Acquisition Costs
Debt acquisition costs are deferred and amortized on a straight-line basis
over the life of the related debt agreement.
48
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
Insurance Liabilities
We use a combination of third-party insurance and/or self-insurance for
certain risks, including workers' compensation, medical, dental, automobile, and
general liability claims. Our insurance liabilities are a component of "Accrued
expenses" on our consolidated balance sheet, and represent an estimate of the
ultimate cost of uninsured claims incurred as of the balance sheet date. In
estimating our self insurance liabilities, we use independent actuarial
estimates of expected losses, which are based on statistical analyses of
historical data. Loss estimates are adjusted based upon actual claim settlements
and reported claims. Although we do not expect the amounts ultimately paid to
differ significantly from our estimates, self-insurance liabilities could be
affected if future claim experience differs significantly from the historical
trends and the actuarial assumptions. We evaluate the adequacy of these
liabilities on a regular basis, modifying our assumptions as necessary, updating
our records of historical experience, and adjusting our liabilities as
appropriate.
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
on a straight-line basis 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 grant or for shares purchased under our Employee
Stock Purchase Plan. We have elected to follow the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation." We adopted the
disclosure requirements of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," as of the beginning of Fiscal 2004.
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 amounts) 2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Net income (loss) as reported............................. $40,639 $(2,770) $(4,406)
Add stock-based employee compensation as reported,
using intrinsic value method, net of income taxes.... 930 790 725
Less stock-based employee compensation, using fair-value
method, net of income taxes.......................... (3,298) (5,864) (3,364)
------- ------- -------
Pro forma net income (loss)............................... $38,271 $(7,844) $(7,045)
======= ======= =======
Basic net income (loss) per share:
As reported.......................................... $.36 $(.02) $(.04)
Pro forma............................................ .34 (.07) (.07)
Diluted net income (loss) per share:
As reported.......................................... .35 .01 (.04)
Pro forma............................................ .33 (.02) (.07)
</TABLE>
49
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
For purposes of determining the pro forma disclosures, we estimate the fair
value of each option grant on the date of grant using the Black-Scholes
option-pricing model. In applying the Black-Scholes model, we used an estimated
stock price volatility of 37.6, a dividend yield of 0.0%, 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>
(In percents) 2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate:
Employee stock purchase plan........ 0.9 1.1 1.7
Stock award plans................... 2.8 3.1 3.8
Stock option and incentive plans.... 2.8 3.1 5.0
</TABLE>
Revenue Recognition
Revenues from merchandise sales are net of returns and allowances, and
exclude sales tax. Revenues from our e-commerce business include shipping and
handling fees billed to customers. We record a reserve for estimated future
sales returns based on an analysis of actual returns received, and we defer
recognition of layaway sales to the date of delivery.
We offer our customers various loyalty card programs (see "Note 12.
customer loyalty card programS" below). Customers that join these programs are
entitled to various benefits, including discounts and rebates on purchases
during the membership period. Customers generally join these programs by paying
an annual membership fee. We recognize revenue from these loyalty programs as
sales over the life of the membership period based on when the customer earns
the benefits and when the fee is no longer refundable. Costs we incur in
connection with administering these programs are recognized in cost of goods
sold as incurred.
Cost of Goods Sold, Buying, and Occupancy Expenses
Cost of goods sold includes merchandise costs net of discounts and
allowances, freight, inventory shrinkage, and shipping and handling costs
associated with our e-commerce business. We capitalize net merchandise costs and
freight as inventory costs. Cost of goods sold also includes costs incurred in
connection with our customer loyalty card programs (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 $60,494,000, $63,943,000, and $47,310,000 in Fiscal 2004, 2003, and
2002, respectively.
Costs Associated With Exit or Disposal Activities
We recognize liabilities for costs associated with exit or disposal
activities initiated after December 31, 2002 when the liabilities are incurred,
and value the liabilities at fair value, in accordance with SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." Severance
pay is recognized as employees render service over future periods if the
severance arrangement requires employees to render future service beyond a
minimum retention period.
50
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
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, we
adjust deferred tax assets and liabilities 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 through January 31, 2004 because we intend to reinvest
such undistributed earnings in foreign operations.
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 convertible
debt, 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.
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 CATHERINES stores are aggregated 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.
Cash Consideration Received from Vendors
As of the beginning of Fiscal 2003, cash consideration received from
vendors is recorded as a reduction of inventory and is recognized in cost of
goods sold as inventory is sold, in accordance with EITF Issue 02-16,
"Accounting by a Customer (Including a Reseller) for Cash Consideration Received
from a Vendor." In Fiscal 2003, we recognized a charge of $5,123,000, net of
income taxes of $2,758,000, for 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 January 31, 2004 and February 1, 2003,
$9,456,000 and $8,097,000, respectively, of cash received from vendors has been
deferred into inventory and will be recognized as inventory is sold. We defer
the recognition of markdown allowances during interim periods in order to better
match the recognition of markdown allowances to the period the related markdown
expenses are recorded. Pro forma net loss and diluted net loss per share for
Fiscal 2002, assuming the change in accounting for the deferral of cash received
from vendors was retroactively applied to the beginning of Fiscal 2002, are
$5,189,000 and $.05, respectively.
51
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
Impact of Recent Accounting Pronouncements
We adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," as
of the beginning of Fiscal 2004. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Adoption of SFAS No. 143 did
not have a material impact on our financial position or results of operations.
In January 2003, the FASB issued Financial Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities," an interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements." A
variable interest entity ("VIE") is a corporation, trust, partnership, or other
legal entity used for business purposes that either does not have equity
investors with substantive voting rights or has equity investors that do not
provide sufficient financial resources for the entity to finance its activities
without additional subordinated financial support from other parties.
Consolidation of a VIE by a variable interest holder is required if the variable
interest holder is subject to a majority of the VIE's risk of loss, is entitled
to receive a majority of the VIE's residual returns, or both. The variable
interest holder that consolidates the VIE is the primary beneficiary. FIN No. 46
also requires that the primary beneficiary and all other enterprises with a
significant variable interest in a VIE provide certain additional disclosures.
FIN No. 46 provides certain exceptions to these rules, including qualifying
special purpose entities ("QSPEs") subject to the requirements of SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities."
FIN No. 46 is effective for all VIEs created after January 31, 2003. The
disclosure provisions of FIN No. 46 apply to financial statements issued after
January 31, 2003, regardless of when the VIE was established. For VIEs created
before February 1, 2003, the consolidation provisions of FIN No. 46, as
originally issued, were to be applied in the first interim or annual reporting
period beginning after June 15, 2003. In October 2003, the FASB postponed the
implementation date for VIEs created before February 1, 2003 to the first
interim or annual period ending after December 15, 2003, provided that the
reporting entity has not issued financial statements reporting the VIE in
accordance with FIN No. 46. In December 2003, the FASB revised FIN No. 46 to
delay the required implementation date for entities that are not special purpose
entities ("SPEs"), such as equity method investments in operating companies.
Early adoption of the provisions of FIN No. 46 is permitted. We do not expect
that adoption of FIN No. 46 will have a material impact on our financial
position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after that date.
We do not currently hold derivative instruments subject to the provisions
of SFAS No. 133, as amended. Adoption of SFAS No. 149 had no impact on our
financial position or results of operations.
52
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that financial instruments within the scope of the statement be
classified as a liability (or an asset in some circumstances). Under previous
guidance, such instruments could be classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of nonpublic entities. On November 7, 2003, the FASB issued a FASB
Staff Position ("FSP") to defer indefinitely the application of various
provisions of SFAS No. 150 for certain mandatorily redeemable non-controlling
interests of all entities. The FSP also deferred indefinitely the classification
and measurement provisions for non-controlling interests in consolidated
limited-life entities.
We have not issued financial instruments subject to the provisions of SFAS
No. 150. We do not expect that adoption of SFAS No. 150 will have a material
impact on our financial position or results of operations.
In December 2003, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB No. 104 revises
or rescinds portions of the interpretive guidance on revenue recognition
included in Topic 13 of the codification of SEC Staff Accounting Bulletins in
order to make this interpretive guidance consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations. The adoption of
SAB No. 104 did not have a material impact on our financial position or results
of operations.
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 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). In December 2001, based on the final determination of the fair
value of the LANE BRYANT net assets acquired, 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 before the
LANE BRYANT acquisition. During Fiscal 2002, we repurchased the 9,525,993 shares
of our common stock issued in connection with our acquisition of LANE BRYANT
(see "Note 8. Stockholders' Equity" below). In accordance with the terms of the
acquisition agreement, the numbers of shares of our common stock issued in
connection with the acquisition were based on the average closing market values
of our stock for the five-day period ending two days before the issuance of the
shares.
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.
53
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
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 were recorded at their
estimated fair values. 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. The fair values of acquired
intangible assets were based on an independent appraisal. The fair values of
acquired property and equipment were based primarily on depreciated replacement
cost. Other assets acquired and liabilities assumed were 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. As of the end of Fiscal 2004, we closed nine of
the under-performing stores. Of the remaining five stores, two stores will close
during Fiscal 2005 and three stores will not be closed. 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. These transitional services included 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. We moved all of the LANE
BRYANT business applications and processes from the Limited Brands platform to
our platform by the end of Fiscal 2003.
In accordance with the provisions of SFAS No. 142, the trademarks,
tradenames, and internet domain names acquired are not being amortized, but are
subject to annual reviews for impairment or for indicators of a limited useful
life. Other intangible assets acquired, consisting of customer lists and a
covenant not to compete, 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 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 an annual review for impairment.
54
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
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 results of operations for Fiscal 2002 are
based on historical data, and give effect to our acquisition of LANE BRYANT as
if the acquisition had occurred on February 4, 2001. The pro forma information
includes adjustments having a continuing impact on the consolidated Company as a
result of using the purchase method of accounting for the acquisition.
<TABLE>
<CAPTION>
(In thousands except per share amounts) 2002
----
<S> <C>
Net sales............................................... $2,486,178
Income before cumulative effect of accounting changes... 1,691
Net income.............................................. 1,691
Net income per share:
Basic.......................................... $.02
Diluted........................................ .02
</TABLE>
The unaudited pro forma results of operations are not necessarily
indicative of the actual results of operations that would have occurred if the
acquisition had occurred as of February 4, 2001, and are not necessarily
indicative of the results that may be achieved in the future. The unaudited pro
forma information does not reflect adjustments for operating synergies that 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.
55
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
During Fiscal 2003, we recorded certain adjustments to goodwill recognized
in connection with the LANE BRYANT acquisition, as follows:
o At the date of acquisition in August 2001, there was an agreement for an
unfavorable service contract for which we recorded a liability of
$4,640,000 based on the estimated payment terms. During Fiscal 2003, the
payment terms of the unfavorable service contract were finalized. As a
result, we revised our estimate of costs related to the contract to
$2,081,000, which resulted in a decrease of $1,561,000 in LANE BRYANT
goodwill, net of deferred income taxes of $998,000.
o We recorded adjustments to certain liabilities, which resulted in a
decrease in LANE BRYANT goodwill of $438,000, net of deferred income taxes
of $90,000.
o We recorded a liability for severance in accordance with an agreement
entered into at the time of the acquisition that allowed us to use the
existing LANE BRYANT distribution center and receive related distribution
services on a transition basis. This severance liability resulted in an
increase in goodwill of $611,000, net of deferred income taxes of $389,000.
o We reduced the acquisition value assigned to equipment and leasehold
improvements in the existing LANE BRYANT distribution center, which we will
abandon at the end of the transition period as a result of our acquisition
of a replacement distribution center in White Marsh, Maryland. This
adjustment, which had no deferred tax impact, resulted in an increase in
goodwill of $971,000.
o We increased a liability for future claims related to LANE BRYANT's
pre-acquisition operations, which resulted in an increase in goodwill of
$1,220,000, net of deferred income taxes of $780,000.
o We 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 goodwill of $1,524,000.
During the fourth quarter of Fiscal 2004, we finalized the closing of
under-performing stores identified at LANE BRYANT's acquisition date and reduced
liabilities for estimated lease termination payments, severance of store
employees, and other liabilities, which resulted in a decrease in goodwill of
$1,638,000, net of deferred income taxes of $1,227,000.
56
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
NOTE 3. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
<TABLE>
<CAPTION>
Lives
(Dollars in thousands) (Years) 2004 2003
------- ---- ----
<S> <C> <C> <C>
Land..................................................... $ 5,983 $ 5,630
Buildings and improvements............................... 10 to 40 70,538 73,285
Store fixtures........................................... 5 to 10 124,018 127,682
Equipment................................................ 3 to 10 195,195 176,477
Equipment acquired under capital leases.................. 7 65,851 48,452
Leasehold improvements................................... 10 to 20 243,672 239,850
-------- --------
Total at cost............................................ 705,257 671,376
-------- --------
Less: Accumulated depreciation and amortization......... 364,143 331,629
Accumulated amortization of capital lease assets.. 22,490 16,666
-------- --------
Total accumulated depreciation and amortization.......... 386,633 348,295
-------- --------
Net property, equipment, and leasehold improvements...... $318,624 $323,081
======== ========
</TABLE>
NOTE 4. TRADEMARKS AND OTHER INTANGIBLE ASSETS
<TABLE>
<CAPTION>
Life
(Dollars in thousands) (Years) 2004 2003
------- ---- ----
<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........................... 1,622 962
-------- --------
Net trademarks and other intangible assets............... $170,478 $171,138
======== ========
</TABLE>
Total amortization of other intangible assets was $660,000 in Fiscal 2004,
$656,000 in Fiscal 2003, and $306,000 in Fiscal 2002. Estimated amortization of
intangible assets for the next five fiscal years is: 2005 and 2006 - $660,000
per year; 2007 - $358,000; thereafter - $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. In accordance
with the provisions of SFAS No. 142, the trademarks, tradenames, and internet
domain names acquired are not being amortized, but are subject to annual reviews
for impairment or for indicators of a limited useful life (see "NOTE 1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES; Goodwill and Intangible Assets" above).
57
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
NOTE 5. AVAILABLE-FOR-SALE SECURITIES
<TABLE>
<CAPTION>
Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
January 31, 2004
Government agency bonds............................ $14,671 $ 0 $(390) $14,281
Charming Shoppes Master Trust certificates and
retained interests(1)......................... 55,363 0 0 55,363
Other.............................................. 565 0 0 565
------- --- ----- -------
$70,599 $ 0 $(390) $70,209
======= === ===== =======
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(2)................. 682 0 0 682
Other.............................................. 299 0 0 299
------- --- ----- -------
$66,622 $13 $(147) $66,488
======= === ===== =======
- --------------------
<FN>
(1) Includes Master Trust certificates of $44,345,000, Interest-only strip of
$9,208,000, and retained interests of $1,810,000 at January 31, 2004, and
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.
Subsequent to January 31, 2004, we sold $9,500,000 of certificates to
third-party investors.
(2) At January 31, 2004, long-term liabilities related to our share of losses
in our low-income housing partnerships were reclassified as a reduction of
the cost of the investment in the partnerships. February 1, 2003 amounts
reflect a reclassification to conform to the current-year presentation.
</FN>
</TABLE>
There were no realized gains or (losses) on available-for-sale securities
during Fiscal 2004 or Fiscal 2003. Gross realized gains and (losses) on
available-for-sale securities were $243,000 and ($12,000), respectively, during
Fiscal 2002.
Contractual maturities of available-for-sale securities at January 31, 2004
were:
<TABLE>
<CAPTION>
Estimated
(In thousands) Cost Fair Value
---- ----------
<S> <C> <C>
Due in one year or less(1)........................ $55,688 $55,688
Due after one year and before five years.......... 5,130 5,055
Due after five years and before ten years......... 8,469 8,224
Due after ten years............................... 1,312 1,242
------- -------
$70,599 $70,209
======= =======
- --------------------
<FN>
(1) Includes Charming Shoppes Master Trust certificates and retained interests.
</FN>
</TABLE>
58
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
NOTE 6. INCOME TAXES
Income (loss) before income taxes, minority interest, and cumulative effect
of accounting changes:
<TABLE>
<CAPTION>
(In thousands) 2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Domestic.............................. $60,296 $71,479 $(7,166)
Foreign............................... 3,342 3,225 2,640
------- ------- -------
$63,638 $74,704 $(4,526)
======= ======= =======
</TABLE>
Income tax provision (benefit):
<TABLE>
<CAPTION>
(In thousands) 2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Current:
Federal............................... $12,743 $ 2,346 $(6,037)
State................................. 1,013 1,265 1,296
Foreign............................... 529 418 288
------- ------- -------
....................................... 14,285 4,029 (4,453)
Deferred(1)........................... 8,856 25,026 4,333
------- ------- -------
$23,141 $29,055 $ (120)
======= ======= =======
- --------------------
<FN>
(1) Primarily Federal
</FN>
</TABLE>
We made income tax payments of $10,147,000 and $5,624,000 during Fiscal
2004 and 2003, respectively, and received an income tax refund of $2,902,000
during Fiscal 2002.
Reconciliation of the effective tax rate with the statutory Federal income
tax rate:
<TABLE>
<CAPTION>
2004 2003 2002(1)
---- ---- ------
<S> <C> <C> <C>
Statutory Federal income tax (benefit) rate... 35.0% 35.0% (35.0)%
State income tax, net of Federal income tax... 2.0 2.4 18.6
Foreign income................................ (1.0) (1.0) (14.1)
Employee benefits............................. (0.4) 1.9 21.1
Amortization of goodwill...................... 0.0 0.0 37.8
Other, net.................................... 0.8 0.6 (31.1)
---- ---- -----
36.4% 38.9% (2.7)%
==== ==== =====
- --------------------
<FN>
(1) Amounts are based on a small pre-tax loss for Fiscal 2002 and are not
necessarily comparable to other fiscal years.
</FN>
</TABLE>
59
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
Components of deferred tax assets and liabilities:
<TABLE>
<CAPTION>
Net Current Net Long-Term
Assets Assets
(In thousands) (Liabilities) (Liabilities)
------------- -------------
<S> <C> <C>
January 31, 2004
Property, equipment, and leasehold improvements... $(22,316)
Tax net operating loss and credit carryforwards... 2,734
Prepaid and accrued expenses...................... $12,342
Inventory......................................... 4,320
Deferred compensation............................. 6,111
Intangible assets................................. (22,914)
Investments....................................... (3,612)
Deferred rent..................................... 2,978
Other............................................. 262 (6,951)
------- --------
$19,902 $(46,948)
======= ========
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....................................... (2,016)
Deferred rent..................................... 2,880
Other............................................. (258) (1,736)
------- --------
$11,726 $(24,884)
======= ========
</TABLE>
During Fiscal 2004, we reached a settlement with the Internal Revenue
Service regarding its audit of our corporate-owned life insurance ("COLI")
program. The settlement included $18,477,000 of income taxes and $4,038,000 of
interest, net of a tax benefit of $2,175,000. Of the $18,477,000 of income
taxes, $16,125,000 was satisfied through the use of existing operating losses
and tax credits. As part of the settlement, we surrendered our existing life
insurance policies and received their cash surrender value of $16,332,000. The
settlement had no impact on our current results of operations, as we had
previously provided for taxes to cover the settlement. The settlement had a net
positive impact of $7,767,000 on our Fiscal 2004 cash flows. The utilization of
the operating losses and tax credits to satisfy income taxes related to the COLI
settlement resulted in a decrease in net deferred tax assets.
60
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
NOTE 7. DEBT
Long-term debt at year end:
<TABLE>
<CAPTION>
(In thousands) 2004 2003
---- ----
<C> <C> <C>
4.75% Senior Convertible Notes Due 2012..... $150,000 $150,000
Capital lease obligations................... 37,934 31,703
6.53% mortgage note......................... 12,250 13,650
7.77% mortgage note......................... 10,039 10,478
7.5% mortgage note.......................... 5,840 6,059
8.15% note.................................. 2,494 3,750
Other long-term debt........................ 1,540 0
-------- --------
Total long-term debt........................ 220,097 215,640
Less current portion........................ 17,278 12,595
-------- --------
$202,819 $203,045
======== ========
</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% of principal 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 our 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 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 JANUARY 31, 2004
(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).
On January 29, 2004, we amended and restated our existing $300,000,000
revolving credit facility that was scheduled to expire on August 16, 2004 and
extended the facility to August 15, 2008. The amended $300,000,000 revolving
credit facility (the "Facility") provides for cash borrowings and enables us to
issue up to $150,000,000 of letters of credit for purchases of merchandise and
for standby letters of credit. As of January 31, 2004, there were no borrowings
outstanding under the Facility. The availability of borrowings under the
Facility is subject to limitations based on eligible inventory and, under
certain circumstances, credit card receivables and in-transit cash. The Facility
is secured by our general assets, except for (i) all assets related to our
credit card securitization program, (ii) all real property, (iii) certain
equipment subject to other mortgages or capital leases, (iv) the assets of our
non-U.S. subsidiaries, and (v) certain other assets. As of January 31, 2004, we
had $4,047,000 of unamortized deferred debt acquisition costs related to the
original revolving credit facility and the amended and restated facility. We are
amortizing these deferred debt acquisition costs on a straight-line basis over
the life of the amended and restated facility as interest expense.
The interest rate on borrowings under the revolving credit facility ranges
from Prime to Prime plus .50% per annum for Prime Rate Loans, and LIBOR plus
1.5% to LIBOR plus 2.00% per annum for Eurodollar Rate Loans. The interest rate
is determined quarterly, based on our average excess and suppressed
availability, as defined in the Facility. As of January 31, 2004, the interest
rate on borrowings under the revolving credit line was 4.00% for Prime Rate
Loans and 2.60% for Eurodollar Rate Loans. There is a fee of 1.0% to 1.25% per
annum on outstanding letters of credit and a fee of .375% per annum on the
unused portion of the revolving credit facility.
The Facility includes limitations on sales and leasebacks, the incurrence
of additional liens and debt, capital lease financing, and other limitations.
The Facility also requires, among other things, that we not pay dividends on our
common stock and, if our excess and suppressed availability (as defined in the
Facility) is less than $50,000,000 at any time within a fiscal quarter, that we
maintain consolidated 12-month earnings before interest, taxes, depreciation,
and amortization ("EBITDA") (excluding non-recurring, non-cash charges), of
$115,000,000. As of January 31, 2004, the excess and suppressed availability,
including excess cash, under the revolving credit facility was $202,429,000. We
had outstanding letters of credit totaling $75,192,000 as of January 31, 2004.
As of January 31, 2004, we were not in default with respect to any of the
Facility's covenants.
62
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
Pursuant to a program to replace point-of-sale ("POS") equipment in our
FASHION BUG stores and, in Fiscal 2004 our LANE BRYANT stores, we acquired
$8,468,000, $ 3,495,000, and $24,677,000 of POS equipment under capital leases
in Fiscal 2004, 2003, and 2002, respectively. These leases generally have an
initial lease term of 60 months and contain a bargain purchase option. As of
January 31, 2004, 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 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. As of February 1, 2003, we
had acquired $1,002,000 of equipment under this lease. We received the remainder
of the equipment and related software under this lease during Fiscal 2004.
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 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.
We assumed a 7.5% Mortgage Note in connection with our CATHERINES
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
CATHERINES office and distribution center in Memphis, Tennessee. There is a
pre-payment penalty of 1% of the outstanding principal.
In December 2001, the Company 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
equipment and fixtures owned by the Company at its distribution center in
Greencastle, Indiana. The net proceeds from the note were used to repay a
portion of the borrowings outstanding under the Company's credit facility,
discussed above.
During Fiscal 2004, 2003, and 2002, we made interest payments of
$13,572,000, $12,859,000, and $17,657,000, respectively. Interest expense
capitalized during Fiscal 2004 was $725,000. Interest expense capitalized in
Fiscal 2003 was immaterial. No interest expense was capitalized during Fiscal
2002.
63
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
Aggregate maturities of long-term debt during the next five fiscal years
are as follows:
<TABLE>
<CAPTION>
(In thousands) 2005 2006 2007 2008 2009
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Capital lease obligations... $12,464 $11,167 $ 8,376 $4,238 $1,580
Mortgage notes.............. 4,604 7,518 1,955 1,999 2,048
Other long-term debt........ 210 212 214 216 218
------- ------- ------- ------ ------
$17,278 $18,897 $10,545 $6,453 $3,846
======= ======= ======= ====== ======
</TABLE>
Minimum lease payments under capital leases for the next five fiscal years
are: 2005 - $14,600,000; 2006 - $12,523,000; 2007 - $9,077,000; 2008 -
$4,503,000; 2009 - $1,644,000. Included in these minimum lease payments is
aggregate imputed interest of $4,522,000.
NOTE 8. STOCKHOLDERS' EQUITY
Our stockholders' equity 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. Prior to Fiscal 2002, we repurchased an aggregate total of
9,105,000 shares of our common stock at an aggregate cost of $41,537,000, which
we held as treasury stock. In August 2001, we re-issued these treasury shares 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.
NOTE 9. STOCK OPTION AND STOCK INCENTIVE PLANS
Our Amended and Restated Non-Employee Directors Program was adopted by the
Board of Directors on July 1, 1999, and provided for the grant of options or
awards of up to an aggregate total of 700,000 shares of common stock. This
program includes an 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 January 31,
2004,
64
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
February 1, 2003, and February 2, 2002, 282,400 options, 180,000 options, and
88,000 options, respectively, were exercisable under this plan. The program also
provided 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 2004, 10,000 shares of restricted common stock were
granted as one-time grants and were outstanding as of January 31, 2004. The
weighted-average market value at date of grant for the Fiscal 2004 award was
$4.57. In June 2002, this plan was amended to provide for annual grants of 3,000
restricted stock units ("RSUs") to each non-employee director. The RSUs
generally vested in full one year after grant. During Fiscal 2004, RSUs
representing 24,000 shares that were granted during Fiscal 2003 were settled in
cash or deferred payment for $113,000, based on a market value of $4.72 per
share on the date of vesting. The weighted-average market value of common stock
at date of grant for the Fiscal 2003 RSU awards was $8.04.
Our 2003 Non-Employee Directors Compensation Plan was approved by
shareholders on June 26, 2003. This plan is an additional amendment and
restatement of our Amended and Restated Non-Employee Directors Program adopted
on July 1, 1999 (see previous paragraph). Directors who are not employed by the
Company are eligible for participation in the plan. The Board of Directors
administers the plan and approves the form and amount of awards under the plan.
This plan provides for the grant of stock options, stock appreciation rights
("SARs"), restricted stock awards, RSUs, or deferred shares of up to an
aggregate total of 600,000 shares of our common stock. No more than 50% of the
shares reserved for issuance under the plan may be issued as restricted stock
awards or RSUs. The exercise price of options or SARs granted under the plan may
not be less than the fair market value of our common stock on the date of grant.
The maximum term of options and SARs issued under the plan is ten years.
Non-employee directors may also elect to receive deferred shares of common stock
of an equivalent market value instead of cash director's fees. The plan includes
a provision that options previously granted under the plan will not be amended
or replaced in a transaction that constitutes a "repricing" (as defined in the
plan) without shareholder approval. The plan provides for an initial restricted
stock award of 10,000 shares of common stock that vest in equal amounts over
three years to a newly elected or appointed non-employee director. The plan also
provides for annual grants of options for 6,500 shares of common stock that vest
in one year and annual grants of 3,000 RSUs that vest in one year to each
non-employee director serving at the date of our Annual Meeting of Shareholders.
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. As of January 31,
2004, no options were exercisable under this plan and 21,000 RSUs were granted
and outstanding. The weighted-average market value of common stock at date of
grant for the Fiscal 2004 RSU awards was $4.78.
Our Board of Directors adopted the 2000 Associates' Stock Incentive Plan on
January 27, 2000. The plan provides for the grant of options, SARS, restricted
stock awards, deferred stock, or other stock-based awards of up to an aggregate
total of 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
January 31, 2004, February 1, 2003, and February 2, 2002, 1,891,271 options,
711,630 options, and 352,160 options, respectively, were exercisable under this
plan. As of January 31, 2004 and February
65
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
1, 2003, restricted stock awards totaling 229,791 shares and 188,840 shares,
respectively, were outstanding under this plan. Additional information related
to this plan is as follows:
<TABLE>
<CAPTION>
2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Restricted stock awards granted.................. 97,000 111,000 166,175
Weighted average market price at date of grant
for awards granted.......................... $3.36 $5.98 $6.54
Shares issued under stock awards................. 27,599 30,545 1,960
Cancellations of restricted stock awards......... 28,450 35,180 20,650
</TABLE>
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 an
aggregate total of 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 January
31, 2004, February 1, 2003, and February 2, 2002, 321,800 options, 250,800
options, and 245,200 options, respectively, were exercisable under this plan.
Our 1993 Employees' Stock Incentive Plan provides for the grant of options
or awards for up to an aggregate total of 10,899,000 shares of common stock and
any shares available but unissued under our discontinued 1990 Employees' Stock
Incentive Plan. 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 January 31, 2004, February 1, 2003, and February 2, 2002, 6,398,767
options, 4,681,587 options, and 4,931,030 options, respectively, were
exercisable under this plan. As of January 31, 2004, February 1, 2003, and
February 2, 2002, restricted stock awards totaling 506,280 shares, 560,740
shares, and 603,918 shares, respectively, were outstanding under this plan.
Additional information related to this plan is as follows:
<TABLE>
<CAPTION>
2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Restricted stock awards granted.................. 52,500 54,500 394,800
Weighted average market price at date of grant
for awards granted.......................... $3.48 $6.34 $5.73
Shares issued under stock awards................. 88,060 95,278 198,822
Cancellations of restricted stock awards......... 18,900 2,400 17,759
</TABLE>
Our 1988 Key Employee Stock Option Plan provides for the grant of options
to our key employees to purchase up to an aggregate total of 3,000,000 shares of
our common stock. The exercise price of options granted under this plan is $1.00
per share. As of January 31, 2004, February 1, 2003, and February 2, 2002,
55,482 options, 60,982 options, and 53,702 options, respectively, were
exercisable under this plan.
66
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
Our 1989 Non-Employee Director Stock Option Plan provided for the grant of
options to each member of our Board of Directors who is not an employee of the
Company to purchase up to 30,000 shares of common stock. 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 January 31, 2004, February 1, 2003, and February 2, 2002,
25,000 options, 49,000 options, and 78,000 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.
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 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
Granted - option price equal to market price... 1,121,375 3.600 2.760 - 6.640
Granted - option price less than market price.. 44,300 1.000 1.000 - 1.000
Canceled/forfeited............................. (913,828) 8.517 1.000 - 15.125
Exercised...................................... (220,459) 3.882 1.000 - 6.000
---------- ------- ----------------
Outstanding at January 31, 2004................ 12,133,986 $5.637 $1.000 - $12.125
========== ====== ================
</TABLE>
The weighted average grant date fair values for options granted, using the
Black-Scholes model and assumptions described under "Note 1. Summary Of
Significant Accounting Policies; Common Stock Plans" above, are as follows:
<TABLE>
<CAPTION>
2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Option price equal to market price...... $1.14 $2.34 $3.16
Option price less than market price..... 3.51 6.23 5.96
</TABLE>
67
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(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 January 31, 2004 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........... 129,588 $1.000 6.3
Options exercisable........... 55,482 1.000
$1.01 - $5.00:
Options outstanding........... 3,816,632 $3.824 3.2
Options exercisable........... 2,832,859 4.058
$5.01 - $10.00:
Options outstanding........... 7,795,916 $6.324 4.1
Options exercisable........... 5,694,529 6.346
$10.01 - $15.81:
Options outstanding........... 391,850 $11.154 0.1
Options exercisable........... 391,850 11.154
</TABLE>
At January 31, 2004, the following shares were available for grant under
our various stock plans: 2000 Associates' Stock Incentive Plan - 758,906 shares;
2003 Non-Employee Directors Compensation Plan - 533,500 shares; Amended and
Restated Non-Employee Directors Program - 55,527 shares; 1999 Associates' Stock
Incentive Plan - 275,100 shares; 1993 Employees' Stock Incentive Plan -
2,136,189 shares; and 1988 Key Employee Stock Option Plan - 133,720 shares.
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 2003
Non-Employee Directors Program, shares issued and options granted are subject to
forfeiture if the individual does not remain a Director of the Company for a
specified period of time except, under certain circumstances, in the case of
retirement or voluntary termination.
NOTE 10. EMPLOYEE STOCK PURCHASE PLAN
Our 1994 Employee Stock Purchase Plan permits employees to purchase shares
of our common stock during quarterly offering periods at a price equal to 85% of
the lower of the stock's market price on the first day of, or the fifth business
day after the end of, the offering period. Employees purchase shares through
accumulation of payroll deductions of up to 10% of the employee's compensation
during each offering period. An aggregate total of 2,000,000 shares are reserved
for grant under this plan. During Fiscal 2004, 2003, and 2002, 106,457 shares,
109,269 shares, and 82,184 shares, respectively, were purchased under the plan.
The weighted average grant date market value for shares purchased during Fiscal
2004, 2003, and 2002 was $4.57, $7.13, and $5.52 per share, respectively. At
January 31, 2004, 1,376,054 shares were available for future purchases under
this plan.
68
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
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 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."
69
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
The purchase price payable and the number of shares of our common stock or
other securities or property to be issued 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. Instead of fractional shares of our
common stock, an adjustment in cash will be made based on the market price of
our common stock on the last trading date before 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. Our Board of Directors may extend the ten-day
period as long as the Rights are still redeemable. Immediately upon the order of
our Board of Directors to redeem the Rights, the Rights will terminate and the
holders of Rights will only be able to receive the redemption price. Until a
Right is exercised, the holder of the Right will have no rights as a shareholder
of the Company, including, without limitation, the right to vote or to receive
dividends.
NOTE 12. CUSTOMER LOYALTY CARD PROGRAMS
During the first quarter of Fiscal 2004, we introduced a new FASHION BUG
customer loyalty card program that we operate under our FASHION BUG proprietary
credit card program. Like our other loyalty programs, this program entitles
customers to various rebates, discounts, and other benefits upon payment of an
annual membership fee. This program also provides customers with the option to
cancel their membership within 90 days, entitling them to a full refund of their
annual fee. Additionally, after 90 days, customers that cancel their membership
are entitled to a pro rata fee refund based on the number of months remaining on
the annual membership. Accordingly, we recognize 25% of the annual membership
fee as revenue after 90 days, with the remaining fee recognized on a pro rata
basis over nine months. During Fiscal 2004, we recognized revenues of $7,750,000
in connection with this program. As of the end of Fiscal 2004, we accrued
$1,200,000 for the estimated costs of discounts earned and coupons issued and
not redeemed.
Under a previous FASHION BUG store loyalty card program, we recognized
revenues from annual membership fees as sales over the life of the membership
based on discounts earned by the customer. For customers who did not earn
discounts during the membership period that exceeded the card fee, the
difference between the membership fee and discounts earned was recognized as
revenue upon the expiration of the annual membership period. Upon early
cancellation of the loyalty card, refunds of membership fees were reduced by the
amount of any discounts granted to the member under the program. During Fiscal
2004, Fiscal 2003, and Fiscal 2002, we recognized revenues of $6,377,000,
$21,828,000, and $13,210,000, respectively, in connection with this program. We
discontinued the issuance of new cards under this program in December 2002, and
we terminated the program during the second quarter of Fiscal 2004.
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 that 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.
70
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
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 was $2,619,000, $2,582,000, and
$2,089,000 for Fiscal 2004, 2003, and 2002, respectively.
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. This plan includes a
matching Company contribution of 50% of the participant's contribution on up to
6% of the participant's compensation, less any matching contributions made for
the participant under our 401(k) plan. The total expense for this plan was
$1,155,000, $854,000, and $867,000 for Fiscal 2004, 2003, and 2002,
respectively.
During Fiscal 2004, we established a non-qualified defined contribution
supplemental retirement plan for certain management and key executives. Under
this plan, we contribute amounts to participant accounts based on age and years
of plan service, as well as earnings as defined in the plan. The total expense
for this plan was $975,000 for Fiscal 2004.
NOTE 14. EXPENSES RELATED TO COST REDUCTION PLAN
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 certain efficiencies, in order to improve
profitability. The components of the cost reduction plan are as follows:
o Reduction in corporate operating expenses by streamlining processes
and gaining optimal pricing through the consolidation of vendors and
the continued centralization of finance, human resources, and other
administrative functions in order to leverage the efficiency of our
shared services organization.
o Workforce reduction at our corporate and divisional home offices.
o Consolidation of our Memphis, Tennessee distribution center into our
distribution center in White Marsh, Maryland.
o Consolidation of our Hollywood, Florida credit operations into our
Milford, Ohio facility.
o Closing of the nine MONSOON/ACCESSORIZE stores that we operate under a
joint venture with MONSOON plc.
71
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
We are accounting for the plan in accordance with the provisions of SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
Expenses incurred in connection with the plan and payments/ settlements of those
expenses for Fiscal 2004, and the remaining accrual at January 31, 2004, were as
follows:
<TABLE>
<CAPTION>
Year Ended
January 31, 2004
----------------------- Accrual at
Expenses Payments/ January 31,
(In thousands) Incurred Settlements 2004
-------- ----------- ----
<S> <C> <C> <C>
Workforce reduction costs......................... $ 2,980 $(2,980) $ 0
Lease termination and related costs............... 3,691 (1,095) 2,596
Accelerated depreciation costs (non-cash charge).. 4,195 (4,195) 0
Other facility closure costs...................... 668 (668) 0
------- ------- ------
Total............................................. $11,534 $(8,938) $2,596
======= ======= ======
</TABLE>
Workforce reduction costs represent involuntary termination benefits and
retention bonuses. Employees affected by the plan were notified during the first
quarter of Fiscal 2004. During Fiscal 2004, we terminated 349 employees in
connection with workforce reductions at our corporate and divisional home
offices and the closing of our Memphis, Tennessee distribution center, our
Hollywood, Florida credit operations, and our remaining MONSOON stores. We
accrued the severance benefit in accordance with SFAS No. 146 and recognized
retention bonuses ratably over the employees' remaining service period. Lease
termination and related costs mainly represent the estimated fair value of the
remaining lease obligations at the Hollywood, Florida facility, reduced by
estimated sublease income. In accordance with SFAS No. 146, we recognized the
present value of the remaining lease obligation less estimated sublease income
related to the Hollywood, Florida facility in June 2003 when we closed the
facility. Accelerated depreciation costs represent the acceleration of
depreciation of the net book value of the assets at our Memphis distribution
center and our Hollywood credit operations, which were closed in June 2003, to
their estimated net realizable values.
During the first quarter of Fiscal 2004, we made the decision to sell the
Memphis, Tennessee distribution center, and began accelerating the depreciation
of the asset to its estimated net realizable value as of its expected cease-use
date of June 2003. During the third quarter of Fiscal 2004, we began to evaluate
alternative uses for the facility, and began to depreciate the then-current
carrying amount of the asset over its estimated useful life.
Expenses related to the plan accrued during the year ended January 31, 2004
are included in "Expenses related to cost reduction plan" in the accompanying
Consolidated Statements of Operations and Comprehensive Income (Loss).
72
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
NOTE 15. NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
(In thousands) 2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Basic weighted average common shares outstanding.................... 112,491 113,810 105,842
Dilutive effect of assumed conversion of convertible notes.......... 15,182 15,655 0
Dilutive effect of stock options.................................... 885 1,472 0
------- ------- -------
Diluted weighted average common shares and equivalents outstanding.. 128,558 130,937 105,842
======= ======= =======
Income (loss) before cumulative effect of accounting changes........ $40,639 $46,328 $(4,406)
Decrease in interest expense from assumed conversion of notes,
net of income taxes............................................ 4,334 4,700 0
------- ------- -------
Income (loss) before cumulative effect of accounting changes
used to determine diluted earnings per share................... 44,973 51,028 (4,406)
Cumulative effect of accounting changes, net of income taxes........ 0 (49,098) 0
------- ------- -------
Net income (loss) used to determine diluted earnings per share...... $44,973 $ 1,930 $(4,406)
======= ======= =======
</TABLE>
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) 2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Number of shares.............................. 8,255 4,583 5,805
Weighted average exercise price per share..... $6.63 $7.66 $7.43
</TABLE>
The effect of an assumed conversion of our Convertible Notes into 12.9
million shares of our common stock was excluded from the calculation 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 were excluded
from the calculation of diluted net loss per share for Fiscal 2002 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.
73
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
NOTE 16. 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 2004, 2003, and 2002, we
recognized the following activity related to the I/O strip:
<TABLE>
<CAPTION>
(In thousands) 2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Additions to the I/O strip.............. $13,638 $18,447 $14,074
Amortization and valuation adjustments.. 14,000 14,856 12,763
Value of the I/O strip at end of year... 9,208 9,570 5,979
</TABLE>
In addition, we recognized a servicing liability in Fiscal Years 2004,
2003, and 2002 because the servicing fees we expect to receive from the
securitizations do not provide adequate compensation for servicing the
receivables. The servicing liability represents the present value of the excess
of our cost of servicing over the servicing fees received, and is recorded at
its estimated fair value. Because quoted market prices are generally not
available for the servicing of proprietary credit card portfolios of comparable
credit quality, we determine the fair value of the cost of servicing by
calculating all costs associated with billing, collecting, maintaining and
providing customer service during the expected life of the securitized credit
card receivable balances. We discount the amount of these costs in excess of the
servicing fees over the estimated life of the receivables sold. The discount
rate and estimated life assumptions used for the present value calculation of
the servicing liability are consistent with those used for the I/O strip. During
Fiscal 2004, 2003, and 2002, we recognized the following activity related to the
servicing liability:
<TABLE>
<CAPTION>
(In thousands) 2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Additions to the servicing liability............. $4,011 $2,496 $3,950
Amortization of the servicing liability.......... 2,141 3,375 3,993
Value of the servicing liability at end of year.. 3,050 1,180 2,059
</TABLE>
We amortize 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 estimate the expected life primarily by using the historical
average of principal payments as a percent of outstanding trust receivables
sold.
74
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
The following table presents additional information relating to the Trust
for Fiscal 2004, 2003, and 2002:
<TABLE>
<CAPTION>
(In thousands) 2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Proceeds from sales of new receivables to Trust.................. $331,718 $384,162 $423,089
Collections reinvested in revolving-period securitizations....... 422,793 450,363 468,919
Cash flows received on retained interests........................ 41,951 45,708 38,992
Servicing fees received.......................................... 6,634 5,723 6,003
Net credit losses................................................ 30,850 39,312 38,878
Investor certificates outstanding at end of year................. 269,425 301,300 303,659
Credit card accounts 90 or more days delinquent at end of year... 9,795 13,102 14,094
</TABLE>
We are the servicer of the Trust, and we receive a servicing fee of
approximately 2% of the investor interest. The investor certificates outstanding
as of January 31, 2004 mature as follows: $169,425,000 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 $55,363,000 and
$50,227,000 at January 31, 2004 and February 1, 2003, 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 as of January 31, 2004. 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. On
January 21, 2004, we closed a new conduit credit card securitization facility of
$132,000,000 that will provide additional funding of up to $100,000,000 for a
term of up to two years, subject to an annual renewal. As of January 31, 2004,
no credit card receivables were funded under this facility. Subsequent to
January 31, 2004, we sold to investors an additional $9,500,000 of certificates
under the $100,000,000 facility that we were holding as a retained interest. As
of January 31, 2004, these certificates were included in short-term
available-for-sale securities. To the extent that remaining certificates under
the $100,000,000 facility are not sold, we will hold them as a retained
interest.
Our management uses key valuation assumptions in determining the fair value
of our I/O strip. We estimate the values for these assumptions using historical
data, the impact of the current economic environment on the performance of the
receivables sold, and the impact of the potential volatility of the current
market for similar instruments in assessing the fair value of the retained
interests. The key assumptions used to value our retained interest were as
follows:
<TABLE>
<CAPTION>
January 31, 2004 February 1, 2003
---------------- ----------------
<S> <C> <C>
Payment rate.......................... 11.4% 13.0%
Residual cash flows discount rate..... 13.5% 9.8%
Net credit loss percentage............ 12.5% 13.0%
Average life of receivables sold...... 0.7 years 0.6 years
</TABLE>
75
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
The following table presents the decrease in our I/O strip receivable that
would result from hypothetical adverse changes of 10% and 20% in the assumptions
used to determine the fair value of the I/O strip. This information is presented
in accordance with the requirements of SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities."
<TABLE>
<CAPTION>
(In thousands) 10% Change 20% Change
---------- ----------
<S> <C> <C>
Payment rate......................... $ 732 $1,321
Residual cash flows discount rate.... 76 153
Credit loss percentage............... 1,143 2,268
</TABLE>
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 January 31, 2004, Charming
Shoppes Receivables Corp. had $28,800,000 of Charming Shoppes Master Trust
certificates and Charming Shoppes Seller, Inc. held retained interests of
$9,208,000 (which are included in the $55,688,000 of short-term
available-for-sale securities at January 31, 2004 - 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 CATHERINES and LANE BRYANT stores. These funding programs expire in January
2005 for CATHERINES 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
CATHERINES 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. Additional information for Fiscal
2004, 2003, and 2002 regarding these agreements is as follows:
<TABLE>
<CAPTION>
(In thousands) 2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Net funding received from sales of receivables:
LANE BRYANT.................................. $262,004 $251,619 $128,947(1)
CATHERINES................................... 100,146 113,526 129,098
Net accounts receivable balance held by third
party at end of year:
LANE BRYANT.................................. 198,272 195,326 206,247
CATHERINES................................... 70,416 85,754 98,388
- --------------------
<FN>
(1) Subsequent to our acquisition of LANE BRYANT on August 16, 2001.
</FN>
</TABLE>
On January 28, 2004, in accordance with the terms of the Merchant Services
Agreement pursuant to which the CATHERINES proprietary credit cards are issued,
we gave notification of termination and election to purchase the CATHERINES
credit card portfolio to the third-party provider. In accordance with the terms
of the agreement, the purchase option required us to provide one year's notice
in order to terminate the agreement and to purchase the portfolio, subject to
the negotiation of the final purchase agreement.
76
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
NOTE 17. 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) 2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Minimum rental..... $200,128 $203,105 $158,878
Contingent rental.. 31,846 32,179 26,201
-------- -------- --------
$231,974 $235,284 $185,079
======== ======== ========
</TABLE>
Minimum annual rental commitments for all non-cancelable leases for the
next five fiscal years and thereafter are: Fiscal 2005 - $202,067,000; Fiscal
2006 - $158,573,000; Fiscal 2007 - $123,922,000; Fiscal 2008 - $94,725,000;
Fiscal 2009 - $68,675,000; Thereafter - $120,136,000.
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 February 2004 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 $1,750,000 for Fiscal 2005, Fiscal 2006,
and Fiscal 2007, and $1,604,000 for Fiscal 2008 to be paid under these
agreements. In September 2002, we acquired a distribution center in White Marsh,
Maryland that replaced the existing distribution center in Columbus, Ohio as of
February 2004.
LANE BRYANT currently subleases 120 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. 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 LANE BRYANT master sublease with Limited
Brands which we have guaranteed, as follows: Fiscal 2005 - $18,089,000; Fiscal
2006 - $12,558,000; Fiscal 2007 - $8,482,000; Fiscal 2008 - $5,258,000; Fiscal
2009 - $4,333,000; Thereafter - $1,821,000.
77
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of the carrying amounts and estimated fair
values of our financial instruments:
<TABLE>
<CAPTION>
January 31, 2004 February 1, 2003
---------------- ----------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents................ $123,781 $123,781 $102,026 $102,026
Available-for-sale securities............ 70,209 70,209 66,488 66,488
Liabilities:
4.75% Senior Convertible Notes due 2012.. 150,000 150,164 150,000 112,920
6.53% mortgage note...................... 12,250 12,205 13,650 13,650
7.77% mortgage note...................... 10,039 10,531 10,478 10,625
7.5% mortgage note....................... 5,840 6,053 6,059 6,365
8.15% note............................... 2,494 2,526 3,750 3,827
Other long-term debt..................... 1,540 1,278 - -
</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 ($0 at January 31, 2004
and $682,000 at February 1, 2003) 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 19. 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:
(i) the closing of 77 THE ANSWER/ADDED DIMENSIONS stores and the conversion of
approximately 20% of the ADDED DIMENSIONS stores to CATHERINES stores; (ii) the
closing of 130 under-performing FASHION BUG stores; and (iii) the conversion of
44 FASHION BUG store locations to LANE BRYANT stores. The restructuring plan
resulted in a pre-tax charge of $37,708,000 in the fourth quarter of Fiscal
2002.
The restructuring charge included a $17,763,000 non-cash write-down of
fixed assets (primarily store fixtures and improvements) in the stores to be
closed, $18,500,000 of anticipated payments to landlords for the early
termination of existing store leases, $829,000 for severance costs, and $616,000
for sign removal and other costs. The fixtures and improvements had no
alternative use or salvage value, and we scrapped them at the time the stores
were closed.
78
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
During Fiscal 2003, we closed 124 FASHION BUG stores, converted 30 FASHION
BUG stores to LANE BRYANT stores, closed 65 CATHERINES/ADDED DIMENSIONS stores,
and converted 12 ADDED DIMENSIONS stores to CATHERINES 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. The restructuring
credits were primarily a result of our ability to negotiate lease terminations
on terms more favorable than our original estimates. We completed the
restructuring plan as of the end of Fiscal 2003.
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>
79
<PAGE>
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2004
(Continued)
NOTE 20. 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 2004
Net sales ............................ $ 564,286 $ 605,456 $ 530,291 $ 585,647
Gross profit ......................... 168,798 177,031 149,137 148,649
Net income ........................... 9,689(1) 18,645(1) 2,159(1) 10,146
Basic net income per share ........... .09 .17 .02 .09
Diluted net income per share ......... .08 .15 .02 .09
Fiscal 2003
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)(2)(3) 25,470 (292)(4) 3,878(4)
Basic net income (loss) per share .... (.28)(2)(3) .22 .00 .03
Diluted net income (loss) per share .. (.24)(2)(3) .20 .00 .03
- -------------------
<FN>
(1) Includes expenses related to cost reduction plan of $4,431 ($2,707
after-tax) in First Quarter, $6,389 ($3,904 after-tax) in Second Quarter,
$148 ($91 after-tax) in Third Quarter, and $566 ($410 after-tax) in Fourth
Quarter.
(2) Includes cumulative effect of accounting change of $(5,123) ($(.05) per
basic share and $(.04) per diluted share), net of income taxes, for
adoption of 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.
(3) 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 CATHERINES acquisition, in accordance with the transition
provisions of SFAS No. 142.
(4) Includes pre-tax restructuring credit of $1,351 ($825 after-tax) in Third
Quarter and $3,462 ($2,116 after-tax) in Fourth Quarter.
</FN>
</TABLE>
80
<PAGE>
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9A. 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 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 management, including our CEO and CFO, in fulfilling
their responsibilities for establishing and maintaining such controls and
procedures and providing accurate, timely, and complete disclosure.
As of the end of the period covered by 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 has been no change in
our internal control over financial reporting that occurred during the fiscal
quarter ended January 31, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
81
<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.
We have adopted the Charming Shoppes, Inc. Business Ethics and Standards of
Conduct Policy (the "Policy"), that applies to all of our directors, officers,
and associates, including our principal executive officer, principal financial
officer, and principal accounting officer. The Policy has been filed as Exhibit
14 to this report on Form 10-K. We have also adopted corporate governance
guidelines (the "Guidelines") and charters (the "Charters") for the audit
committee, the compensation and stock option committee, the corporate governance
and nominating committee, and the finance committee of our Board of Directors.
The Policy, Guidelines, and Charters are available on our Internet website,
www.charmingshoppes.com, in the "About Us" section. A copy of the Policy,
Guidelines, and Charters are also available, at no charge, upon written request
to Charming Shoppes, Inc., Attn. Director of Investor Relations, 450 Winks Lane,
Bensalem, PA, 19020.
Our Board of Directors has sole authority for making any amendments to, or
granting waivers from, any provision of the Policy that affects our executive
officers or directors, including our principal executive officer, principal
financial officer, or principal accounting officer. We intend to satisfy the
disclosure requirement under Item 10 of Form 8-K regarding any such amendment or
waiver by disclosing the nature of such amendment or waiver in a report on Form
8-K within five days.
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.
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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. Principal Accountant Fees and Services
Information regarding principal accountant fees and services is included
under the caption "Audit and Other Fees" 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.
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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
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<S> <C>
Report of Independent Auditors............................................ 40
Consolidated Balance Sheets - January 31, 2004 and February 1, 2003....... 41
Consolidated Statements of Operations and Comprehensive Income (Loss) -
Years Ended January 31, 2004, February 1, 2003, and February 2, 2002. 42
Consolidated Statements of Stockholders' Equity - Years Ended
January 31, 2004, February 1, 2003, and February 2, 2002............. 43
Consolidated Statements of Cash Flows - Years Ended
January 31, 2004, February 1, 2003, and February 2, 2002............. 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 20, 2003, we filed a Current Report on Form 8-K to furnish,
under "Item 12. Results of Operations and Financial Condition" the text of our
press release, issued November 20, 2003, announcing our earnings for the quarter
ended November 1, 2003 (the third quarter of our fiscal year ending January 31,
2004).
On February 4, 2004, we filed a Current Report on Form 8-K to report, under
"Item 5. Other Events and Regulation FD Disclosure" the text of our press
release, issued February 4, 2004, announcing that we have amended and restated
our $300 million revolving credit facility effective as of January 29, 2004.
On March 18, 2004, we filed a Current Report on Form 8-K to furnish, under
"Item 12. Results of Operations and Financial Condition" the text of our press
release, issued March 18, 2004, announcing our earnings for the quarter and
fiscal year ended January 31, 2004.
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(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, 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.
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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4.3 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).
4.4 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).
4.5 Amended and Restated Loan and Security Agreement, dated as of January 29,
2004, 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, and Joint Bookrunner; J.P. Morgan Business Credit Corp., as
Co-Documentation Agent, Joint Lead Arranger, and Joint Bookrunner; Wachovia
Bank, National Association, as Joint Lead Arranger; Bank of America, N.A. and
Fleet Retail Group, Inc., as Co-Documentation Agents; and The Financial
Institutions named therein, as Lenders, incorporated by reference to Form 8-K of
the Registrant dated February 4, 2004. (Exhibit 99.2).
Our miscellaneous long-term debt instruments and credit facility
agreements, under which the underlying authorized debt is equal to less than 10%
of our consolidated total assets, may not be filed as exhibits to this report.
We agree to furnish to the Commission, upon request, copies of any such
instruments not filed.
Material Contracts
10.1.1 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).
10.1.2 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).
10.1.3 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).
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10.1.4 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).
10.1.5 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).
10.1.6 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).
10.1.7 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)).
10.1.8 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).
10.1.9 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)).
10.1.10 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).
10.1.11 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).
10.1.12 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 2002-1 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).
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10.1.13 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).
10.1.14 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 D Holders
described therein, incorporated by reference to Form 10-Q of the Registrant for
the quarter ended November 2, 2002. (Exhibit 10.4).
10.1.15 $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).
10.1.16 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).
10.1.17 Certificate Purchase Agreement, dated as of January 21, 2004, among
Charming Shoppes Receivables Corp., as Seller and as the Class B Purchaser,
Spirit of America, Inc., as Servicer, Sheffield Receivables Corporation, as the
Conduit Purchaser, and Barclay's Bank PLC as Administrator for the Conduit
Purchaser.
10.1.18 Series 2004-VFC Supplement, dated as of January 21, 2004, to Second
Amended and Restated Pooling and Service Agreement, dated as of November 25,
1997 and amended as of July 22, 1999 and as of May 8, 2001, among Charming
Shoppes Receivables Corp., as Seller, Spirit of America, Inc., as Servicer, and
Wachovia Bank, National Association, as Trustee on behalf of the Series 2004-VFC
Certificateholders, for up to $132,000,000 Charming Shoppes Master Trust
Asset-Backed Certificates Series 2004-VFC.
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).
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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, incorporated by reference to Form 10-K
of the Registrant for the fiscal year ended February 1, 2003. (Exhibit 10.2.6).
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, incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended February 1, 2003. (Exhibit 10.2.16).
10.2.17 Employment Agreement, dated as of March 12, 2003, by and between
Charming Shoppes, Inc. and Erna Zint, incorporated by reference to Form 10-K of
the Registrant for the fiscal year ended February 1, 2003. (Exhibit 10.2.17).
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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).
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).
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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,
incorporated by reference to Form 10-K of the Registrant for the fiscal year
ended February 1, 2003. (Exhibit 10.2.30).
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, incorporated by reference to Form
10-K of the Registrant for the fiscal year ended February 1, 2003. (Exhibit
10.2.31).
10.2.32 Charming Shoppes, Inc. Supplemental Retirement Plan, effective February
1, 2003, incorporated by reference to Form 10-Q of the Registrant for the
quarter ended May 3, 2003. (Exhibit 10.1).
Other Exhibits
14 Charming Shoppes, Inc. Business Ethics and Standards of Conduct Policy
21 Subsidiaries of Registrant
23 Consent of independent auditors
31.1 Certification by Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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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 8, 2004 /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 8, 2004 April 8, 2004
/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 8, 2004
April 8, 2004
/S/ ALAN ROSSKAMM /S/ WILLIAM O. ALBERTINI
- ----------------- ------------------------
Alan Rosskamm William O. Albertini
Director Director
April 8, 2004 April 8, 2004
/S/ KATHERINE M. HUDSON /S/ PAMELA S. LEWIS
- ----------------------- -------------------
Katherine M. Hudson Pamela S. Lewis
Director Director
April 8, 2004 April 8, 2004
/S/ KENNETH S. OLSHAN /S/ CHARLES T. HOPKINS
- --------------------- ----------------------
Kenneth S. Olshan Charles T. Hopkins
Director Director
April 8, 2004 April 8, 2004
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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 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).
4.4 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).
4.5 Amended and Restated Loan and Security Agreement, dated as of
January 29, 2004, 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,
and Joint Bookrunner; J.P. Morgan Business Credit Corp., as
Co-Documentation Agent, Joint Lead Arranger, and Joint Bookrunner;
Wachovia Bank, National Association, as Joint Lead Arranger; Bank of
America, N.A. and Fleet Retail Group, Inc., as Co-Documentation
Agents; and The Financial Institutions named therein, as Lenders,
incorporated by reference to Form 8-K of the Registrant dated
February 4, 2004. (Exhibit 99.2).
10.1.1 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).
10.1.2 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).
10.1.3 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).
10.1.4 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).
94
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10.1.5 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).
10.1.6 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).
10.1.7 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)).
10.1.8 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).
10.1.9 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)).
10.1.10 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).
10.1.11 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).
10.1.12 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 2002-1 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).
10.1.13 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).
95
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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 D Holders described therein, incorporated by reference
to Form 10-Q of the Registrant for the quarter ended November 2,
2002. (Exhibit 10.4).
10.1.15 $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).
10.1.16 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).
10.1.17 Certificate Purchase Agreement, dated as of January 21, 2004, among
Charming Shoppes Receivables Corp., as Seller and as the Class B
Purchaser, Spirit of America, Inc., as Servicer, Sheffield
Receivables Corporation, as the Conduit Purchaser, and Barclay's
Bank PLC as Administrator for the Conduit Purchaser.
10.1.18 Series 2004-VFC Supplement, dated as of January 21, 2004, to Second
Amended and Restated Pooling and Service Agreement, dated as of
November 25, 1997 and amended as of July 22, 1999 and as of May 8,
2001, among Charming Shoppes Receivables Corp., as Seller, Spirit of
America, Inc., as Servicer, and Wachovia Bank, National Association,
as Trustee on behalf of the Series 2004-VFC Certificateholders, for
up to $132,000,000 Charming Shoppes Master Trust Asset-Backed
Certificates Series 2004-VFC.
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).
96
<PAGE>
10.2.6 The Charming Shoppes, Inc. Non-Employee Directors Compensation
Program, As Amended and Restated at June 27, 2002, incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended
February 1, 2003. (Exhibit 10.2.6).
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, incorporated by reference to Form
10-K of the Registrant for the fiscal year ended February 1, 2003.
(Exhibit 10.2.16).
10.2.17 Employment Agreement, dated as of March 12, 2003, by and between
Charming Shoppes, Inc. and Erna Zint, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended February 1,
2003. (Exhibit 10.2.17).
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).
97
<PAGE>
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).
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, incorporated by reference to Form 10-K of
the Registrant for the fiscal year ended February 1, 2003. (Exhibit
10.2.30).
98
<PAGE>
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,
incorporated by reference to Form 10-K of the Registrant for the
fiscal year ended February 1, 2003. (Exhibit 10.2.31).
10.2.32 Charming Shoppes, Inc. Supplemental Retirement Plan, effective
February 1, 2003, incorporated by reference to Form 10-Q of the
Registrant for the quarter ended May 3, 2003. (Exhibit 10.1).
14 Charming Shoppes, Inc. Business Ethics and Standards of Conduct
Policy
21 Subsidiaries of Registrant
23 Consent of independent auditors
31.1 Certification by Principal Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification by Principal Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<FILENAME>exh10117.txt
<TEXT>
EXHIBIT 10.1.17
CERTIFICATE PURCHASE AGREEMENT
among
CHARMING SHOPPES RECEIVABLES CORP.
as Seller and as the Class B Purchaser,
SPIRIT OF AMERICA, INC.
as Servicer,
SHEFFIELD RECEIVABLES CORPORATION,
as the Conduit Purchaser,
and
BARCLAYS BANK PLC
as Administrator for the Conduit Purchaser.
dated as of January 21, 2004
<PAGE>
Table of Contents Page
ARTICLE I DEFINITIONS.......................................................1
Section 1.01. Certain Defined Terms....................................1
Section 1.02. Other Definitional Provisions............................6
ARTICLE II PURCHASE AND SALE.................................................6
Section 2.01. Purchase and Sale of the Certificates....................6
Section 2.02. Class A Incremental Fundings.............................7
Section 2.03. Class B Incremental Fundings.............................8
Section 2.04. Reduction or Increase of Maximum Funded Amounts..........9
Section 2.05. Calculation of the Certificate Rates....................10
ARTICLE III CLOSING..........................................................11
Section 3.01. Closing.................................................11
Section 3.02. Transactions to be Effected at the Closing..............11
ARTICLE IV CONDITIONS PRECEDENT TO PURCHASE ON THE CLOSING DATE.............11
Section 4.01. Performance by the Seller and Servicer..................11
Section 4.02. Representations and Warranties..........................11
Section 4.03. Corporate Documents.....................................11
Section 4.04. [reserved]..............................................11
Section 4.05. Opinions of Counsel to the Trustee......................11
Section 4.06. Financing Statements....................................12
Section 4.07. Ratings.................................................12
Section 4.08. Documents...............................................12
Section 4.09. No Actions or Proceedings...............................12
Section 4.10. Approvals and Consents..................................12
Section 4.11. Officer's Certificate...................................12
Section 4.12. Other Documents.........................................12
Section 4.13. Fees....................................................12
ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER AND SERVICER............13
Section 5.01. Representations and Warranties of the Seller............13
Section 5.02. Representations and Warranties of the Servicer..........14
<PAGE>
ARTICLE VI REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE PURCHASER.....16
Section 6.01. Organization............................................16
Section 6.02. Authority, etc..........................................16
Section 6.03. Securities Act..........................................16
Section 6.04. Investment Company Act..................................17
ARTICLE VII COVENANTS OF THE SELLER AND THE SERVICER.........................17
Section 7.01. Rating of Class A Certificates or Notes.................17
Section 7.02. Information.............................................17
Section 7.03. Access to Information...................................18
Section 7.04. Security Interests; Further Assurances..................18
Section 7.05. Covenants...............................................18
Section 7.06. Amendments..............................................18
Section 7.07. Cardholder Guidelines...................................18
ARTICLE VIII ADDITIONAL COVENANTS............................................19
Section 8.01. Legal Conditions to Closing.............................19
Section 8.02. Transfer Restrictions...................................19
Section 8.03. Consents, etc...........................................19
ARTICLE IX INDEMNIFICATION..................................................19
Section 9.01. Indemnification by the Seller...........................19
Section 9.02. Procedure...............................................20
Section 9.03. Defense of Claims.......................................20
Section 9.04. Increased Cost and Reduced Return.......................21
Section 9.05. Other Expenses..........................................22
ARTICLE X MISCELLANEOUS....................................................23
Section 10.01. Amendments..............................................23
Section 10.02. Notices.................................................23
Section 10.03. No Waiver; Remedies.....................................23
Section 10.04. Binding Effect; Assignability...........................23
Section 10.05. Provision of Documents and Information..................24
Section 10.06. GOVERNING LAW; JURISDICTION; WAIVER OF JURY TRIAL.......24
Section 10.07. No Proceedings..........................................25
<PAGE>
Section 10.08. Execution in Counterparts...............................25
Section 10.09. No Recourse.............................................25
Section 10.10. Survival................................................25
Section 10.11. Tax Characterization....................................25
Section 10.12. Tax Non-Confidentiality.................................25
EXHIBIT A Form of Notice of Incremental Funding
EXHIBIT B Form of Investment Letter
SCHEDULE I Addresses for Notices
<PAGE>
This CERTIFICATE PURCHASE AGREEMENT (this "Agreement") dated as of January
21, 2004, is among CHARMING SHOPPES RECEIVABLES CORP., a Delaware corporation as
seller, (in such capacity, the "Seller") and as Class B Purchaser, (in such
capacity, the "Class B Purchaser"), SPIRIT OF AMERICA, INC., a Delaware
corporation (the "Servicer"), SHEFFIELD RECEIVABLES CORPORATION, a Delaware
corporation (the "Conduit Purchaser") and BARCLAYS BANK PLC, a bank organized
under the laws of England and Wales, as administrator for the Conduit Purchaser
(in such capacity, the "Administrator").
The parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Certain Defined Terms. Capitalized terms used herein
without definition shall have the meanings set forth in the Pooling and
Servicing Agreement (as defined below) or the Supplement (as defined below), as
applicable. If a term used herein is defined both in the Pooling and Servicing
Agreement and the Supplement, it shall have the meaning set forth in the
Supplement. Additionally, the following terms shall have the following meanings:
"Act" means the Securities Act of 1933, as amended.
"Administrator" is defined in the preamble.
"Agent" means Administrator as agent for the Conduit Purchaser and the
Liquidity Providers.
"Agreement" is defined in the preamble.
"Alternate Rate" means for any day falling in any Interest Period, the per
annum rate equal to the higher of (a) the rate of interest announced by Barclays
Bank PLC at its principal office located in New York, New York, as its prime
commercial lending rate for such day and (b) the sum of (i) the Federal Funds
Rate for such day and (ii) 0.50%.
"Applicable Margin" is defined in the Fee Letter.
"Bank Rate" means, for any day falling in any Interest Period, an interest
rate per annum equal to the Eurodollar Rate for that Interest Period plus the
Applicable Margin, except that the Bank Rate shall equal the Alternate Rate plus
the Applicable Margin (i) as to any day falling in any Interest Period if the
Administrator does not receive notice or determine, by no later than 12:00 noon
(New York City time) on the third Business Day prior to such day that the Bank
Rate shall apply on such day, (ii) as to any day falling in any Interest Period,
if the Administrator has determined that for any reason it is not legally
permissible or commercially practicable for any Liquidity Provider to fund its
investment in the Class A Certificates by purchasing dollar deposits in the
London interbank market, (iii) as to any day falling in any Interest Period to
the extent that the portion of the Class A Funded Amount to be funded at the
Bank Rate on such day is less than $1,000,000, or (iv) if elected by the Seller
by notice delivered to the Administrator no
1
<PAGE>
later than 12:00 noon (New York City time) on the third Business Day prior to
the first day of the Interest Period in which such day falls.
"Class A Additional Amounts" means all amounts owed by the Seller pursuant
to Article IX hereof plus any Breakage Payments owed to any Purchasers pursuant
to Section 4.6(c) of the Supplement.
"Class A Certificates" means the Class A Floating Rate Asset Backed
Certificates, Series 2004-VFC to be issued by the Trust pursuant to the Pooling
and Servicing Agreement and the Supplement, evidencing undivided beneficial
interests in certain assets of the Trust.
"Class B Certificate Rate" means, for each Interest Period, a per annum
rate equal to 0.25% per annum in excess of the Class A Certificate Rate for such
Interest Period.
"Class B Purchaser" is defined in the preamble.
"Closing" is defined in Section 3.01.
"Closing Date" is defined in Section 3.01.
"Commercial Paper" means promissory notes issued by the Conduit Purchaser
in the commercial paper market through one or more commercial paper placement
agents selected by Administrator.
"Conduit Purchaser" is defined in the preamble.
"Cost of Funds" means for any Interest Period, the sum, for each day
falling in such period, of an amount equal to the product of (i) the Class A
Investor Interest on such day times (ii) the Daily Conduit Purchaser Rate.
"Covered Person" means any Funding Source, the Agent and the Administrator.
"CP Rate" means, for any day falling in any Interest Period, a rate per
annum calculated by the Administrator equal to the sum of (a) the rate or, if
more than one rate, the weighted average of the rates at which Commercial Paper
allocated to the Class A Investor Interest bears interest on such day,
determined by converting to an interest-bearing equivalent rate per annum the
discount rate (or rates) at which such Commercial Paper has been sold, and
taking into consideration any incremental carrying costs associated with such
Commercial Paper maturing other than on dates when the Conduit Purchaser
receives funds, plus (b) to the extent not included in (a), the commissions and
charges charged by such commercial paper placement agents with respect to such
Commercial Paper, expressed as a percentage of such face amount and converted to
an interest-bearing equivalent rate per annum plus (c) certain documentation and
transaction costs in respect of such Commercial Paper plus (d) the cost of
borrowings to fund small or odd dollar amounts that are not easily accommodated
in the commercial paper market.
2
<PAGE>
"Daily Conduit Purchaser Rate" means:
(a) as to any day on which the Conduit Purchaser funds the entire Class A
Investor Interest with Commercial Paper, the CP Rate plus the Applicable Margin
divided by 360; and
(b) as to any day on which the Conduit Purchaser funds all or part of the
Class A Investor Interest other than through the issuance of Commercial Paper,
the weighted average of (x) the CP Rate plus the Applicable Margin divided by
360 (weighted on the basis of the portion of the Class A Investor Interest that
was funded with Commercial Paper) and (y) the Bank Rate, divided by (i) 360 (to
the extent that the Bank Rate is determined by reference to the Eurodollar Rate)
or (ii) 365 or 366, as applicable (to the extent that the Bank Rate is
determined by reference to the Alternate Rate) (weighted, in each case, on the
basis of the portion of the Class A Investor Interest that was funded at such
Bank Rate).
"Eurodollar Business Day" means a day on which dealings in Dollars are
carried on in the eurodollar interbank market.
"Eurodollar Determination Date" means the second Eurodollar Business Day
prior to the commencement of each Interest Period.
"Eurodollar Rate" means, for any day falling in any Interest Period (or
portion thereof wherein interest shall be calculated at the Eurodollar Rate),
the per annum rate of interest determined by the Administrator to be equal to
the rate (rounded upwards, if necessary, to the nearest whole multiple of
1/100th of one percent per annum) for deposits in Dollars for a period
approximating such Interest Period (or portion thereof wherein interest shall be
calculated at the Eurodollar Rate) which appears on the Reuters Screen LIBO Page
as of 11:00 A.M. (London time) on the second Eurodollar Business Day before (and
for value on) the first day of such Interest Period (or the first day of the
portion thereof wherein interest shall be calculated at the Eurodollar Rate) and
if such rate shall not be so quoted, the rate per annum at which the
Administrator is offered for such Dollar deposits at or about 11:00 a.m., New
York City time, on such date by prime banks in the interbank eurodollar market
where the eurodollar and foreign currency exchange operations in respect of the
Incremental Fundings are then being conducted, divided by the remainder of one
minus the Eurodollar Reserve Percentage (expressed as a decimal) applicable
during such Interest Period.
"Eurodollar Reserve Percentage" means, with respect to any Interest Period
(or portion thereof wherein interest shall be calculated at the Eurodollar
Rate), the then applicable percentage (expressed as a decimal) prescribed by the
Federal Reserve Board for determining reserve requirements applicable to
"Eurocurrency Liabilities" pursuant to Regulation D.
"Federal Bankruptcy Code" means the bankruptcy code of the United States of
America codified in Title 11 of the United States Code.
"Federal Funds Rate" means, for any day, an interest rate per annum equal
to:
(a) the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by federal
funds brokers, as published for such
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day (or, if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of Boston; or
(b) if such rate is not so published for any day which is a Business Day,
the average of the quotations for such day on such transactions received by
Administrator from three federal funds brokers of recognized standing selected
by it.
"Fee Letter" means the Fee Letter, dated as of the Closing Date, among the
Seller and the Administrator setting forth certain fees payable by the Seller in
connection with the purchase of the Class A Certificates by the Agent for the
benefit of the Conduit Purchaser.
"Foreign" means, with respect to any Funding Source that is an assignee or
participant of the Conduit Purchaser hereunder, any Person not organized under
the laws of the United States, one of the states thereof, or the District of
Columbia.
"Funding Agreement" means any agreement or instrument executed by any
Funding Source with or for the benefit of the Conduit Purchaser.
"Funding Source" means any insurance company, bank or other financial
institution providing liquidity, credit enhancement or back-up purchase support
or facilities to the Conduit Purchaser in respect of commercial paper issued by
the Conduit Purchaser and any of such Person's Affiliates and Persons deemed to
be such Person's Affiliates by any applicable Official Body.
"Governmental Actions" means any and all consents, approvals, permits,
orders, authorizations, waivers, exceptions, variances, exemptions or licenses
of, or registrations, declarations or filings with, any Governmental Authority
required under any Requirement of Law.
"Governmental Authority" means the United States of America, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government and having jurisdiction over the applicable Person.
"Incremental Funding" means an increase in the aggregate outstanding
principal balance of the Class A Certificates in accordance with the provisions
of Section 2.02 or an increase in the aggregate outstanding principal balance of
the Class B Certificates in accordance with the provisions of Section 2.03.
"Incremental Funding Date" means each date on which an Incremental Funding
occurs.
"Indemnified Party" means each Purchaser, the Administrator, each of the
Funding Sources and any of their respective officers, directors, employees,
agents, representatives, assignees or affiliates.
"Investment Letter" is defined in Section 6.03.
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"Law" means any law (including common law), constitution, statute, treaty,
regulation, rule, ordinance, order, injunction, writ, decree, judgment or award
of any Official Body.
"Liquidity Agreement" means that certain Revolving Asset Purchase
Agreement, dated as of the Closing Date, among the Conduit Purchaser, the
financial institutions thereto as Assignees and Barclays Bank PLC, as agent, as
amended from time to time.
"Liquidity Provider" means each Person that may from time to time be party
to the Liquidity Agreement as a "liquidity purchaser" thereunder.
"Losses" is defined in Section 9.01.
"Notice of Incremental Funding" means a written notice of an Incremental
Funding in the form of Exhibit A.
"Official Body" means any Governmental Authority or any accounting board or
authority (whether or not a part of government) which is responsible for the
establishment or interpretation of national or international accounting
principles, in each case whether foreign or domestic.
"Pooling and Servicing Agreement" means the Second Amended and Restated
Pooling and Servicing Agreement dated as of November 25, 1997 and amended as of
July 22, 1999 and as of May 8, 2001 among the Seller, the Servicer, and Wachovia
Bank, National Association, as Trustee, as the same may be further amended,
modified or supplemented.
"Purchase Expiration Date" means the earlier of (i) the date which is 364
days from the Closing Date (or such later date as the Conduit Purchaser shall
agree) and (ii) the commencement of the Early Amortization Period.
"Purchasers" mean the Conduit Purchaser and the Class B Purchaser.
"Regulation D" means Regulation D of the Federal Reserve Board, or any
other regulation of the Federal Reserve Board that prescribes reserve
requirements applicable to nonpersonal time deposits or "Eurocurrency
Liabilities" as presently defined in Regulation D, as in effect from time to
time.
"Regulatory Change" means (i) the adoption of any Law or bank regulatory
guideline (ii) any amendment or change in the administration, interpretation or
application of any existing or future Law or bank regulatory guideline by any
Official Body charged with the administration, interpretation or application
thereof, (iii) the compliance with any directive of any Official Body issued
after the Closing Date (in the case of any bank regulatory guideline, whether or
not having the force of Law) or (iv) the effectiveness after the Closing Date of
any existing Law or bank regulatory guideline.
"Securitization Entity" is defined in Section 10.09.
"Seller" is defined in the preamble.
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"Series Documents" means the Pooling and Servicing Agreement, the
Supplement and this Agreement.
"Servicer" is defined in the preamble.
"Supplement" means the Series 2004-VFC Supplement dated as of the Closing
Date, among the Seller, the Servicer, and Wachovia Bank, National Association,
as Trustee, supplementing the Pooling and Servicing Agreement and relating to
the Series 2004-VFC Certificates, as the same may be amended, modified or
supplemented.
"Taxes" means, in the case of any Funding Source that is an assignee or
participant of the Conduit Purchaser, taxes, levies, imposts, deductions,
charges, withholdings and liabilities, now or hereafter imposed, levied,
collected, withheld or assessed by any country (or any political subdivision
thereof), excluding income or franchise taxes imposed on it by (i) the
jurisdiction under the laws of which such Funding Source is organized (or by any
political subdivision thereof), (ii) any jurisdiction in which an office of such
Funding Source funding the Class A Funded Amount is located (or any political
subdivision thereof), or (iii) any jurisdiction in which such Funding Source is
already subject to tax.
"Third Party Claim" is defined in Section 9.02.
Section 1.02. Other Definitional Provisions.
(a) All terms defined in this Agreement shall have the defined meanings
when used in any certificate or other document made or delivered pursuant hereto
unless otherwise defined therein.
(b) As used herein and in any certificate or other document made or
delivered pursuant hereto or thereto, accounting terms not defined in Section
1.01, and accounting terms partially defined in Section 1.01 to the extent not
defined, shall have the respective meanings given to them under generally
accepted accounting principles. To the extent that the definitions of accounting
terms herein are inconsistent with the meanings of such terms under generally
accepted accounting principles, the definitions contained herein shall control.
(c) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement; and Section, subsection,
Schedule and Exhibit references contained in this Agreement are references to
Sections, subsections, the Schedule and Exhibits in or to this Agreement unless
otherwise specified.
ARTICLE II
PURCHASE AND SALE
Section 2.01. Purchase and Sale of the Certificates.
(a) Purchase and Sale of the Class A Certificates. On the terms and subject
to the conditions set forth in this Agreement, and in reliance on the covenants,
representations,
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warranties and agreements herein set forth, the Seller shall sell to the Agent,
for the benefit of the Conduit Purchaser and the Liquidity Providers, and the
Agent, for the benefit of the Conduit Purchaser and the Liquidity Providers,
shall purchase at the Closing, a Class A Certificate with an initial outstanding
principal amount of zero and with a purchase limit equal to the Maximum Class A
Funded Amount.
(b) Purchase and Sale of the Class B Certificates. On the terms and subject
to the conditions set forth in this Agreement, and in reliance on the covenants,
representations, warranties and agreements herein set forth the Seller shall
sell to the Class B Purchaser, and the Class B Purchaser shall purchase at the
Closing, a Class B Certificate with an initial outstanding principal amount of
zero and with a purchase limit equal to the Maximum Class B Funded Amount.
Section 2.02. Class A Incremental Fundings.
(a) The Conduit Purchaser will be obligated to make Class A Incremental
Fundings from time to time during the Revolving Period upon satisfaction, as of
the applicable Incremental Funding Date, of each of the following conditions:
(i) the Administrator shall have received copies of all monthly
statements and all reports required to be delivered by Servicer to the
Trustee pursuant to Section 3.4 of the Pooling and Servicing Agreement;
(ii) each of the representations and warranties of the Seller and the
Servicer made in the Series Documents shall be true and correct in all
material respects as of the applicable Incremental Funding Date immediately
after giving effect to such Class A Incremental Funding (except to the
extent they expressly relate to an earlier or later time);
(iii) the Seller and the Servicer shall be in compliance in all
material respects with all of their respective covenants contained in the
Series Documents;
(iv) both before and immediately after giving effect to such Class A
Incremental Funding, no Early Amortization Event, Servicer Default or event
which with the giving of notice or passage of time or both could become an
Early Amortization Event or Servicer Default shall have occurred;
(v) [RESERVED];
(vi) no other Class A Incremental Fundings shall have occurred during
the same calendar week;
(vii) the Spread Account Amount shall be at least equal to the
Required Spread Account Amount, the Specified Enhancement Amount shall be
at least equal to the Required Enhancement Amount and the Available Series
Cash Collateral Amount shall be at least equal to the Required CCA Floor
Amount, in each case after giving effect to any deposits to, and
withdrawals from, such accounts on such date and any Incremental Funding on
such date;
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(viii) at least two Business Days prior to the Incremental Funding
Date, the Administrator and the Conduit Purchaser shall have received a
completed Notice of Incremental Funding;
(ix) no event shall have occurred that results in the Conduit
Purchaser being unable to access the United States commercial paper markets
and the Liquidity Providers not being obligated to make a purchase under
the Liquidity Agreement;
(x) both before and immediately after giving effect to such Class A
Incremental Funding, the Seller Interest shall not be less than the
Aggregate Minimum Seller Interest;
(xi) immediately after giving effect to such Class A Incremental
Funding, the Class A Investor Interest shall be equal to or less than the
notional amount then in effect under the Cap Agreement; and
(xii) in the case of the initial Incremental Funding Date, prior to
such date, the Administrator and the Conduit Purchaser shall have received
(i) fully executed counterparts of the Cap Agreement, which is Exhibit E to
the Supplement, and the assignment of the rights of Fashion Service Corp.
under such Cap Agreement to the Trust, each in substantially the form of
the latest drafts received by the parties as of the Closing Date, (ii) a
copy of the UCC-1 financing statements executed by Fashion Service Corp. in
connection with the assignment referred to in clause (i) above, which
financing statement shall, or concurrently with such Incremental Funding
shall be, filed in the jurisdictions necessary to perfect such assignment,
(iii) opinions of Mayer, Brown, Rowe & Maw LLP and Colin Stern, Executive
Vice President and General Counsel to Charming Shoppes, Inc., each in
substantially the form of the latest drafts reviewed by the parties as of
the Closing Date and (iv) the form of the Monthly Settlement Report, which
is Exhibit D to the Supplement, as agreed to by the parties.
(b) Each Class A Incremental Funding shall be requested in an aggregate
principal amount of $100,000 (except in the case of the initial funding, which
shall be at least $500,000) and integral multiples of $100,000 in excess
thereof; provided, that a Class A Incremental Funding may be requested in the
entire remaining Maximum Class A Funded Amount.
(c) The Conduit Purchaser shall not be required to make any Class A
Incremental Funding if, after giving effect to such funding, the Class A Funded
Amount would exceed the Maximum Class A Funded Amount.
(d) The purchase price of each Class A Incremental Funding shall be equal
to 100% of the amount of such Class A Incremental Funding and shall be paid not
later than 3:00 p.m. New York City time on the Incremental Funding Date by wire
transfer of immediately available funds to such account as may from time to time
be specified by the Seller in a notice to the Administrator.
Section 2.03. Class B Incremental Fundings.
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(a) The Class B Purchaser will be obligated to make Class B Incremental
Fundings from time to time during the Revolving Period upon satisfaction, as of
the applicable Incremental Funding Date, of each of the following conditions:
(i) the Class B Purchaser shall have received copies of all monthly
statements and all reports required to be delivered by Servicer to the
Trustee pursuant to Section 3.4 of the Pooling and Servicing Agreement;
(ii) each of the representations and warranties of the Seller and the
Servicer made in the Series Documents shall be true and correct in all
material respects as of the applicable Incremental Funding Date (except to
the extent they expressly relate to an earlier or later time);
(iii) the Seller and the Servicer shall be in compliance in all
material respects with all of their respective covenants contained in the
Series Documents;
(iv) no Early Amortization Event, Servicer Default or event which with
the giving of notice or passage of time or both could become an Early
Amortization Event or Servicer Default shall have occurred; and
(v) at least two Business Days prior to the Incremental Funding Date,
the Class B Purchaser shall have received a completed Notice of Incremental
Funding.
(b) The Class B Purchaser shall not be required to make any Class B
Incremental Funding if, after giving effect to such funding, the Class B
Investor Interest would exceed the Maximum Class B Funded Amount.
(c) The purchase price of each Class B Incremental Funding shall be equal
to 100% of the amount of such Class B Incremental Funding and shall be paid not
later than 1:00 p.m. New York City time on the Incremental Funding Date by wire
transfer of immediately available funds to such account as may from time to time
be specified by the Seller in a notice to the Class B Purchaser.
Section 2.04. Reduction or Increase of Maximum Funded Amounts.
(a) The Seller shall not reduce in whole or in part the Maximum Class A
Funded Amount without the prior written consent of the Administrator.
(b) The Seller may request an increase in the Class A Maximum Funded Amount
by written notice to the Administrator at least 30 days before the date on which
such increase is requested to become effective. No such increase will take
effect unless (i) the Conduit Purchaser and Administrator agree thereto and (ii)
the available commitments of the Funding Sources under the Funding Agreements
for the commercial paper program of the Conduit Purchaser are increased as
necessary to maintain the then-current ratings of the Conduit Purchaser's
Commercial Paper.
(c) The Seller may reduce in whole or in part the Maximum Class B Funded
Amount (but not below the Class B Investor Interest or the Required Class B
Amount) by giving the
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Class B Purchaser written notice thereof at least two Business Days before such
reduction is to take place. The Seller shall pay the Class B Purchaser any
accrued and unpaid Class B Non-Use Fee on the first Distribution Date following
the date of such reduction with respect to the reduction amount.
(d) The Seller may request an increase in the Maximum Class B Funded Amount
by written notice to the Class B Purchaser at least 30 days before the date on
which such increase is requested to become effective. No such increase will take
effect unless the Class B Purchaser agrees thereto.
Section 2.05. Calculation of the Certificate Rates.
(a) On or before the fourth Business Day of each month, the Administrator
shall calculate the Cost of Funds, the Class A Certificate Rate and the Class A
Monthly Interest applicable to the Class A Certificates for the Interest Period
related to such Distribution Date and shall notify the Trustee, the Seller and
the Servicer of such rates and amount (such Cost of Funds shall be calculated
using an estimate of the CP Rate, if necessary, for the remaining days in such
Interest Period; provided, however, that each such estimated amount shall be
adjusted as provided in paragraph (c) below).
(b) On or before the Business Day preceding each Distribution Date, the
Servicer shall calculate the Class B Certificate Rate and the Class B Monthly
Interest applicable to the Class B Certificates for the Interest Period related
to such Distribution Date and shall notify the Trustee and the Seller of such
rates and amount. On any Distribution Date on which the Class B Funded Amount is
reduced to zero and on the Series 2004-VFC Termination Date, Class B Monthly
Interest shall include amounts which accrue from (and excluding) the last day of
the preceding calendar month through (and including) such Distribution Date or
Series 2004-VFC Termination Date, as applicable.
(c) Except as provided in the next sentence, if the Administrator shall
have used an estimate of the CP Rate to calculate the Cost of Funds pursuant to
paragraph (a) with respect to any Interest Period, following the end of such
Interest Period the Administrator shall compute the actual CP Rate for each day
during such Interest Period, and (i) if the actual Cost of Funds computed using
such actual CP Rate is greater than the estimated Cost of Funds for such
Interest Period, the Cost of Funds for the next Interest Period shall be
increased by the amount of such difference, and (ii) if the actual Cost of Funds
so computed is less than the estimated Cost of Funds for such Interest Period,
the Cost of Funds for the next Interest Period shall be decreased by the amount
of such difference. If the Class A Funded Amount shall be reduced to zero or the
Series 2004-VFC Termination Date shall occur, in either case, on the related
Distribution Date, then on or before the Business Day preceding such
Distribution Date, the Administrator shall recalculate the Cost of Funds and the
CP Rate and shall notify the Trustee, the Seller and the Servicer of such
recalculated rates and amounts and such recalculated rates and amounts shall be
deemed to constitute such amounts and rates as required to be reported in
paragraph (a).
ARTICLE III
CLOSING
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Section 3.01. Closing. The closing (the "Closing") of the purchase and sale
of the Class A Certificates and Class B Certificates shall take place at the
offices of Mayer, Brown Rowe & Maw LLP, 190 South LaSalle Street, Chicago,
Illinois 60603 on January 21, 2004, or if the conditions to closing set forth in
Article IV of this Agreement shall not have been satisfied or waived by such
date, as soon as practicable after such conditions shall have been satisfied or
waived, or at such other time, date and place as the parties shall agree upon
(the date of the Closing being referred to herein as the "Closing Date").
Section 3.02. Transactions to be Effected at the Closing. At the Closing
(a) the Seller shall deliver a Class A Certificate to the Agent in consideration
for the agreements of the Conduit Purchaser hereunder and (b) the Seller shall
deliver a Class B Certificate to the Class B Purchaser in consideration for the
agreements of the Class B Purchaser hereunder.
ARTICLE IV
CONDITIONS PRECEDENT TO
PURCHASE ON THE CLOSING DATE
The purchase of the Series 2004-VFC Certificates hereunder is subject to
the satisfaction at the time of the Closing of the following conditions (any or
all of which may be waived by the Conduit Purchaser and the Class B Purchaser in
their sole discretion):
Section 4.01. Performance by the Seller and Servicer. All the terms,
covenants, agreements and conditions of the Series Documents to be complied with
and performed by the Seller and the Servicer at or before the Closing shall have
been complied with and performed in all material respects.
Section 4.02. Representations and Warranties. Each of the representations
and warranties of the Seller and the Servicer made in the Series Documents shall
be true and correct in all material respects as of the time of the Closing
(except to the extent they expressly relate to an earlier or later time).
Section 4.03. Corporate Documents. The Administrator shall have received
copies of the (i) certificate of incorporation, good standing certificate and
by-laws of the Seller, (ii) Board of Directors resolutions of the Seller with
respect to the Series Documents, and (iii) incumbency certificate of the Seller,
each certified by appropriate corporate authorities.
Section 4.04. [reserved].
Section 4.05. Opinions of Counsel to the Trustee. Counsel to the Trustee
shall have delivered to the Administrator a favorable opinion, dated as of the
Closing Date and reasonably satisfactory in form and substance to the
Administrator and its counsel.
Section 4.06. Financing Statements. The Administrator shall have received
evidence satisfactory to it of the completion of all recordings, registrations,
and filings as may be necessary or, in the opinion of the Administrator,
desirable to perfect or evidence the assignment by the Seller to the Trust of
its ownership interest in the Receivables and the proceeds thereof and the
security interest granted pursuant to the Pooling and Servicing Agreement,
including:
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(a) Acknowledgment copies of all UCC financing statements and assignments
(other than those referred to in Section 2.02(a)(xi)) that have been filed in
the offices of the Secretary of State of the applicable states and in the
appropriate office or offices of such other locations as may be specified in the
opinions of counsel delivered pursuant to Section 4.04; and
(b) Search reports from parties acceptable to the Administrator and their
counsel dated a date reasonably near the Closing Date and listing all effective
financing statements which name the Seller, as seller, assignor or debtor and
which are filed in all jurisdictions in which the filings were or will be made,
together with copies of such financing statements.
Section 4.07. Ratings. The Conduit Purchaser's Commercial Paper shall
continue to be rated at least A-1+ by S&P and P-1 by Moody's.
Section 4.08. Documents. The Administrator shall have received a duly
executed counterpart of each of the Series Documents and each and every document
or certification delivered by any party in connection with any of such
agreements (other than those referred to in Section 2.02(a)(xi)), and each such
document shall be in full force and effect.
Section 4.09. No Actions or Proceedings. No action, suit, proceeding or
investigation by or before any Governmental Authority shall have been instituted
to restrain or prohibit the consummation of, or to invalidate, the transactions
contemplated by the Series Documents and the documents related thereto in any
material respect.
Section 4.10. Approvals and Consents. All Governmental Actions of all
Governmental Authorities required with respect to the transactions contemplated
by the Series Documents and the other documents related thereto shall have been
obtained or made.
Section 4.11. Officer's Certificate. The Administrator shall have received
an Officer's Certificate from the Seller in form and substance reasonably
satisfactory to the Administrator and its counsel, dated as of the Closing Date,
certifying as to the satisfaction of the conditions set forth in Sections 4.01
and 4.02.
Section 4.12. Other Documents. The Seller shall have furnished to the
Administrator such other information, certificates and documents as the
Administrator may reasonably request.
Section 4.13. Fees. The fees due on the Closing Date specified in the Fee
Letter shall have been paid.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLER AND SERVICER
Section 5.01. Representations and Warranties of the Seller. The Seller
hereby represents and warrants to the Purchasers and the Administrator as of the
Closing Date as follows:
(a) Organization and Good Standing. The Seller is a corporation duly
organized and validly existing under the laws of the State of Delaware and has
full corporate power, authority
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and legal right to own its properties and conduct its business as such
properties are presently owned and such business is presently conducted, and to
execute, deliver and perform its obligations under this Agreement and each other
Series Document to which it is a party.
(b) Due Qualification. The Seller is duly qualified to do business and is
in good standing (or is exempt from such requirement) in any state required in
order to conduct its business, and has obtained all necessary licenses and
approvals with respect to the Seller required under applicable law.
(c) Due Authorization. The execution and delivery by the Seller of this
Agreement and each other Series Document and the consummation of the
transactions provided for hereunder and thereunder have been duly authorized by
the Seller by all necessary corporate action on its part and this Agreement and
each other Series Document will remain, from the time of its execution, an
official record of the Seller.
(d) Enforceability. Each of this Agreement and each other Series Document
constitutes a legal, valid and binding obligation of the Seller, enforceable
against the Seller in accordance with its terms, except as such enforceability
may be limited by Debtor Relief Laws.
(e) No Conflict. The execution and delivery of this Agreement and each
other Series Document, the performance of the transactions contemplated
hereunder and thereunder and the fulfillment of the terms hereof and thereof
will not conflict with, result in any breach of any of the material terms and
provisions of, or constitute (with or without notice or lapse of time or both) a
default under, any indenture, contract, agreement, mortgage, deed of trust, or
other instrument to which the Seller is a party or by which it or any of its
properties are bound.
(f) No Violation. The execution and delivery of this Agreement and each
other Series Document, the performance of the transactions contemplated
hereunder and thereunder and the fulfillment of the terms hereof and thereof
will not conflict with or violate in any material respect any Requirements of
Law applicable to the Seller.
(g) No Proceedings. There are no proceedings pending or, to the best
knowledge of the Seller, threatened against the Seller before any Governmental
Authority (i) asserting the invalidity of this Agreement or any other Series
Document, (ii) seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or any other Series Document, (iii) seeking any
determination or ruling that, in the reasonable judgment of the Seller, would
materially and adversely affect the performance by the Seller of its obligations
under this Agreement or any other Series Document, (iv) seeking any
determination or ruling that would materially and adversely affect the validity
or enforceability of this Agreement or any other Series Document or (v) seeking
to affect adversely the income tax attributes of the Trust.
(h) All Consents Required. All appraisals, authorizations, consents, orders
or other actions of any Person or of any Governmental Authority required in
connection with the execution and delivery by the Seller of this Agreement and
each other Series Document, the performance of the transactions contemplated
hereunder and thereunder and the fulfillment of the terms hereof, have been
obtained.
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(i) Incorporated Representations and Warranties. Its representations and
warranties in Sections 2.3 and 2.4 of the Pooling and Servicing Agreement are
true and correct in all material respects as of the dates they were so made.
(j) Investment Company Act. Neither the Seller nor the Trust is required to
be registered under the Investment Company Act of 1940, as amended.
(k) No Early Amortization Event, Insolvency Event or Servicer Default. No
Early Amortization Event with respect to the Series 2004-VFC Certificates,
Insolvency Event or Servicer Default has occurred and is continuing, and no
event, act or omission has occurred and is continuing which, with the lapse of
time, the giving of notice or both, would constitute an Early Amortization
Event, Insolvency Event or Servicer Default.
(l) Series 2004-VFC Certificates. The Series 2004-VFC Certificates have
been duly and validly authorized, and, when executed and authenticated in
accordance with the terms of the Pooling and Servicing Agreement and the
Supplement, and delivered to and paid for in accordance with this Agreement,
will be duly and validly issued and outstanding and will be entitled to the
benefits of the Pooling and Servicing Agreement and the Supplement.
(m) Cardholder Guidelines. The Cardholder Guidelines require a Receivable
to be charged off as uncollectible once that Receivable is determined to be 180
days or more past due.
Section 5.02. Representations and Warranties of the Servicer. The Servicer
hereby represents and warrants to the Purchasers and the Administrator as of the
Closing Date as follows:
(a) Organization and Good Standing. The Servicer is a corporation duly
organized and validly existing under the laws of the State of Delaware and has
full corporate power, authority and legal right to own its properties and
conduct its business as such properties are presently owned and such business is
presently conducted, and to execute, deliver and perform its obligations under
this Agreement and each other Series Document to which it is a party.
(b) Due Qualification. The Servicer is duly qualified to do business and is
in good standing (or is exempt from such requirement) in any state required in
order to conduct its business, and has obtained all necessary licenses and
approvals with respect to the Servicer required under applicable law.
(c) Due Authorization. The execution and delivery by the Servicer of this
Agreement and each other Series Document to which it is a party and the
consummation of the transactions provided for hereunder and thereunder have been
duly authorized by the Servicer by all necessary corporate action on its part
and this Agreement and each other Series Document to which it is a party will
remain, from the time of its execution, an official record of the Servicer.
(d) Enforceability. Each of this Agreement and each other Series Document
to which the Servicer is a party constitutes a legal, valid and binding
obligation of the Servicer, enforceable against the Servicer in accordance with
its terms, except as such enforceability may be limited by Debtor Relief Laws.
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(e) No Conflict. The execution and delivery of this Agreement and each
other Series Document to which the Servicer is a party, the performance of the
transactions contemplated hereunder and thereunder and the fulfillment of the
terms hereof and thereof will not conflict with, result in any breach of any of
the material terms and provisions of, or constitute (with or without notice or
lapse of time or both) a default under, any indenture, contract, agreement,
mortgage, deed of trust, or other instrument to which the Servicer is a party or
by which it or any of its properties are bound.
(f) No Violation. The execution and delivery of this Agreement and each
other Series Document to which the Servicer is a party, the performance of the
transactions contemplated hereunder and thereunder and the fulfillment of the
terms hereof and thereof will not conflict with or violate in any material
respect any Requirements of Law applicable to the Servicer.
(g) No Proceedings. There are no proceedings pending or, to the best
knowledge of the Servicer, threatened against the Servicer before any court,
regulatory body, administrative agency, or other tribunal or governmental
instrumentality (i) asserting the invalidity of this Agreement or any other
Series Document to which it is a party, (ii) seeking to prevent the consummation
of any of the transactions contemplated by this Agreement or any other Series
Document, (iii) seeking any determination or ruling that, in the reasonable
judgment of the Servicer, would materially and adversely affect the performance
by the Servicer of its obligations under this Agreement or any other Series
Document to which it is a party, (iv) seeking any determination or ruling that
would materially and adversely affect the validity or enforceability of this
Agreement or any other Series Document or (v) seeking to affect adversely the
income tax attributes of the Trust.
(h) All Consents Required. All appraisals, authorizations, consents, orders
or other actions of any Person or of any governmental body or official required
in connection with the execution and delivery by the Servicer of this Agreement
and each other Series Document to which it is a party, the performance of the
transactions contemplated hereunder and thereunder and the fulfillment of the
terms hereof, have been obtained.
(i) Incorporated Representations and Warranties. Its representations and
warranties in Section 3.3 of the Pooling and Servicing Agreement are true and
correct in all material respects as of the dates they were so made.
(j) No Early Amortization Event, Insolvency Event or Servicer Default. No
Early Amortization Event with respect to the Series 2004-VFC Certificates,
Insolvency Event or Servicer Default has occurred and is continuing, and no
event, act or omission has occurred and is continuing which, with the lapse of
time, the giving of notice or both, would constitute an Early Amortization
Event, Insolvency Event or Servicer Default.
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ARTICLE VI
REPRESENTATIONS AND WARRANTIES
WITH RESPECT TO THE PURCHASER
Each of the Purchasers hereby makes the following representations and
warranties to the Seller on which the Seller shall rely in entering into this
Agreement.
Section 6.01. Organization. Such Purchaser has been duly organized and is
validly existing and in good standing as a corporation under the laws of the
state governing its formation, with power and authority to own its properties
and to transact the business in which it is now engaged.
Section 6.02. Authority, etc. Such Purchaser has all requisite power and
authority to enter into and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby and thereby. The execution and
delivery by such Purchaser of this Agreement and the consummation by such
Purchaser of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate or partnership action on the part of such
Purchaser. This Agreement has been duly and validly executed and delivered by
such Purchaser and constitutes a legal, valid and binding obligation of such
Purchaser, enforceable against such Purchaser in accordance with its terms,
subject as to enforcement to bankruptcy, reorganization, insolvency, moratorium
and other similar laws of general applicability relating to or affecting
creditors' rights and to general principles of equity. Neither the execution and
delivery by such Purchaser of this Agreement nor the consummation by such
Purchaser of any of the transactions contemplated hereby, nor the fulfillment by
such Purchaser of the terms hereof, will conflict with, or violate, result in a
breach of or constitute a default under any term or provision of the certificate
of incorporation or by-laws of such Purchaser or any Requirement of Law
applicable to such Purchaser.
Section 6.03. Securities Act. The Series 2004-VFC Certificate purchased by
such Purchaser pursuant to this Agreement will be acquired for investment only
and not with a view to any public distribution thereof, and such Purchaser will
not offer to sell or otherwise dispose of its Series 2004-VFC Certificate so
acquired by it (or any interest therein) in violation of any of the registration
requirements of the Act or any applicable state or other securities laws. Such
Purchaser acknowledges that it has no right to require the Seller to register
under the Act or any other securities law the Series 2004-VFC Certificates to be
acquired by such Purchaser pursuant to this Agreement.
Such Purchaser agrees with the Seller that: (i) such Purchaser will execute
and deliver to the Seller on or before the Closing Date a certain letter (the
"Investment Letter"), in the form attached hereto as Exhibit B, with respect to
the purchase of the Series 2004-VFC Certificates and (ii) all of the statements
made by such Purchaser in the Investment Letter are true and correct in all
material respects as of the date made. The Conduit Purchaser will also cause the
Agent and Liquidity Providers to execute and deliver an Investment Letter to
Seller on or prior to the Closing Date. Each Purchaser understands and agrees
that receipt by the Seller of a duly executed Investment Letter is a condition
precedent to the Seller's obligations hereunder to sell the Series 2004-VFC
Certificates.
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Section 6.04. Investment Company Act. Neither such Purchaser nor the
Administrator is required to register as an "investment company" nor is such
Purchaser or the Administrator controlled by an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
ARTICLE VII
COVENANTS OF THE SELLER AND THE SERVICER
Section 7.01. Rating of Class A Certificates or Notes. To the extent that
any rating provided with respect to the Class A Certificates or the Conduit
Purchaser's Commercial Paper by any rating agency is conditional upon the
furnishing of documents or the taking of any other action by the Seller, the
Seller shall take all reasonable actions to furnish such documents and take any
such other action.
Section 7.02. Information. So long as the Class A Certificates remain
outstanding, the Servicer and the Seller will furnish to the Conduit Purchaser
and the Administrator:
(a) as soon as possible and in any event within three Business Days of
knowledge thereof, notice of (i) any litigation, investigation or proceeding
which, in the Servicer's reasonable opinion, could have a material adverse
effect on the Class A Certificateholders and (ii) any material adverse
development in previously disclosed litigation;
(b) prior to its effective date, notice of any material change in the
Cardholder Guidelines which, in the Servicer's reasonable opinion, could have a
material adverse effect on the Class A Certificateholders;
(c) a copy of each certificate, opinion, report, statement, notice or other
communication (other than investment instructions) furnished by or on behalf of
the Seller to the Trustee or either Rating Agency under the Pooling and
Servicing Agreement or the Supplement, concurrently therewith, and promptly
after receipt thereof, a copy of each notice, demand or other communication
received by or on behalf of the Seller under the Pooling and Servicing
Agreement, the Purchase Agreement or the Supplement;
(d) such other information (including financial information), documents,
records or reports respecting the Trust, the Receivables, the Seller, the
Originator or the Servicer as a Purchaser or the Administrator may from time to
time reasonably request; and
(e) as soon as possible and in any event within five Business Days after
the occurrence thereof, notice of each Early Amortization Event, Servicer
Default or event which with the giving of notice or the passage of time or both
would constitute an Early Amortization Event or Servicer Default.
Section 7.03. Access to Information. So long as the Class A Certificates
remain outstanding, the Seller will and will cause the Originator and the
Servicer to, at any time from time to time during regular business hours, or
reasonable notice to the Seller, permit the Purchasers or the Administrator, or
their agents or representatives to:
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(a) examine all books, records and documents (including computer tapes and
disks) in the possession or under the control of the Seller, the Originator and
the Servicer relating to the Receivables, and
(b) visit the offices and property of the Seller, the Originator and the
Servicer for the purpose of examining such materials described in clause (a);
provided, that (x) so long as no Early Amortization Event with respect to Series
2004-VFC has occurred and is continuing no more than one such examination and
visit shall be made by each Purchaser and the Administrator (or their respective
agents and representatives) in any one year period and (y) the Purchasers and
the Administrator shall use their reasonable efforts to coordinate any such
examination and visit with any similar examination and visit to be made by any
other Purchaser or the Administrator or other agents and representatives.
Except as provided in Section 10.05, any information obtained by a
Purchaser or the Administrator pursuant to this Section 7.03 shall be held in
confidence by such Purchaser and the Administrator unless and to the extent such
information (i) has become available to the public, (ii) is required or
requested by any Governmental Authority or in any court proceeding or (iii) is
required by any Requirement of Law. In the case of any disclosure permitted by
clause (ii) or (iii), the Purchaser and the Administrator shall use commercially
reasonable efforts to (x) provide the Seller with advance notice of any such
disclosure and (y) cooperate with the Seller in limiting the extent or effect of
any such disclosure.
Section 7.04. Security Interests; Further Assurances. The Seller will take
all action necessary to maintain the Trustee's first priority perfected
ownership or security interest in the Receivables and the collateral granted
pursuant to the Pooling and Servicing Agreement.
Section 7.05. Covenants. The Seller will duly observe and perform each of
its covenants set forth in the Pooling and Servicing Agreement and the
Supplement.
Section 7.06. Amendments. The Seller will not make, or permit any Person to
make, any material amendment, modification or change to, or provide any material
waiver under the Pooling and Servicing Agreement or any Series Document without
satisfaction of the Rating Agency Condition.
Section 7.07. Cardholder Guidelines. Neither the Seller nor the Servicer
shall make or permit any person to make, any amendment, modification or change
to the Cardholder Guidelines if, as a result of such change, a Receivable would
not be required to be charged off as uncollectible once that Receivable was
determined to be 180 days or more past due.
ARTICLE VIII
ADDITIONAL COVENANTS
Section 8.01. Legal Conditions to Closing. The parties hereto will take all
reasonable action necessary to obtain (and will cooperate with one another in
obtaining) any consent, authorization, permit, license, franchise, order or
approval of, or any exemption by, any
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Governmental Authority or any other Person, required to be obtained or made by
it in connection with any of the transactions contemplated by this Agreement.
Section 8.02. Transfer Restrictions.
(a) Except as otherwise provided in Section 10.04, no Series 2004-VFC
Certificate may be offered, sold or otherwise transferred to any Person (other
than the Seller) unless the Seller shall have given its prior written approval
to such offer, sale or transfer (which approval shall not be unreasonably
withheld). Each Purchaser further agrees that it will not make any general
solicitation or general advertising for the offer or sale of its Series 2004-VFC
Certificate and will not transfer its Series 2004-VFC Certificate (or any
portion thereof) to any Person except (a) to a Person within the United States
which such Purchaser reasonably believes is a "qualified institutional buyer"
(as defined in Rule 144A under the Act) that is purchasing (1) for its own
account or (2) for the account of a "qualified institutional buyer" (as so
defined) or (b) to a Person that is an institutional "accredited investor"
within the meaning of Rule 501(a) (1), (2), (3) or (7) of Regulation D under the
Act, that is, in either case, aware that such resale, pledge or transfer is
being made in reliance on an exemption from registration under the Act, and, in
either case, unless such Person shall have delivered to such Purchaser an
Investment Letter. Each Purchaser further agrees to provide to any Person
purchasing a Series 2004-VFC Certificate (or any portion thereof) from it a
notice advising such purchaser that resales of the Series 2004-VFC Certificates
are restricted as stated above.
(b) Seller shall not execute, and (if given prior written notice by the
Servicer of the inability of the Seller to execute any Subject Instrument by
operation of this clause (b)) the Transfer Agent and Registrar shall not
register the transfer of, any Class B Certificate unless (i) after giving effect
to the execution or transfer of such Class B Certificate, there would be no more
than 5 Private Holders of Class B Certificates and (ii) the other conditions to
transfer set forth in Section 6.3 of the Pooling Agreement have been satisfied.
Section 8.03. Consents, etc. Each Purchaser agrees not to unreasonably
withhold or delay its consent to any amendment or other matter requiring consent
of the Holders of the Series 2004-VFC Certificates under a provision of any
Series Document to the extent that such provision specifies that such consent is
not to be unreasonably withheld or delayed.
ARTICLE IX
INDEMNIFICATION
Section 9.01. Indemnification by the Seller. The Seller agrees to indemnify
and hold harmless each Indemnified Party against any and all losses, claims,
damages, liabilities or expenses, including legal and accounting fees
(collectively, "Losses"), as incurred (payable promptly upon written request),
for or on account of or arising from or in connection with this Agreement,
including any breach of any representation, warranty or covenant of the Seller
in this Agreement or in any certificate or other written material delivered
pursuant hereto; provided, however, that the Seller shall not be so required to
indemnify any such Person or otherwise be liable to any such Person hereunder
for any Losses (i) resulting from the performance of the Receivables, market
fluctuations, a shortfall or failure to make payment under any Enhancement
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or other similar market or investment risks associated with ownership of the
Class A Certificates, (ii) which would otherwise be covered in Section 9.04
hereof, (iii) arising from such Person's gross negligence or willful misconduct
or (iv) arising from a breach of any representation or warranty set forth in the
Pooling and Servicing Agreement, a remedy for the breach of which is provided in
Section 2.4 of the Pooling and Servicing Agreement.
Section 9.02. Procedure. In order for an Indemnified Party to be entitled
to any indemnification provided for under this Agreement in respect of, arising
out of, or involving a claim made by any Person against the Indemnified Party (a
"Third Party Claim"), such Indemnified Party must notify the Seller in writing
of the Third Party Claim within a reasonable time after receipt by such
Indemnified Party of written notice of the Third Party Claim unless the Seller
shall have previously obtained actual knowledge thereof. Thereafter, the
Indemnified Party shall deliver to the Seller, within a reasonable time after
the Indemnified Party's receipt thereof, copies of all notices and documents
(including court papers) received by the Indemnified Party relating to the Third
Party Claim.
Section 9.03. Defense of Claims. If a Third Party Claim is made against an
Indemnified Party, (a) the Seller will be entitled to participate in the defense
thereof and, (b) if it so chooses, to assume the defense thereof with counsel
selected by the Seller, provided that in connection with such assumption (i)
such counsel is not reasonably objected to by the Indemnified Party and (ii) the
Seller, subject to Section 10.09, first admits in writing its liability to
indemnify the Indemnified Party with respect to all elements of such claim in
full to the extent such claim is valid. Should the Seller so elect to assume the
defense of a Third Party Claim, the Seller will not be liable to the Indemnified
Party for any legal expenses subsequently incurred by the Indemnified Party in
connection with the defense thereof. If the Seller elects to assume the defense
of a Third Party Claim, the Indemnified Party will (i) cooperate in all
reasonable respects with the Seller in connection with such defense and (ii) not
admit any liability with respect to, or settle, compromise or discharge, such
Third Party Claim without the Seller's prior written consent, as the case may
be. If the Seller shall assume the defense of any Third Party Claim, the
Indemnified Party shall be entitled to participate in (but not control) such
defense with its own counsel at its own expense. If the Seller does not assume
the defense of any such Third Party Claim, the Indemnified Party may defend the
same in such manner as it may deem appropriate, including settling such claim or
litigation after giving notice to the Seller of such terms and, subject to
Section 10.09, the Seller will promptly reimburse the Indemnified Party upon
written request. Anything contained in this Agreement to the contrary
notwithstanding, the Seller shall not be entitled to assume the defense of any
part of a Third Party Claim that seeks an order, injunction or other equitable
relief or relief for other than money damages against the Indemnified Party.
Section 9.04. Increased Cost and Reduced Return.
(a) If (i) Regulation D or (ii) any Regulatory Change occurring after the
Closing Date:
(A) shall impose, modify or deem applicable any reserve (including,
without limitation, any reserve imposed by the Federal Reserve Board, but
excluding any reserve included in the determination of the Daily Conduit
Purchaser Rate), special deposit or
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similar requirement against assets of any Covered Person, deposits or
obligations with or for the account of any Covered Person, or credit
extended by any Covered Person under any Funding Agreement;
(B) shall change the amount of capital maintained or required or
requested or directed to be maintained by any Covered Person;
(C) shall impose on any Covered Person any other condition affecting
any Class A Certificates owned or funded in whole or in part by any Covered
Person, or its obligations or rights, if any, to fund any Class A
Incremental Fundings; or
(D) shall change the rate for, or the manner in which the Federal
Deposit Insurance Corporation (or a successor thereto) or any other
applicable regulator assesses, deposit insurance premiums or similar
charges;
and the result of any of the foregoing is or would be
(x) to increase the cost to (or in the case of Regulation D referred
to above, to impose a cost on) a Covered Person funding the Class A Funded
Amount, any purchases, reinvestments, or loans or other extensions of
credit under any Funding Agreement or any commitment of any Covered Person
with respect to any of the foregoing,
(y) to reduce the amount of any sum received or receivable by a
Covered Person under any Funding Agreement with respect thereto, or
(z) in the reasonable determination of such Covered Person, to reduce
the rate of return on the capital of a Covered Person as a consequence of
its obligations arising in connection herewith to a level below that which
such Covered Person could otherwise have achieved but for Regulation D or
such Regulatory Change,
then within thirty days after demand by such Covered Person (which demand shall
be accompanied by a statement setting forth the basis of such demand), the
Seller shall pay to the Conduit Purchaser solely from amounts remitted to the
Seller pursuant to Section 4.9(a)(xii) of the Supplement, for the benefit of
such Covered Person, such amounts charged to such Funding Source or to
compensate such Covered Person for such reduction. This Section 9.04(a) shall
not apply to taxes.
(b) Each Covered Person will promptly notify the Conduit Purchaser, the
Seller and the Administrator of any event of which it has knowledge which will
entitle such Funding Source to compensation pursuant to this Section 9.04;
provided, however, no failure to give or delay in giving such notification shall
adversely affect the rights of any Covered Person to such compensation.
(c) In determining any amount provided for or referred to in this Section
9.04, a Covered Person may use any reasonable averaging and attribution methods
that it (in its sole discretion) shall deem applicable. Any Covered Person when
making a claim under this Section 9.04 shall submit to the Conduit Purchaser and
the Seller a statement as to such increased cost or
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reduced return (including calculation thereof in reasonable detail), which
statement shall, in the absence of demonstrable error, be conclusive and binding
upon Seller.
(d) The Conduit Purchaser agrees that it shall use its reasonable best
efforts to take any action that will avoid the need to pay, or reduce the amount
of, any increased amounts referred to in paragraph (a); provided that the
Conduit Purchaser shall not be obligated to take any actions that would, in the
reasonable opinion of the Conduit Purchaser, be disadvantageous to the Conduit
Purchaser.
(e) Subject to Section 9.04(g), any and all payments made under this
Agreement shall be made free and clear of, and without deduction for, any and
all present or future Taxes. If any amount of Taxes shall be required by law to
be deducted from or in respect of any sum payable hereunder to any Foreign
Funding Source that is an assignee or participant of the Conduit Purchaser, (i)
the sum payable shall be increased as may be necessary so that after making all
required deductions (including deductions applicable to additional sums payable
under this Section 9.04(e)), such Foreign Funding Source receives an amount
equal to the sum it would have received had no such deductions been made, (ii)
the Seller shall make such deductions and (iii) the Seller shall pay the full
amount deducted to the relevant taxation authority or other authority in
accordance with applicable law solely from amounts remitted to the Seller
pursuant to Section 4.9(a)(xii) of the Supplement.
(f) Each Foreign Funding Source that is an assignee or participant of the
Conduit Purchaser, on or prior to the date pursuant to which it becomes an
assignee or participant of the Conduit Purchaser, and from time to time
thereafter if requested in writing by the Seller (unless such Funding Source can
no longer lawfully do so due to a change in law subsequent to the date it became
an assignee or participant of Purchaser hereunder), shall provide Seller with
such form(s) prescribed by the Internal Revenue Service, certifying that such
Funding Source is entitled to benefits under an income tax treaty to which the
United States is a party which reduces the rate of withholding tax on payments
of interest to zero or certifying that the income receivable pursuant to this
Agreement is effectively connected with the conduct of a trade or business in
the United States.
(g) For any period with respect to which a Funding Source that is a Foreign
assignee or participant of the Conduit Purchaser has failed to provide the
Seller with the appropriate form described in Section 9.04(f) (other than if
such failure is due to a change in law occurring subsequent to the date on which
a form originally was required to be provided), such Funding Source shall not be
entitled to payments of additional amounts under Section 9.04(e).
Section 9.05. Other Expenses. Seller agrees, upon receipt of a written
invoice, to pay or cause to be paid, and to save the Conduit Purchaser, any
Liquidity Provider, the Administrator and the Agent harmless against liability
for the payment of, all reasonable out-of-pocket expenses (including attorneys',
accountants' and other third parties' fees and expenses, any filing fees and
expenses incurred by officers or employees of Conduit Purchaser, any Liquidity
Provider, the Administrator and/or the Agent) or intangible, documentary or
recording taxes incurred by or on behalf of the Conduit Purchaser, any Liquidity
Provider, the Administrator or the Agent (i) in connection with the preparation,
negotiation, execution and delivery of this Agreement, the Supplement or the
Series 2004-VFC Certificates and any documents or
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instruments delivered pursuant hereto and thereto and the transactions
contemplated hereby or thereby, including any examination pursuant to Section
7.03 and (ii) from time to time (A) relating to any amendments, waivers or
consents under this Agreement the Supplement and the Series 2004-VFC
Certificates or (B) arising in connection with the Conduit Purchaser, any
Liquidity Provider, the Administrator or the Agent's enforcement or preservation
of rights hereunder; provided, however, that unless and until an Early
Amortization Event with respect to Series 2004-VFC shall have occurred and be
continuing, the Seller shall be responsible for the costs and expenses related
to only one annual audit, solely to the extent provided in Section 7.03.
ARTICLE X
MISCELLANEOUS
Section 10.01. Amendments. No amendment or waiver of any provision of this
Agreement shall in any event be effective unless the same shall be in writing
and signed by all of the parties hereto. No amendment or waiver of any provision
of the Fee Letter shall in any event be effective unless the same shall be in
writing and signed the Seller and the Administrator. The Administrator shall
give each of Standard & Poor's and Moody's notice of any such amendment to this
Agreement or the Fee Letter.
Section 10.02. Notices. All notices and other communications provided for
hereunder shall, unless otherwise stated herein, be in writing (including
telecopies, telegraphic, telex or cable communication) and mailed, telecopied,
telegraphed, cabled or delivered, as to each party hereto, at its address set
forth in Schedule I hereto or at such other address as shall be designated by
such party in a written notice to the other party hereto. All such notices and
communications shall, when mailed, telecopied, telegraphed or cabled, be
effective when deposited in the mails, confirmed by telephone, delivered to the
telegraph company or delivered to the cable company, respectively.
Section 10.03. No Waiver; Remedies. No failure on the part of any party
hereto to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
Section 10.04. Binding Effect; Assignability.
(a) This Agreement shall be binding upon and inure to the benefit of the
Seller, the Administrator and the Purchasers and their respective successors and
assigns (including any subsequent holders of the Series 2004-VFC Certificates);
provided, however, that the Seller shall not have the right to assign its rights
hereunder or any interest herein (by operation of law or otherwise) without the
prior written consent of the Administrator and the Purchasers, which consent
shall not be unreasonably withheld. The Administrator and the Conduit Purchaser
each agrees that it shall not transfer a Class A Certificate or any interest
therein without the Seller's consent, unless such transfer is to a Liquidity
Provider. The Seller agrees that it will not unreasonably withhold its consent
to the transfer by the Administrator and the Conduit Purchaser of a Class A
Certificate to a special purpose company which is administered by the
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Administrator and engages in activities substantially similar to the Conduit
Purchaser. The Class B Purchaser agrees that it shall not transfer a Class B
Certificate without the Administrator's consent, unless such transfer is to an
affiliate of the Class B Purchaser.
(b) This Agreement shall create and constitute the continuing obligation of
the parties hereto in accordance with its terms, and shall remain in full force
and effect until such time as all amounts payable with respect to the Series
2004-VFC Certificates shall have been paid in full.
Section 10.05. Provision of Documents and Information. The Seller
acknowledges and agrees that the Conduit Purchaser and the Administrator are
permitted to provide to permitted assignees and participants, the placement
agents for the Commercial Paper, the rating agencies with respect to the
Commercial Paper and other liquidity and credit providers under their respective
commercial paper programs, opinions, certificates, documents and other
information relating to the Seller, the Originator, the Servicer and the
Receivables delivered to the Purchasers or the Administrator pursuant to this
Agreement.
Section 10.06. GOVERNING LAW; JURISDICTION; WAIVER OF JURY TRIAL.
(a) THIS CERTIFICATE PURCHASE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS
CONFLICT OF LAW PROVISIONS. EACH OF THE PARTIES TO THIS CERTIFICATE PURCHASE
AGREEMENT HEREBY AGREES TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK AND ANY APPELLATE COURT HAVING
JURISDICTION TO REVIEW THE JUDGMENTS THEREOF. EACH OF THE PARTIES HEREBY WAIVES
ANY OBJECTION BASED ON FORUM NON CONVENIENS AND ANY OBJECTION TO VENUE OF ANY
ACTION INSTITUTED HEREUNDER IN ANY OF THE AFOREMENTIONED COURTS AND CONSENTS TO
THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH
COURT.
(b) EACH OF THE PARTIES HERETO WAIVES TRIAL BY JURY IN ANY JUDICIAL
PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN
TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED
WITH THIS AGREEMENT, ANY DOCUMENT EXECUTED BY ANY PARTY PURSUANT TO THIS
AGREEMENT OR THE RELATIONSHIPS ESTABLISHED HEREUNDER.
Section 10.07. No Proceedings.
(a) The Seller agrees that so long as Commercial Paper of the Conduit
Purchaser shall be outstanding or there shall not have elapsed one year plus one
day since the last day on which any Commercial Paper of the Conduit Purchaser
shall have been outstanding, it shall not file, or join in the filing of, a
petition against the Conduit Purchaser under any Debtor Relief Laws, or join in
the commencement of any bankruptcy, reorganization, arrangement, insolvency,
liquidation or other similar proceeding against the Conduit Purchaser.
(b) Each Purchaser severally agrees that it shall not at any time file, or
join in the filing of, a petition against the Trust or the Seller under any
Debtor Relief Laws, or join in the
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commencement of any bankruptcy, reorganization, arrangement, insolvency,
liquidation or other similar proceeding against the Seller or the Trust.
Section 10.08. Execution in Counterparts. This Agreement may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.
Section 10.09. No Recourse. The obligations of the Conduit Purchaser, the
Servicer or the Seller (each, a "Securitization Entity") under this Agreement,
or any other agreement, instrument, document or certificate executed and
delivered by or issued by such Securitization Entity or any officer thereof are
solely the corporate or partnership obligations of such Securitization Entity.
No recourse shall be had for payment of any fee or other obligation or claim
arising out of or relating to this Agreement or any other agreement, instrument,
document or certificate executed and delivered or issued by such Securitization
Entity, or any officer thereof in connection therewith, against any stockholder,
limited partner, employee, officer, director or incorporator of such
Securitization Entity, provided, however, that provisions of this section shall
not relieve any of the foregoing persons from any liability arising from his,
her or its intentional misrepresentation or willful misconduct.
Section 10.10. Survival. All representations, warranties, covenants,
guaranties and indemnifications contained in this Agreement and in any document,
certificate or statement delivered pursuant hereto or in connection herewith
shall survive the sale, transfer or repayment of the Series 2004-VFC
Certificates.
Section 10.11. Tax Characterization. Each party to this Agreement (a)
acknowledges and agrees that it is the intent of the parties to this Agreement
that, for federal, state and local income and franchise tax purposes only, the
Class A Certificates will be treated as evidence of indebtedness secured by the
Receivables and proceeds thereof and the Trust will not be characterized as an
association (or publicly traded partnership) taxable as a corporation, (b)
agrees to treat the Class A Certificates for federal, state and local income and
franchise tax purposes as indebtedness and (c) agrees that the provisions of
this Agreement and all related Series Documents shall be construed to further
these intentions of the parties
Section 10.12. Tax Non-Confidentiality. Notwithstanding anything to the
contrary set forth in Section 7.03 or elsewhere herein or in the Supplement, the
parties to this Agreement acknowledge and agree that (i) any obligations of
confidentiality contained herein do not apply and have not applied from the
commencement of discussions between the parties to the tax treatment and tax
structure of the Series 2004-VFC Certificates (and any related transactional
arrangements), and (ii) each party (and each of its employees, representatives
or other agents) may disclose to any and all persons, without limitation of any
kind, the tax treatment and tax structure of the Series 2004-VFC Certificates
and all materials of any kind (including opinions or other tax analyses) that
are provided to such party relating to such tax treatment and tax structure, all
within the meaning of the U.S. Department of Treasury Regulations, Section
1.6011-4.
25
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective officers thereunto duly authorized, as of the date first
above written.
CHARMING SHOPPES RECEIVABLES CORP.,
as Seller
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
SHEFFIELD RECEIVABLES CORPORATION,
as Conduit Purchaser
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
BARCLAYS BANK PLC
as Administrator
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
CHARMING SHOPPES RECEIVABLES CORP.,
as Class B Purchaser
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
SPIRIT OF AMERICA, INC., as Servicer
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
26
<PAGE>
EXHIBIT A
Form of Notice of Incremental Funding
A. Proposed Incremental Funding Date: ___________
B. Amount of requested Class A Incremental Funding $__________
C. Purchase Price (100% of the related Class A Incremental Funding
Amount) $__________
D. Remaining Maximum Class A Funded Amount (excluding the requested
Class A Incremental Funding) $__________
E. Remaining Maximum Class A Funded Amount (after giving effect to
the requested Class A Incremental Funding on the date hereof) $__________
F. Amount of requested Class B Incremental Funding $__________
G. Purchase Price (100% of the related Class B Incremental Funding
Amount) $__________
H. Remaining Maximum Class B Funded Amount (excluding the requested
Class B Incremental Funding) $__________
I. Remaining Maximum Class B Funded Amount (after giving effect to
the requested Class B Incremental Funding on the date hereof) $__________
F. Certifications:
1. The representations and warranties of Charming Shoppes Receivables
Corp. ("CSRC") in the Second Amended Pooling and Servicing Agreement
dated as of November 25, 1997, as amended as of July 22, 1999 and as
of May 8, 2001 (as amended or otherwise modified, the "Pooling and
Servicing Agreement"), among CSRC, as Seller, Spirit of America, Inc.,
as Servicer, and Wachovia Bank, National Association as trustee (the
"Trustee"), and the Certificate Purchase Agreement dated as of January
21, 2004 (as amended or otherwise modified, the "Agreement"), among
CSRC, the Conduit Purchaser, the Administrator, the Servicer and the
Class B Purchaser are true and correct on the date hereof.
2. The applicable Incremental Funding Conditions specified in Section
2.02(a) of the Agreement, if a Class A Incremental Funding is
requested hereby, and Section 2.03(a) of the Agreement, if a Class B
Incremental Funding is requested hereby, have been satisfied and/or
will be satisfied as of the applicable Incremental Funding Date.
27
<PAGE>
CHARMING SHOPPES RECEIVABLES CORP
By ________________________
Authorized Officer
Date of Notice: __________
28
<PAGE>
EXHIBIT B
[Form of Investment Letter]
January 21, 2004
Wachovia Bank, National Association
123 South Broad Street, M/B/O/, 18th Floor
Philadelphia, PA 19019
Attn: Corporate Trust Administration
Charming Shoppes Receivables Corp.
c/o Charming Shoppes, Inc.
450 Winks Lane
Bensalem, PA 19020
Re: Purchase of [Class A/Class B] Certificate
Ladies and Gentlemen:
This letter (the "Investment Letter") is delivered by ____________________
(the "Purchaser") and [____________________ ("__________"), as Agent](1)
pursuant to Section 6.03 of the Certificate Purchase Agreement dated as of
January 21, 2004 (as amended or otherwise modified, the "Agreement") among
Charming Shoppes Receivables Corp. ("CSRC"), Spirit of America, Inc., as
Servicer, the Conduit Purchaser, the Class B Purchaser and the Agent.
Capitalized terms used herein without definition shall have the meanings set
forth in the Agreement. The Purchaser represents to the Seller as follows:
(a) the Purchaser is authorized to enter into the Agreement and to perform
its obligations thereunder and to consummate the transactions contemplated
thereby;
(b) the Purchaser [and Agent] have such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of an investment in the [Class A/Class B] Certificate and the Purchaser is
able to bear the economic risk of such investment;
(c) the Purchaser [and Agent] have reviewed the Pooling and Servicing
Agreement and the Supplement (including the schedules and exhibits thereto) and
have had the opportunity to perform due diligence with respect thereto and to
ask questions of and receive answers from the Seller and its representatives
concerning the Seller, the Servicer, the Originator, the Trust and the [Class
A/Class B] Certificates;
(d) [Agent is an agent on behalf of the Purchaser and the Purchaser is not
acquiring the Class A Certificate as an agent or otherwise for any other
person.] The Purchaser is a [____________________]; [Agent is a
[____________________]];
- -----------------
(1) Bracketed language for conduit purchasers only.
29
<PAGE>
(e) Each of the Purchaser [and Agent] is either (x) an "accredited
investor" (as such term is defined in Rule 501(a)(1), (2), (3) or (7) of
Regulation D promulgated by the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended or (y) a qualified
institutional buyer as defined in Rule 144A promulgated by the Commission under
the Securities Act of 1933, as amended. Each of the Purchaser [and Agent]
understands that the offering and sale of the [Class A/Class B] Certificates
have not been and will not be registered under the Securities Act of 1933, as
amended, and have not and will not be registered or qualified under any
applicable "blue sky" law, and that the offering and sale of the [Class A/Class
B] Certificates have not been reviewed by, passed on or submitted to any federal
or state agency or commission, securities exchange or other regulatory body;
(f) The Purchaser[, through the Agent], is acquiring the [Class A/Class B]
Certificate without a view to any distribution, resale or other transfer
thereof, except as contemplated by the following sentence. The Purchaser and
Agent will not resell or otherwise transfer the [Class A/Class B] Certificate or
any portion thereof, except in accordance with Section 8.02 of the Agreement.
(g) The Purchaser [and Agent] understand that each [Class A/Class B]
Certificate will bear a legend to substantially the following effect:
THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), IN RELIANCE UPON EXEMPTIONS
PROVIDED BY THE SECURITIES ACT. NO RESALE OR OTHER TRANSFER OF THIS
CERTIFICATE MAY BE MADE EXCEPT IN COMPLIANCE WITH THE REGISTRATION
PROVISIONS OF THE SECURITIES ACT AND ANY APPLICABLE PROVISIONS UNDER STATE
BLUE SKY OR SECURITIES LAWS OR PURSUANT TO AN AVAILABLE EXEMPTION FROM SUCH
PROVISIONS. THE TRANSFER OF THIS CERTIFICATE IS SUBJECT TO CERTAIN
CONDITIONS SET FORTH IN THE POOLING AND SERVICING AGREEMENT, THE SUPPLEMENT
AND THE CERTIFICATE PURCHASE AGREEMENT REFERRED TO HEREIN.
NEITHER THIS CERTIFICATE NOR ANY INTEREST HEREIN MAY BE ACQUIRED BY
(A) AN EMPLOYEE BENEFIT PLAN (AS DEFINED IN SECTION 3(3) OF THE EMPLOYEE
RETIREMENT SECURITY ACT OF 1974, AS AMENDED ("ERISA")) THAT IS SUBJECT TO
THE PROVISIONS OF TITLE 1 OF ERISA, (B) A PLAN DESCRIBED IN SECTION
4975(E)(1) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, OR (C) ANY
ENTITY WHOSE UNDERLYING ASSETS INCLUDE PLAN ASSETS BY REASON OF A PLAN'S
INVESTMENT IN THE ENTITY (EACH A "BENEFIT PLAN"). BY ACCEPTING AND HOLDING
THIS CERTIFICATE OR ANY INTEREST HEREIN, THE HOLDER HEREOF OR ANY OWNER OF
AN INTEREST HEREIN SHALL BE DEEMED TO HAVE REPRESENTED AND WARRANTED THAT
IT IS NOT A BENEFIT PLAN.
(h) This Investment Letter has been duly authorized, executed and delivered
and constitutes the legal, valid and binding obligations of the Purchaser [and
the Agent], enforceable against the Purchaser [and the Agent] in accordance with
its terms, except as such enforceability
30
<PAGE>
may be limited by receivership, conservatorship, bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and general principles of equity.
(i) [Each of] the Purchaser and [the Agent] represents and warrants that
neither the Purchaser [nor the Agent] is (i) an employee benefit plan (as
defined in Section 3(3) of ERISA) that is subject to the provisions of Title I
of ERISA, (ii) a plan described in Section 4975(e)(1) of the Internal Revenue
Code, or (iii) an entity whose underlying assets include plan assets by reason
of a plan's investment in such entity.
Very truly yours,
------------------------------,
as Purchaser
By:___________________________
Name:
Title:
------------------------------,
as Agent
By:___________________________
Name:
Title:
31
<PAGE>
SCHEDULE I
Addresses for Notices
Sheffield Receivables Corporation
c/o Barclays Bank PLC
200 Park Avenue, 5th Floor
New York, NY 10166
Attention: David Lister
Fax: (212) 412-6846
Telephone: (212) 412-7659
Barclays Bank PLC
200 Park Avenue, 5th Floor
New York, New York 10166
Attention: Pierre Duleyrie
Fax: (212) 412-6846
Telephone: (212) 412-2932
Spirit of America, Inc.
c/o Spirit of American National Bank
450 Winks Lane
Bensalem, Pennsylvania 19020
Attn: General Counsel
Fax: (215) 633-4653
Phone: (215) 245-9100
Charming Shoppes Receivables Corp.
c/o Fashion Service Corp.
450 Winks Lane
Bensalem, Pennsylvania 19020
Attn: General Counsel
Fax: (215) 633-4653
Phone: (215) 245-9100
32
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>5
<FILENAME>exh10118.txt
<TEXT>
EXHIBIT 10.1.18
CHARMING SHOPPES RECEIVABLES CORP.
Seller
SPIRIT OF AMERICA, INC.
Servicer
and
WACHOVIA BANK, NATIONAL ASSOCIATION
Trustee
on behalf of the Series 2004-VFC Certificateholders
----------------------------------
SERIES 2004-VFC SUPPLEMENT
Dated as of January 21, 2004
to
SECOND AMENDED AND RESTATED POOLING AND
SERVICING AGREEMENT
Dated as of November 25, 1997
and amended as of July 22, 1999 and as of May 8, 2001
up to $132,000,000
CHARMING SHOPPES MASTER TRUST
SERIES 2004-VFC
<PAGE>
SECTION 1. Designation.....................................................1
SECTION 2. Definitions.....................................................1
SECTION 3. Servicing Compensation.........................................17
SECTION 4. Variable Funding Mechanics.....................................18
SECTION 5. Optional Repurchase; Reassignment and Termination Provisions...20
SECTION 6. Maximum Funded Amounts.........................................20
SECTION 7. Delivery and Payment for the Series 2004-VFC Certificates......21
SECTION 8. Article IV of Agreement........................................21
SECTION 9. Article V of the Agreement.....................................34
SECTION 10. Series Early Amortization Events...............................35
SECTION 11. Series 2004-VFC Termination....................................36
SECTION 12. Ratification of Agreement......................................36
SECTION 13. Counterparts...................................................37
SECTION 14. Governing Law..................................................37
SECTION 15. No Petition....................................................37
SECTION 16. Tax Representation and Covenant................................37
SECTION 17. Amendments.....................................................37
SECTION 18. Agent as Class A Certificateholder.............................37
EXHIBITS
EXHIBIT A-1 Form of Class A Certificate
EXHIBIT A-2 Form of Class B Certificate
EXHIBIT B Form of Optional Amortization Payment Instructions and Notification
to the Trustee
EXHIBIT C Form of Monthly Payment Instructions and Notification to the
Trustee
EXHIBIT D Form of Monthly Certificateholders' Statement
EXHIBIT E Form of Interest Rate Cap Agreement
<PAGE>
SERIES 2004-VFC SUPPLEMENT, dated as of January 21, 2004 (this
"Supplement"), by and among CHARMING SHOPPES RECEIVABLES CORP., a Delaware
corporation, as Seller (the "Seller"), SPIRIT OF AMERICA, INC., as Servicer (the
"Servicer"), and WACHOVIA BANK, NATIONAL ASSOCIATION, as Trustee (the "Trustee")
under the Second Amended and Restated Pooling and Servicing Agreement dated as
of November 25, 1997 and amended as of July 22, 1999 and as of May 8, 2001 among
the Seller, the Servicer and the Trustee (as amended from time to time, the
"Agreement").
Section 6.9 of the Agreement provides, among other things, that the Seller,
the Servicer and the Trustee may at any time and from time to time enter into a
supplement to the Agreement for the purpose of authorizing the delivery by the
Trustee to the Seller for the execution and redelivery to the Trustee for
authentication of one or more Series of Certificates.
Pursuant to this Supplement, the Seller and the Trustee shall create a new
Series of Investor Certificates and shall specify the Principal Terms thereof.
SECTION 1. Designation.
(a) There is hereby created a Series of Investor Certificates to be issued
in two classes pursuant to the Agreement and this Supplement and to be known
together as the "Series 2004-VFC Certificates." The two classes shall be
designated the Class A Floating Rate Asset Backed Certificates, Series 2004-VFC
(the "Class A Certificates") and the Class B Floating Rate Asset Backed
Certificates, Series 2004-VFC (the "Class B Certificates"). The Class A
Certificates and the Class B Certificates shall be substantially in the form of
Exhibits A-1 and A-2, hereto, respectively.
(b) Series 2004-VFC shall be included in Group One. Series 2004-VFC shall
not be subordinated to any other Series.
SECTION 2. Definitions. In the event that any term or provision contained
herein shall conflict with or be inconsistent with any provision contained in
the Agreement, the terms and provisions of this Supplement shall govern with
respect to this Series. All Article, Section or subsection references herein
shall mean Article, Section or subsections of the Agreement, except as otherwise
provided herein. All capitalized terms not otherwise defined herein are defined
in the Agreement. Each capitalized term defined herein shall relate only to the
Series 2004-VFC Certificates and no other Series of Certificates or Receivables
Purchase Series issued by the Trust.
"Accrued Costs" means, with respect to any Distribution Date, the sum of
(i) the Class A Monthly Interest for such Distribution Date, plus (ii) the Class
A Additional Amounts, if any, for such Distribution Date.
"Adjusted Excess Yield Percentage" shall mean, with respect to any
Distribution Date, the excess, if any, of (i) the Portfolio Net Yield for the
related Due Period over (ii) the Base Rate for such Distribution Date.
"Administrator" shall mean Barclays Bank PLC, as administrator for the
initial Class A Purchaser.
1
<PAGE>
"Agent" is defined in Section 18.
"Agreement" is defined in the preamble hereto.
"Amortization Period" shall mean, unless an Early Amortization Event shall
have occurred prior thereto, the period commencing at the close of business on
the earlier to occur of (i) the Purchase Expiration Date (or such later date as
shall have been agreed to by the Seller and each Series 2004-VFC
Certificateholder) and (ii) the second anniversary of the Closing Date and
ending on the earlier to occur of (a) the commencement of the Early Amortization
Period, and (b) the Series 2004-VFC Termination Date, provided that the Seller
may, by written notice to the Trustee and each Series 2004-VFC Certificateholder
(and so long as the Early Amortization Period has not begun), cause the
Amortization Period to begin on any date earlier than the one otherwise
specified above.
"Available Funds" shall mean, with respect to any Distribution Date, an
amount equal to the sum (without duplication) of (i) all Collections of Finance
Charge Receivables received during the related Due Period and allocated to the
Series 2004-VFC Certificates, (ii) the interest and earnings on funds on deposit
in the Series Cash Collateral Account and the Spread Account for such Due Period
deposited into the Collection Account pursuant to Sections 4.16 and 4.17 on the
related Distribution Date and (iii) the amount of any Cap Payment with respect
to such Distribution Date and the amount of any payments due from the Cap
Provider but not paid with respect to any prior date (to the extent received by
the Trustee).
"Available Principal Collections" shall mean, (i) with respect to any
Optional Amortization Date that is not also a Distribution Date, all Collections
of Principal Receivables previously allocated to the Series 2004-VFC
Certificateholders pursuant to Section 4.5(a)(ii), (a)(iii), (b)(ii) and
(b)(iii) then on deposit in the Collection Account and (ii) with respect to any
Distribution Date, the sum of (a) the Principal Allocation Percentage of all
Collections of Principal Receivables for the related Due Period minus any such
Collections of Principal Receivables used to make an Optional Amortization,
minus the amount of Reallocated Class B Principal Collections with respect to
such Due Period which pursuant to Section 4.12 are required to fund the Class A
Required Amount, (b) any Shared Principal Collections with respect to other
Series in Group One that are allocated to Series 2004-VFC in accordance with
Section 4.15 for such Distribution Date, and (c) any other amounts which
pursuant to Section 4.9(a) (iv), (v), (vi) and (vii) or Section 4.11 (to the
extent allocable to the Class A Investor Loss Amount or the Class A Dilution
Amount) for such Due Period (other than such amounts paid from Reallocated Class
B Principal Collections) are to be treated as Available Principal Collections
for such Distribution Date.
"Available Series Cash Collateral Amount" shall mean with respect to any
date, the amount on deposit in the Series Cash Collateral Account on such date
(such amount calculated before giving effect to any deposit to, or withdrawal
from, the Series Cash Collateral Account to be made with respect to such date).
"Available Shared Principal Collections" shall mean, with respect to any
date, the amount of Shared Principal Collections available for distribution in
connection with an Optional Amortization.
2
<PAGE>
"Average Class A Funded Amount" shall mean, with respect to any Interest
Period, the quotient of (a) the sum of the Class A Funded Amount as of each day
in such Interest Period, divided by (b) the number of days in such Interest
Period.
"Average Class B Funded Amount" shall mean, with respect to any Interest
Period, the quotient of (a) the sum of the Class B Funded Amount as of each day
in such Interest Period, divided by (b) the number of days in such Interest
Period.
"Average Maximum Class A Funded Amount" shall mean, with respect to any
Interest Period, the quotient of (a) the sum of the Maximum Class A Funded
Amount as of each day in such Interest Period, divided by (b) the number of days
in such Interest Period.
"Average Maximum Class B Funded Amount" shall mean, with respect to any
Interest Period, the quotient of (a) the sum of the Maximum Class B Funded
Amount as of each day in such Interest Period, divided by (b) the number of days
in such Interest Period.
"Base Rate" means, with respect to any Distribution Date, the annualized
percentage equivalent of a fraction (calculated on the basis of a 365/366 day
year, as applicable), the numerator of which is the sum of (i) the Accrued Costs
for such Distribution Date, plus (ii) the Investor Monthly Servicing Fee for the
related Due Period plus (iii) the Class B Monthly Interest and Class B
Additional Amounts payable on the Class B Certificates, in each case, for such
Distribution Date, and the denominator of which is the Weighted Average Investor
Interest for the related Due Period; provided, however, that the Base Rate for
the December, 2003 Due Period shall be deemed to be 5.04% and for the November,
2003 Due Period, 5.20%; provided, further, that for any Distribution Date after
the Closing Date which relates to a Due Period during which the Weighted Average
Investor Interest is zero, the Base Rate shall be the Hypothetical Base Rate for
such Distribution Date.
"Breakage Payment" is defined in Section 4.6(c).
"Calculation Date" shall mean the date of any Class A Incremental Funding
and each Distribution Date.
"Cap Agreement" shall mean the interest rate cap agreement dated on or
prior to the initial Incremental Funding between Fashion Service Corp. and the
Cap Provider and assigned to the Trust for the benefit of the Series 2004-VFC
Certificateholders in substantially the form attached hereto as Exhibit E, or
any Replacement Interest Rate Cap therefore.
"Cap Payment" shall mean, with respect to a Distribution Date, the payment,
if any, received from the Cap Provider on the day preceding such Distribution
Date, as determined pursuant to the Cap Agreement.
"Cap Provider" shall mean the initial counterparty under the Cap Agreement,
or any successor or assign thereto appointed as provided in the Cap Agreement,
in its individual capacity pursuant to the Cap Agreement, or if any Replacement
Interest Rate Cap is obtained therefor pursuant to Section 4.18, such
replacement cap provider, it being understood that the
3
<PAGE>
initial counterparty and any replacement cap provider shall be required to have
short-term debt obligations which are rated at least A-1 by Standard & Poor's
and P-1 by Moody's.
"Cap Replacement Event" shall mean (i) (x) any Cap Provider shall fail to
make any payment required to be made by it pursuant to the Cap Agreement and
such failure shall continue for three Business Days, (y) the withdrawal of or
reduction below A-1 in the senior unsecured, unguaranteed, short-term debt
rating of a Cap Provider by Standard & Poor's or a withdrawal of or reduction
below P-1 of the unsecured, unguaranteed, short-term debt rating of a Cap
Provider by Moody's, or (z) any Cap Agreement shall terminate or shall not be
extended in connection with the extension of the Purchase Expiration Date and
(ii) the Servicer shall fail to enter into a Replacement Interest Rate Cap
within 30 days of the occurrence of any event described in clause (i).
"Certificate Purchase Agreement" shall mean the Certificate Purchase
Agreement among Seller, Servicer, the Conduit Purchaser, the Administrator and
the Class B Certificateholder, as supplemented by the Fee Letter referred to
(and defined) therein and as the same may be amended or otherwise modified from
time to time. The Certificate Purchase Agreement is hereby designated a
"Transaction Document" for all purposes of the Agreement and this Supplement.
"Change in Control" means, as to Seller, Servicer or Originator, that any
person or group of related persons (excluding Charming Shoppes, Inc. and its
Affiliates) gains beneficial ownership of a majority in voting interest of the
outstanding voting stock of Seller, Servicer or Originator or has caused to be
elected a majority of the Board of Directors of Seller, Servicer or Originator.
"Class A Additional Amounts" is defined in Section 4.6(b).
"Class A Certificate Rate" shall mean, for any Interest Period, a per annum
interest rate which if multiplied by the Class A Investor Interest as of the
last day of such Interest Period would produce, on the basis of a 360 day year
(based on actual days elapsed), as the case may be, an amount equal to the Cost
of Funds (as defined in the Certificate Purchase Agreement) for such Interest
Period.
"Class A Certificateholder" shall mean each Person in whose name a Class A
Certificate is registered in the Certificate Register.
"Class A Certificates" shall mean any of the certificates executed by the
Seller and authenticated by or on behalf of the Trustee, substantially in the
form of Exhibit A-1 hereto.
"Class A Fixed Allocation Percentage" shall mean, for any Due Period during
the Fixed Allocation Period, the percentage equivalent (which percentage shall
never exceed 100%) of a fraction, (a) the numerator of which is the Class A
Investor Interest as of the close of business on the last day of the Revolving
Period and (b) the denominator of which is equal to the Investor Interest as of
the close of business on the last day of the Revolving Period.
"Class A Floating Allocation Percentage" shall mean, (a) with respect to
any Due Period, the percentage equivalent (which percentage shall never exceed
100%) of a fraction (i) the
4
<PAGE>
numerator of which is equal to the Weighted Average Class A Investor Interest
during such Due Period and (ii) the denominator of which is equal to the
Weighted Average Investor Interest for such Monthly Period, and (b) with respect
to any day, the percentage equivalent of a fraction (i) the numerator of which
is equal to the Class A Investor Interest at the close of business on the
preceding Business Day and (ii) the denominator of which is equal to the
Investor Interest at the close of business on such preceding Business Day.
"Class A Funded Amount" shall mean, with respect to any date of
determination, an amount equal to the result of (a) the Class A Initial Investor
Interest, plus (b) the aggregate amount of all Class A Incremental Funded
Amounts for all Class A Incremental Fundings occurring on or prior to such date,
minus (c) the aggregate amount of principal payments made on the Class A
Certificates prior to such date. As applied to any particular Class A
Certificate, the "Class A Funded Amount" means the portion of the overall Class
A Funded Amount represented by that Certificate.
"Class A Incremental Funded Amount" shall mean the amount of the increase
in the Class A Funded Amount occurring as a result of any Class A Incremental
Funding, which amount shall equal the aggregate amount of the purchase price
paid by the Conduit Purchaser with respect to that Class A Incremental Funding
pursuant to the Certificate Purchase Agreement and Section 4 hereof.
"Class A Incremental Funding" shall mean any increase in the Class A Funded
Amount during the Revolving Period made pursuant to the Certificate Purchase
Agreement.
"Class A Initial Investor Interest" shall mean the aggregate initial
principal amount of the Class A Certificates, which is $0.
"Class A Investor Allocation" shall mean, with respect to any Due Period or
any date during any Due Period, as applicable, (a) with respect to Loss Amounts
and the Series 2004-VFC Investor Dilution Amount, the Weighted Average Class A
Floating Allocation Percentage, (b) with respect to Collections of Finance
Charge Receivables at any time and Collections of Principal Receivables during
the Revolving Period, the Class A Floating Allocation Percentage and (c) with
respect to Collections of Principal Receivables during the Fixed Allocation
Period, the Class A Fixed Allocation Percentage.
"Class A Investor Charge-Offs" is defined in subsection 4.10(a).
"Class A Investor Dilution Amount" shall mean, for any Distribution Date,
an amount equal to the product of (a) the Series 2004-VFC Investor Dilution
Amount for such Distribution Date and (b) the Weighted Average Class A Floating
Allocation for the related Due Period.
"Class A Investor Interest" shall mean, on any date of determination, an
amount equal to (a) the Class A Funded Amount on that date, minus (b) the
excess, if any, of the aggregate amount of Class A Investor Charge-Offs pursuant
to Section 4.10(a) over Class A Investor Charge-Offs reimbursed pursuant to
Section 4.9(a)(v), 4.11 or 4.16 prior to such date of determination; provided
that the Class A Investor Interest may not be reduced below zero.
5
<PAGE>
"Class A Investor Loss Amount" shall mean, with respect to each
Distribution Date, an amount equal to the product of (a) the Investor Loss
Amount for the related Due Period and (b) the Weighted Average Class A Floating
Allocation Percentage applicable for the related Due Period.
"Class A Monthly Interest" shall mean the monthly interest distributable in
respect of the Class A Certificates as calculated in accordance with subsection
4.6(a).
"Class A Monthly Principal" shall mean the monthly principal distributable
in respect of the Class A Certificates as calculated in accordance with
subsection 4.7(a).
"Class A Non-Use Fee" is defined in Section 4.6(b).
"Class A Optional Amortization" is defined in Section 4(b).
"Class A Optional Amortization Amount" is defined in Section 4(b).
"Class A Required Amount" is defined in subsection 4.8(a).
"Class A Scheduled Final Payment Date" shall mean the twelfth Distribution
Date following the termination of the Revolving Period.
"Class B Additional Amounts" is defined in Section 4.6(e).
"Class B Certificate Rate" shall mean, for any Interest Period, the rate
specified in the Certificate Purchase Agreement as the Class B Certificate Rate
for such Interest Period.
"Class B Certificateholder" shall mean each Person in whose name a Class B
Certificate is registered in the Certificate Register.
"Class B Certificates" shall mean any of the certificates executed by the
Seller and authenticated by or on behalf of the Trustee, substantially in the
form of Exhibit A-2 hereto.
"Class B Fixed Allocation Percentage" shall mean, with respect to any Due
Period during a Fixed Allocation Period, the excess (if any) of 100% over the
Class A Fixed Allocation Percentage for such Due Period.
"Class B Floating Allocation Percentage" shall mean, with respect to any
Due Period, the excess (if any) of 100% over the Class A Floating Allocation
Percentage for such Due Period.
"Class B Funded Amount" shall mean, with respect to any date of
determination, an amount equal to the result of (a) the Class B Initial Investor
Interest, plus (b) the aggregate amount of all Class B Incremental Funded
Amounts for all Class B Incremental Fundings occurring on or prior to such date,
minus (c) the aggregate amount of principal payments made to the Class B
Certificateholders prior to such date. As applied to any particular Class B
Certificate, the "Class B Funded Amount" means the portion of the overall Class
B Funded Amount represented by that Certificate.
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"Class B Incremental Funded Amount" shall mean the amount of each increase
in the Class B Funded Amount occurring as a result of any Class B Incremental
Funding, which amount shall equal the aggregate amount of the purchase price
paid by the Class B Certificateholders with respect to that Class B Incremental
Funding pursuant to the Certificate Purchase Agreement and Section 4 hereof.
"Class B Incremental Funding" shall mean any increase in the Class B Funded
Amount during the Revolving Period made pursuant to the Certificate Purchase
Agreement and Section 4 hereof.
"Class B Initial Investor Interest" shall mean the aggregate initial
principal amount of the Class B Certificates, which is $0.
"Class B Investor Allocation" shall mean, with respect to any Due Period or
any date during any Due Period, as applicable, (a) with respect to Loss Amounts
and the Series 2004-VFC Investor Dilution Amount, the Weighted Average Class B
Floating Allocation Percentage, (b) with respect to Collections of Finance
Charge Receivables at any time and Collections of Principal Receivables during
the Revolving Period, the Class B Floating Allocation Percentage and (c) with
respect to Collections of Principal Receivables during the Fixed Allocation
Period, the Class B Fixed Allocation Percentage.
"Class B Investor Charge-Offs" is defined in subsection 4.10(b).
"Class B Investor Dilution Amount" shall mean, for any Distribution Date,
an amount equal to the product of (a) the Series 2004-VFC Investor Dilution
Amount for such Distribution Date and (b) the Weighted Average Class B Floating
Allocation for the related Due Period.
"Class B Investor Interest" shall mean, on any date of determination, an
amount equal to (a) the Class B Funded Amount on such date, minus (b) the
aggregate amount of Class B Investor Charge-Offs for all prior Distribution
Dates pursuant to subsection 4.10(b), minus (c) the aggregate amount of
Reallocated Class B Principal Collections allocated pursuant to subsection 4.12
on all prior Distribution Dates, minus (d) an amount equal to the amount by
which the Class B Investor Interest has been reduced on all prior Distribution
Dates pursuant to subsection 4.10(a) and plus (e) the aggregate amount of
Available Funds and Shared Excess Finance Charge Collections allocated and
available on all prior Distribution Dates pursuant to subsections 4.9 and 4.11
for the purpose of reimbursing amounts deducted pursuant to the foregoing
clauses (b), (c) and (d); provided, however, that the Class B Investor Interest
may not be reduced below zero.
"Class B Investor Loss Amount" shall mean, with respect to each
Distribution Date, an amount equal to the product of (a) the Investor Loss
Amount for the related Due Period and (b) the Weighted Average Class B Floating
Allocation Percentage applicable for the related Due Period.
"Class B Monthly Interest" shall mean the monthly interest distributable in
respect of the Class B Certificates as calculated in accordance with subsection
4.6(d).
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"Class B Monthly Principal" shall mean the monthly principal distributable
in respect of the Class B Certificates as calculated in accordance with
subsection 4.7(b).
"Class B Non-Use Fee" is defined in Section 4.6(e).
"Class B Optional Amortization" is defined in Section 4(e).
"Class B Optional Amortization Amount" is defined in Section 4(e).
"Closing Date" shall mean January 21, 2004.
"Conduit Purchaser" shall mean Sheffield Receivables Corporation, a
Delaware Corporation.
"Controlled Amortization Amount" shall mean for any Distribution Date with
respect to the Amortization Period prior to the payment in full of the Class A
Investor Interest, the Class A Investor Interest as of the close of business on
the last day of the Revolving Period divided by twelve.
"Controlled Amortization Shortfall" initially shall mean zero and
thereafter shall mean, with respect to any Due Period during the Amortization
Period, the excess, if any, of the Controlled Payment Amount for the previous
Due Period over the amounts distributed pursuant to Section 4.9(c)(i) with
respect to the Class A Certificates for the previous Due Period.
"Controlled Payment Amount" shall mean, with respect to any Distribution
Date, the sum of (a) the Controlled Amortization Amount for such Distribution
Date and (b) any existing Controlled Amortization Shortfall; provided that (a)
Seller may designate any amount greater than the foregoing as the Controlled
Payment Amount upon five Business Days' notice to the Series 2004-VFC
Certificateholders prior to the related Distribution Date and (b) in no event
will the Controlled Payment Amount exceed the Class A Investor Interest.
"Controlling Certificateholders" shall mean (a) on any date of
determination on which the Class A Investor Interest is greater than zero, Class
A Certificateholders owning Class A Certificates evidencing more than 50% of the
sum of the Class A Investor Interest, and (b) thereafter, Class B
Certificateholders owning Class B Certificates evidencing more than 50% of the
Class B Investor Interest.
"Cumulative Principal Shortfall" shall mean the sum of the Principal
Shortfalls (as such term is defined in each of the related Supplements or
Receivables Purchase Agreement) for each Series in Group One that are Principal
Sharing Series.
"Designated Class A Investor Interest" means at any time, the Class B
Investor Interest at such time divided by the Required B Enhancement Multiplier
at such time.
"Early Amortization Period" shall mean the period commencing at the close
of business on the Business Day immediately preceding the day on which an Early
Amortization Event with respect to Series 2004-VFC is deemed to have occurred,
and ending on the Series 2004-VFC Termination Date.
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"Enhancement" shall mean with respect to the Class A Certificates, the
subordination of the Class B Certificates, the Series Cash Collateral Account
and the Spread Account.
"Enhancement Provider" shall mean the Class B Certificateholders.
"Enhancement Surplus" shall mean, with respect to any Distribution Date,
the excess, if any, of (a) the Specified Enhancement Amount (after giving effect
to any reductions made with respect to such date other than as the result of the
existence of an Enhancement Surplus) over (b) the Required Enhancement Amount.
"Eurodollar Rate" is defined in the Certificate Purchase Agreement.
"Fee Letter" is defined in the Certificate Purchase Agreement.
"Finance Charge Shortfall" is defined in subsection 4.14