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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended February 2, 2002
[ ] 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.
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(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-1721355
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
450 Winks Lane, Bensalem, Pennsylvania 19020
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (215) 245-9100
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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)
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(Title of Class)
Stock Purchase Rights
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(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]
As of April 29, 2002, 113,013,331 shares of common stock were outstanding.
The aggregate market value of the common stock (based upon the closing price on
April 29, 2002), held by non-affiliates was approximately $953,231,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of Form 10-K is incorporated by
reference herein from 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.
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CHARMING SHOPPES, INC.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
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Item 1 Business
General ......................................................... 1
Stores .......................................................... 2
Merchandising and Buying ........................................ 3
Marketing and Promotions ........................................ 4
Sourcing ........................................................ 5
Distribution and Logistics ...................................... 6
Competition ..................................................... 6
Monsoon and Accessorize Joint Venture ........................... 6
Employees ....................................................... 7
Trademarks and Servicemarks ..................................... 7
Executive Offices ............................................... 7
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
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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
Critical Accounting Policies ............................ 15
Results of Operations ................................... 18
Recent Developments ..................................... 23
Financial Condition ..................................... 26
Market Risk ............................................. 32
Impact of Recent Accounting Pronouncements .............. 32
Item 7A Quantitative and Qualitative Disclosures About Market Risk ...... 32
Item 8 Financial Statements and Supplementary Data ..................... 33
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure ...................................... 67
PART III
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Item 10 Directors and Executive Officers of the Registrant .............. 68
Item 11 Executive Compensation .......................................... 68
Item 12 Security Ownership of Certain Beneficial Owners and Management .. 68
Item 13 Certain Relationships and Related Transactions .................. 68
PART IV
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Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K . 69
PART I
Item 1. Business
General
We are a leading specialty apparel retailer primarily focused on plus-size
women's apparel through our three distinct brands: Lane Bryant, Fashion Bug, and
Catherine's Plus Sizes. During Fiscal 2002, the sale of plus-size apparel
represented approximately 66% of our total net sales. We anticipate that this
percentage will exceed 70% during Fiscal 2003. Through our fashion content,
store layouts, and broad merchandise assortments, we seek to appeal to customers
from a broad range of socioeconomic, demographic, and cultural profiles. As of
February 2, 2002, we operated 2,446 stores in 48 states.
In the late 1990's, our management team initiated a strategic plan aimed at
capitalizing on the anticipated growth in the market for plus-size women's
apparel. We began this process by increasing the floor space allocated to
plus-size apparel in our Fashion Bug stores. In August 1999, we acquired the
Modern Woman chain of 136 stores in 22 states, which specialized in plus-size
women's apparel. In January 2000, we acquired the Catherine's chain of stores,
which operated 436 stores in 40 states and the District of Columbia that also
specialized in plus-size women's apparel. We have since converted all of the
original Modern Woman stores into Catherine's stores. In August 2001, we
acquired Lane Bryant, Inc., which operated 651 stores across the United States.
Lane Bryant is a premier brand in the plus-size market with an established
customer base and proprietary branded labels. The acquisition of Lane Bryant
significantly accelerated our long-term growth strategy of becoming a leader in
the sale of plus-size women's apparel.
We operate the following differentiated brands, each of which 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 Clothing Co.(R) and
Cacique(TM) (a line of intimate apparel), Lane Bryant offers
fashionable and sophisticated clothes in plus-sizes 14-28. Lane Bryant
has a loyal customer base, ranging in age from 18 to 54 years old, that
shops for fashionable merchandise in the moderate price range.
Primarily a mall-based destination store for the plus-size woman, Lane
Bryant currently operates 647 stores in 46 states that average
approximately 6,100 square feet.
Fashion Bug and Fashion Bug Plus. Fashion Bug and Fashion Bug Plus
stores specialize in selling a wide variety of plus-size, misses and
junior sportswear, dresses, coats, lingerie, accessories, and casual
footwear. Fashion Bug customers range in age from 20 to 49 years old
and shop in the low-moderate price range. The majority of the 1,252
Fashion Bug stores are located in strip shopping centers across the
United States and average approximately 8,900 square feet.
Catherine's Plus Sizes. Catherine's also specializes in plus-sizes
and is particularly known for extended sizes (over size 28) and petite
plus-sizes. Catherine's has also developed its proprietary body basics
fit program, which is designed to help a woman choose merchandise
styles that most flatter her figure. Catherine's offers classic apparel
and accessories for career and casual lifestyles in a one-on-one
selling environment, and its customers 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 461 Catherine's stores are located
in 45 states, primarily in the Southeast, Mid-Atlantic, and Eastern
Central regions of the United States and average approximately 3,900
square feet.
1
On January 28, 2002, we announced a restructuring plan that includes a
number of initiatives designed to position our business for increased
profitability and growth. The major components of this plan include:
o The closing of our The Answer/Added Dimensions chain and its 77 stores,
including the conversion of approximately 20% of the Added Dimensions
stores to Catherine's stores;
o The closing of 130 under-performing Fashion Bug stores; and
o The conversion of 44 Fashion Bug store locations to Lane Bryant stores.
The Answer/Added Dimensions, which was acquired as part of the Catherine's
transaction in January 2000, operates 77 plus-size stores in 21 states,
concentrated in the Southeast and the Northeast. The square footage for the
chain is approximately 300,000 square feet, which is approximately 2% of the
total square footage under lease for all our stores. These store closings and
conversions are expected to be completed by the end of the second quarter of
Fiscal 2003.
The majority of the 130 under-performing Fashion Bug stores will close
during the fourth quarter of Fiscal 2003, resulting in a reduction of 1.1
million square feet, or 6% of total square footage under lease for all our
stores. The locations are dispersed throughout the country, and do not
significantly represent any one geographic region.
The Company also plans to convert 44 Fashion Bug stores to the Lane Bryant
format. These conversions will enable us to enhance profitability and accelerate
our strip center store opening strategy for Lane Bryant.
Stores
Our 2,446 stores (as of February 2, 2002) are primarily located in suburban
areas and small towns. Approximately 65% of these stores are located in strip
shopping centers, while the balance are located in community and regional malls.
Most of our Lane Bryant stores are in malls. In many locations, Lane Bryant is
the only plus-size women's specialty apparel store in the mall. Lane Bryant has
also recently demonstrated success in strip center locations. We believe that a
significant opportunity exists to aggressively expand both Lane Bryant and
Catherine's into additional strip center locations. We believe that our
customers visit strip shopping centers more frequently than malls as a result of
the tenant mix and convenience of strip shopping centers. 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 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, easier to shop layout.
In addition, we emphasize customer service, including the presence of helpful
salespeople in the stores, lay-away 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.
Store unit growth during Fiscal 2003 is projected to be approximately 50-60
stores. The breakdown by store format is approximately: 25 Lane Bryant stores
(excluding conversions), 25 Catherine's stores, and 8 Fashion Bug stores.
Additionally, we plan to remodel approximately 45-50 stores, and relocate
approximately 75-80 stores during Fiscal 2003. We continue to seek additional
new locations that meet our financial and operational objectives.
2
Our store openings and closings and number of locations over the past five
fiscal years are set forth in the following table:
Fiscal Year Ended
Feb. 2, Feb. 3, Jan. 29, Jan. 30, Jan. 31,
2002 2001 2000 1999 1998
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Number of stores open at beginning of period ................1,755 1,740 1,135 1,135 1,134
Opened during period ........................................ 125 106 75 65 25
Acquired during period ...................................... 651 0 572 0 0
Closed during period ........................................ (85) (91)(1) (42) (65) (24)
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2,446 1,755 1,740 1,135 1,135
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Store Brand
Fashion Bug and Fashion Bug Plus ............................1,252 1,230 1,185 1,135 1,135
Lane Bryant ................................................. 647 0 0 0 0
Catherine's/The Answer/Added Dimensions ..................... 538 524 555(2) 0 0
Monsoon/Accessorize(3) ...................................... 9 1 0 0 0
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2,446 1,755 1,740 1,135 1,135
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(1) Includes 35 Modern Woman stores that were closed as a result of the
consolidation of Modern Woman stores into Catherine's during the year ended
February 3, 2001.
(2) Includes 122 Modern Woman stores that were closed or converted to the
Catherine's formats during the year ended February 3, 2001.
(3) See "Monsoon and Accessorize Joint Venture" below.
All stores are operated under our direct management. Each store has a
manager and an assistant manager, 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 approximately eleven 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 promotions from within,
competitive wages and various incentive, medical, and retirement plans. We
centrally develop store operations, merchandising, and buying policies, leaving
individual store management with the principal duties of display, selling, and
reporting through point-of-sale terminals.
Merchandising and Buying
We employ a merchandising and buying strategy that is focused on providing
an attractive selection of apparel and accessories that reflect the fashion
preferences of the target customer for each of our brands. Merchandise
purchasing is conducted by separate merchandise groups for each of our brands by
buyers supervised by one or more merchandise managers. We believe that
specialization of buyers within particular brands enhances the distinctiveness
between the brands and their offerings. In addition, we use domestic and
international fashion market guidance, fashion advisory services, proprietary
design, and in-store testing to determine the optimal product assortments for
each of our brands. We believe that this approach results in greater success in
predicting customer preferences while reducing our inventory investment and
risk. We also seek to maintain high quality standards with respect to
merchandise fabrication, construction, and fit.
3
At Lane Bryant, we offer a combination of fashion basics, seasonal
fashions, and high fashion in casual and career-oriented merchandise and
intimate apparel. We strive to translate the latest trends into plus-sizes and
to be first to market with our merchandise. At Fashion Bug, we offer an
assortment of both casual and career-oriented products, in plus, misses, and
junior sizes at attractive prices. Fashion Bug's plus and misses size
merchandise typically reflects established fashion trends and includes a broad
offering of ready-to-wear apparel, including knit and woven tops, dresses,
shorts, pants and skirts, as well as footwear, accessories, intimate apparel,
and seasonal items, such as outerwear. Fashion Bug's junior merchandise reflects
the latest fashion trends and includes a significant amount of third-party,
well-recognized national brands. At Catherine's, we offer a broad assortment of
plus-size merchandise in classic styles designed to provide "head-to-toe"
dressing for the 40 to 65 year-old customer. Catherine's features sportswear,
dresses, intimate apparel, suits and accessories in a variety of plus-sizes,
such as petites and extended sizes. Catherine's has developed a unique expertise
in the fit, design and manufacturing of extended sizes, making it one of the few
retailers to emphasize these sizes.
We continue to refine our merchandise assortments to reflect the needs and
demands of our diverse customer groups and the demographics of each store's
location. We have distribution systems in place whereby stores that are
identified as having certain customer profiles can be stocked with products
specifically targeted to such customers. 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 staffs obtain store and chain-wide inventory information
generated by merchandise information systems that use point-of-sale terminals.
Through these terminals, merchandise can be followed from the placement of our
initial order for the merchandise to the actual sale to our customer. Based upon
this data, our merchandise managers compare budgeted-to-actual sales and make
merchandising decisions, as needed, including re-order, markdowns, and changes
in the buying plans for upcoming seasons.
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 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 typically does allow sufficient margin to
permit merchandise discounts in order to stimulate customer purchases when
necessary. In the future, we expect to continue to achieve a higher initial
markup in our merchandise that is purchased through our overseas sourcing
operations.
Our stores experience a normal seasonal sales pattern for the retail
apparel industry, with peak sales occurring during the Easter, Labor Day, and
Christmas seasons. We generally build inventory levels before these peak selling
periods. To keep inventory current and fashionable, we reduce the price of
slow-moving merchandise throughout the year. Much of our merchandise is
developed for one or more of our six seasons: spring, summer, summer-fall
transitional, fall, holiday, and holiday-spring transitional. End-of-season
sales are conducted with the objective of carrying a minimal amount of seasonal
merchandise over from one season to another. Sales for the four quarters of
Fiscal 2002, as a percent of total sales, were 19.8%, 20.2%, 27.6%, and 32.4%,
respectively. Sales for the third and fourth quarters of Fiscal 2002 include the
results of Lane Bryant, Inc., acquired on August 16, 2001. On a pro forma basis,
had the acquisition of Lane Bryant occurred as of the beginning of Fiscal 2002,
sales for the four quarters of Fiscal 2002, as a percent of total sales, would
have been 25.4%, 25.5%, 23.1%, and 26.0%, respectively.
Marketing and Promotions
We use several types of advertising to stimulate customer traffic, such as
targeted direct mail advertising to preferred customers. These customers are
selected from a database of more than 26 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. With the planning
and guidance of specialized home
4
office personnel, each store provides such displays and advertising as may be
necessary to feature certain merchandise or certain promotional selling prices
from time to time.
We maintain websites for our Lane Bryant and Catherine's brands that
provide information regarding current fashions and promotions. Our Lane Bryant
website enjoys more than 500,000 unique visitors per month and an established
on-line community. We are presently developing e-commerce capabilities on this
site. In March 2002, we launched an e-commerce pilot for our Catherine's brand.
A grand opening of this site will be marketed later in 2002.
We also seek to encourage sales through our proprietary and private-label
credit cards. We believe that these credit cards act as promotional vehicles by
engendering customer loyalty, creating a substantial base for targeted direct
mail promotion, and encouraging incremental sales.
Our proprietary Fashion Bug credit card program has approximately four
million active accounts, which accounted for approximately 33% of Fashion Bug
retail sales in Fiscal 2002. We control and service the entire Fashion Bug
proprietary credit card file and have entered into various agreements whereby we
securitize and sell all of our credit card receivables generated by this
program. Under these agreements, we continue to service the receivables and
control credit policies. This allows us to continue to fund receivable growth,
provide customer service, and collect past-due accounts. Accordingly, our
relationship with our credit card customers is not affected by these
securitization agreements. Our Fashion Bug proprietary credit card portfolio is
originated by Spirit of America National Bank, a national banking association
and our wholly owned subsidiary. Spirit of America National Bank approves credit
applications and a third party performs all billing and collection activities.
Lane Bryant and Catherine's also offer customers the convenience of a
private-label credit card. We use third-party banks to finance and service these
private-label credit card programs. These third-party banks provide new account
approval, credit authorization, billing, and account collection services. Under
non-recourse agreements with the third-party banks, we are reimbursed with
respect to sales generated by the private-label credit cards. These third-party
agreements may require us to repurchase receivables from the third-party banks
under certain conditions.
Sourcing
To meet the demands of our customers, we access both the domestic and
overseas wholesale apparel marketplace for our merchandise purchases. This
allows us to maintain short lead times, respond quickly to current fashion
trends, and quickly replenish merchandise inventory as necessary. During Fiscal
2002, we purchased merchandise from approximately 1,100 suppliers and factories
located throughout the world. We use our overseas sourcing operations primarily
to procure fashion-basic merchandise for our brands, which generally requires
longer lead times and in Fiscal 2002 accounted for approximately 30% of the
Fashion Bug merchandise and approximately 20% of Catherine's merchandise. During
Fiscal 2002, we purchased a portion of Lane Bryant merchandise from Mast
Industries, Inc., a contract manufacturer and apparel importer, which is a
wholly-owned subsidiary of The Limited, Inc. On a pro forma basis, if the
acquisition of Lane Bryant had occurred as of the beginning of Fiscal 2002,
purchases from Mast would have accounted for approximately 16% of our total
merchandise purchases and approximately 39% of merchandise purchases for Lane
Bryant. No more than 7% of goods purchased originated from any single
manufacturer or factory.
We pay for merchandise purchases outside the United States via letters of
credit with third party vendors where we are the importer of record. To date, we
have not experienced difficulties in purchasing merchandise overseas or
importing such merchandise into the United States. Should political instability
result in a disruption of normal activities in any single country with which we
do business, we believe that we would have adequate alternative sources of
supply.
5
Distribution and Logistics
We utilize three distribution centers. For our Fashion Bug stores, we
operate a distribution center in Greencastle, Indiana. Located on a 150-acre
tract of land, this facility contains a building of approximately 1,000,000
square feet. We estimate that this facility has the capacity to service 1,800
stores. For our Catherine's stores, we operate a 213,000 square foot
distribution center in Memphis, Tennessee, which is designed to handle up to
approximately 600 stores. For our Lane Bryant stores, we utilize a 514,000
square foot facility near Columbus, Ohio under an agreement with Distribution
Land Corp., an affiliate of The Limited, Inc. Under a services agreement with
The Limited, we receive inbound and outbound logistics and transportation
services and receiving, handling, processing, storing, and distribution of all
merchandise for Lane Bryant at the Ohio distribution facility. The lease and
related logistics and transportation services will terminate in August 2004,
although we have the right to terminate the services earlier upon notice.
Most of our merchandise purchases are received at these three distribution
facilities, where they are prepared for distribution to our stores. The
automated sorting systems in these 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 models to combine
shipments when possible and improve the efficiency of the distribution
operations. These models enable the distribution operations to reflect various
customer profiles into each store's plan. These profiles provide information not
only about the quantity of merchandise to be distributed to each store, but also
about the type of merchandise to be shipped.
Our merchandising and buying philosophy coupled with enhancements in
inventory management help facilitate the timely and orderly purchase and flow of
merchandise. This enables our stores to offer fresh product assortments on a
regular basis. We are also currently analyzing our existing distribution
network, and we expect shortly to make a decision whether to lease or purchase
an additional distribution facility.
Competition
The retail sale of women's apparel is a highly competitive business with
numerous competitors, including department stores, specialty apparel stores,
discount stores, and mail-order and e-commerce companies. We cannot reasonably
estimate the number of our competitors due to the large number of companies
selling women's apparel. The primary elements of competition are merchandise
style, size, selection, quality, display, and price, as well as store location,
design, advertising, and promotion and personalized service to the customers.
Monsoon and Accessorize Joint Venture
In October 2000, we entered into a joint venture with Monsoon plc. of
London to bring its successful apparel and accessories retail stores concepts,
Monsoon and Accessorize, from the United Kingdom to the United States. The
Monsoon concept is a women's apparel specialty store in the moderate-better
price range, with locations in premier malls. All merchandise is marketed under
private label and is created by Monsoon's team of designers and buyers using
manufacturing resources throughout the world. Product offerings include leading
fashions in both career and special-occasion dressing. The target customer is 25
to 55 years old. Accessorize specializes in women's accessories in the moderate
price range. Merchandise is also private label and is sourced from around the
world using Accessorize's design, buying, and development teams. Product
offerings include bags, necklaces, bracelets, earrings, hair accessories, hats,
purses, scarves, sunglasses, and sarongs, among others. The target customer is
16 to 45 years old. We opened eight Monsoon and/or Accessorize stores during
Fiscal 2002 and will be evaluating the performance of these stores in developing
a longer-term growth strategy for these brands.
6
Employees
As of the end of Fiscal 2002, we employed approximately 24,000 associates,
which included approximately 15,000 part-time employees. In addition, we hire a
number of temporary employees during the Christmas season. Approximately 60 of
our employees are represented by unions, including approximately 35 employees at
our Memphis, Tennessee distribution center. We believe that our relationship
with these unions, and our employees overall, 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)", "L.A. BLUES(R)",
"Catherine's(R)", "Catherine's PLUS SIZES(R)", "CST STUDIO(R)", "CST SPORT(R)",
"MAGGIE BARNES(R)", "ANNA MAXWELL(R)", "LIZ & ME(R)", "Lane Bryant(R)", "VENEZIA
CLOTHING CO.(R)", "ELEMENTAL STRETCH(TM)", "PLUS SIZE SPECIALIST(TM)", "FASHION
CHOICES FASHION SAVINGS Fashion Bug(TM)", and "CACIQUE(TM)" and several other
trademarks and servicemarks of lesser importance to us have been registered or
are in the process of being registered with the United States Patent and
Trademark Office and in other countries.
We also own the following domain name registrations: charming.com,
charmingshoppes.com, fashionbug.com, fashionbugplus.com, catherines.com,
lanebryant.com and others of lesser importance.
Executive Offices
Charming Shoppes, Inc., was incorporated in Pennsylvania in 1969. Our
principal offices are located at 450 Winks Lane, Bensalem, Pennsylvania 19020.
Our telephone number is (215) 245-9100.
7
Item 2. Properties
We lease all our stores, with the exception of five stores, which we own.
Typically, store leases have initial terms of 5 to 20 years and generally
contain provisions for renewal options, additional rental charges based on sales
performance, and payment of real estate taxes and common area charges.
With respect to leased stores open as of February 2, 2002, the following
table shows the number of store leases expiring during the periods indicated,
assuming the exercise of our renewal options:
Number of
Period Leases Expiring
------ ---------------
2002 139
2002 - 2007 728
2008 - 2012 499
2013 - 2017 338
2018 - 2022 416
2023 - 2027 269
Thereafter 52
We own a 1,000,000 square foot distribution center in Greencastle, Indiana
that services our Fashion Bug and Fashion Bug Plus stores and a 213,000 square
foot distribution center in Memphis, Tennessee that services our Catherine's
stores. We also lease a 514,000 square foot distribution center near Columbus,
Ohio that services our Lane Bryant stores pursuant to a lease with an affiliate
of The Limited that will terminate in 2004.
We lease 91,000 square feet of office space in Bensalem, Pennsylvania that
houses our corporate headquarters and Fashion Bug operations. We also own
approximately 22 acres in Bensalem with a 145,000 square foot office building
that houses our primary data processing facility and additional administrative
offices. We own a 99,000 square foot facility in Memphis, Tennessee that houses
our Catherine's operations and an additional data processing facility. We also
lease a 130,000 square foot facility near Columbus, Ohio that houses our Lane
Bryant operations. Spirit of America National Bank, our wholly owned credit card
bank subsidiary, occupies 30,000 square feet of leased office space in Miami
Township, Ohio and 48,000 square feet of leased space for a credit card
processing facility in Hollywood, Florida. 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.
8
Item 3. Legal Proceedings
On October 24, 2001, a terminated employee filed a purported class action
suit in Alameda Superior Court, California against Lane Bryant, Inc. alleging
that she was misclassified as an exempt employee and that she was entitled to be
paid overtime which she had not received. She further asserted that all of the
Lane Bryant store sales managers in California were also misclassified and
entitled to overtime. Because the investigation of the case and the discovery
phase of the proceedings are at their initial stages, it is premature to
speculate on the potential risk this suit presents to Lane Bryant. We intend to
vigorously defend this suit.
There are no other pending legal proceedings, other than ordinary routine
litigation incidental to our business, to which we or any of our subsidiaries is
a party or of which our property or the property of any of our subsidiaries is
the subject that are expected to have a material adverse effect on our financial
condition or results of operations.
Item 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
Additional Part I Information - Our Executive Officers
The following list contains certain information relative to our executive
officers. There are no family relationships among any of our executive officers.
Dorrit J. Bern, 52, has served as Chairman of the Board of Directors since
January 1997. She has also served as President and Chief Executive Officer since
September 1995. Ms. Bern's term as a Director expires in 2002.
Joseph M. Baron, 54, has served as Executive Vice President and Chief
Operating Officer since March 2002. Prior to that, he served as President and
Chief Executive Officer of Homelife Corporation from February 1999 to October
2001, and as President of Sears Homelife Furniture from 1996 to February 1999.
Homelife Corporation filed a bankruptcy petition under Chapter 11 of the U. S.
Bankruptcy Code during July 2001.
Anthony A. DeSabato, 53, has served as Executive Vice President and
Corporate Director of Human Resources since 1990, and he has been employed by us
since 1987.
Eric M. Specter, 44, 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, 53, has served as Executive Vice President and General
Counsel since 1990, and he has been employed by us since 1989. He has also
served as Secretary since February 1998.
Erna Zint, 58, has served as Executive Vice President - Sourcing since
January 1996.
Jonathon Graub, 43, has served as Senior Vice President - Real Estate,
since December 1999, and he has been employed by us since 1981.
Jeffery A. Warzel, 45, has served as Senior Vice President - Infrastructure
Operations and Strategic Planning since January 2000. Prior to that, he served
as Vice President - Operations Support and Business Development for Western
Auto, a subsidiary of Sears Roebuck & Co., from August 1996 to December 1999.
Carmen Monaco, 55, has served as Vice President - Marketing since May 1997.
Prior to that, he served as Senior Vice President - Marketing/Advertising for
Goody's Family Clothing Inc. from August 1992 to May 1997.
John J. Sullivan, 55, has served as Vice President - Corporate Controller
since October 1998. Prior to that, he served as Senior Vice President and Chief
Financial Officer for National Media Corp. from January 1998 to October 1998,
and as Senior Vice President of Administration for National Media Corp. from
April 1995 to January 1998.
10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Our common stock is traded on the over-the-counter market and quoted on the
Nasdaq National Market under the symbol "CHRS." The following table sets forth
the high and low sale prices for our common stock during the indicated periods,
as reported by Nasdaq.
Fiscal 2002 Fiscal 2001
----------- -----------
High Low High Low
---- --- ---- ---
1st Quarter ....................$7.13 $4.62 $8.00 $4.94
2nd Quarter .................... 7.05 5.18 7.03 4.63
3rd Quarter .................... 7.00 4.48 6.19 4.88
4th Quarter .................... 6.70 4.73 7.13 5.38
The approximate number of holders of record of our common stock as of
April 29, 2002 was 2,408. This number excludes individual stockholders holding
stock under nominee security position listings.
We have not paid any dividends since 1995, and we do not expect to declare
or pay any dividends on our common stock in the foreseeable future. In addition,
our existing credit facility and one of our agreements with The Limited, Inc.
restrict the payment of dividends on our common stock. (See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition - Financing" and "Item 8. Financial Statements
and Supplementary Data - Notes to Consolidated Financial Statements - Debt").
On August 16, 2001, we acquired 100% of the outstanding capital stock of
Lane Bryant, Inc. from a subsidiary of The Limited, Inc. for cash of $286.2
million, including direct costs of the acquisition of $6.2 million and 8,688,784
shares of our common stock, valued at $55.0 million. On December 10, 2001, based
on the final determination of the value of the Lane Bryant net assets acquired,
we issued an additional 837,209 shares of our common stock, valued at $4.3
million, to a subsidiary of The Limited in connection with the acquisition. The
shares were issued in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933. The Limited has made certain
representations to us as to investment intent, receipt of all information
necessary or appropriate in deciding whether to purchase the shares, and
knowledge and experience in financial or business matters. No offers to sell the
shares were made by any form of general solicitation or general advertisement.
The shares were issued subject to restrictions on transfer absent registration
under the Securities Act and, in any event, The Limited is restricted from
selling the shares for a one-year period after the close of the transaction.
Pursuant to a Registration Agreement, we have agreed to provide certain
registration rights with respect to the shares after the one-year period.
11
Item 6. Selected Financial Data
The following table presents selected financial data for each of our five
fiscal years ended as of January 31, 1998 through February 2, 2002. 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."
CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY
Fiscal Year Ended
-----------------
Feb. 2, Feb. 3, Jan. 29, Jan. 30, Jan. 31,
(in thousands, except share amounts) 2002(1) 2001(1)(2) 2000(1) 1999 1998
---- ---- ---- ---- ----
Operating Statement Data:
Net sales .......................................... $1,993,843 $1,607,079 $1,196,529 $1,035,160 $1,016,537
---------- ---------- ---------- ---------- ----------
Cost of goods sold, buying, and occupancy
expenses ...................................... 1,455,601 1,134,554 854,774 771,107 772,709
Selling, general, and administrative expenses ...... 486,204 382,398 281,637 245,164 231,476
Amortization of goodwill ........................... 4,885 4,885 0 0 0
Restructuring charge (credit) ...................... 37,708(3) 0 (3,471)(4) 54,246(5) 0
Non-recurring gain from demutualization of
insurance company ............................. 0 0 (6,700)(6) 0 0
Non-recurring gain from asset securitization ....... 0 0 0 0 (13,018)(7)
---------- ---------- ---------- ---------- ----------
Total operating expenses .......................... 1,984,398 1,521,837 1,126,240 1,070,517 991,167
---------- ---------- ---------- ---------- ----------
Income (loss) from operations ...................... 9,445 85,242 70,289 (35,357) 25,370
Other income, principally interest ................. 4,730 8,304 7,698 14,420 14,442
Interest expense ................................... (18,701) (8,894) (7,308) (10,052) (10,390)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes,
extraordinary item, and cumulative
effect of accounting change ................... (4,526) 84,652 70,679 (30,989) 29,422
Income tax provision (benefit) ..................... (120) 33,014 26,852 (10,854) 10,088
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item and
cumulative effect of accounting change ........ (4,406) 51,638 43,827 (20,135) 19,334
Extraordinary gain on early retirement of debt,
net of tax .................................... 0 0 1,232 0 0
Cumulative effect of accounting change, net of tax . 0 (540)(8) 0 0 0
---------- ---------- ---------- ---------- ----------
Net income (loss) .................................. $ (4,406) $ 51,098 $ 45,059 $ (20,135) $ 19,334
========== ========== ========== =========== ==========
Basic net income (loss) per share .................. $(.04) $.50 $.46 $(.20) $.18
Basic weighted average common shares outstanding ... 105,842 101,119 98,609 99,441 105,678
Net income (loss) per share, assuming dilution ..... $(.04) $.48 $.43 $(.20) $.18
Diluted weighted average common shares and
equivalents outstanding ....................... 105,842 115,027 115,888 99,441 107,081
Balance Sheet Data:
Total assets ....................................... $1,132,677 $852,767 $784,796 $684,649 $709,738
Current portion - long-term debt ................... 9,379 4,954 1,920 16 16
Long-term debt ..................................... 208,491 113,540 105,213 119,475 138,116
Working capital .................................... 145,047 208,389 161,376 192,274 163,208
Stockholders' equity ............................... 549,802 493,269 436,263 383,572 416,810
12
Fiscal Year Ended
-----------------
Feb. 2, Feb. 3, Jan. 29, Jan. 30, Jan. 31,
2002(1) 2001(1)(2) 2000(1) 1999 1998
---- ---- ---- ---- ----
Performance Data:
Including restructuring charge (credit) and non-recurring items:
Net return on average stockholders' equity ...................... (0.8)% 11.0% 11.0% (5.0)% 4.6%
Net return on average total assets .............................. (0.4) 6.2 6.1 (2.9) 2.7
Excluding restructuring charge (credit) and non-recurring items:
Net return on average stockholders' equity ...................... 3.6 10.6 8.6 3.7 2.6
Net return on average total assets .............................. 2.0 6.2 5.3 2.2 1.5
--------------------
(1) Results for Fiscal 2002 include the results of Lane Bryant, Inc., acquired
August 16, 2001, from the date of acquisition. Results for Fiscal 2002,
Fiscal 2001, and Fiscal 2000 include the results of Catherines Stores
Corporation, acquired January 7, 2000, and Modern Woman Holdings, Inc.,
acquired August 2, 1999, from the dates of their respective acquisitions.
(2) Fiscal 2001 consisted of 53 weeks.
(3) In January 2002, our Board of Directors approved a restructuring plan which
included the closing of The Answer/Added Dimensions chain of 77 stores, the
conversion of approximately 20% of the Added Dimensions stores to
Catherine's stores, the closing of 130 under-performing Fashion Bug stores,
and the conversion of 44 Fashion Bug stores to Lane Bryant stores, which
resulted in a pre-tax charge of $37,708,000.
(4) During Fiscal 2000, we revised our estimates of costs recognized during
Fiscal 1999 relating to the closing of our Bensalem distribution center and
the elimination of our men's business (see note (5) below). As a result, we
recognized pre-tax restructuring credits of $2,834,000 relating to the
closing of our distribution center and $2,096,000 relating to the
elimination of our men's business. In addition, we recognized a pre-tax
restructuring charge of $1,459,000 in Fiscal 2000 in conjunction with the
consolidation of the Modern Woman chain of stores into the Catherine's
chain.
(5) During Fiscal 1999, our Board of Directors approved a restructuring plan in
conjunction with the elimination of our men's business, which resulted in a
pre-tax charge of $34,000,000. In addition, our Board of Directors approved
a restructuring plan in conjunction with the decision to consolidate our
distribution center operations, which resulted in a pre-tax charge of
$20,246,000.
(6) During Fiscal 2000, we received a stock distribution from one of our mutual
insurance carriers in connection with the carrier's conversion to a
publicly held corporation (demutualization). We recorded the distribution
at its fair value and recognized the resulting non-recurring gain in income
from operations.
(7) During Fiscal 1998, we adopted Statement of Financial Accounting Standards
("SFAS") No. 125, which included the valuing of an "I/O Strip" representing
a payment stream consisting of excess finance charges and past-due fees
over the sum of the return paid to certificate holders and credit losses.
As a result, we eliminated our loss reserve related to our retained
interest and related recourse provisions of our credit card certificates,
and recognized a non-recurring gain of $13,018,000.
(8) 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.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the financial
statements and accompanying notes appearing elsewhere in this report. As used
herein, the terms "Fiscal 2002," "Fiscal 2001," and "Fiscal 2000" refer to our
fiscal years ended February 2, 2002, February 3, 2001, and January 29, 2000,
respectively. Fiscal 2001 consisted of 53 weeks, while Fiscal 2002 and Fiscal
2000 each consisted of 52 weeks.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters contained in the
following analysis and elsewhere in this report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements may include, but are not limited to, projections of revenues, income
or loss, and capital expenditures, plans for future operations, and financing
needs or plans, as well as assumptions relating to the foregoing. The words
"expect," "project," "estimate," "predict," "anticipate," "believes," and
similar expressions are also intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results, performance, and achievements could differ materially from those set
forth in, contemplated by, or underlying the forward-looking statements. We
assume no obligation to update any forward-looking statement to reflect actual
results or changes in or additions to the factors affecting such forward-looking
statements.
Factors that could cause our actual results of operations or financial
condition to differ from those described in this report include, but are not
necessarily limited to, the following:
o Our business is dependent upon our being able to accurately
predict rapidly changing fashion trends, customer preferences
and other fashion-related factors, which we may not be able to
successfully accomplish in the future.
o The general slowdown in the United States economy and the
uncertain economic outlook has led to reduced consumer demand
for our apparel and accessories and may continue to do so in
the future.
o The women's specialty retail apparel industry is highly
competitive and we may be unable to compete successfully
against existing or future competitors.
o We cannot assure the successful implementation of our business
plan for increased profitability and growth in our plus-sized
women's apparel business.
o Our business plan is largely dependent upon the continued
growth in the plus-sized women's apparel market which may not
continue.
o We depend on key personnel, particularly our Chief Executive
Officer, Dorrit J. Bern, and we may not be able to retain or
replace these employees or recruit additional qualified
personnel.
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
14
unable to obtain sufficient financing at affordable cost, our
ability to merchandise our stores would be adversely affected.
o We rely significantly on foreign sources of production and
face a variety of risks (including political instability,
imposition of duties or quotas, increased security
requirements applicable to imports, delays in shipping,
increased costs of transportation, and issues relating to
compliance with domestic or international labor standards)
generally associated with doing business in foreign markets
and importing merchandise from abroad.
o Our stores experience seasonal fluctuations in net sales and
operating income. Any decrease in sales or margins during our
peak sales periods, or in the availability of working capital
needed in the months preceding such periods, could have a
material adverse effect on our business. In addition, extreme
or unseasonable weather conditions may have an impact on our
sales.
o War, acts of terrorism, or the threat of either may negatively
impact availability of merchandise, customer traffic to our
stores and otherwise adversely impact our business.
o We may be unable to obtain adequate insurance for our
operations at a reasonable cost.
o We may be unable to protect our trademarks and other
intellectual property rights, which we believe are important
to our success and our competitive position.
o We may be unable to hire and retain suitable sales associates
at our stores.
o We may be unable to successfully implement our restructuring
plan described elsewhere in this report.
o Our manufacturers may be unable to manufacture and deliver
merchandise to us in a timely manner or to meet our quality
standards.
o Our sales are dependent upon a high volume of traffic in the
strip centers and malls in which our stores are located and
our future growth is dependent upon the availability of
suitable locations for new stores.
o We may be unable to successfully integrate Lane Bryant into
our current operating structure, and we currently rely on
management information systems and logistics services from The
Limited with respect to our Lane Bryant stores.
CRITICAL ACCOUNTING POLICIES
We have prepared the financial statements and accompanying notes included
elsewhere in this report in conformity with United States generally accepted
accounting principles. This requires us to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
These estimates and assumptions are based on historical experience, analysis of
current trends, and various other factors that we believe to be reasonable under
the circumstances. Actual results could differ from those estimates under
different assumptions or conditions.
We periodically reevaluate our accounting policies, assumptions, and
estimates and make adjustments when facts and circumstances warrant.
Historically, actual results have not differed materially from those determined
using required estimates. Our significant accounting policies are described in
the notes accompanying the financial
15
statements included elsewhere in this report. However, we consider the following
accounting policies to be more critical to the preparation of our financial
statements and accompanying notes.
Revenue Recognition
Our revenues from merchandise sales are net of returns and allowances and
exclude sales tax. We have adopted Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," effective as of the beginning of Fiscal 2001. As a result of
adoption of SAB 101, we established a reserve for estimated future sales returns
based on an analysis of actual returns received following the end of each fiscal
period and we began deferring recognition of layaway sales to the date of
delivery. A change in our actual rates of sales returns and layaway sales
experience would affect the level of revenue recognized.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. The program provides discounts on customer purchases over a
twelve-month period upon payment of a $20 annual fee. We recognize revenues from
card fees as sales over the life of the membership dependent upon discounts
being earned by the customer. If a customer does not earn discounts in an amount
that exceeds the card fee, such difference is recognized as revenue upon the
expiration of the annual period. Upon early cancellation of a loyalty card,
refunds of membership fees are reduced by the amount of any discounts granted to
the member under the program. We recognize our costs of administering the
program in cost of goods sold as incurred. We offset revenues recognized from
card fees by discounts granted under the program. An increase in the level of
refunds of membership fees could impact the level of revenue recognized.
Inventories
We value our merchandise inventories at the lower of cost or market under
the retail inventory method (average cost basis), which is an averaging method
that has been widely used in the retail industry. Under the retail inventory
method ("RIM"), the valuation of inventories at cost and the resulting gross
margins are adjusted in proportion to markdowns and shrinkage on our retail
inventories. The use of the RIM will result in valuing inventories at the lower
of cost or market if markdowns are currently taken as a reduction of the retail
value of inventories. The RIM calculation involves certain significant
management judgments and estimates including, among others, merchandise markon,
markup, markdowns, and shrinkage, which significantly affect the ending
inventory valuation at cost as well as resulting gross margins. Events such as
store closings, liquidations, and the general economic environment for retail
apparel sales could result in an increase in the level of markdowns, which under
the RIM could result in lower inventory values and increases to cost of goods
sold as a percentage of net sales in future periods. In addition, failure to
estimate markdowns currently can result in an overstatement of inventory cost
under the lower of cost or market principle. At the end of Fiscal 2002, for
purposes of valuing our inventory, we recognized markdowns that had not been
taken and which reduced inventories by approximately $4.5 million.
In connection with our restructuring plan announced on January 28, 2002
(see "RECENT DEVELOPMENTS - Restructuring Charges" 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 stores we expect to
close during the first half of Fiscal 2003.
Impairment of Long-Lived Assets
We evaluate 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." SFAS No. 121 requires us to assess these assets for recoverability whenever
events or changes in circumstances indicate that the carrying amounts of
long-lived tangible and intangible assets may not be recoverable. We consider
historical performance and future estimated results in our evaluation of
potential
16
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, the asset is written down to its estimated fair value and an
impairment loss is recognized. Our estimation of fair value is generally based
on either appraised value or measured by discounting future cash flows, based on
a number of assumptions and estimates.
In connection with our restructuring plan announced on January 28, 2002
(see "RECENT DEVELOPMENTS - Restructuring Charges" below), we recognized a
write-down of store fixed assets of approximately $17.8 million in accordance
with the provisions of SFAS No. 121. We believe that the estimates and
assumptions used in determining this impairment charge are reasonable and
appropriate.
At February 2, 2002, we evaluated the recoverability of goodwill and other
long-lived assets by comparing carrying values to undiscounted cash flows. When
we fully adopt SFAS No. 142, "Goodwill and Other Intangible Assets" in Fiscal
2003, impairment for goodwill and indefinite-lived intangible assets will be
determined by comparing carrying values and fair values. Indefinite-lived
intangible assets must be tested during the first quarter. The initial step in
testing goodwill must be completed by the end of the second quarter. We
currently believe that upon adoption of SFAS No. 142, we may be required to
write-down a significant portion of Catherine's goodwill, which totaled $87.2
million at the end of Fiscal 2002. Any such write-down would be presented as the
cumulative effect of an accounting change in the Fiscal 2003 Consolidated
Statement of Operations and Comprehensive Income(Loss).
Acquisitions - Purchase Price Allocation
We allocate the cost of acquisitions to the assets acquired and liabilities
assumed. We assign to all identifiable assets acquired, including intangible
assets, and all identifiable liabilities assumed a portion of the cost of the
acquired company equal to the estimated fair value of such assets and
liabilities at the date of acquisition. We record the excess of the cost of the
acquired company over the sum of the amounts assigned to identifiable assets
acquired less liabilities assumed as goodwill. We make the initial purchase
price allocation based on the evaluation of information and estimates available
at the date of the financial statements. As final information regarding the fair
value of assets acquired and liabilities assumed is evaluated and estimates are
refined, we make appropriate adjustments to the amounts allocated to those
assets and liabilities and change the amounts allocated to goodwill. We use all
available information to make these fair value determinations and, for major
business acquisitions, typically engage an outside appraisal firm to assist in
the fair value determination of the acquired long-lived assets. We have, if
necessary, up to one year after the closing date of an acquisition to finish
these fair value determinations and finalize the purchase price allocation.
Asset Securitizations
We use an asset securitization program to fund substantially all of the
credit card receivables generated by our Fashion Bug credit card program. The
Fashion Bug credit cards are issued by Spirit of America National Bank, one of
our subsidiaries. Asset securitization is a practice commonly used in the retail
industry which allows companies with proprietary credit card programs to finance
credit card receivables at attractive rates. Asset securitization involves the
sale of the bank's Fashion Bug proprietary credit card receivables to a special
purpose entity, which in turn transfers the receivables to a qualified special
purpose entity (the "Trust") which is administered by an independent trustee.
Because the Trust qualifies as a qualifying special purpose entity ("QSPE"), its
assets and liabilities are not consolidated in our balance sheet.
The Trust issues to investors various forms of certificates or credit card
receivable interests (the "Certificates") that represent interests in the
underlying Trust assets. The Trust pays to the holders of Certificates a portion
of future scheduled cash flows under preset terms and conditions, the receipt of
which is dependent upon cash flows generated by the underlying performance of
the Trust assets.
17
In each securitization transaction, we retain certain subordinated
interests, which effectively serve as a form of credit enhancement to the
Certificates sold to outside investors. To the extent amounts remain available
after repayment to the outside investors, the amounts are paid to us. Neither
the investors nor the Trust have recourse against us beyond the combination of
Trust assets and our subordinated interests, other than for breaches of certain
customary representations, warranties and covenants. These representations,
warranties, covenants and related indemnities do not protect the Trust or the
outside investors against credit-related losses on the receivables.
In accordance with SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," we record an interest in
the estimated present value of cash flows to be received by us over the expected
outstanding period of the receivables. These cash flows essentially represent
finance charges and past due fees in excess of the amounts paid to Certificate
holders and credit losses, and are referred to as the "I/O strip." We use
certain valuation assumptions related to the average lives of the receivables
sold and anticipated credit losses, as well as the appropriate market discount
rate, in determining the estimated present value of the I/O strip. Changes in
the average life of the receivables sold, loan payment rate, discount rate, and
credit loss percentage could adversely impact the actual value of the I/O strip.
Accordingly, actual results could differ materially from the estimates, and
changes in circumstances could result in significant future changes to the
assumptions currently being used.
RESULTS OF OPERATIONS
Financial Summary
The following table sets forth certain financial data expressed as a
percentage of net sales and on a comparative basis:
Percentage Increase
(Decrease)
Percentage of Net Sales From Prior Year
----------------------- ---------------
Fiscal Fiscal Fiscal Fiscal Fiscal
2002 2001 2000 2002-2001 2001-2000
---- ---- ---- --------- ---------
Net sales ........................................... 100.0% 100.0% 100.0% 24.1% 34.3%
Cost of goods sold, buying, and occupancy ........... 73.0 70.6 71.4 28.3 32.7
Selling, general, and administrative ................ 24.4 23.8 23.5 27.1 35.8
Amortization of goodwill ............................ 0.2 0.3 -- -- **
Restructuring charge (credit) ....................... 1.9 -- (0.3) ** (100.0)
Non-recurring gain from demutualization of
insurance company .............................. -- -- 0.6 -- (100.0)
Income from operations .............................. 0.5 5.3 5.9 (88.9) 21.3
Other income, principally interest .................. 0.2 0.5 0.6 (43.0) 7.9
Interest expense .................................... 0.9 0.5 0.6 110.3 21.7
Income tax provision (benefit) ...................... -- 2.1 2.2 (100.4) 22.9
Income (loss) before extraordinary item and
cumulative effect of accounting change ......... (0.2) 3.2 3.7 (108.5) 17.8
Gain on early retirement of debt, net of taxes ...... -- -- 0.1 -- **
Net income (loss) ................................... (0.2) 3.2 3.8 (108.6) 13.4
--------------------
** Not meaningful
18
The following table sets forth our net sales by store brand:
Year Ended Year Ended Year Ended
February 2, 2002 February 3, 2001 January 29, 2000
Fiscal Fourth Fiscal Fourth Fiscal Fourth
(in millions) Year Quarter Year Quarter Year Quarter
---- ------- ---- ------- ---- -------
Fashion Bug $1,164.0 $303.4 $1,213.1 $340.8 $1,138.3 $310.8
Lane Bryant 445.3(1) 254.1 0.0 0.0 0.0 0.0
Catherine's, including Modern
Woman 381.7 88.0 394.0 93.9 58.2(2)(3) 37.6(2)
Monsoon/Accessorize 2.8 1.6 0.0 0.0 0.0 0.0
-------- ------ -------- ------ -------- ------
Total net sales $1,993.8 $647.1 $1,607.1 $434.7 $1,196.5 $348.4
======== ====== ======== ====== ======== ======
--------------------
(1) Sales from the date of acquisition on August 16, 2001.
(2) Includes Catherine's sales from the date of acquisition on January 7, 2000.
(3) Includes Modern Woman sales from the date of acquisition on August 2, 1999.
The following table sets forth certain additional information related to
changes in our net sales:
Year Ended Year Ended
February 2, 2002 February 3, 2001
Fiscal Fourth Fiscal Fourth
Year Quarter Year Quarter
---- ------- ---- -------
(Decrease) increase in comparable store sales(1)(2):
Fashion Bug ................................................. (7)% (8)% 1% (1)%
Catherine's ................................................. (2) (5) -- --
Sales from new stores as a percentage of total
consolidated prior-period sales(2):
Fashion Bug ................................................. 5 4 8 7
Catherine's ................................................. 3 2 28(3) 14(3)
Lane Bryant ................................................. 28 58 -- --
Monsoon/Accessorize ......................................... -- -- -- --
Prior-period sales from closed stores as a percentage
of total consolidated prior-period sales(2):
Fashion Bug ................................................. (3) (3) (3) (3)
Catherine's ................................................. (3) (1) -- --
Increase in sales from additional week in Fiscal 2001 ............ -- -- 2 8
Increase in total sales .......................................... 24 % 49 % 34 % 25 %
--------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation.
(2) Pro forma for Fiscal 2001 as if based on comparable 52-week fiscal years
and 13-week fiscal quarters. Results for the fourth quarter and fiscal year
ended February 2, 2002 may not be equivalent to the change in total sales.
(3) Includes sales from Modern Woman stores acquired in August 1999.
19
Comparison of Fiscal 2002 to Fiscal 2001
Net Sales
Net sales were $1,993.8 million in Fiscal 2002, an increase of 24.1% from
$1,607.1 million in Fiscal 2001, primarily due to our acquisition of Lane Bryant
in August 2001. The number of retail stores in operation at the end of Fiscal
2002 was 2,446 (including 647 Lane Bryant stores), compared to 1,755 at the end
of Fiscal 2001. In line with overall consumer shopping trends and a generally
weak retail sales environment, we experienced a year-over-year decrease in
overall comparable store sales in Fiscal 2002 of 4.0%. For Fashion Bug stores,
improvements in junior sportswear were offset by declines in other merchandise
categories. In January 2001, we announced plans to support growth in plus-size
apparel, and eliminated girls apparel from Fashion Bug stores effective at the
end of the 2000-2001 winter season. Sales of Fashion Bug girls apparel were
approximately $38.0 million during Fiscal 2001. For Catherine's stores, an
increase in Fiscal 2002 sales of casual sportswear was offset by declines in
other merchandise categories.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers (see "CRITICAL ACCOUNTING POLICIES - Revenue Recognition"
above). We recognized $13.6 million of revenues from card fees in connection
with this program in Fiscal 2002.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $1,455.6 million in
Fiscal 2002, an increase of 28.3% from $1,134.6 million in Fiscal 2001,
principally reflecting the increase in net sales. As a percentage of net sales,
these costs increased by 2.4% in Fiscal 2002 as compared to Fiscal 2001.
Cost of goods sold as a percentage of net sales increased 0.4% in Fiscal
2002 as compared to Fiscal 2001. Reduced merchandise margins in our Fashion Bug
and Catherine's stores as a result of an increased level of promotional activity
during Fiscal 2002, and costs related to exiting the girls business in our
Fashion Bug stores, were partially offset by higher merchandise margins for our
Lane Bryant stores and to a lesser extent by close management of in-season
inventory levels. We include in cost of goods sold merchandise costs, net of
discounts and allowances, freight, and inventory shrinkage. Net merchandise
costs and freight are capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales increased 2.0%
in Fiscal 2002 as compared to Fiscal 2001. The increase in buying and occupancy
expenses as a percentage of net sales was primarily attributable to the lack of
leverage on relatively fixed occupancy costs as a result of the decline in
comparable store sales. Increased utilities expenses, relatively higher
occupancy expenses for new and relocated stores as compared to our existing
stores, and relatively higher occupancy expenses for our Lane Bryant stores also
contributed to the increase in buying and occupancy expenses as a percentage of
net sales. Buying expenses increased slightly as a percentage of net sales,
primarily as a result of buying costs for Lane Bryant stores, which are
relatively higher due to the product development and design process required to
support a 100% private-label business. Buying expenses include payroll, payroll
related costs, and operating expenses for our buying departments and warehouses.
Occupancy expenses include rent, real estate taxes, insurance, common area
maintenance, utilities, maintenance, and depreciation for our stores and
warehouse facilities and equipment. Buying and occupancy costs are treated as
period costs and are not capitalized as part of inventory.
Selling, General, and Administrative
Selling, general, and administrative expenses were $486.2 million in Fiscal
2002, an increase of 27.1% from $382.4 million in Fiscal 2001, principally
reflecting the acquisition of a large number of new stores in connection with
the Lane Bryant transaction. As a percentage of net sales, these costs increased
by 0.6% in Fiscal
20
2002 as compared to Fiscal 2001. Selling expenses increased 0.8% as a percentage
of net sales. The relative increase was attributable to the lack of leverage on
relatively fixed store payroll expenses as a result of the decline in comparable
store sales. An improvement in our credit operations (which are included in
selling expenses) as a result of reduced interest rates related to our asset
securitization program was partially offset by increased delinquencies in our
proprietary credit card program during the latter part of Fiscal 2002. General
and administrative expenses decreased 0.2% as a percentage of net sales in
Fiscal 2002, primarily as a result of the synergistic effect of a larger sales
base on corporate administrative expenses and the favorable impact of cost
reduction initiatives. Selling, general, and administrative expenses exclude
goodwill amortization related to our acquisition of Catherine's.
Other Income
Other income was $4.7 million in Fiscal 2002, a decrease of 43.0% from $8.3
million in Fiscal 2001. This decrease was primarily caused by a decrease in
interest income. Interest income decreased as a result of lower levels of
invested funds and a decrease in the average yield on investments during Fiscal
2002 as compared to Fiscal 2001. During Fiscal 2002, investments in marketable
securities were converted into cash and cash equivalents, and we used $83.0
million of cash and cash equivalents in connection with the acquisition of Lane
Bryant.
Interest Expense
Interest expense was $18.7 million in Fiscal 2002, an increase of 110.3%
from $8.9 million in Fiscal 2001. This increase was primarily the result of
short-term and long-term borrowings incurred in connection with the Lane Bryant
acquisition, and to a lesser extent, the result of additional long-term mortgage
borrowings and acquisitions of point-of-sale equipment under long-term capital
leases.
Income Tax Provision (Benefit)
The income tax benefit for Fiscal 2002 was $120 thousand resulting in a
(2.7)% effective tax rate, as compared to an income tax provision for Fiscal
2001 of $33.0 million, resulting in a 39% effective tax rate. The Fiscal 2002
net tax benefit was negatively affected by a $1.8 million provision related to
one of our employee insurance programs.
Comparison of Fiscal 2001 to Fiscal 2000
Net Sales
Net sales were $1,607.1 million in Fiscal 2001, an increase of 34.3% from
net sales of $1,196.5 million for Fiscal 2000, primarily due to our acquisition
of Catherine's and Modern Woman. Net sales for Fiscal 2001 include $394.0
million of sales from Catherine's and Modern Woman stores compared to net sales
of $58.2 million from Catherine's and Modern Woman stores in Fiscal 2000. We
experienced a year-over-year increase in overall comparable store sales in
Fiscal 2001 of 1.0%.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $1,134.6 million in
Fiscal 2001, an increase of 32.7% from $854.8 million in Fiscal 2000, reflecting
the increase in net sales. As a percentage of net sales, these costs decreased
by 0.8% in Fiscal 2001 as compared to Fiscal 2000. Cost of goods sold as a
percentage of net sales decreased 1.2% in Fiscal 2001 as compared to Fiscal
2000. The improvement in merchandise margins was primarily a result of the
effect of relatively higher gross margins for our Catherine's stores, although
cost of goods sold for our Fashion Bug stores also decreased as a percentage of
net sales in Fiscal 2001 as compared to Fiscal 2000. Buying and occupancy
expenses, expressed as a percentage of net sales, increased 0.4% in Fiscal 2001
as
21
compared to Fiscal 2000. The increase in buying and occupancy expenses was
primarily a result of increased utilities expenses and relatively higher
occupancy expenses for new and relocated stores as compared to our existing
stores.
Selling, General, and Administrative
Selling, general, and administrative expenses were $382.4 million in Fiscal
2001, an increase of 35.8% from $281.6 million in Fiscal 2000, principally
reflecting the acquisition of a large number of new stores in connection with
the Catherine's and Modern Woman transactions. As a percentage of net sales,
these costs increased by 0.3% in Fiscal 2001 as compared to Fiscal 2000. The
relative increase reflects relatively higher expenses for Catherine's as a
percentage of net sales. Selling, general, and administrative expenses for the
Fashion Bug stores were relatively unchanged as a percentage of net sales.
Selling expenses were constant as a percentage of net sales. Increases in
payroll costs were offset by lower marketing expenses as a percentage of sales
and a reduction in the cost of our proprietary credit card program. General and
administrative expenses increased 0.3% as a percentage of net sales in Fiscal
2001, primarily as a result of the lack of sales leverage and relatively higher
expenses for Catherine's, which have been partially offset by improvements
arising from the integration and consolidation of Catherine's.
Other Income
Other income was $8.3 million in Fiscal 2001, an increase of 7.9% from $7.7
million in Fiscal 2000. This increase was primarily caused by a decrease in net
realized losses on sales of available-for-sale securities in Fiscal 2001 as
compared to Fiscal 2000. During the second half of Fiscal 2000, we incurred
realized losses from sales of available-for-sale securities to finance the
Catherine's and the Modern Woman acquisitions. Interest income also decreased as
a result of reduced levels of available-for-sale securities during Fiscal 2001
as compared to Fiscal 2000.
Interest Expense
Interest expense was $8.9 million in Fiscal 2001, an increase of 21.7% from
$7.3 million in Fiscal 2000. This increase was primarily the result of an
increase in long-term capital lease financing.
Income Tax Provision (Benefit)
The income tax provision for Fiscal 2001 was $33.0 million, resulting in a
39% effective tax rate, as compared to an income tax provision for Fiscal 2000
of $26.9 million, resulting in a 38% effective tax rate. Included in the Fiscal
2001 and Fiscal 2000 tax provisions are $3.5 million and $2.0 million,
respectively, related to one of our employee insurance programs. The increase in
the effective tax rate from Fiscal 2000 to Fiscal 2001 is also the result of the
non-deductibility for tax purposes of goodwill related to our Catherine's
acquisition.
Non-recurring Gain From Demutualization of Insurance Company
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). In accordance with the consensus
reached in Emerging Issues Task Force Issue No. 99-4, "Accounting for Stock
Received from the Demutualization of A Mutual Insurance Company," we recorded
the distribution at its fair value and recognized the resulting non-recurring
gain of $6.7 million in income from operations, and subsequently sold the
securities received.
22
Gain on Early Retirement of Debt
During Fiscal 2000, we repurchased $23.3 million aggregate principal amount
of our 7.5% Convertible Subordinated Notes due 2006 at a total cost of $21.0
million. The notes had an aggregate carrying value of $22.9 million as of the
repurchase dates. The repurchases resulted in an extraordinary gain of $1.2
million, net of income taxes of $0.7 million.
Comparison of Fourth Quarter 2002 to Fourth Quarter 2001
Net Sales
Net sales in the fourth quarter of Fiscal 2002 were $647.1 million, an
increase of 48.9% from net sales of $434.7 million in the fourth quarter of
Fiscal 2001, primarily due to our acquisition of Lane Bryant. Net sales for the
fourth quarter of Fiscal 2002 include $254.1 million of sales from Lane Bryant
stores. We experienced a quarter-over-quarter decrease in overall comparable
store sales in the fourth quarter of Fiscal 2002 of 3.0%.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $482.1 million in
the fourth quarter of Fiscal 2002, an increase of 55.1% from $310.9 million in
the fourth quarter of Fiscal 2001, reflecting the increase in net sales over the
period. As a percentage of net sales, these costs increased by 3.0% in the
fourth quarter of Fiscal 2002 as compared to the fourth quarter of Fiscal 2001.
Cost of goods sold, as a percentage of net sales, increased 0.7% in the fourth
quarter of Fiscal 2002 as compared to the fourth quarter of Fiscal 2001.
Decreased margins in our Fashion Bug and Catherine's stores as a result of
higher levels of promotional activity in response to slower sales activity were
partially offset by relatively higher gross margins for our Lane Bryant stores.
Cost of goods sold for the fourth quarter of Fiscal 2002 also included $3.0
million of costs related to the valuation of inventory for stores to be closed
during the first half of Fiscal 2003 as a result of the restructuring plan
announced on January 28, 2002. Buying and occupancy expenses, expressed as a
percentage of net sales, increased 2.3% in the fourth quarter of Fiscal 2002 as
compared to the fourth quarter of Fiscal 2001. The increase in buying and
occupancy expenses was primarily attributable to the lack of leverage on
relatively fixed occupancy costs as a result of the decline in comparable store
sales and relatively higher occupancy expenses for our Lane Bryant stores.
Selling, General, and Administrative
Selling, general, and administrative expenses were $161.7 million in the
fourth quarter of Fiscal 2002, an increase of 52.1% from $106.3 million in the
fourth quarter of Fiscal 2001, principally reflecting the acquisition of a large
number of new stores in connection with the Lane Bryant transaction. As a
percentage of net sales, these costs increased by 0.5% in the fourth quarter of
Fiscal 2002 as compared to the fourth quarter of Fiscal 2001. Improvements in
selling expense as a result of the net reduction in the cost of our proprietary
credit card program and a decrease in store payroll expenses at our Fashion Bug
and Catherine's stores were offset by increased delinquencies in our proprietary
credit card program and the negative effect of the lack of leverage on fixed
expenses caused by the decline in comparable store sales.
RECENT DEVELOPMENTS
Acquisition of Lane Bryant
On August 16, 2001, we acquired 100% of the outstanding stock of Lane
Bryant, Inc. from a subsidiary of The Limited, Inc. for cash of $286.2 million,
including direct costs of the acquisition of $6.2 million, and 8.7 million
shares of our common stock, valued at $55.0 million. 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
23
plus-sizes 14 and greater. Lane Bryant had net sales of $930.0 million in Fiscal
2001. The cash we paid for the acquisition was funded with approximately $83.0
million from our existing cash and cash equivalents, a $75.0 million term loan,
and revolving loans under a new credit facility obtained in connection with the
acquisition. Based on a final determination of the value of the Lane Bryant net
assets acquired, on December 10, 2001, we issued to a subsidiary of The Limited
an additional 837,209 shares of our common stock valued at $4.3 million. Of the
aggregate total of 9.5 million shares issued to The Limited, 9.1 million shares
had been previously held by us as treasury shares. The Limited, Inc. is
restricted from selling our shares for one year after the close of the
transaction. We have accounted for this acquisition under the purchase method of
accounting, and have 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.
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 termination of approximately 140
store employees. As of February 2, 2002, we had finalized our plan to close the
under-performing stores and to terminate the store employees. As a result, we
recorded a liability of $3.8 million as part of the purchase price allocation,
which was primarily for estimated lease termination payments. In addition, we
recorded an accrual of $390 thousand for severance of store employees.
In connection with the acquisition, we entered into a services agreement
with The Limited and certain of its affiliates under which we receive certain
transitional services, including data center processing of Lane Bryant business
applications such as store polling and support of store systems, continuation of
contract services with vendors for voice and data networks, and conversion
services, through October 2, 2002. We have begun moving all of the Lane Bryant
business applications and processes from The Limited to our platform and expect
the transition to be completed by October 2, 2002. Other transitional services
provided by The Limited have terms ranging from one month to 36 months, and we
expect to pay approximately $25.7 million and $19.6 million during Fiscal 2003
and Fiscal 2004, respectively, to The Limited under these agreements. The cost
of the services to be provided by The Limited is intended to approximate The
Limited's cost in providing the services. We may terminate these agreements
before their expiration dates with notice.
We also entered into a lease agreement with Distribution Land Corp., an
affiliate of The Limited, under which Lane Bryant has leased a distribution
center and office space near Columbus, Ohio for a period of three years. The
current monthly rental is $393 thousand and is subject to annual Consumer Price
Index adjustments. In addition, Lane Bryant subleased 207 retail properties from
The Limited under a Master Sublease. The stores subject to the Master Sublease
had been operated as Lane Bryant stores before the acquisition. We have
guaranteed the obligations of Lane Bryant under the Master Sublease. In
connection with such guaranty, we agreed with The Limited to certain limitations
on our ability to incur debt, make distributions to our shareholders, and
purchase our own shares. These limitations will continue until The Limited's
liability for the leases falls below a certain level or in certain other
circumstances.
Restructuring Charges
Closing/Conversion of The Answer/Added Dimension and Fashion Bug Stores
On January 28, 2002, we announced a restructuring plan, including a number
of initiatives designed to position us for increased profitability and growth in
the women's plus-size apparel business. The major components of the plan include
(1) the closing of The Answer/Added Dimensions chain of 77 stores, including the
conversion of approximately 20% of the Added Dimensions stores to Catherine's
stores, (2) the closing of 130 under-performing Fashion Bug stores, and (3) the
conversion of 44 Fashion Bug store locations to Lane Bryant stores. The
restructuring plan resulted in a pre-tax charge of $37.7 million ($24.5 million
after-tax, or $.23 per share) in the fourth quarter of Fiscal 2002. The
restructuring charge includes a $17.8 million non-cash write-down of fixed
assets (primarily store fixtures and improvements) in the stores to be closed,
$18.5 million of anticipated payments
24
to landlords for the early termination of existing store leases, $800 thousand
for severance costs, and $600 thousand for signage removal and other costs.
The fixtures and improvements have no alternative use or salvage value, and
we expect them to be scrapped when the stores are closed. Our estimate of
anticipated lease termination payments is based on our prior experience.
However, the actual payment amount will depend on the results of our
negotiations with many landlords, which could result in future adjustments to
this estimate. We do not expect that any such adjustments would be material.
Our estimated net after-tax cash cost of the restructuring is approximately
$6.7 million. Our balance sheet at February 2, 2002 reflects the fixed asset
write-down and the accrued lease termination, severance, and other costs. We
expect to substantially complete the restructuring plan by the end of Fiscal
2003 and anticipate that this will thereafter improve our annualized pre-tax
earnings by approximately $12.0 million. Because a majority of the store
closings will occur during the second half of Fiscal 2003, the full impact of
the completion of the restructuring plan is expected to first benefit the fiscal
year ending January 31, 2004.
Store Restructuring and Elimination of Men's Merchandise From Fashion Bug Stores
On March 5, 1998, our Board of Directors approved a restructuring plan that
resulted in a pre-tax charge of $34.0 million. The plan was approved in
conjunction with the decision to eliminate men's merchandise from our Fashion
Bug stores. We closed 72 stores and downsized 100 stores in connection with the
plan. Elimination of the men's merchandise from the stores was completed in
October 1998, the balance of the men's inventory was sold, and the selling space
used for men's merchandise was re-merchandised. In Fiscal 2000, we determined
that 21 of the stores originally included in the plan would remain open as a
result of negotiations with landlords and changes in economic conditions. As a
result, we reversed reserves related to these stores and recognized a pre-tax
restructuring credit of $2.1 million in Fiscal 2000. This restructuring plan was
completed as of February 3, 2001, and there are no remaining restructure
accruals relating to this plan.
The restructuring charge included a $10.0 million write-off of the carrying
value of fixtures and improvements in the stores to be reduced in size or
closed. The fixtures and improvements had no alternative use or salvage value,
and were expected to be scrapped at the time of the closing or downsizing of the
stores. The restructuring charge also included accruals for anticipated payments
to landlords for the early termination of existing store leases of $19.7
million, severance payments of $320 thousand, costs to remove store signs and
entrances of $3.3 million, costs of supplies to be scrapped of $400 thousand,
and legal and architectural fees of $280 thousand. The accrual for severance
payments was for 650 store employees expected to be terminated as a result of
the store closings. The number of employees actually terminated was reduced to
590 as a result of the 21 stores that remained open, as discussed above, and the
excess severance accrual was reversed as part of the restructuring credit of
$2.1 million recognized in Fiscal 2000. During Fiscal 2001, we closed one store
and completed the downsizing of 28 stores in connection with the plan.
Distribution Center Restructuring
On December 10, 1998, our Board of Directors approved a plan to close our
Bensalem, Pennsylvania distribution center and sell the facility. The plan was
approved in conjunction with the decision to consolidate the Bensalem
distribution center operations into our Greencastle, Indiana distribution
center. The plan resulted in a pre-tax restructuring charge of $20.2 million
during Fiscal 1999.
The restructuring charge included a $18.0 million write-down of the cost of
the Bensalem facilities from a carrying value of $23.6 million to a net
realizable value of $5.7 million, based on an independent appraisal. The
restructuring charge also included an accrual of $1.5 million for severance
costs resulting from the termination of 90 warehouse and distribution personnel
and eleven management employees. In addition, the restructuring charge included
an accrual of $721 thousand for incremental warehouse handling costs,
outplacement services for
25
terminated employees, legal fees related to the sale of the facility, and other
non-recurring costs relating to the closure.
The Bensalem distribution center closed on December 10, 1998, and we
completed the sale of the Bensalem facility during Fiscal 2000. Upon completion
of the sale of the facility, we recognized a pre-tax restructuring credit of
$2.8 million in Fiscal 2000, which primarily represented sales proceeds in
excess of the estimated net realizable value of the Bensalem facility. As of
February 3, 2001, this restructuring plan has been completed, and there are no
remaining restructure accruals relating to this plan.
Closing of Modern Woman Stores
During the fourth quarter of Fiscal 2000, we recorded a restructuring
charge of $1.5 million in connection with our acquisitions of Modern Woman and
Catherine's. At the time of the Catherine's acquisition, we had planned to
consolidate Modern Woman stores into the Catherine's division. The restructuring
charge was primarily for lease termination costs related to the closing of
eleven Modern Woman stores that geographically overlapped Catherine's stores.
During Fiscal 2001, we closed ten of the eleven stores, and paid lease
termination costs of $1.1 million related to the closed stores. As of February
3, 2001, $400 thousand of accrued restructuring charges related to the remaining
store were unpaid. We closed the remaining store during Fiscal 2002, utilizing
the remaining accrual.
Other Recent Developments
On September 11, 2001, major terrorist attacks occurred against the World
Trade Center in New York City and the Pentagon in Washington, D.C. These attacks
adversely affected the United States economy, which was already slowing and
showing signs of a recession before September 11, 2001. We did not experience
any direct instances of destruction or impairment of our assets. However, many
strip centers and malls in which we have stores were closed, in some cases for
more than one day, and since then the government has reported threats of further
attacks against United States locations including malls. We believe that the
effects of the terrorist incidents had an adverse impact on our results of
operations during Fiscal 2002.
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 facilities described below. The following table
highlights certain information related to our liquidity and capital resources:
Fiscal Fiscal Fiscal
----------- 2002 2001 2000
(dollars in thousands) ---- ---- ----
Cash and cash equivalents ............. $ 36,640 $ 56,544 $ 34,299
Available-for-sale securities ......... 70,366 125,278 115,829
Cash provided by operating activities . 142,865 93,269 57,894
Working capital ....................... 145,047 208,389 161,376
Current ratio ......................... 1.4 1.9 1.7
Long-term debt to equity ratio ........ 37.9% 23.0% 24.1%
Our cash provided by operating activities increased $49.6 million in Fiscal
2002 as compared to Fiscal 2001, from $93.3 million to $142.9 million. Earnings
before interest, taxes, depreciation, and amortization and a non-cash write-down
of fixed assets decreased $46.9 million from Fiscal 2001 to Fiscal 2002, from
$141.8 million to $94.9 million. Excluding the acquisition of Lane Bryant, our
investment in inventories, net of accounts payable,
26
decreased $46.3 million in Fiscal 2002 as compared to Fiscal 2001 as a result of
certain inventory management initiatives. Accrued restructuring costs increased
$19.4 million in Fiscal 2002 as compared to a decrease of $7.8 million in
accrued restructuring costs during Fiscal 2001.
As a result of the recent decline in interest rates, a portion of our
investments in U. S. government agency bonds with early redemption provisions
were called for redemption during the first half of Fiscal 2002. The decrease in
available-for-sale securities during Fiscal 2002 was primarily a result of these
redemptions. We invested the proceeds from these early redemptions in cash
equivalents until we used them in connection with our acquisition of Lane Bryant
in August 2001.
Our cash provided by operating activities increased $35.4 million in Fiscal
2001 as compared to Fiscal 2000, from $57.9 million to $93.3 million. Earnings
before interest, taxes, depreciation, and amortization and excluding
non-recurring gains increased by $41.0 million from Fiscal 2000 to Fiscal 2001,
from $100.8 million to $141.8 million. This increase was primarily attributable
to the acquisitions of Catherine's and Modern Woman in Fiscal 2000. A reduced
level of growth in inventories from Fiscal 2000 to Fiscal 2001 was substantially
offset by increased payments of prepaid and accrued expenses.
Our capital expenditures were $63.0 million, $57.9 million, and $39.2
million in Fiscal 2002, 2001, and 2000, respectively. These expenditures were
primarily for the construction, remodeling, and fixturing of new and existing
retail stores, loss-prevention equipment, and systems technology. Fiscal 2000
expenditures included approximately $6.1 million for expansion of our
Greencastle, Indiana distribution center.
During Fiscal 2003, we anticipate capital expenditures of approximately
$55.0-$65.0 million. These expenditures will primarily be for construction and
fixturing of new stores, remodeling and fixturing of existing stores,
investments in management information systems technology, and improvements to
our corporate offices and distribution centers. It is anticipated that the funds
required for capital expenditures will be financed principally through
internally generated funds.
27
The following table sets forth information with respect to store activity
for Fiscal 2002 and planned store activity for Fiscal 2003:
Fashion Monsoon/
Bug Lane Bryant Catherine's Accessorize Total
--- ----------- ----------- ----------- -----
Fiscal 2002:
Stores at February 3, 2001 ............. 1,230 -- 524 1 1,755
----- --- --- --- -----
Stores acquired ........................ -- 651 -- -- 651
Stores opened .......................... 60 9 48 8 125
Stores closed .......................... (38) (13) (34) -- (85)
....................................... --- --- --- -- ----
Net changes in stores .................. 22 647 14 8 691
--- --- --- -- ----
Stores at February 2, 2002 ............. 1,252 647 538 9 2,446
===== === === == =====
Stores relocated during period ......... 27 -- 21 -- 48
Stores remodeled during period ......... 22 -- 13 -- 35
Fiscal 2003:
Planned store openings ................. 8 69(1) 35(2) -- 112
Planned store relocations .............. 25 25 25 -- 75
Planned store closings ................. 174(1) 15 84(3) -- 273
---------
(1) Includes conversion of 44 Fashion Bug stores to Lane Bryant stores.
(2) Includes conversion of 10 Added Dimension stores to Catherine's stores.
(3) Includes the closing of 77 The Answer/Added Dimension stores, including 10
stores to be converted to Catherine's stores.
During Fiscal 2002 and Fiscal 2001, pursuant to a program to replace our
existing point-of-sale ("POS") equipment, we acquired $24.7 million and $14.9
million, respectively, of POS equipment for our Fashion Bug and Catherine's
stores under capital leases. These leases generally have an initial lease term
of 60 months and contain a bargain purchase option. During Fiscal 2002, we
re-negotiated the terms of certain of our existing POS equipment capital leases.
The re-negotiated leases were combined into a new lease with a 60-month term and
a lower interest rate. The effect of the re-negotiation was a net (decrease)
increase in total lease payments as follows: Fiscal 2002 - ($25 thousand);
Fiscal 2003 - ($149 thousand); Fiscal 2004 - $235 thousand; Fiscal 2005 - $337
thousand; Fiscal 2006 - $6 thousand; Fiscal 2007 - $2.1 million.
28
At February 2, 2002, our commitments for future principal payments under
our short-term and long-term debt obligations, and minimum lease payments under
our capital leases and operating leases, were as follows:
Fiscal Year Ended
(in millions) 2003 2004 2005 2006 2007 Thereafter
---- ---- ---- ---- ---- ----------
Short-term debt ........... $ 54.3
Long-term debt ............ 1.8 $ 1.9 $ 70.7 $ 6.1 $ 96.6 $ 8.5
Capital leases ............ 9.6 9.6 8.5 5.7 3.8 --
Operating leases(1) ....... 212.2 183.5 150.0 112.7 79.6 170.4
------ ------ ------ ------ ------ ------
Total ..................... $277.9 $195.0 $229.2 $124.5 $180.0 $178.9
====== ====== ====== ====== ====== ======
--------------------
(1) Commitments under operating leases include $92.9 million payable under the
Lane Bryant master sublease with The Limited, which we have guaranteed.
We are currently analyzing our existing distribution network, and we are
considering whether to purchase or lease an additional distribution center,
either of which alternatives would require additional capital expenditures and
will require approval under our existing credit arrangements. We are also
presently evaluating various alternatives to our current capital structure,
including whether to refinance a portion of our existing long-term debt. There
can be no assurance as to the terms and conditions of any such refinancing or
whether any such refinancing will be accomplished.
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 $423.1 million and $437.7 million of credit card
receivables in Fiscal 2002 and Fiscal 2001, respectively, and had $303.7 million
of securitized credit card receivables outstanding as of February 2, 2002. We
held retained interests in our securitizations of $47.2 million as of the end of
Fiscal 2002, which were generally subordinated in right of payment to
certificates issued by the trust to third-party investors. Our obligation to
repurchase receivables sold to the trust is limited to those receivables that,
at the time of their transfer, fail to meet the trust's eligibility standards
under normal representations and warranties. To date, we have repurchased only a
small amount of receivables pursuant to this obligation. A securitization series
in the aggregate principal amount of $83.5 million is scheduled to mature prior
to the end of Fiscal 2003. We are currently considering various alternatives to
replace this series. No assurance can be given that we will be successful in
securing such replacement financing.
Charming Shoppes Receivables Corp. and Charming Shoppes Seller, Inc., our
consolidated wholly owned indirect subsidiaries, are separate special purpose
entities created for the securitization program. At February 2, 2002, Charming
Shoppes Receivables Corp. held $38.5 million of Charming Shoppes Master Trust
Certificates (which are included in the $47.2 million of retained interests we
held at February 2, 2002) and Charming Shoppes Seller, Inc. held retained
interests of $1.6 million. These assets are first and foremost available to
satisfy the claims of the respective creditors of these separate corporate
entities, including certain claims of investors in the Charming Shoppes Master
Trust. We could be affected by certain events that would cause the trust to
require additional enhancement from proceeds within the trust that would
otherwise be available to be paid to us with respect to our subordinated
interests. Specifically, if either we or the trust fail to meet certain
financial performance standards, a credit enhancement condition would occur and
the trust would be required to retain amounts otherwise payable to us. During
Fiscal 2002, credit card receivable credit loss percentages exceeded a specified
threshold percentage, which obligates the trust to accumulate $9.5 million into
such an enhancement account, which if not required to be paid to the other
certificate holders, will be available to us at the termination of the
securitization series. As of February 2, 2002, the Charming Shoppes Master Trust
had $3.0 million segregated for such additional enhancement purposes. We do not
expect the requirement to materially affect our liquidity or results of
operations. We have no obligation to directly fund these enhancement accounts of
the trust, other than
29
for breaches of customary representations, warranties and covenants. These
representations, warranties, covenants and related indemnities do not protect
the trust or investors in the trust against credit-related losses on the
receivables. The providers of the credit enhancements and trust investors have
no other recourse to us.
These securitization agreements are intended to improve our overall
liquidity by providing short-term sources of funding. 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 - Asset Securitization" for further discussion of our asset
securitization program.
We also have non-recourse agreements under which third parties provide
accounts receivable proprietary credit card sales funding programs for both our
Catherine's and Lane Bryant stores. These funding programs expire in January
2005 for Catherine's and in January 2006 for Lane Bryant. Under these
agreements, the third parties reimburse us daily with respect to the proprietary
credit card sales generated by the respective store's credit card accounts.
Under the Catherine's agreement, we may be required to repurchase receivables
from the third party under certain conditions relating to a change in control.
Under the Lane Bryant agreement, we may be required to repurchase receivables
from the third party upon termination of the agreement. Net proceeds received
from sales of Catherine's receivables for Fiscal 2002 and Fiscal 2001 were
approximately $129.1 million and $121.1 million, respectively. The net balances
of Catherine's accounts receivable held by the third party at February 2, 2002
and February 3, 2001 were approximately $98.4 million and $99.6 million,
respectively. Net proceeds received from sales of Lane Bryant receivables for
Fiscal 2002 (subsequent to the date of acquisition) were approximately $128.9
million. The net balance of Lane Bryant accounts receivable held by the third
party at February 2, 2002 was approximately $206.2 million.
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 The Limited restrict the payment of dividends on
our common stock.
We believe that our capital resources and liquidity position are sufficient
to support our current operations. Our requirements for working capital, capital
expenditures, and repayment of debt and other obligations are expected to be
funded from operations, supplemented as needed by short-term or long-term
borrowings available under our credit facility, our proprietary credit card
receivables securitization agreements, leases and other available financing
sources, including possible refinancings of our existing debt.
Financing
In connection with the acquisition of Lane Bryant, we replaced our existing
$150.0 million revolving credit facility with a $375.0 million credit facility.
We also terminated existing $20.0 million and $10.0 million revolving credit
facilities. The new credit facility consists of a $300.0 million revolving
credit facility and a $75.0 million three-year term loan. The credit facility
provides for cash borrowings and enables us to issue up to $150.0 million of
letters of credit for overseas purchases of merchandise. As of February 2, 2002,
we had $54.3 million outstanding under the revolving credit facility, $67.5
million outstanding under the term loan, and outstanding letters of credit
totaling $47.5 million. The availability of borrowings under our revolving
credit facility is subject to limitations based on eligible inventory and the
value of certain real property. The credit facility is secured by our general
assets, except for certain assets related to our credit card securitization
program, certain real properties and equipment subject to other mortgages, our
interest in our joint venture with Monsoon plc, and the assets of our
30
non-U.S. subsidiaries. The credit facility expires on August 16, 2004, with
an option to renew the revolving portion for an additional year. At February 2,
2002, we had unused availability under the revolving credit facility of $128.7
million.
The interest rate on borrowings under the revolving credit facility ranges
from Prime to Prime plus .75% per annum for Prime Rate Loans, and LIBOR plus
2.0% to LIBOR plus 2.75% per annum for Eurodollar Rate Loans, and is determined
quarterly, based on our Leverage Ratio or excess availability, as defined in the
credit facility. As of February 2, 2002, the interest rate on borrowings under
the revolving credit line was 3.9%. The interest rate on borrowings under the
term loan equals Prime plus 4.0% per annum, with minimum and maximum rates of
11.5% and 13.0%, respectively, per annum. As of February 2, 2002, the interest
rate on borrowings under the term loan was 11.5%.
The credit facility includes limitations on sales and leasebacks, the
incurrence of additional liens and debt, capital lease financing, and other
limitations. The credit facility also requires, among other things, that we not
pay dividends on our common stock and, under certain circumstances, that we
maintain an Adjusted Tangible Net Worth of $228.0 million (subject to
adjustment). In January 2002, we amended the new credit facility in connection
with our restructuring plan. Until the term loan is paid in full, the credit
facility requires that we maintain a minimum twelve-month earnings before
interest, income taxes, depreciation, and amortization, as adjusted pursuant to
the terms of the credit facility and to account for the acquisition of Lane
Bryant ("Adjusted EBITDA") of $140.0 million for Fiscal 2002 and $120.0 million
through the end of Fiscal 2003. Thereafter, until the term loan is paid in full,
the credit facility requires that we maintain a twelve-month Adjusted EBITDA of
$140.0 million. Until the term loan is paid in full, the credit facility also
requires that we maintain a ratio of Total Secured Debt to Adjusted EBITDA of
not greater than 3.0 to 1.0 as of February 2, 2002, 2.85 to 1.0 at the end of
the first quarter of Fiscal 2003, decreasing to 2.55 to 1.0 at the end of the
fourth quarter of Fiscal 2003, and increasing to 3.0 to 1.0 at the end of each
fiscal quarter thereafter. As of the end of Fiscal 2002, we were not in
violation of any of the covenants included in the credit facility.
In November 2001, we borrowed $10.9 million under a 7.77% mortgage note.
The mortgage note has a ten-year term with 119 monthly installments of principal
and interest of $103 thousand commencing in January 2002, and a final payment of
any remaining unpaid principal and interest in December 2011. The mortgage note
is secured by our land, buildings, fixtures, and equipment 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 credit facility.
In December 2001, we borrowed $5.0 million under an 8.15% note. The note
has a three-year term with 35 monthly installments of principal and interest of
$126 thousand commencing in January 2002, and a final payment of any remaining
unpaid principal and interest in December 2004. The note is secured by our
equipment and fixtures in our distribution center in Greencastle, Indiana. The
net proceeds from the note were used to repay a portion of the borrowings
outstanding under our credit facility.
In July 1996, we completed a public offering of $138.0 million aggregate
principal amount of 7.5% Convertible Subordinated Notes due 2006 (the "Notes").
The Notes are convertible into shares of our common stock at a conversion price
of $7.46 per share. The Notes are redeemable, at our option, at 102.5% of
principal through July 14, 2002 and at declining prices thereafter, decreasing
to 100% on or after July 15, 2005. Holders of the Notes may require us to
repurchase some or all of the Notes at 100% of the principal amount plus accrued
and unpaid interest, if any, under certain circumstances involving a change in
control. There is no sinking fund for the Notes. During Fiscal 2000, we
repurchased $23.3 million aggregate principal amount of the Notes, which had a
net carrying value of $22.9 million as of the dates of purchase, at a total cost
of $21.0 million.
31
As part of the acquisition of Catherine's, we assumed a 7.5% mortgage note
of $6.9 million and certain capital lease obligations totaling $2.8 million. The
mortgage financing agreement provides for a mortgage facility with a seven-year
term and annual payments based on a 20-year amortization period. A final payment
of $5.6 million is payable in Fiscal 2006. The mortgage note is secured by land
and buildings at the Memphis, Tennessee office of Catherine's. The capital
leases are for data processing and POS equipment. At the end of the initial
lease term, we have the option of purchasing the equipment at fair market value
(or at $1 in the case of the POS equipment), renewing the leases, or returning
the equipment to the lessor.
MARKET RISK
We manage our Fashion Bug proprietary credit card program through various
operating entities that we own. The primary activity of these entities is to
service our proprietary credit card portfolio, the balances of which we sell
under a credit card securitization program. Under the securitization program, we
can be exposed to fluctuations in interest rates to the extent that the interest
rates charged to our customers vary from the rates paid on certificates issued
by the trust. Until November 2000, the credit card program billed finance
charges based on a fixed rate. As of November 2000, finance charges on all
accounts are billed using a floating rate index (the Prime lending rate),
subject to a floor and limited by legal maximums. The floating rate index on all
of the certificates is either one-month LIBOR or the commercial paper rate,
depending on the issuance. Consequently, we have reduced our exposure to
fluctuations in interest rates. However, we have exposure in the movement of
basis risk between the floating rate index on the certificates and the Prime
rate. As of February 2, 2002, the floating-rate finance charge rate was below
the contractual floor rate, thus exposing us to a portion of interest-rate risk.
To the extent that short-term interest rates were to increase by one percentage
point by the end of Fiscal 2003, an increase of approximately $500 thousand in
selling, general, and administrative expenses would result.
As of February 2, 2002, only our borrowings of $54.3 million under our
credit facility were exposed to variable interest rates. An increase in market
interest rates will increase our interest expense and decrease our cash flows. A
decrease in market interest rates will decrease our interest expense and
increase our cash flows.
We are not subject to material foreign exchange risk, as our foreign
transactions are primarily U.S. Dollar-denominated and our foreign operations do
not constitute a material part of our business.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
See "Item 8. Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - 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."
32
Item 8. Financial Statements and Supplementary Data
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
Charming Shoppes, Inc.
We have audited the accompanying consolidated balance sheets of Charming
Shoppes, Inc. and subsidiaries as of February 2, 2002 and February 3, 2001, and
the related consolidated statements of operations and comprehensive income
(loss), stockholders' equity, and cash flows for each of the three fiscal years
in the period ended February 2, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Charming Shoppes, Inc. and subsidiaries at February 2, 2002 and February 3,
2001, and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended February 2, 2002, in
conformity with accounting principles generally accepted in the United States.
As discussed in Notes to Consolidated Financial Statements - Summary of
Significant Accounting Policies - Impact of Recent Accounting Pronouncements, in
the fiscal year ended February 2, 2002, the Company acquired Lane Bryant, Inc.,
which was accounted for in accordance with SFAS No. 141, "Business
Combinations." In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets," goodwill and indefinite-lived intangible assets associated with the
acquisition are not being amortized, which is different from the method of
accounting for similar assets associated with previous acquisitions.
As discussed in Notes to Consolidated Financial Statements - Summary of
Significant Accounting Policies - Revenue Recognition, in the fiscal year ended
February 3, 2001, the Company changed its method of accounting for sales returns
and allowances and layaway sales.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 11, 2002
33
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 2, February 3,
(dollars in thousands) 2002 2001
---- ----
ASSETS
Current assets
Cash and cash equivalents ................................................... $ 36,640 $ 56,544
Available-for-sale securities, including fair value adjustments of
$24 as of February 2, 2002 and $3 as of February 3, 2001 .................. 48,351 48,817
Merchandise inventories ..................................................... 300,407 259,127
Deferred taxes .............................................................. 21,228 10,678
Prepayments and other ....................................................... 78,118 56,748
---------- --------
Total current assets ........................................................ 484,744 431,914
---------- --------
Property, equipment, and leasehold improvements - at cost ................... 657,067 504,071
Less accumulated depreciation and amortization .............................. 341,055 286,208
---------- --------
Net property, equipment, and leasehold improvements ......................... 316,012 217,863
---------- --------
Trademarks and other intangible assets ...................................... 171,794 0
Goodwill .................................................................... 110,243 92,520
Available-for-sale securities, including fair value adjustments of $(39)
as of February 2, 2002 and $77 as of February 3, 2001 ..................... 22,015 76,461
Other assets ................................................................ 27,869 34,009
---------- --------
Total assets ................................................................ $1,132,677 $852,767
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings ....................................................... $ 54,296 $ 0
Accounts payable ............................................................ 107,891 94,881
Accrued expenses ............................................................ 148,373 123,317
Accrued restructuring costs ................................................. 19,758 373
Current portion - long-term debt ............................................ 9,379 4,954
---------- --------
Total current liabilities ................................................... 339,697 223,525
---------- --------
Deferred taxes .............................................................. 33,687 21,433
Long-term debt .............................................................. 208,491 113,540
Minority interest in consolidated subsidiary ................................ 1,000 1,000
Stockholders' equity
Common stock $.10 par value
Authorized - 300,000,000 shares
Issued - 111,891,156 shares and 110,731,483 shares ...................... 11,189 11,073
Additional paid-in capital .................................................. 103,267 80,977
Treasury stock at cost - 0 shares and 9,105,000 shares ...................... 0 (41,537)
Deferred employee compensation .............................................. (3,741) (1,629)
Accumulated other comprehensive (loss) income ............................... (818) 74
Retained earnings ........................................................... 439,905 444,311
---------- --------
Total stockholders' equity .................................................. 549,802 493,269
---------- --------
Total liabilities and stockholders' equity .................................. $1,132,677 $852,767
========== ========
See Notes to Consolidated Financial Statements.
34
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
Year Ended
February 2, February 3, January 29,
(in thousands, except per share amounts) 2002 2001 2000
---- ---- ----
Net sales ..................................................................... $1,993,843 $1,607,079 $1,196,529
----------- ---------- ----------
Cost of goods sold, buying, and occupancy expenses ............................ 1,455,601 1,134,554 854,774
Selling, general, and administrative expenses ................................. 486,204 382,398 281,637
Amortization of goodwill ...................................................... 4,885 4,885 0
Restructuring charge (credit) ................................................. 37,708 0 (3,471)
Non-recurring gain from demutualization of insurance company .................. 0 0 (6,700)
----------- ---------- ----------
Total operating expenses ...................................................... 1,984,398 1,521,837 1,126,240
----------- ---------- ----------
Income from operations ........................................................ 9,445 85,242 70,289
Other income, principally interest ............................................ 4,730 8,304 7,698
Interest expense .............................................................. (18,701) (8,894) (7,308)
---------- ---------- ----------
Income (loss) before income taxes, extraordinary item, and
cumulative effect of accounting change ...................................... (4,526) 84,652 70,679
Income tax provision (benefit) ................................................ (120) 33,014 26,852
----------- ---------- ----------
Income (loss) before extraordinary item and cumulative effect of
accounting change ........................................................... (4,406) 51,638 43,827
Extraordinary item - gain on early retirement of debt, net of
income taxes of $664 ........................................................ 0 0 1,232
----------- ---------- ----------
Income (loss) before cumulative effect of accounting change ................... (4,406) 51,638 45,059
Cumulative effect of accounting change, net of income tax
benefit of $334 ............................................................. 0 (540) 0
----------- ---------- ----------
Net income (loss) ............................................................. (4,406) 51,098 45,059
----------- ---------- ----------
Other comprehensive income (loss), net of tax:
Unrealized (losses) gains on available-for-sale securities, net of income tax
(expense) benefit of $(66) in 2002, ($718) in 2001, and $214 in 2000 ........ 70 1,335 (343)
Reclassification of realized losses (gains) on available-for-sale securities
included in net income, net of income tax (benefit) expense of $80
in 2002, ($87) in 2001 and $726 in 2000 ..................................... (151) 162 (1,347)
Unamortized deferred loss on termination of derivative, net of income tax
benefit of $621 in 2002 ..................................................... (1,152) 0 0
Reclassification of amortization of deferred loss on termination of
derivative, net of income tax (benefit) of ($185) in 2002 ................... 341 0 0
----------- ---------- ----------
Total other comprehensive income (loss) ....................................... (892) 1,497 (1,690)
----------- ---------- ----------
Comprehensive income (loss) ................................................... $ (5,298) $ 52,595 $ 43,369
=========== ========== ==========
Basic net income (loss) per share:
Before extraordinary item and cumulative effect of accounting change .......... $(.04) $ .51 $ .45
Extraordinary item ............................................................ .00 .00 .01
Cumulative effect of accounting change ........................................ .00 (.01) .00
----- ----- -----
Net income (loss) ............................................................. $(.04) $ .50 $ .46
===== ===== =====
Diluted net income (loss) per share:
Before extraordinary item and cumulative effect of accounting change .......... $(.04) $ .49 $ .42
Extraordinary item ............................................................ .00 .00 .01
Cumulative effect of accounting change ........................................ .00 (.01) .00
----- ----- -----
Net income (loss) ............................................................. $(.04) $ .48 $ .43
===== ===== =====
Certain prior-period amounts have been reclassified to conform to the current presentation.
See Notes to Consolidated Financial Statements.
35
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Stock Paid-in Treasury Stock
(dollars in thousands) Shares Amount Capital Shares Amount
------ ------ ------- ------ ------
Balance, January 30, 1999 ............................... 106,830,596 $10,683 $ 64,924 (8,710,000) $(39,405)
Issued to employees ..................................... 354,620 36 1,575
Exercise of stock options ............................... 3,364,058 336 13,952
Shares received in payment of stock option
exercises .......................................... (909,849) (91) (6,374)
Purchases of treasury stock ............................. (245,000) (1,419)
Tax benefit - employee stock programs ................... 2,048
----------- ------- -------- --------- -------
Balance, January 29, 2000 ............................... 109,639,425 10,964 76,125 (8,955,000) (40,824)
Issued to employees ..................................... 224,141 22 1,020
Exercise of stock options ............................... 906,701 91 3,831
Shares withheld for payment of employee
payroll taxes due on shares issued
under employee stock plans ......................... (38,784) (4) (214)
Purchases of treasury stock (150,000) (713)
Tax benefit - employee stock programs ................... 215
----------- ------- -------- --------- -------
Balance, February 3, 2001 ............................... 110,731,483 11,073 80,977 (9,105,000) (41,537)
Issued to employees ..................................... 467,113 47 3,532
Exercise of stock options ............................... 284,165 28 1,112
Shares withheld for payment of employee
payroll taxes due on shares issued ................
under employee stock plans ......................... (12,598) (1) ( 95)
Acquisition of Lane Bryant, Inc. ........................ 420,993 42 17,721 9,105,000 41,537
Tax benefit - employee stock programs ................... 20
----------- ------- -------- --------- -------
Balance, February 2, 2002 ............................... 111,891,156 $11,189 $103,267 0 $ 0
=========== ======= ======== ========= =======
Accumulated
Deferred Other
Employee Comprehensive Retained
Compensation Income (Loss) Earnings
------------ ------------- --------
Balance, January 30, 1999 ......................... $(1,051) $ 267 $348,154
Issued to employees ............................... (1,488)
Amortization ...................................... 747
Unrealized losses, net of tax benefit of $940 ..... (1,690)
Net income ........................................ 45,059
------- ------ --------
Balance, January 29, 2000 ......................... (1,792) (1,423) 393,213
Issued to employees ............................... (785)
Amortization. ..................................... 948
Unrealized gains, net of income taxes of $805 ..... 1,497
Net income ........................................ 51,098
------- ------ --------
Balance, February 3, 2001 ......................... (1,629) 74 444,311
Issued to employees ............................... (3,229)
Amortization. ..................................... 1,117
Unrealized losses, net of tax benefit of $450 ..... (892)
Net loss .......................................... (4,406)
------- ------ --------
Balance, February 2, 2002 ......................... $(3,741) $ (818) $439,905
======= ====== ========
See Notes to Consolidated Financial Statements.
36
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
February 2, February 3, January 29,
2002 2001 2000
(in thousands) ---- ---- ----
Operating activities
Net income (loss) ...................................................... $ (4,406) $ 51,098 $ 45,059
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ........................................ 59,017 43,397 32,650
Amortization of goodwill ............................................. 4,885 4,885 302
Deferred income taxes, net of acquisitions ........................... 9,212 10,375 18,250
Non-recurring gain from demutualization of insurance company ......... 0 0 (6,700)
Write-down of capital assets due to restructuring .................... 17,763 0 0
Net (gain) loss from disposition of capital assets ................... 4,278 2,587 (1,469)
Tax benefit related to stock plans ................................... 20 215 2,048
Net (gain) loss on sale of available-for-sale securities ............. (231) 249 4,627
Net gain on repurchase of notes ...................................... 0 0 (1,896)
Changes in operating assets and liabilities, net of acquisitions:
Merchandise inventories ........................................... 66,671 1,665 (29,703)
Accounts payable .................................................. (12,541) 6,160 (1,797)
Prepayments and other ............................................. (10,832) (8,841) (5,097)
Accrued expenses .................................................. (10,356) (10,716) 16,349
Income taxes payable .............................................. 0 0 (4,552)
Accrued restructuring costs ....................................... 19,385 ( 7,805) (10,177)
--------- --------- ---------
Net cash provided by operating activities .............................. 142,865 93,269 57,894
--------- --------- ---------
Investing activities
Gross purchases of available-for-sale securities ....................... (51,902) (102,228) (393,393)
Proceeds from sales of available-for-sale securities ................... 106,950 94,840 523,545
Acquisitions, net of cash acquired ..................................... (280,841) 0 (145,309)
Investment in capital assets ........................................... (63,046) (57,921) (39,211)
Proceeds from sales of capital assets .................................. 0 833 10,556
Decrease (increase) in other assets .................................... 2,705 (6,444) (4,927)
--------- --------- ---------
Net cash used in investing activities .................................. (286,134) (70,920) (48,739)
--------- --------- ---------
Financing activities
Proceeds from short-term borrowings .................................... 623,704 0 30,600
Repayments of short-term borrowings .................................... (569,407) 0 (34,393)
Proceeds from long-term borrowings ..................................... 90,950 0 0
Reduction of long-term borrowings ...................................... (16,251) (3,535) (21,237)
Payments of deferred financing costs ................................... (7,991) 0 0
Purchases of treasury stock ............................................ 0 (713) (1,419)
Proceeds from exercise of stock options ................................ 2,360 3,144 7,804
Minority shareholder investment in joint venture ....................... 0 1,000 0
--------- --------- ---------
Net cash provided by (used in) financing activities .................... 123,365 (104) (18,645)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ....................... (19,904) 22,245 (9,490)
Cash and cash equivalents, beginning of year ........................... 56,544 34,299 43,789
--------- --------- ---------
Cash and cash equivalents, end of year ................................. $ 36,640 $ 56,544 $ 34,299
========= ========= =========
Non-cash financing and investing activities
Common stock issued for acquisition of Lane Bryant, Inc. ............... $ 59,300 $ 0 $ 0
========= ========= =========
Purchases of assets under capital leases ............................... $ 24,677 $ 14,896 $ 0
========= ========= =========
See Notes to Consolidated Financial Statements.
37
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company operates retail specialty stores located throughout the
continental United States that merchandise plus-size, misses, and junior
sportswear, dresses, coats, and lingerie, as well as accessories and casual
footwear at a wide range of prices.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The parent and its
subsidiaries have a 52-53 week fiscal year ending on the Saturday nearest to
January 31. The fiscal year ended February 3, 2001 consisted of 53 weeks. As
used herein, the terms "Fiscal 2002," "Fiscal 2001," and "Fiscal 2000" refer to
the fiscal years ended February 2, 2002, February 3, 2001, and January 29, 2000,
respectively.
On October 26, 2000, the Company signed a joint venture agreement with
Monsoon plc. The joint venture is operated as a separate consolidated operating
unit of the Company. The Company invested $4.0 million, or 80% of the initial
capital in the joint venture, during Fiscal 2001. The impact of the joint
venture on the Company's earnings for Fiscal 2002 and Fiscal 2001 was
immaterial.
Foreign Operations
The Company uses a December 31 fiscal year for its foreign subsidiaries in
order to expedite the year-end closing. There were no intervening events or
transactions with respect to the Company's foreign subsidiaries during the
period from January 1, 2002 to February 2, 2002 that would have a material
effect on the Company's 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 management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents
The Company considers all highly-liquid investments with a maturity of
three months or less when purchased to be cash equivalents. These amounts are
stated at cost, which approximates market value.
Available-for-Sale Securities
The Company's investments are classified as available for sale. Securities
traded on an established market are carried at fair value and unrealized gains
and losses are reported in a separate component of stockholders' equity. The
cost of investments is adjusted for amortization of premiums and the accretion
of discounts to maturity. Such amortization is included in other income.
Realized gains and losses and interest from investments are also included in
other income. The cost of securities sold is based on the specific
identification method. Short-term investments include investments with an
original maturity of greater than three months and a remaining maturity of less
than one year. Short-term investments consist primarily of the Company's
retained interests in its asset securitization program (see "ASSET
SECURITIZATION" below). Long-term investments have an original maturity of
greater than one year, but are available on an as needed basis to support
working capital needs.
38
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
Inventories
Merchandise inventories are valued at the lower of cost or market as
determined by the retail inventory method (average cost basis). Under the retail
inventory method, the valuation of inventories at cost and the resulting gross
margins are adjusted in proportion to markdowns and shrinkage on retail
inventories. The Company accrues an estimate for markdowns not yet taken which
are necessary to sell aged inventory. Inventory shrinkage is based on
semi-annual physical inventories on a store-by-store basis, with supplemental
observations in locations exhibiting high shrinkage rates. Interim shrinkage
estimates are determined on a store-by-store basis, based on the most recent
physical inventory results.
Property and Depreciation
For financial reporting purposes, depreciation and amortization are
computed principally 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. Accelerated depreciation methods are used for income tax
reporting purposes. Depreciation and amortization expense was $53,134,000,
$38,066,000, and $30,483,000 in Fiscal 2002, 2001, and 2000, respectively.
Depreciation and amortization expense for Fiscal 2002 and 2001 includes
amortization of equipment acquired under capital leases.
The Company evaluates the recoverability of its 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." SFAS No. 121 requires the Company to assess these assets for
recoverability whenever events or changes in circumstances indicate that the
carrying amounts of long-lived tangible and intangible assets may not be
recoverable. The Company considers historical performance and future estimated
results in its evaluation of potential impairment and then compares the carrying
amount of the asset to the estimated future undiscounted cash flows expected to
result from the use of the asset. To the extent that the estimated future
undiscounted cash flows are less than the carrying amount of the asset, the
asset is written down to its estimated fair value and an impairment loss is
recognized. The estimation of fair value is generally based on either appraised
value or measured by discounting estimated future cash flows.
Goodwill and Intangible Assets
In Fiscal 2002, the Company acquired trademarks, tradenames, internet
domain names, customer lists, and a covenant not to compete in connection with
the acquisition of Lane Bryant (see "ACQUISITIONS" 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 trademarks, tradenames, and internet domain
names, which have indefinite useful lives, have not been amortized. The customer
lists and covenant not to compete are being amortized over their estimated
useful life of five years.
The excess of the cost of the Lane Bryant acquisition over the estimated
fair value of the identifiable tangible and intangible net assets acquired has
been allocated to goodwill. In accordance with the provisions of SFAS No. 142,
the goodwill has not been amortized.
Goodwill related to the acquisition of Catherines Stores, Inc. has been
amortized on a straight-line basis over 20 years. The Company periodically
evaluates goodwill to determine if a revision to the remaining estimated useful
life is required, or if a reduction in the carrying value is required because of
an impairment of the asset.
39
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
Asset Securitizations
The Company adopted the disclosure provisions of SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (a replacement of SFAS No. 125), as of Fiscal 2001. Transaction
expenses related to securitizations are deferred and amortized over the
reinvestment period of the transaction. Net securitization income is included as
a reduction of selling, general, and administrative expenses in the accompanying
consolidated statements of operations. The Company adopted the accounting
requirements of SFAS No. 140 as of March 31, 2001, and has applied the
requirements to new beneficial interests issued under its asset securitization
program after that date. Adoption of SFAS No. 140 did not have a material impact
on the Company's results of operations or financial position for Fiscal 2002 or
2001.
Deferred Debt Acquisition Costs
Debt acquisition costs are deferred and amortized over the life of the
related debt agreement.
Common Stock Plans
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and its related interpretations. Deferred compensation expense
attributable to stock awards and stock options having an exercise price less
than the market price on the date of grant is amortized over the vesting period.
No compensation expense is recognized for options having an exercise price equal
to the market price on the date of grant or for the Company's Employee Stock
Purchase Plan. The Company has adopted the disclosure requirements of SFAS No.
123, "Accounting for Stock-Based Compensation."
Revenue Recognition
Revenues from merchandise sales are net of returns and allowances, and
exclude sales tax. The Company adopted the provisions of Securities and Exchange
Commission Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition
in Financial Statements," effective as of the beginning of Fiscal 2001. As a
result of adoption of SAB 101, the Company established a reserve for estimated
future sales returns based on an analysis of actual returns received following
the end of each fiscal period and began deferring recognition of layaway sales
to the date of delivery. The cumulative effect of the adoption of SAB 101 as of
January 30, 2000 was a decrease in income, net of taxes, of $540,000. The effect
of adoption of SAB 101 on the results of operations for Fiscal 2002 and 2001 was
immaterial. The pro forma effect of adoption of SAB 101 for Fiscal 2000 was
immaterial.
In Fiscal 2002, the Company began a customer loyalty card program for its
Fashion Bug store customers. The program grants discounts on customer purchases
over a twelve-month period upon payment of a $20 annual fee. Revenues from card
fees under the program are recognized as sales over the life of the membership
dependent on discounts being earned by the customer. If a customer does not earn
discounts in an amount that exceeds that card fee, such difference is recognized
as revenue upon the expiration of the annual period. Upon early cancellation of
a loyalty card, refunds of membership fees are reduced by the amount of any
discounts granted to the member under the program. Costs incurred by the Company
in connection with administering the program are recognized in cost of goods
sold as incurred. Revenues recognized from card fees are offset by discounts
granted under the program.
40
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
Cost of Goods Sold, Buying, and Occupancy Expenses
Cost of goods sold includes merchandise costs, net of discounts and
allowances, freight, and inventory shrinkage. Net merchandise costs and freight
are capitalized as inventory costs. Cost of goods sold for Fiscal 2002 includes
costs incurred in connection with the Company's Fashion Bug customer loyalty
card program (see "Revenue Recognition" above). Buying expenses include payroll,
payroll related costs, and operating expenses for the Company's buying
departments and warehouses. Occupancy expenses include rent, real estate taxes,
insurance, common area maintenance, utilities, maintenance, and depreciation for
the Company's stores and warehouse facilities and equipment. Buying and
occupancy costs are treated as period costs and are not capitalized as part of
inventory.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs
charged to expense were $47,310,000, $39,529,000, and $28,876,000 in Fiscal
2002, 2001, and 2000, respectively.
Income Taxes
The Company uses the liability method of accounting for income taxes as
prescribed by SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred tax assets and liabilities are adjusted to reflect the effect
of changes in enacted tax rates on expected reversals of financial statement and
income tax basis differences.
U.S. income taxes have not been provided on undistributed earnings of
foreign subsidiaries accumulated prior to February 2, 2002 because the Company
intends to reinvest such undistributed earnings in foreign operations.
Presently, income taxes would not be significantly increased if such earnings
were remitted because of available foreign tax credits.
Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted-average number of
common shares outstanding during each fiscal year. Net income per share assuming
dilution is based on the weighted-average number of common shares and share
equivalents outstanding. Common share equivalents include the effect of dilutive
stock options and stock awards, using the treasury stock method. Common share
equivalents also include the effect of assumed conversion of the Company's 7.5%
Convertible Subordinated Notes Due 2006, using the "if-converted" method, when
the effect of such assumed conversion is dilutive. Share equivalents are not
included in the weighted-average shares outstanding for determining net loss per
share, as the result would be 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
The Company's Lane Bryant, Fashion Bug, and Catherine's stores operate
within a single segment -- retail sales of women's apparel, and within a single
geographic area -- the continental United States. The Company's foreign sourcing
operations do not constitute a material geographic segment.
41
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
Costs of Computer Software Developed or Obtained for Internal Use
Costs related to the development of internal-use software, other than those
incurred during the application development stage, are expensed as incurred.
Costs incurred during the application development stage are capitalized and
amortized over the estimated useful life of the software.
Derivative Instruments and Hedging Activities
The Company adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," as of the
beginning of Fiscal 2002. Prior to the end of Fiscal 2001, the Company
terminated its interest rate swap agreement, which was used to limit the
Company's interest rate risk on certain assets related to the management of its
proprietary credit card program. Adoption of SFAS No. 133, as amended by SFAS
No. 137 and SFAS No. 138, did not have a material effect on the Company's
financial position or results of operations for Fiscal 2002.
Impact of Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the
use of the purchase method of accounting for business combinations initiated
after June 30, 2001, and expands the definition of intangible assets that are to
be recorded separately from goodwill. For business combinations accounted for
under the purchase method that were completed prior to July 1, 2001, previously
recorded goodwill and intangibles are to be evaluated against the criteria in
SFAS No. 141, which may result in the reclassification of certain intangible
assets into or out of recorded goodwill. SFAS No. 142 requires that goodwill and
intangible assets with an indefinite useful life not be amortized, but reviewed
for impairment at least annually and written down in periods in which the
recorded value of the goodwill or intangible asset exceeds its fair value. The
transition provisions of SFAS No. 142 require the continuation of amortization
of goodwill acquired prior to June 30, 2001, and require non-amortization of
goodwill and indefinite-lived intangible assets acquired subsequent to June 30,
2001, until the provisions of SFAS No. 142 are adopted in full.
The Company is required to adopt the provisions of SFAS No. 141 and
SFAS No. 142 in full as of February 3, 2002 (the beginning of the fiscal year
ending February 1, 2003). The Company recognized $4,885,000 of amortization of
goodwill in Fiscal 2002 and Fiscal 2001 related to the Catherine's acquisition.
The Company's consolidated balance sheet as of February 2, 2002 includes
$87,205,000 of goodwill related to the Catherine's acquisition. Commencing
February 3, 2002, the Company will no longer amortize the Catherine's goodwill.
However, the goodwill will be subject to periodic impairment reviews in
accordance with the provisions of SFAS No. 142.
At the time of the Catherine's acquisition, the Company did not separately
recognize or account for intangible assets (primarily trademarks and tradenames)
acquired that would be amortized over the same period as goodwill, and included
the value of these intangible assets in goodwill. Upon implementation of SFAS
No. 142 in Fiscal 2003, no later than the end of the second quarter the Company
will be required to test the goodwill associated with the Catherine's
acquisition for impairment, and if the Company determines that there has been
impairment, it would be required to write-down the goodwill associated with that
acquisition. The Company currently believes that upon adoption of SFAS No. 142
it may be required to write-down a significant portion of the goodwill
associated with the Catherine's acquisition. Any such write-down would be
presented in the Fiscal 2003 Consolidated Statement of Operations and
Comprehensive Income (Loss) as the cumulative effect of an accounting change as
of
42
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
February 3, 2002. The Company adopted the provisions of SFAS No. 141 and the
transition provisions of SFAS No. 142 in accounting for its acquisition of Lane
Bryant, Inc. (see "ACQUISITIONS" below).
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002, and addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Adoption of SFAS No. 143 is not expected to
have a material impact on the Company's financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" related to the disposal of a segment of a
business. SFAS No. 144 also resolves certain implementation issues related to
SFAS No. 121. The Company is currently evaluating the effect that adoption of
SFAS No. 144 will have on the Company's financial position and results of
operations.
ACQUISITIONS
On August 16, 2001, the Company acquired 100% of the outstanding stock of
Lane Bryant, Inc. ("Lane Bryant") from a subsidiary of The Limited, Inc. for
cash of $286,223,000, including direct costs of the acquisition of $6,223,000,
and 8,688,784 shares of the Company's 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. Lane Bryant had net sales of $930.0 million
in the fiscal year ended February 3, 2001. The cash paid for the acquisition was
funded with the use of approximately $83,000,000 of the Company's existing cash
and cash equivalents, a $75,000,000 term loan, and revolving loans under a new
credit facility obtained in connection with the acquisition (see "DEBT" below).
Based on the final determination of the value of the Lane Bryant net assets
acquired, on December 10, 2001, the Company issued to a subsidiary of The
Limited, Inc. an additional 837,209 shares of the Company's common stock valued
at $4.3 million. Of the aggregate total of 9,525,993 shares of common stock
issued, 9,105,000 shares had been previously re-acquired by the Company and were
being held as treasury shares. The Limited, Inc. is restricted from selling the
common stock it received from the Company for one year after the close of the
transaction. The acquisition has been accounted for under the purchase method of
accounting, and the results of operations of Lane Bryant are included in the
Company's results of operations from the date of acquisition. Prior-period
results have not been restated.
Assets acquired and liabilities assumed have been recorded at their
estimated fair values. The recorded values of assets acquired and liabilities
assumed are preliminary, and are subject to adjustment, pending final
determination of their acquisition values. The final allocation of the purchase
price is not expected to differ materially from the allocations used to prepare
these financial statements. The Company expects to complete the final allocation
of the purchase price within twelve months from the date of acquisition. The
number of shares of the Company's common stock issued in connection with the
acquisition is based on a five-day average market value as defined in the
purchase agreement.
43
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
Concurrent with the acquisition of Lane Bryant, the Company 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, the
Company finalized its plan to close the under-performing stores and to terminate
the store employees. As a result, the Company recorded a liability of $3,762,000
as part of the purchase price allocation, which was primarily for estimated
lease termination payments. In addition, the Company recorded an accrual of
$390,000 for severance of store employees. Generally, if actual lease
termination and severance payments differ from these estimates, an adjustment
would be recorded to the purchase price allocation.
In connection with the acquisition, The Company entered into a services
agreement with The Limited and certain affiliates of The Limited under which the
Company receives certain transitional services, including data center processing
of Lane Bryant business applications, such as store polling and support of store
systems, continuation of contract services with vendors for voice and data
networks, and conversion services, through October 2, 2002. The Company has
begun moving all of the Lane Bryant business applications and processes from The
Limited to the Company's platform and expects the transition to be completed by
October 2, 2002.
In accordance with the requirements of SFAS No. 141, the Company recognized
certain intangible assets acquired, primarily trademarks, tradenames, and
internet domain names, separately from goodwill. In accordance with the
provisions of SFAS No. 142, the trademarks, tradenames, and internet domain
names ($168,800,000) will not be amortized, but will be subject to periodic
impairment reviews in accordance with the provisions of SFAS No. 142. Other
intangible assets acquired, consisting of customer lists ($2,700,000) and a
covenant not to compete ($600,000), will be 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 will not be
amortized, but will be subject to periodic impairment reviews in accordance with
the provisions of SFAS No. 142.
44
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
The following condensed balance sheet presents the financial position of
Lane Bryant as of August 16, 2001 after giving effect to the acquisition.
(in thousands)
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
========
The acquisition of Lane Bryant complements the Company's long-term growth
strategy of becoming a leader in the sale of plus-size specialty apparel. Lane
Bryant is a premier brand in the plus-size market with an established customer
base and proprietary brand names, and operates in multiple retail venues,
primarily in leading malls.
The following unaudited pro forma information is based on historical data,
and gives effect to the Company's acquisition of Lane Bryant as if the
acquisition had occurred on January 30, 2000. The pro forma information includes
adjustments having a continuing impact on the consolidated company as a result
of using the purchase method of accounting for the acquisition. Pro forma
adjustments consist of additional depreciation from the step-up in value of
property, equipment, and leasehold improvements acquired, additional
amortization expense related to intangible assets acquired, additional interest
expense and amortization of deferred financing costs related to debt incurred to
finance the acquisition (see "DEBT" below), and a reduction in interest income
from the use of approximately $83,000,000 of the Company's cash and cash
equivalents to fund a portion of the acquisition.
(in thousands except per share amounts) 2002 2001
---- ----
Net sales ............................... $2,486,178 $2,536,952
Income before cumulative effect of
accounting change .................... 1,691 40,873
Net income .............................. 1,691 40,333
Net income per share:
Basic ................................. $.02 $.36
Diluted ............................... .02 .36
The unaudited pro forma information is not necessarily indicative of the
actual results of operations that would have occurred if the acquisition had
occurred as of January 30, 2000, and is not necessarily indicative of the
45
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
results that may be achieved in the future. The unaudited pro forma information
does not reflect adjustments for operating synergies that the Company may
realize as a result of the acquisition. No assurances can be given as to the
amount and timing of any financial benefits that the Company may realize as a
result of the acquisition.
In August 1999, the Company acquired 100% of the outstanding stock of
Modern Woman Holdings, Inc. ("Modern Woman") for $9,773,000 ($8,709,000 net of
cash acquired). In January 2000, the Company acquired 100% of the outstanding
stock of Catherine's Stores Corporation ("Catherine's") for $154,884,000
($136,600,000 net of cash acquired). The acquisitions have been accounted for
under the purchase method of accounting, and the results of operations of the
acquired companies are included in the Company's results of operations from
their dates of acquisition. Prior-period results have not been restated. Assets
acquired and liabilities assumed have been recorded at their estimated fair
values. In connection with the Catherine's acquisition, the purchase price
exceeded the fair value of identifiable net assets acquired. The excess purchase
price, approximately $97,707,000, has been accounted for as goodwill. In
connection with the Modern Woman acquisition, the fair value of the net assets
acquired exceeded the purchase price, and the excess was applied to reduce the
fair value of non-current assets. The acquisitions were financed through the use
of internally-generated funds.
PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Lives
(dollars in thousands) (Years) 2002 2001
------- ---- ----
Land ........................................................ $ 1,757 $ 1,757
Buildings and improvements .................................. 10 to 40 60,141 54,232
Store fixtures .............................................. 5 to 10 142,392 108,069
Equipment ................................................... 3 to 10 159,899 144,978
Equipment acquired under capital leases ..................... 5 45,847 21,928
Leasehold improvements ...................................... 10 to 20 247,031 173,107
-------- ---------
Total at cost ............................................... 657,067 504,071
-------- ---------
Less: Accumulated depreciation and amortization ............ 329,053 278,471
Accumulated amortization of capital leases ........... 12,002 7,737
-------- ---------
Total accumulated depreciation and amortization ............. 341,055 286,208
-------- ---------
Net property, equipment, and leasehold improvements ......... $316,012 $ 217,863
======== ========
TRADEMARKS AND OTHER INTANGIBLE ASSETS
Life
(dollars in thousands) (Years) 2002
------- ----
Trademarks, tradenames, and internet domain names ........... $168,800
Customer lists and covenant not to compete .................. 5 3,300
--------
Total at cost ............................................... 172,100
Less: accumulated amortization of customer lists and
covenant not to compete .............................. 306
--------
Net trademarks and other intangible assets .................. $171,794
========
46
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
Total amortization of other intangible assets was $306,000 in Fiscal 2002.
Estimated amortization of intangible assets for the next five fiscal years are:
2003 through 2006 - $660,000 per year; 2007 - $354,000.
The trademarks and other intangible assets were acquired during Fiscal 2002
in connection with the acquisition of Lane Bryant (see "ACQUISITIONS" above).
The values of the 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 trademarks, tradenames, and
internet domain names have indefinite useful lives, and are not being amortized.
AVAILABLE-FOR-SALE SECURITIES
Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
---- ----- ------ ----------
February 2, 2002
U. S. Treasury and government agency bonds ................ $ 14,862 $37 $ (52) $ 14,847
Charming Shoppes Master Trust retained interest ........... 47,240 0 0 47,240
Low income housing partnerships ........................... 7,952 0 0 7,952
Other ..................................................... 327 0 0 327
-------- --- ------- --------
$ 70,381 $37 $ (52) $ 70,366
======== === ======= ========
February 3, 2001
U. S. Treasury and government agency bonds ................ $ 69,192 $99 $ (19) $ 69,272
Charming Shoppes Master Trust retained interest ........... 47,724 0 0 47,724
Low income housing partnerships ........................... 7,952 0 0 7,952
Other ..................................................... 330 0 0 330
-------- --- ------- --------
$125,198 $99 $ (19) $125,278
======== === ======= ========
Gross realized gains and (losses) on available-for-sale securities were
$243,000 and ($12,000), respectively, during Fiscal 2002. Gross realized gains
and (losses) were $43,000 and ($292,000), respectively, during Fiscal 2001.
Gross realized gains and (losses) on available-for-sale securities were
$6,910,000 and ($4,837,000), respectively, during Fiscal 2000.
Contractual maturities of available-for-sale securities at February 2, 2002
were:
Estimated
(in thousands) Cost Fair Value
---- ----------
Due in one year or less ............................... $48,327 $48,351
Due after one year through five years ................. 14,102 14,063
------- -------
62,429 62,414
Equity securities ..................................... 7,952 7,952
------- -------
$70,381 $70,366
======= =======
47
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
INCOME TAXES
Income (loss) before income taxes, extraordinary item, and cumulative effect of
accounting change:
(in thousands) 2002 2001 2000
---- ---- ----
Domestic ............................. $ (8,008) $79,716 $ 65,615
Foreign .............................. 3,482 4,936 5,064
-------- ------- --------
$ (4,526) $84,652 $ 70,679
========= ======= ========
Income tax provision (benefit):
(in thousands) 2002 2001 2000
---- ---- ----
Current:
Federal .............................. $ (6,037) $17,345 $ 5,431
State ................................ 1,296 1,683 1,158
Foreign .............................. 288 883 514
-------- ------- --------
(4,453) 19,911 7,103
Deferred(1) .......................... 4,333 13,103 19,749
-------- ------- --------
$ (120) $33,014 $26,852
======== ======= ========
--------------------
(1) Primarily Federal
The Company received an income tax refund of $2,902,000 during Fiscal 2002
and made income tax payments of $20,041,000 and $9,692,000 during Fiscal 2001
and 2000, respectively.
Included in "Prepayments and other" in the accompanying balance sheet as of
February 2, 2002 is an income tax receivable of $11,633,000.
Reconciliation of the effective tax rate with the statutory Federal income tax
rate:
2002 2001 2000
---- ---- ----
Statutory Federal income tax (benefit) rate ... (35.0)% 35.0% 35.0%
State income tax, net of Federal income tax ... 18.6 1.9 1.0
Foreign income ................................ (14.1) (1.0) (1.7)
Employee benefits ............................. 21.1 2.5 3.1
Amortization of goodwill ...................... 37.8 2.0 --
Other, net .................................... (31.1) (1.4) 0.6
----- ---- ----
(2.7)% 39.0% 38.0%
======= ===== ====
48
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
Components of deferred tax assets and liabilities:
Net Current Net Long-Term
Assets Assets
(in thousands) (Liabilities) (Liabilities)
------------- -------------
February 2, 2002
Property, equipment, and leasehold improvements .......... $ (3,892)
Tax net operating loss and credit carryforwards .......... 6,879
Prepaid and accrued expenses ............................. $ 5,392
Inventory ................................................ 1,278
Deferred compensation .................................... 4,104
Intangible assets ........................................ (14,809)
Accrued restructuring expense ............................ 14,864
Investments .............................................. (5,137)
Deferred rent ............................................ 2,098
Employee insurance program ............................... (15,900)
Other .................................................... (2,404) (4,932)
------- ---------
$21,228 $(33,687)
======= =========
February 3, 2001
Property, equipment, and leasehold improvements .......... $ (208)
Prepaid and accrued expenses ............................. $13,396
Inventory ................................................ (1,853)
Deferred compensation .................................... 2,729
Investments .............................................. (6,907)
Deferred rent ............................................ 2,099
Employee insurance program ............................... (14,100)
Other .................................................... (2,964) (2,947)
------- ---------
$10,678 $(21,433)
======= =========
--------------------
Certain prior-year amounts have been reclassified to conform to the current
presentation.
The Company's Federal tax returns for the fiscal years ended January 1994
through January 1999 are currently under audit, only as to an issue related to
one of the Company's employee insurance programs. While no assessment has been
made, the Company has established a reserve with respect to this issue. While
the ultimate outcome of this matter cannot be predicted with certainty, in the
opinion of management, it will not have a material adverse impact on the
Company's financial position or results of operations.
49
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
DEBT
Long-term debt at year end:
(in thousands) 2002 2001
---- ----
7.5% Convertible Subordinated Notes Due 2006 ...... $ 96,047 $ 96,047
Term loan due August 16, 2004 ..................... 67,500 0
Capital lease obligations ......................... 32,256 15,890
7.77% mortgage note ............................... 10,885 0
8.15% note ........................................ 4,908 0
7.5% mortgage note ................................ 6,261 6,449
Other ............................................. 13 108
--------- ---------
Total long-term debt .............................. 217,870 118,494
Less current portion .............................. 9,379 4,954
--------- ---------
$208,491 $113,540
========= =========
The 7.5% Convertible Subordinated Notes (the "Notes") are convertible at
any time prior to maturity into shares of common stock of the Company at a
conversion price of $7.46 per share. The Notes are redeemable at the Company's
option, in whole or in part, at 102.5% of principal through July 14, 2002 and at
declining prices thereafter, decreasing to 100% on or after July 15, 2005. Under
certain circumstances involving a change in control of the Company, holders of
the Notes may require the Company to repurchase all or a portion of the Notes at
100% of the principal amount plus accrued and unpaid interest, if any. There is
no sinking fund for the Notes.
During Fiscal 2000, the Company repurchased $23,316,000 aggregate principal
amount of the Notes, which had a net carrying value of $22,927,000 as of the
dates of purchase, at a total cost of $21,031,000. The repurchases resulted in
an extraordinary gain of $1,232,000, net of income taxes of $664,000, for Fiscal
2000.
In connection with the acquisition of Lane Bryant, on August 16, 2001 the
Company replaced its existing $150,000,000 revolving credit facility with a
$375,000,000 credit facility pursuant to a loan and security agreement of the
same date (the "Facility" or the "Agreement"). This Facility includes a
revolving credit facility with a maximum availability of $300,000,000, subject
to borrowing limitations based on eligible inventory and the value of certain
real property, and a three-year term loan of $75,000,000. The Facility provides
for cash borrowings and enables the Company to issue up to $150,000,000 of
letters of credit for overseas purchases of merchandise. The Facility is secured
by the general assets of the Company, except for certain assets of the Company's
credit card securitization program, certain real properties and equipment
subject to other mortgages, the Company's interest in its joint venture with
Monsoon plc, and assets of the Company's non-U.S. subsidiaries. The Facility
expires on August 16, 2004, with an option to renew the revolving credit
facility for an additional year. The Company also terminated its existing
$20,000,000 and $10,000,000 revolving credit facilities, which were obtained in
connection with the Company's previous acquisitions of the Catherine's and
Modern Woman stores.
The interest rate on borrowings under the revolving credit facility ranges
from Prime to Prime plus .75% per annum for Prime Rate Loans, and LIBOR plus 2%
to LIBOR plus 2.75% per annum for Eurodollar Rate Loans, and is determined
quarterly, based on the Company's Leverage Ratio or excess availability, as
defined in the Agreement. The interest rate on borrowings under the term loan
equals Prime plus 4% per annum, with minimum and maximum rates of 11.5% and 13%,
respectively, per annum. As of February 2, 2002, the interest rates on
borrowings under the revolving credit line and term loan were 3.9% and 11.5%,
respectively. There is a fee of 1-
50
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
1/2% per annum on outstanding documentary letters of credit, a fee of 2% per
annum on outstanding stand-by letters of credit, a fee of .375% to .5% per annum
on the unused portion of the revolving credit facility, and annual servicing
fees totaling $156,000. Costs incurred by the Company in obtaining the Facility
were approximately $7,991,000. These debt acquisition costs have been deferred
and are being amortized over the life of the Agreement.
The Agreement includes limitations on sales and leasebacks, the incurrence
of additional liens and debt, capital lease financing, and other limitations.
The Agreement also requires, among other things, that the Company not pay
dividends on its common stock and, under certain circumstances maintain an
Adjusted Tangible Net Worth (as defined in the Agreement) of $228,000,000
(subject to adjustment). In January 2002, the Company amended the Agreement in
connection with its restructuring plan. Until the term loan is paid in full, the
Agreement requires that the Company maintain a minimum twelve-month earnings
before interest, income taxes, depreciation, and amortization, as adjusted
pursuant to the terms of the credit facility and to account for the acquisition
of Lane Bryant ("Adjusted EBITDA") of $140.0 million for Fiscal 2002 and $120.0
million through the end of Fiscal 2003. Thereafter, until the term loan has been
paid in full, the Agreement requires that the Company maintain a twelve-month
Adjusted EBITDA of $140.0 million. The Agreement, as amended, also requires that
until the term loan is paid in full the Company must maintain a ratio of Total
Secured Debt to Adjusted EBITDA of not greater than 3.0 to 1.0 as of February 2,
2002, 2.85 to 1.0 at the end of the first quarter of Fiscal 2003, decreasing to
2.55 to 1.0 at the end of the fourth quarter of Fiscal 2003, and increasing to
3.0 to 1.0 at the end of each fiscal quarter thereafter. As of February 2, 2002,
the Company was not in default with respect to any of the Agreement's covenants.
The Company had outstanding letters of credit totaling $47,459,000 as of
February 2, 2002, and the unused availability under the revolving credit
facility was $128,706,000.
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, fixtures, and
equipment owned by the Company at its offices in Bensalem, Pennsylvania and by
leases and rents owned or received by the Company 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 $375,000,000 credit
facility, discussed above.
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 $375,000,000 credit
facility, discussed above.
During Fiscal 2002 and Fiscal 2001, the Company acquired $24,677,000 and
$14,896,000, respectively, of POS equipment for its Fashion Bug and Catherine's
stores under capital leases. These leases generally have an initial lease term
of 60 months and contain a bargain purchase option. During Fiscal 2002, the
Company re-negotiated the terms of certain of its existing POS equipment capital
leases. The re-negotiated leases were combined into a new lease with a 60-month
term and a lower interest rate. The effect of the re-negotiation was a net
(decrease) increase in total lease payments as follows: Fiscal 2002 - ($25,000);
Fiscal 2003 - ($149,000); Fiscal 2004 - $235,000; Fiscal 2005 - $337,000; Fiscal
2006 - $6,000; Fiscal 2007 - $2,072,000. As of February 2, 2002, the imputed
interest rates on the capital leases ranged from 6.23% to 8.35%.
51
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
A 7.5% Mortgage Note and $2,753,000 of capital lease obligations were
assumed in January 2000 in connection with the acquisition of Catherine's. The
mortgage financing agreement provides for a $6,919,000 mortgage facility with a
seven-year term and payments based on a 20-year amortization period. The
mortgage includes a final payment of $5,585,000 in Fiscal 2006. The mortgage is
secured by land and buildings at Catherine's office in Memphis, Tennessee. The
capital leases are for data processing and point-of-sale equipment. At the end
of the initial lease term, the Company has the option of purchasing the
equipment at fair market value (or at $1 in the case of the point-of-sale
equipment), renewing the leases, or returning the equipment to the lessor.
During Fiscal 2002, 2001, and 2000, the Company made interest payments of
$17,657,000, $8,712,000, and $7,519,000, respectively.
Aggregate maturities of long-term debt during the next five fiscal years are:
7.5%
Convertible
Subordinated Term Capital Mortgage
(in thousands) Notes Loan Leases Notes Other Total
----- ---- ------ ----- ----- -----
Fiscal Year:
2003 .............. $7,603 $1,767 $ 9 $ 9,379
2004 .............. 8,109 1,914 4 10,027
2005 .............. $67,500 7,645 3,205 78,350
2006 .............. 5,262 6,118 11,380
2007 .............. $96,047 3,637 554 100,238
Minimum lease payments under capital leases for the next five fiscal years
are: 2003 - $9,612,000; 2004 - $9,564,000; 2005 - $8,525,000; 2006 - $5,691,000;
2007 - $3,754,000. Included in these minimum lease payments is aggregate imputed
interest of $4,890,000.
STOCKHOLDERS' EQUITY
The Company's capital consists of 1,000,000 shares of Series Participating
Preferred Stock, $1.00 par value, of which 500,000 shares of Participating
Series A Junior Preferred Stock, $1.00 par value, have been authorized; and
300,000,000 shares of common stock, $.10 par value.
During the fiscal years ended January 31, 1998 and January 30, 1999, the
Company's Board of Directors ("the Board") authorized the repurchase of up to
20,000,000 shares of the Company's common stock. As of February 3, 2001, the
Company had repurchased an aggregate total of 9,105,000 shares of its common
stock at an aggregate cost of $41,537,000. The shares repurchased were held as
treasury stock. During Fiscal 2002, these treasury shares were re-issued in
connection with the acquisition of Lane Bryant (see "ACQUISITIONS" above).
STOCK OPTION AND STOCK INCENTIVE PLANS
At February 2, 2002, the Company had various stock-based compensation
plans, which are described below. The Company applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its stock plans. Accordingly, no compensation has been recognized
in the financial
52
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
statements for options issued under such plans with an exercise price equal to
the market price of the Company's common stock at the date of grant. In
addition, no compensation expense has been recognized for shares of stock issued
under the Company's Employee Stock Purchase Plan. Compensation cost recognized
in the financial statements for discounted stock options, restricted stock
awards and performance share awards granted was $1,117,000, $948,000, and
$747,000 in Fiscal 2002, 2001, and 2000, respectively.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires pro forma
disclosures of the effect of using fair values at the dates of grant to
determine compensation cost for awards under stock-based compensation plans.
Using the method prescribed under SFAS No. 123 to determine compensation cost
for the Company's plans, the Company's net income (loss) and net income (loss)
per share would have changed to the pro forma amounts shown below:
(in thousands, except per-share data) 2002 2001 2000
---- ---- ----
Pro forma net income (loss) .................. $(7,045) $49,185 $43,102
Pro forma net income (loss) per share
Basic net income (loss) per share ........ $(.07) $.49 $.44
Diluted net income (loss) per share ...... $(.07) $.47 $.41
For purposes of determining the pro forma disclosures, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. In applying the Black-Scholes model, the following
assumptions were used: dividend yield of 0%; expected stock price volatility of
37.6%; expected lives of 3 months for the Employee Stock Purchase Plan, 1 to 3
years for stock award plans, and 6 to 7 years for stock option and stock
incentive plans; and the following risk-free interest rates:
2002 2001 2000
---- ---- ----
Employee stock purchase plan ................. 1.7% 4.9% 5.4%
Stock award plans ............................ 3.8 4.8 6.5
Stock option and incentive plans ............. 5.0 5.1 6.6
The Company's Board of Directors adopted the 2000 Associates' Stock
Incentive Plan on January 27, 2000. The plan provides for the grant of options,
stock appreciation rights, restricted stock awards, deferred stock, or other
stock-based awards to purchase up to 5,000,000 shares of the Company's common
stock. The form of the grants, exercise price, and maximum term, where
applicable, are at the discretion of the Board of Directors and the Stock Option
Committee of the Board of Directors. As of February 2, 2002 and February 3,
2001, 352,160 options and 177,690 options, respectively, were exercisable under
this plan.
The Company's Amended and Restated Non-Employee Directors Program was
adopted by the Board of Directors on July 1, 1999. This program provides for the
automatic annual grant of options to purchase 20,000 shares of common stock to
each non-employee director. The options vest in equal installments over five
years. The exercise price of such options may not be less than the fair market
value of the stock on the date of grant. As of February 2, 2002, February 3,
2001, and January 29, 2000, 88,000 options, 28,000 options, and 0 options,
respectively, were exercisable under this plan. The program also provides for a
one-time grant of 10,000 shares of restricted common stock to each newly elected
non-employee director. The grants vest in equal amounts over three years. During
Fiscal 2002, Fiscal 2001, and Fiscal 2000, 0 shares, 10,000 shares, and 20,000
shares, respectively, were granted and issued as one-time grants under this
program. The weighted average market value at date of grant for shares granted
in Fiscal 2001 and Fiscal 2000 was $5.13 and $6.21, respectively.
53
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
The Company's Board of Directors adopted the 1999 Associates' Stock
Incentive Plan in February 1999. The plan provides for the grant of options to
purchase up to 1,000,000 shares of the Company's common stock. The exercise
price of such options may not be less than the fair market value at the date of
grant. The maximum term of options issued under the plan is ten years. As of
February 2, 2002, February 3, 2001, and January 29, 2000, 245,200 options,
127,500 options, and 0 options, respectively, were exercisable under this plan.
The Company's 1993 Employees' Stock Incentive Plan provides for the
grant of options to purchase up to 9,000,000 shares of common stock plus 9% of
shares issued by the Company after the effective date of the plan and any shares
available but unissued under the 1990 Plan described below. The form of the
grants and exercise price, where applicable, are at the discretion of the Board
of Directors and the Stock Option Committee of the Board of Directors. The
maximum term of options issued under the plan is ten years. As of February 2,
2002, February 3, 2001, and January 29, 2000, 4,931,030 options, 4,380,640
options, and 3,415,250 options, respectively, were exercisable under this plan.
During Fiscal 2002, 2001, and 2000, 394,800 shares, 88,000 shares and 306,307
shares, respectively, were granted as restricted stock awards under this plan.
The weighted average market value at date of grant for the Fiscal 2002, 2001,
and 2000 awards was $5.73, $6.81, and $4.61 per share, respectively. During
Fiscal 2002, 198,822 shares granted as restricted stock awards under this plan
were issued and awards totaling 17,759 shares were canceled. During Fiscal
2001, 38,308 shares granted as restricted stock awards under this plan were
issued and awards totaling 10,300 shares were canceled. As of February 2, 2002,
restricted stock awards totaling 603,918 shares were outstanding under this
plan.
The Company's 1988 Key Employee Stock Option Plan provides for the
grant of options to purchase up to 3,000,000 shares of common stock to key
employees of the Company. The exercise price of options granted under this plan
is $1.00 per share. As of February 2, 2002, February 3, 2001, and January 29,
2000, 53,702 options, 92,937 options, and 205,330 options, respectively, were
exercisable under this plan.
The Company's 1990 Employees' Stock Incentive Plan provides for the
grant of options to purchase common stock to key employees of the Company. The
exercise price of such options may not be less than the fair market value at the
date of grant. As a result of adoption of the 1993 Employees' Stock Incentive
Plan, the Company no longer intends to issue options under this Plan. As of
February 2, 2002, February 3, 2001, and January 29, 2000, 144,000 options,
144,000 options, and 483,800 options, respectively, were exercisable under this
plan.
The Company's 1989 Non-Employee Director Stock Option Plan provides for
the grant of options to purchase up to 30,000 shares of common stock to each
member of the Board of Directors who is not an employee of the Company. The
exercise price of such options may not be less than the fair market value of the
stock on the date of grant. As of February 2, 2002, February 3, 2001, and
January 29, 2000, 78,000 options, 66,000 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, the
Company no longer intends to issue options under this plan.
54
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
The table below summarizes the activity in all Stock Option Plans:
Average Option
Option Option Prices
Shares Price Per Share
------ ----- ---------
Outstanding at January 30, 1999 ....................... 10,427,334 $5.249 $ .500 - 16.875
Granted-option price equal to market .................. 1,794,970 4.077 3.625 - 6.625
Granted-option price less than market ................. 16,000 1.000 1.000 - 1.000
Canceled/forfeited .................................... (417,387) 5.068 .500 - 15.750
Exercised ............................................. (3,364,058) 4.247 .500 - 6.188
---------- ------ ----------------
Outstanding at January 29, 2000 ....................... 8,456,859 5.400 500 - 16.875
Granted-option price equal to market .................. 2,192,050 6.633 5.000 - 6.813
Granted-option price less than market ................. 37,700 1.000 1.000 - 1.000
Canceled/forfeited .................................... (682,035) 6.225 1.000 - 16.875
Exercised ............................................. (906,701) 4.326 .500 - 6.188
---------- ------ ----------------
Outstanding at February 3, 2001 ....................... 9,097,873 5.724 .500 - 15.813
Granted-option price equal to market .................. 2,661,200 6.380 4.730 - 6.710
Granted-option price less than market ................. 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
========== ====== ================
Weighted average grant date fair value for options granted, using
Black-Scholes model and assumptions described above:
2002 2001 2000
---- ---- ----
Option price equals market price ..................... $3.16 $2.35 $1.92
Option price less than market price .................. 5.96 5.32 2.96
55
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
The table below summarizes information regarding weighted average
exercise price and weighted average remaining contractual life in years for
options outstanding and options exercisable as of February 2, 2002 for the
ranges of exercise prices shown:
Weighted Weighted
Average Average
Option Option Remaining
Ranges of Option Prices Shares Price Life
----------------------- ------ ----- ----
$0.50-$1.00:
Options outstanding ..................... 130,690 $.989 5.9
Options exercisable ..................... 53,702 .972
$1.01-$5.00:
Options outstanding ..................... 4,342,100 $4.029 5.25
Options exercisable ..................... 3,156,800 4.063
$5.01-$10.00:
Options outstanding ..................... 5,752,640 $6.370 7.6
Options exercisable ..................... 1,869,590 6.272
$10.01-$15.81:
Options outstanding ..................... 844,700 $13.010 1.35
Options exercisable ..................... 812,000 13.020
At February 2, 2002, 2,514,805 shares were available for grant under
the 2000 Associates' Stock Incentive Plan, 88,327 shares were available for
grant under the Amended and Restated Non-Employee Directors Program, 261,000
shares were available for grant under the 1999 Associates' Stock Incentive Plan,
2,103,266 shares were available for future grant under the 1993 Employees' Stock
Incentive plan, and 168,417 shares were available for grant under the 1988 Key
Employee Stock Option Plan.
The Company's 1998 Restricted Stock Award Program provides for the
grant of rights to receive shares of the Company's common stock subject to
attainment of specified performance goals for Fiscal 2000. During Fiscal 2001,
77,450 shares were issued under this plan and rights to receive 33,605 shares
were canceled. During Fiscal 2000, rights to receive 4,591 shares were granted
and rights to receive 7,768 shares were canceled. The weighted average market
value at date of grant for awards granted in Fiscal 2000 was $4.03 per share.
Associates pay no cash consideration for shares received under the plan. The
Company does not intend to grant further awards under this plan.
The Company's Non-Employee Director Compensation Program and the
Compensation Program for the Non-Employee Chairman of the Board of Directors
were adopted on August 21, 1996 and approved by shareholders on June 19, 1997.
These programs stipulate that, effective June 27, 1996, 60% of Non-Employee
Director and 50% of Non-Employee Chairman compensation shall be paid in common
stock of the Company. During Fiscal 2000, 1,500 rights were granted under this
plan, and 1,500 shares were issued. The weighted average market value at date of
grant for awards granted in Fiscal 2000 was $4.00 per share. Awards under this
program were discontinued as of July 1, 1999 as a result of adoption of the
Amended and Restated Non-Employee Directors Program.
The Company's Board of Directors adopted the Restricted Stock Award
Plan for Associates on January 26, 1995. The plan provides for discretionary
awards of rights to receive up to 200,000 shares of restricted common stock to
associates who are not directors or executive officers of the Company.
Associates will pay no cash consideration for restricted stock received under an
award. During Fiscal 2001, 5,500 shares were issued under this
56
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
plan. During Fiscal 2000, 5,500 rights were granted under this plan, and 5,500
shares were issued. The weighted average market value at date of grant for
awards granted in Fiscal 2000 was $3.63 per share. The Company does not intend
to grant further awards under this plan.
The shares issued and options granted under the above plans are subject
to forfeiture if the employees do not remain employed by the Company for a
specified period of time. Under the 1989 Non-Employee Director Stock Option
Plan, the Non-Employee Director Compensation Program, the Compensation Program
for the Non-Employee Chairman of the Board of Directors, and the Amended and
Restated Non-Employee Directors Program, shares issued and options granted are
subject to forfeiture if the individual ceases to remain a Director of the
Company except, under certain circumstances, in the case of retirement.
EMPLOYEE STOCK PURCHASE PLAN
The Company's 1994 Employee Stock Purchase Plan permits employees to
purchase shares during each quarterly offering period at a price equal to 85% of
the market price of the Company's common stock on either the first day of the
offering period or the fifth business day after the end of the offering period,
whichever is lower. The shares are purchased through the accumulation of payroll
deductions of up to 10% of each participating employee's compensation during
such offering period. Under this plan, 2,000,000 shares have been reserved for
grant. During Fiscal 2002, 2001, and 2000, 82,184 shares, 57,527 shares, and
31,343 shares, respectively, were purchased under the plan. The weighted average
grant date market value for shares purchased during Fiscal 2002, 2001, and 2000
was $5.52, $5.41, and $4.84 per share, respectively. At February 2, 2002,
1,591,780 shares were available for future purchases under this plan.
SHAREHOLDER RIGHTS PLAN
On April 12, 1999, pursuant to a Rights Agreement between the Company
and American Stock Transfer & Trust Company, as Rights Agent, the Board of
Directors of the Company declared a dividend distribution of one Right for each
outstanding share of common stock of the Company payable upon the close of
business on April 26, 1999. Each Right entitles the registered holder to
purchase from the Company 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 the Company
permits, 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 the outstanding common stock
of the Company (the "Stock Acquisition Date"), or (ii) the close of business on
such date as may be fixed by the Board of Directors of the Company after the
commencement of a tender offer or exchange offer that would result in a person
or group beneficially owning 20% or more of the outstanding common stock of the
Company. 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 common stock of the
57
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
Company 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, common stock of the Company (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, the
Company may permit the holders simply to surrender the Rights under certain
circumstances in which event they will be entitled to receive common stock of
the Company (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 the Company as set forth in the Rights Agreement.
In the event that, at any time following the Stock Acquisition Date,
(i) the Company is acquired in a merger or other business combination
transaction in which the Company is 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 the Company's assets or earning power
is sold or transferred, each holder of a Right (except Rights that previously
have been voided as set forth above) shall thereafter have the right to receive,
upon exercise, common shares of the acquiring company having a value equal to
two times the exercise price of the Right. Again, provision is made to permit
surrender of the Rights in exchange for one-half of the value otherwise
purchasable. The events set forth in this paragraph and above are referred to as
the "Triggering Events."
The purchase price payable, and the number of shares of common stock of
the Company or other securities or property issuable, upon exercise of the
Rights are subject to certain anti-dilution adjustments. With certain
exceptions, no adjustment in the purchase price will be required until
cumulative adjustments amount to at least 1% of the purchase price. No
fractional shares of common stock of the Company will be issued and, in lieu
thereof, an adjustment in cash will be made based on the market price of the
common stock of the Company on the last trading date prior to the date of
exercise.
At any time until ten days following the Stock Acquisition Date, the
Company may redeem the Rights in whole, but not in part, at a redemption price
of $.01 per Right, subject to adjustment. The ten-day period may be extended by
the Board of Directors so long as the Rights are still redeemable. Immediately
upon the action of the Board of Directors ordering redemption of the Rights, the
Rights will terminate and the only right of the holders of Rights will be to
receive the redemption price. Until a Right is exercised, the holder thereof, as
such, will have no rights as a shareholder of the Company, including, without
limitation, the right to vote or to receive dividends.
58
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
NET INCOME (LOSS) PER SHARE
(in thousands) 2002 2001 2000
---- ---- ----
Basic weighted average common shares outstanding ............................... 105,842 101,119 98,609
Dilutive effect of assumed conversion of convertible notes ..................... 0 12,875 16,001
Dilutive effect of stock options ............................................... 0 1,033 1,278
-------- -------- --------
Diluted weighted average common shares and equivalents outstanding ............. 105,842 115,027 115,888
======== ======== ========
Income (loss) before extraordinary item and cumulative effect of
accounting change ......................................................... $(4,406) $51,638 $43,827
Decrease in interest expense from assumed conversion of notes,
net of income taxes ....................................................... 0 4,455 4,708
-------- -------- --------
Income (loss) before extraordinary item and cumulative effect of
accounting change used to determine diluted earnings per share ............ (4,406) 56,093 48,535
Extraordinary item, net of income taxes ........................................ 0 0 1,232
Cumulative effect of accounting change, net of income taxes .................... 0 (540) 0
-------- -------- --------
Net income (loss) used to determine diluted earnings per share ................. $ (4,406) $ 55,553 $ 49,767
======== ======== ========
Options with weighted average exercise price greater than market price, excluded
from computation of diluted earnings per share:
Number of shares (in thousands) ................................................ 5,805 3,762 4,089
Weighted average exercise price ................................................ $7.43 $8.06 $6.95
The effect of an assumed conversion of the Company's Convertible Notes
into 12.9 million shares of common stock was excluded from the computation of
diluted net loss per share for Fiscal 2002 because the effect would have been
anti-dilutive. All options to purchase the Company's common stock at February 2,
2002, were excluded from the calculation of diluted net loss per share because
the effect would have been anti-dilutive.
Grants of stock awards under the Company's restricted stock award
programs generally require continuing employment for a specified period of time
as a condition for vesting of the award. Grants that have not vested and are
subject to a risk of forfeiture are included in the calculation of diluted
earnings per share using the treasury stock method if the impact of the award is
dilutive. Upon vesting, shares issued under these award programs are included in
the calculation of basic earnings per share.
EMPLOYEE RETIREMENT BENEFIT PLAN
The Company provides a comprehensive retirement benefit program for its
employees. This plan provides for a noncontributory profit-sharing contribution
which covers substantially all full-time employees who meet age and service
requirements. The contribution is completely discretionary and is determined by
the Board of Directors on an annual basis.
The program also includes a 401(k) employee savings plan under which
eligible participating employees may elect to contribute up to 15% of their
compensation to an investment trust. The 401(k) plan includes a matching Company
contribution of 50% of the participant's elective contribution on up to 6% of
the participant's compensation. Participating employees are immediately vested
in their own contributions. Full vesting in the matching Company contribution
occurs on the earlier of the participant's attainment of 6 years of service,
59
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 the Company's own common stock.
The total expense for the above plans amounted to $3,486,000,
$2,137,000, and $1,312,000 for Fiscal 2002, 2001, and 2000, respectively.
As of the dates of their respective acquisitions, Lane Bryant (through
The Limited, Inc.), Catherine's, and Modern Woman provided retirement plans for
their employees with benefits substantially the same as the Company's plan. Lane
Bryant participant accounts in The Limited's plan have been transferred to the
Company's plan, and the Catherine's and Modern Woman plans have been merged into
the Company's plan. Participants in these plans retain credited years of service
earned under those plans. In connection with the acquisition of Lane Bryant, the
Company assumed an unfunded liability of $4,244,000 for supplemental retirement
benefits for certain Lane Bryant employees.
Also available to officers and certain key executives is a
non-qualified deferred compensation plan. Under this plan, which was adopted
January 1, 1998, participants may contribute up to 77% of their base
compensation and 100% of bonus compensation.
ASSET SECURITIZATION
Asset securitization involves the sale by the Company's credit card
bank of Fashion Bug proprietary credit card receivables to a special purpose
entity, which in turn transfers the receivables to a qualified special purpose
entity (the "Trust") created for the securitization. Asset-backed certificates
issued by the Trust represent undivided interests in those credit card
receivables transferred into the Trust. Certificates issued by the Trust are
sold to investors, with any remaining undivided interest retained by the
Company. The Company includes the remaining undivided interest and any other
retained interest in investment securities available for sale in the
accompanying consolidated balance sheet. The carrying value of these retained
interests approximates their fair value. The assets and liabilities of the Trust
are not consolidated in the Company's balance sheet.
The Company records gains or losses on the securitization of Fashion
Bug credit card receivables based on the estimated fair value of the assets
retained and liabilities incurred in the sale. Gains represent the present value
of the estimated cash flows that the Company has retained over the estimated
outstanding period of the receivables. This excess cash flow essentially
represents an "interest-only" ("I/O") strip, consisting of the present value of
the excess finance charges and past due fees over the sum of the return paid to
certificate holders and credit losses. During Fiscal Years 2002, 2001, and 2000,
the Company recognized additions to the I/O strip of $14,074,000, $11,973,000,
and $9,876,000, respectively. Amortization and valuation adjustments in each
year were $12,763,000, $13,143,000, and $9,836,000, respectively. The value of
the I/O strip was $5,979,000, $4,668,000 and $5,838,000 as of the end of Fiscal
2002, 2001 and 2000, respectively. In addition, the Company recognized a
servicing liability of $3,950,000, $3,864,000, and $2,744,000 in Fiscal Years
2002, 2001, and 2000, respectively, and of those balances, $3,993,000,
$3,260,000, and $2,797,000 were amortized in each Fiscal Year, respectively. The
Company amortizes additions to the I/O strip and servicing liability on a
straight-line basis over the expected life of the credit card receivables, which
is generally less than one year. The expected life is computed using the
12-month rolling average of principal payments as a percent of outstanding trust
receivables sold.
Proceeds from the sale of new loans to the Trust were approximately
$423,089,000, $437,697,000, and $398,646,000 for Fiscal Years 2002, 2001, and
2000, respectively. At February 2, 2002 and February 3, 2001,
60
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATD FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
approximately $303,659,000 and $301,704,000, respectively, of investor
certificates remained outstanding. The investor certificates mature as follows:
$153,659,000 in the fiscal year ending February 1, 2003 and $150,000,000 in the
fiscal year ending January 29, 2005. The Company's retained interests in its
securitizations, which aggregated $47,240,000 and $47,724,000 at February 2,
2002 and February 3, 2001, respectively, are generally subordinated in right of
payment to certificates issued by the Trust to third-party investors. The
Company's 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, the
amount of receivables repurchased pursuant to this obligation has been
immaterial.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
a replacement of SFAS No. 125. The Company adopted the disclosure provisions of
SFAS No. 140 as of Fiscal 2001, and has adopted the accounting requirements of
SFAS No. 140 to the extent that it has issued new beneficial interests after
March 31, 2001. Management uses key valuation assumptions in determining the
fair value of its I/O strip. Key valuation assumptions relate to the average
lives of the receivables sold and anticipated credit losses, as well as the
appropriate market discount rate. The Company estimates the average lives of the
receivables and the anticipated credit losses using the rolling average of the
past twelve months' experience, adjusted as necessary for the future impact of
these key assumptions. The key assumptions used for the following sensitivities
are a loan payment rate of 13.5%, a discount rate of 12.0% and a credit loss
percentage of 12.7%. The average life of the receivables sold is approximately
0.6 years. A 10% and 20% adverse change in the loan payment rate would impact
the fair value of the I/O strip by $467,000 and $861,000, respectively. A 10%
and 20% adverse change in the discount rate would impact the fair value of the
I/O strip receivable by $20,000 and $38,000, respectively. A 10% and 20% adverse
change in the credit loss percentage would impact the fair value of the I/O
strip receivable by $731,000 and $1,462,000, respectively. These adverse changes
are hypothetical in nature and are presented in accordance with SFAS No. 140.
Collections reinvested in revolving-period securitizations were
$468,919,000 and $445,576,000 for Fiscal 2002 and 2001, respectively. Cash flows
received on retained interests were $38,992,000 and $34,963,000 for Fiscal 2002
and 2001, respectively. Servicing fees received were $6,003,000 and $5,708,000
for Fiscal 2002 and 2001, respectively. The Company is the servicer of the
Master Trust, and receives a servicing fee of approximately 2% of the investor
interest. Total net credit losses were $38,878,000 and $22,602,000 for Fiscal
2002 and 2001, respectively, and credit card accounts that were 90 or more days
delinquent at February 2, 2002 were $14,094,000.
Charming Shoppes Receivables Corp. and Charming Shoppes Seller, Inc.,
consolidated wholly owned indirect subsidiaries of the Company, are separate
special purpose entities created for the securitization program. At February 2,
2002, Charming Shoppes Receivables Corp. had $38,460,000 of Charming Shoppes
Master Trust Certificates (which are included in the $47,240,000 of retained
interests at February 2, 2002) and Charming Shoppes Seller, Inc. held retained
interests of $1,616,000. 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. The Company could be impacted by certain trigger events that would cause
the Trust to require additional enhancement from proceeds within the Trust that
would otherwise be available to the Company. Specifically, if either the Company
or the Trust fail to meet certain financial performance standards, a credit
enhancement condition would occur. During Fiscal 2002, credit card receivable
credit loss percentages exceeded a specified threshold percentage, which
obligates the Trust to accumulate $9.5 million into such an enhancement account,
which if not required to be paid to the other certificate holders, will be
available to the Company at the termination of the securitization series. As of
February 2, 2002, the Trust had $3.0 million segregated for such additional
enhancement purposes. The Company has no obligation to directly
61
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATD FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
fund such enhancement accounts of the Trust. The providers of the credit
enhancements and trust investors have no other recourse to the Company.
The Company has non-recourse agreements pursuant to which third parties
provide accounts receivable proprietary credit card sales funding programs for
both its Catherine's and Lane Bryant stores. These funding programs expire in
January 2005 for Catherine's and in January 2006 for Lane Bryant. Under these
agreements, the third parties reimburse the Company daily with respect to the
proprietary credit card sales generated by the respective store's credit card
accounts. The agreements may require the Company to repurchase receivables from
the third parties under certain conditions. Net proceeds received from sales of
Catherine's receivables for Fiscal 2002 and Fiscal 2001 were approximately
$129,098,000 and $121,093,000, respectively. The net balance of Catherine's
accounts receivable held by the third party at February 2, 2002 and February 3,
2001 was approximately $98,388,000 and $99,571,000, respectively. Net proceeds
received from sales of Lane Bryant receivables for Fiscal 2002 (subsequent to
the date of acquisition) were approximately $128,947,000. The net balance of
Lane Bryant accounts receivable held by the third party at February 2, 2002 was
approximately $206,247,000.
DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
Although the Company securitizes credit card receivables from its
Fashion Bug proprietary credit card program in a non-consolidated master trust,
the Company is exposed to fluctuations in interest rates. On September 15, 1999,
the Company entered into an interest rate swap transaction with a notional
amount of $50,000,000 that limited the Company's exposure to rising interest
rates should the one-month LIBOR rate increase to a rate above the agreement's
specified rate of 6.51%. During Fiscal 2001, the Company terminated the swap
agreement. In Fiscal 2002, the deferred loss related to this termination was
recognized in comprehensive income and is being amortized to selling, general,
and administrative expenses over 44 months (the remaining life of the original
swap period) in accordance with SFAS No. 133.
LEASES
The Company leases substantially all of its stores under non-cancelable
operating lease agreements. Generally, these leases have initial periods of 5 to
20 years and contain provisions for renewal options, additional rentals based on
a percentage of sales, and payment of certain real estate taxes. The Company
also leases certain other buildings and equipment.
Rental expense was:
(in thousands) 2002 2001 2000
---- ---- ----
Minimum rental ...................$158,878 $117,824 $ 86,438
Contingent rental ................ 26,201 18,901 15,399
-------- -------- ---------
$185,079 $136,725 $101,837
======== ======== ========
Minimum annual rental commitments for all non-cancelable leases for the
next five fiscal years and thereafter are: Fiscal 2003 - $212,248,000; Fiscal
2004 - $183,493,000; Fiscal 2005 - $150,041,000; Fiscal 2006 - $112,661,000;
Fiscal 2007 - $79,633,000; Thereafter - $170,389,000.
62
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATD FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
Rental expense includes charges from The Limited for office and
distribution center space under agreements which expire in August 2004. These
charges approximate market rates. The minimum annual rental commitments shown
above include $4,720,000, $4,720,000, and $2,557,000 for Fiscal 2003, Fiscal
2004, and Fiscal 2005, respectively, to be paid under these agreements.
Lane Bryant has subleased 207 properties from The Limited pursuant to a
Master Sublease. The properties subject to the Master Sublease were operated as
Lane Bryant stores prior to the closing of the acquisition. The Company has
guaranteed the obligations of Lane Bryant under the Master Sublease, and, in
connection with such guaranty, has entered into an agreement with The Limited,
which requires the Company to comply with certain financial covenants
restricting the incurrence of additional debt and payments to shareholders. The
minimum annual rental commitments shown above include amounts payable under the
Lane Bryant master sublease with The Limited which are guaranteed by the
Company, as follows: Fiscal 2003 - $25,990,000; Fiscal 2004 - $21,786,000;
Fiscal 2005 - $17,292,000; Fiscal 2006 - $11,183,000; Fiscal 2007 - $7,291,000;
Thereafter - $9,327,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of the carrying amounts and estimated fair
values of the Company's financial instruments:
February 2, 2002 February 3, 2001
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
------ ----- ------ -----
Assets:
Cash and cash equivalents ..............................$ 36,640 $ 36,640 $ 56,544 $ 56,544
Available-for-sale securities .......................... 70,366 70,366 125,278 125,278
Liabilities:
7.5% Convertible Subordinated Notes due 2006 ........... 96,047 101,089 96,047 93,012
Term loan due August 15, 2004 .......................... 67,500 67,500 0 0
7.77% mortgage note .................................... 10,885 10,885 0 0
8.15% note ............................................. 4,908 4,908 0 0
7.5% mortgage note ..................................... 6,261 6,261 6,449 6,449
Other long-term debt ................................... 13 13 108 108
The fair value of cash and cash equivalents approximates their carrying
amount because of the short maturities of such instruments. The fair value of
available-for-sale securities is based on quoted market prices of the
securities, except for certain equity securities that have no available bid/ask
or sales prices as they are not traded in the open market. The carrying amount
of these equity securities ($7,952,000 at February 2, 2002 and February 3, 2001)
was used to approximate fair value. The fair value of the Company's 7.5%
Convertible Subordinated Notes is based on quoted market prices for the
securities. The fair values of the term loan, mortgage notes, and other
long-term debt, based on estimated current interest rates that the Company could
obtain on similar borrowings, would not be significantly different from the
carrying value of the debt.
63
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATD FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
RESTRUCTURING CHARGE (CREDIT)
Store Restructuring and Elimination of Men's Merchandise From the Company's
Fashion Bug Stores
On March 5, 1998, the Company's Board of Directors approved a
restructuring plan that resulted in a pre-tax charge of $34,000,000. The plan
was approved in conjunction with the decision to eliminate men's merchandise
from the Company's Fashion Bug stores. The Company closed 72 stores and
downsized 100 stores in connection with the plan. Elimination of the men's
merchandise from the stores was completed in October 1998, the balance of the
men's inventory was sold, and the selling space used for men's merchandise was
re-merchandised. In Fiscal 2000, the Company determined that 21 of the stores
originally included in the plan would remain open as a result of negotiations
with landlords and changes in economic conditions. As a result, the Company
reversed reserves related to these stores and recognized a pre-tax restructuring
credit of $2,096,000 in Fiscal 2000. This restructuring plan was completed as of
February 3, 2001, and there are no remaining restructuring accruals relating to
this plan.
The restructuring charge included a $10,000,000 write-off of the
carrying value of fixtures and improvements in the stores to be reduced in size
or closed. The fixtures and improvements had no alternative use or salvage
value, and were expected to be scrapped at the time of the closing or downsizing
of the stores. The restructuring charge also included accruals for anticipated
payments to landlords for the early termination of existing store leases of
$19,700,000, severance payments of $320,000, costs to remove store signs and
entrances of $3,300,000, costs of supplies to be scrapped of $400,000, and legal
and architectural fees of $280,000. The accrual for severance payments was for
650 store employees expected to be terminated as a result of the store closings.
The number of employees actually terminated was reduced to 590 as a result of
the 21 stores that remained open, as discussed above, and the excess severance
accrual was reversed as part of the restructuring credit of $2,096,000
recognized in Fiscal 2000.
The following is a summary of restructuring charges accrued in
connection with the plan to eliminate men's merchandise from the Company's
Fashion Bug stores, and payments charged against the accrual:
Sign and
Entrance
Lease Removal Total
Termination and Other Accrued
(in thousands) Costs Costs Severance Costs
----- ----- --------- -----
Beginning accrual ...................................$19,700 $3,980 $ 320 $24,000
Fiscal 1999:
Payments ....................................... (6,071) (551) (200) (6,822)
-------- ------- ----- --------
Balance, January 30, 1999 ........................... 13,629 3,429 120 17,178
Fiscal 2000:
Payments ....................................... (6,955) (1,340) (90) (8,385)
Revision of cost estimate ...................... (1,784) (282) (30) (2,096)
-------- ------- ------ --------
Balance, January 29, 2000 ........................... 4,890 1,807 0 6,697
Fiscal 2001:
Payments ....................................... (4,890) (1,807) -- (6,697)
-------- ------- ------- --------
Balance, February 3, 2001 ...........................$ 0 $ 0 $ 0 $ 0
======== ======= ======= ========
64
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATD FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
Distribution Center Restructuring
On December 10, 1998, the Company's Board of Directors approved a plan
to close the Company's Bensalem, Pennsylvania distribution center and sell the
facility. The plan was approved in conjunction with the decision to consolidate
the Company's distribution center operations in the Company's Greencastle,
Indiana distribution center. The plan resulted in a pre-tax restructuring charge
of $20,246,000 during Fiscal 1999.
The restructuring charge included a $17,969,000 write-down of the cost
of the Bensalem facilities from a carrying value of $23,631,000 to a net
realizable value of $5,662,000, based on an independent appraisal. The
restructuring charge also included an accrual of $1,556,000 for severance costs
resulting from the termination of 90 warehouse and distribution personnel and
eleven management employees. In addition, the restructuring charge included an
accrual of $721,000 for incremental warehouse handling costs, outplacement
services for terminated employees, legal fees related to the sale of the
facility, and other non-recurring costs relating to the closure.
The Bensalem distribution center closed on December 10, 1998, and the
Company completed the sale of the Bensalem facility during Fiscal 2000. Upon
completion of the sale of the facility, the Company recognized a pre-tax
restructuring credit of $2,834,000 in Fiscal 2000, which primarily represented
sales proceeds in excess of the estimated net realizable value of the Bensalem
facility.
The following is a summary of restructuring charges accrued in
connection with the closing of the Bensalem facility, and payments charged
against the accrual:
Contractual
Warehouse
Handling Other Total
(in thousands) Severance Costs Costs Costs
--------- ----- ----- -----
Beginning accrual ....................................$ 1,556 $ 436 $ 285 $2,277
Fiscal 1999:
Payments ........................................ (981) (0) (26) (1,007)
------- ------- ------- -------
Balance, January 30, 1999 ............................ 575 436 259 1,270
Fiscal 2000:
Payments ........................................ (575) (436) (144) (1,155)
------- ------- ------- -------
Balance, January 29, 2000 ............................ 0 0 115 115
Fiscal 2001:
Payments ........................................ -- -- (115) (115)
------- ------- ------- --------
Balance, February 3, 2001 ............................$ 0 $ 0 $ 0 $ 0
======= ======= ======= ========
Closing of Modern Woman Stores
During the fourth quarter of Fiscal 2000, the Company recorded a
restructuring charge of $1,459,000 in connection with the Company's acquisitions
of Modern Woman and Catherine's. At the time of the Catherine's acquisition, the
Company had planned to consolidate Modern Woman stores into the Catherine's
division. The restructuring charge was primarily for lease termination costs
related to the closing of 11 Modern Woman stores that geographically overlapped
Catherine's stores. There were no payments charged against this accrual as of
January 29, 2000. During Fiscal 2001, the Company closed 10 of the 11 stores,
and accrued restructuring charges
65
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATD FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
of $1,086,000 related to the closed stores were paid. As of February 3, 2001,
$373,000 of accrued restructuring charges related to the remaining store were
unpaid. The Company closed the remaining store during Fiscal 2002, utilizing the
remaining accrual.
Closing/Conversion of The Answer/Added Dimensions and Fashion Bug Stores
On January 28, 2002, the Company announced a restructuring plan,
including a number of initiatives designed to position the Company for increased
profitability and growth in the plus-size businesses. The major components of
the plan include (1) the closing of The Answer/Added Dimensions chain of 77
stores and the conversion of approximately 20% of the Added Dimensions stores to
Catherine's stores, (2) the closing of 130 under-performing Fashion Bug stores,
and (3) the conversion of 44 Fashion Bug store locations to Lane Bryant stores.
The restructuring plan resulted in a pre-tax charge of $37,708,000 in the fourth
quarter of Fiscal 2002.
The restructuring charge includes a $17,763,000 non-cash write-down of
fixed assets (primarily store fixtures and improvements) in the stores to be
closed, $18,500,000 of anticipated payments to landlords for the early
termination of existing store leases, $829,000 for severance costs, and $616,000
for sign removal and other costs. The fixtures and improvements have no
alternative use or salvage value, and are expected to be scrapped at the time
the stores are closed. The estimated net after-tax cash cost of the
restructuring is approximately $6,747,000. The Company's balance sheet at
February 2, 2002 reflects the fixed asset write-down and the accrued lease
termination, severance, and other costs. The Company expects to complete the
restructuring plan by the end of Fiscal 2003.
NON-RECURRING GAIN FROM DEMUTUALIZATION OF INSURANCE COMPANY
During Fiscal 2000, the Company received a $6,700,000 stock
distribution from one of its mutual insurance carriers in connection with the
carrier's conversion to a publicly-held corporation (demutualization). In
accordance with the consensus reached in Emerging Issues Task Force Issue No.
99-4, "Accounting for Stock Received from the Demutualization of A Mutual
Insurance Company," the Company recorded the distribution at its fair value and
recognized the resulting non-recurring gain in income from continuing
operations, and subsequently sold the securities received.
66
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATD FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 2, 2002
(Continued)
QUARTERLY FINANCIAL INFORMATION (Unaudited)
First Second Third Fourth
(in thousands, except per share amounts) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal 2002(1)
Net sales ..................................... $394,761 $402,700 $549,295 $647,087
Gross profit .................................. 109,185 110,819 153,269 164,969
Net income (loss) ............................. 8,368 14,860 160 (27,794)(2)
Basic net income (loss) per share ............. .08 .15 .00 (.25)
Diluted net income (loss) per share ........... .08 .14 .00 (.25)
Fiscal 2001(3)
Net sales ..................................... $378,925 $429,658 $363,812 $434,684
Gross profit .................................. 107,409 133,128 108,236 123,752
Net income .................................... 7,733 26,841 7,377 9,147
Basic net income per share .................... .08 .27 .07 .09
Diluted net income per share .................. .08 .24 .07 .09
--------------------
(1) Results of operations for the third and fourth quarters of Fiscal 2002
include the results of Lane Bryant Inc. from August 16, 2001 (the date of
acquisition).
(2) Net loss includes an after-tax restructuring charge of $24,510.
(3) Fiscal 2001 consisted of 53 weeks. The fourth quarter of Fiscal 2001
consisted of 14 weeks.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
There are no matters that are required to be reported under this Item 9.
67
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding our directors is included under the caption
"Election of Directors" in our definitive proxy statement to be filed with the
Securities and Exchange Commission within 120 days of the end of our fiscal
year, which is incorporated herein by reference. Information regarding Executive
Officers is included under "Additional Part I Information - Our Executive
Officers," in Part I of this Report.
Item 11. Executive Compensation
Information regarding executive compensation is included under the
caption "Management 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
Information regarding the security ownership of certain beneficial
owners and management is included under the caption "Principal Shareholders and
Management Ownership" in our definitive proxy statement to be filed with the
Securities and Exchange Commission within 120 days of the end of our fiscal
year, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is
included under the captions "Certain Relationships and Related Transactions" and
"Compensation Committee Interlocks and Insider Participation" in our definitive
proxy statement to be filed with the Securities and Exchange Commission within
120 days of the end of our fiscal year, which is incorporated herein by
reference.
68
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The following Consolidated Financial Statements of Charming Shoppes,
Inc. and its subsidiaries are included in Part II, Item 8:
Page
----
Report of Independent Auditors .......................................................33
Consolidated Balance Sheets -- February 2, 2002 and February 3, 2001 .................34
Consolidated Statements of Operations and Comprehensive Income (Loss) --
years ended February 2, 2002, February 3, 2001, and January 29, 2000 .................35
Consolidated Statements of Stockholders' Equity -- years ended
February 2, 2002, February 3, 2001, and January 29, 2000 .............................36
Consolidated Statements of Cash Flows -- years ended
February 2, 2002, February 3, 2001, and January 29, 2000 .............................37
Notes to Consolidated Financial Statements ...........................................38
(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
No reports were filed during the quarter ended February 2, 2002.
(c) Exhibits, including those incorporated by reference
The following is a list of Exhibits filed as part of this Annual Report
on Form 10-K. Where so indicated by footnote, Exhibits that were previously
filed are incorporated by reference. For Exhibits incorporated by reference, the
location of the Exhibit in the previous filing is indicated in parenthesis.
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 The Limited, Inc.,
incorporated by reference to Form 8-K of the Registrant dated August 16, 2001,
filed on August 31, 2001. (Exhibit 2.1).
69
2.2 Services Agreement, dated as of August 16, 2001, between LBH, Inc. and The
Limited, Inc., incorporated by reference to Form 8-K of the 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 The Limited, Inc., incorporated by reference to Form 8-K of the
Registrant dated August 16, 2001, filed on August 31, 2001. (Exhibit 2.3).
2.4 Master Sublease, dated as of August 16, 2001, between The Limited, Inc. and
Lane Bryant, Inc., incorporated by reference to Form 8-K of the Registrant dated
August 16, 2001, filed on August 31, 2001. (Exhibit 2.4).
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 The Limited, Inc., incorporated by reference to Form 8-K of
the Registrant dated August 16, 2001, filed on August 31, 2001. (Exhibit 4.1).
4.3 Loan and Security Agreement, dated as of August 16, 2001, by and among
Charming Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI Industries,
Inc., Catherine Stores Corporation, Lane Bryant, Inc. and FB Apparel, Inc., as
Borrowers, Charming Shoppes of Delaware, Inc., as Borrowers' Agent, Congress
Financial Corporation, as Administrative Agent, Collateral Agent, Joint Lead
Arranger and Joint Bookrunner, J.P. Morgan Business Credit Corp., as Co-Agent,
Joint Lead Arranger and Joint Bookrunner and The Financial Institutions named
therein, as Lenders, incorporated by reference to Form 8-K of the Registrant
dated August 16, 2001, filed on August 31, 2001. (Exhibit 4.3).
4.4 Amendment No. 1, dated January 12, 2002, to Loan and Security Agreement
dated as of August 16, 2001 by and among Charming Shoppes, Inc., Charming
Shoppes of Delaware, Inc., CSI Industries, Inc.,
70
Catherine Stores Corporation, Lane Bryant, Inc. and FB Apparel, Inc., as
Borrowers, Charming Shoppes of Delaware, Inc., as Borrowers' Agent, Congress
Financial Corporation, as Administrative Agent, Collateral Agent, Joint Lead
Arranger and Joint Bookrunner, J.P. Morgan Business Credit Corp., as Co-Agent,
Joint Lead Arranger and Joint Bookrunner and The Financial Institutions named
therein, as Lenders.
4.5 Indenture, dated as of July 22, 1996, between Charming Shoppes, Inc. and
First Union National Bank.
Our miscellaneous long-term debt instruments and credit facility agreements,
under which the underlying authorized debt is equal to less than 10% of the
total assets of us and our subsidiaries on a consolidated basis, may not be
filed as exhibits to this report. We agree to furnish to the Commission, upon
request, copies of any such unfiled instruments.
Material Contracts
10.1.1 Series 1997-1 Supplement dated as of November 25, 1997 to the Second
Amended and Restated Pooling and Servicing Agreement dated as of November 25,
1997 by and among Charming Shoppes Receivables Corp., as Seller, Spirit of
America National Bank, as Servicer and First Union National Bank, as Trustee on
behalf of the Series 1997-1 Certificate Holders ($83,500,000 Charming Shoppes
Master Trust Series 1997-1), incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended January 31, 1998. (Exhibit 10.1.9).
10.1.2 Second Amended and Restated Pooling and Servicing Agreement, dated as of
November 25, 1997, as amended on July 22, 1999, among Charming Shoppes
Receivables Corp., as Seller, Spirit of America, Inc., as Servicer, and First
Union National Bank as Trustee, incorporated by reference to Form 8-K of
Charming Shoppes Master Trust and Charming Shoppes Receivables Corp., (No.
333-71757) dated July 22, 1999. (Exhibit No. 4.1).
10.1.3 Series 1999-1 Supplement, dated as of July 22, 1999, to Second Amended
and Restated Pooling and Service Agreement, dated as of November 25, 1997, as
amended on July 22, 1999, among Charming Shoppes Receivables Corp., as Seller,
Spirit of America, Inc., as Servicer, and First Union National Bank, as Trustee,
for $150,000,000 Charming Shoppes Master Trust Asset-Backed Certificates Series
1999-1, incorporated by reference to Form 8-K of Charming Shoppes Master Trust
and Charming Shoppes Receivables Corp., (No. 333-71757) dated July 22, 1999.
(Exhibit No. 4.2).
10.1.4 Receivables Purchase Agreement, dated as of May 28, 1999, among Charming
Shoppes Street, Inc. as Seller, Spirit of America, Inc., as Servicer, Clipper
Receivables Corporation, as Purchaser, State Street Capital Corporation, as
Administrator, and State Street Bank & Trust Company, as Relationship Bank.
10.1.5 Series 1999-2 Supplement, dated as of May 28, 1999, to Second Amended and
Restated Pooling and Service Agreement, dated as of November 25, 1997, as
amended on July 22, 1999, among Charming Shoppes Receivables Corp., as Seller,
Spirit of America, Inc., as Servicer, and First Union National Bank, as Trustee,
for $55,750,000 Charming Shoppes Master Trust Asset-Backed Certificates Series
1999-2, incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended January 29, 2000. (Exhibit 10.1.23).
10.1.6 Series 2000-VFC Supplement, dated as of November 9, 2000, to Second
Amended and Restated Pooling and Service Agreement, dated as of November 25,
1997, among Charming Shoppes Receivables Corp., as Seller, Spirit of America,
Inc., as Servicer, and First Union National Bank, as Trustee, on behalf
71
of the Series 2000-VFC Certificateholders, for up to $60,122,700 Charming
Shoppes Master Trust Series 2000-VFC, incorporated by reference to Form 10-K of
the Registrant for the fiscal year ended February 3, 2001. (Exhibit 10.1.16).
10.1.7 Certificate Purchase Agreement, dated as of November 9, 2000, among
Charming Shoppes Receivables Corp. as Seller and as the Class B Purchaser,
Spirit of America, Inc. as Servicer, Monte Rosa Capital Corporation as the
Conduit Purchaser, and ING Baring (U.S.) Capital Markets LLC as Administrator
for the Conduit Purchaser, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended February 3, 2001. (Exhibit 10.1.17).
10.1.8 Merchant Services Agreement, between Hurley State Bank and Catherines,
Inc., incorporated by reference to Form 10-Q of Catherines Stores Corp. for the
quarter ended May 1, 1999. (File No. 000-19372, Item 6. (A)(1)).
10.1.9 Credit Card Processing Agreement, among World Financial Network National
Bank, Lane Bryant, Inc. and Sierra Nevada Factoring, Inc., dated as of January
31, 1996.
10.1.10 Purchase and Sale Agreement, among Spirit of America National Bank, as
Seller, and Charming Shoppes Receivables Corp., as Purchaser, dated as of
November 25, 1997, incorporated by reference to Form S-1/A of Charming Shoppes
Receivables Corp. (No. 333-71757) (Exhibit 10.1(a)).
10.1.11 First Amendment to Purchase and Sale Agreement, among Spirit of America
National Bank, as Seller, and Charming Shoppes Receivables Corp., as Purchaser,
dated as of July 22, 1999, incorporated by reference to Form 8-K of Charming
Shoppes Receivables Corp. (No. 333-71757) (Exhibit 10.1).
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,
As Amended and Restated, incorporated by reference to Form 10-Q of the
Registrant for the quarter ended July 31, 1999. (Exhibit 10.1).
10.2.5 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).
72
10.2.6 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).
10.2.7 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).
10.2.8 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Restricted Stock Agreement, dated as of February 11, 2002.
10.2.9 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).
10.2.10 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).
10.2.11 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).
10.2.12 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).
10.2.13 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).
10.2.14 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).
10.2.15 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).
10.2.16 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).
10.2.17 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).
10.2.18 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).
73
10.2.19 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).
10.2.20 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan Stock
Option Agreement (regular vesting schedule).
10.2.21 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan Stock
Option Agreement (accelerated vesting schedule).
10.2.22 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Performance-Accelerated Stock Option Agreement.
10.2.23 The Charming Shoppes, Inc. Amended and Restated 2000 Associates' Stock
Incentive Plan Stock Option Agreement (regular vesting schedule).
10.2.24 The Charming Shoppes, Inc. Amended and Restated 2000 Associates' Stock
Incentive Plan Stock Option Agreement (accelerated vesting schedule).
10.2.25 The Charming Shoppes, Inc. Amended and Restated 2000 Associates' Stock
Incentive Plan Restricted Stock Agreement.
10.2.26 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 of
Charming Shoppes, Inc., are incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended January 29, 2000. (Exhibit 10.2.33).
Other Exhibits
21 Subsidiaries of Registrant
23 Consent of independent auditors
74
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 29, 2002 /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 the
Registrant 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 29, 2002 April 29, 2002
/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 29, 2002
April 29, 2002
/S/ ALAN ROSSKAMM /S/ MARVIN L. SLOMOWITZ
----------------- -----------------------
Alan Rosskamm Marvin L. Slomowitz
Director Director
April 29, 2002 April 29, 2002
/S/ MARJORIE MARGOLIES-MEZVINSKY /S/ PAMELA S. LEWIS
-------------------------------- -------------------
Marjorie Margolies-Mezvinsky Pamela S. Lewis
Director Director
April 29, 2002 April 29, 2002
/S/ KENNETH S. OLSHAN /S/ CHARLES T. HOPKINS
--------------------- ----------------------
Kenneth S. Olshan Charles T. Hopkins
Director Director
April 29, 2002 April 29, 2002
/S/ KATHERINE M. HUDSON
-----------------------
Katherine M. Hudson
Director
April 29, 2002
75
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 The Limited, Inc., incorporated by reference to Form
8-K of the Registrant dated August 16, 2001, filed on August
31, 2001. (Exhibit 2.1).
2.2 Services Agreement, dated as of August 16, 2001, between LBH,
Inc. and The Limited, Inc., incorporated by reference to Form
8-K of the 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 The Limited, Inc., incorporated by
reference to Form 8-K of the Registrant dated August 16, 2001,
filed on August 31, 2001. (Exhibit 2.3).
2.4 Master Sublease, dated as of August 16, 2001, between The
Limited, Inc. and Lane Bryant, Inc., incorporated by reference
to Form 8-K of the Registrant dated August 16, 2001, filed on
August 31, 2001. (Exhibit 2.4).
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 The Limited, Inc., incorporated by
reference to Form 8-K of the Registrant dated August 16, 2001,
filed on August 31, 2001. (Exhibit 4.1).
4.3 Loan and Security Agreement, dated as of August 16, 2001, by
and among Charming Shoppes, Inc., Charming Shoppes of
Delaware, Inc., CSI Industries, Inc., Catherine Stores
Corporation, Lane Bryant, Inc. and FB Apparel, Inc., as
Borrowers, Charming Shoppes of Delaware, Inc., as Borrowers'
Agent, Congress Financial Corporation, as Administrative
Agent, Collateral Agent, Joint Lead Arranger and Joint
Bookrunner, J.P. Morgan Business
76
Credit Corp., as Co-Agent, Joint Lead Arranger and Joint
Bookrunner and The Financial Institutions named therein, as
Lenders, incorporated by reference to Form 8-K of the
Registrant dated August 16, 2001, filed on August 31, 2001.
(Exhibit 4.3).
4.4 Amendment No. 1, dated January 12, 2002, to Loan and Security
Agreement dated as of August 16, 2001 by and among Charming
Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI
Industries, Inc., Catherine Stores Corporation, Lane Bryant,
Inc. and FB Apparel, Inc., as Borrowers, Charming Shoppes of
Delaware, Inc., as Borrowers' Agent, Congress Financial
Corporation, as Administrative Agent, Collateral Agent, Joint
Lead Arranger and Joint Bookrunner, J.P. Morgan Business
Credit Corp., as Co-Agent, Joint Lead Arranger and Joint
Bookrunner and The Financial Institutions named therein, as
Lenders.
4.5 Indenture, dated as of July 22, 1996, between Charming
Shoppes, Inc. and First Union National Bank.
10.1.1 Series 1997-1 Supplement dated as of November 25, 1997 to the
Second Amended and Restated Pooling and Servicing Agreement
dated as of November 25, 1997 by and among Charming Shoppes
Receivables Corp., as Seller, Spirit of America National Bank,
as Servicer and First Union National Bank, as Trustee on
behalf of the Series 1997-1 Certificate Holders ($83,500,000
Charming Shoppes Master Trust Series 1997-1), incorporated by
reference to Form 10-K of the Registrant for the fiscal year
ended January 31, 1998. (Exhibit 10.1.9).
10.1.2 Second Amended and Restated Pooling and Servicing Agreement,
dated as of November 25, 1997, as amended on July 22, 1999,
among Charming Shoppes Receivables Corp., as Seller, Spirit of
America, Inc., as Servicer, and First Union National Bank as
Trustee, incorporated by reference to Form 8-K of Charming
Shoppes Master Trust and Charming Shoppes Receivables Corp.,
(No. 333-71757) dated July 22, 1999. (Exhibit No. 4.1).
10.1.3 Series 1999-1 Supplement, dated as of July 22, 1999, to Second
Amended and Restated Pooling and Service Agreement, dated as
of November 25, 1997, as amended on July 22, 1999, among
Charming Shoppes Receivables Corp., as Seller, Spirit of
America, Inc., as Servicer, and First Union National Bank, as
Trustee, for $150,000,000 Charming Shoppes Master Trust
Asset-Backed Certificates Series 1999-1, incorporated by
reference to Form 8-K of Charming Shoppes Master Trust and
Charming Shoppes Receivables Corp., (No. 333-71757) dated July
22, 1999. (Exhibit No. 4.2).
10.1.4 Receivables Purchase Agreement, dated as of May 28, 1999,
among Charming Shoppes Street, Inc. as Seller, Spirit of
America, Inc., as Servicer, Clipper Receivables Corporation,
as Purchaser, State Street Capital Corporation, as
Administrator, and State Street Bank & Trust Company, as
Relationship Bank.
10.1.5 Series 1999-2 Supplement, dated as of May 28, 1999, to Second
Amended and Restated Pooling and Service Agreement, dated as
of November 25, 1997, as amended on July 22, 1999, among
Charming Shoppes Receivables Corp., as Seller, Spirit of
America, Inc., as Servicer, and First Union National Bank, as
Trustee, for $55,750,000 Charming Shoppes Master Trust
Asset-Backed Certificates Series 1999-2, incorporated by
reference to Form 10-K of the Registrant for the fiscal year
ended January 29, 2000. (Exhibit 10.1.23).
77
10.1.6 Series 2000-VFC Supplement, dated as of November 9, 2000, to
Second Amended and Restated Pooling and Service Agreement,
dated as of November 25, 1997, among Charming Shoppes
Receivables Corp., as Seller, Spirit of America, Inc., as
Servicer, and First Union National Bank, as Trustee, on behalf
of the Series 2000-VFC Certificateholders, for up to
$60,122,700 Charming Shoppes Master Trust Series 2000-VFC,
incorporated by reference to Form 10-K of the Registrant for
the fiscal year ended February 3, 2001. (Exhibit 10.1.16).
10.1.7 Certificate Purchase Agreement, dated as of November 9, 2000,
among Charming Shoppes Receivables Corp. as Seller and as the
Class B Purchaser, Spirit of America, Inc. as Servicer, Monte
Rosa Capital Corporation as the Conduit Purchaser, and ING
Baring (U.S.) Capital Markets LLC as Administrator for the
Conduit Purchaser, incorporated by reference to Form 10-K of
the Registrant for the fiscal year ended February 3, 2001.
(Exhibit 10.1.17).
10.1.8 Merchant Services Agreement, between Hurley State Bank and
Catherines, Inc., incorporated by reference to Form 10-Q of
Catherines Stores Corp. for the quarter ended May 1, 1999.
(File No. 000-19372, Item 6. (A)(1)).
10.1.9 Credit Card Processing Agreement, among World Financial
Network National Bank, Lane Bryant, Inc. and Sierra Nevada
Factoring, Inc., dated as of January 31, 1996.
10.1.10 Purchase and Sale Agreement, among Spirit of America National
Bank, as Seller, and Charming Shoppes Receivables Corp., as
Purchaser, dated as of November 25, 1997, incorporated by
reference to Form S-1/A of Charming Shoppes Receivables Corp.
(No. 333-71757) (Exhibit 10.1(a)).
10.1.11 First Amendment to Purchase and Sale Agreement, among Spirit
of America National Bank, as Seller, and Charming Shoppes
Receivables Corp., as Purchaser, dated as of July 22, 1999,
incorporated by reference to Form 8-K of Charming Shoppes
Receivables Corp. (No. 333-71757) (Exhibit 10.1).
10.2.1 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, As Amended and Restated, incorporated by reference to
Form 10-Q of the Registrant for the quarter ended July 31,
1999. (Exhibit 10.1).
10.2.5 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).
78
10.2.6 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).
10.2.7 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).
10.2.8 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive
Plan Restricted Stock Agreement, dated as of February 11,
2002.
10.2.9 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).
10.2.10 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).
10.2.11 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).
10.2.12 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).
10.2.13 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).
10.2.14 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).
10.2.15 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).
10.2.16 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).
10.2.17 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).
10.2.18 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).
79
10.2.19 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).
10.2.20 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive
Plan Stock Option Agreement (regular vesting schedule).
10.2.21 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive
Plan Stock Option Agreement (accelerated vesting schedule).
10.2.22 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive
Plan Performance-Accelerated Stock Option Agreement.
10.2.23 The Charming Shoppes, Inc. Amended and Restated 2000
Associates' Stock Incentive Plan Stock Option Agreement
(regular vesting schedule).
10.2.24 The Charming Shoppes, Inc. Amended and Restated 2000
Associates' Stock Incentive Plan Stock Option Agreement
(accelerated vesting schedule).
10.2.25 The Charming Shoppes, Inc. Amended and Restated 2000
Associates' Stock Incentive Plan Restricted Stock Agreement.
10.2.26 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 of Charming
Shoppes, Inc., are incorporated by reference to Form 10-K of
the Registrant for the fiscal year ended January 29, 2000.
(Exhibit 10.2.33).
21 Subsidiaries of Registrant
23 Consent of independent auditors
80