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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 2002
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File No. 000-07258
CHARMING SHOPPES, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1721355
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 WINKS LANE, BENSALEM, PA 19020
(Address of principal executive offices) (Zip Code)
(215) 245-9100
(Registrant's telephone number, including Area Code)
NOT APPLICABLE
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of the issuer's Common Stock, as of August
3, 2002, was 122,342,213 shares.
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CHARMING SHOPPES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
August 3, 2002 and February 2, 2002............................... 2-3
Condensed Consolidated Statements of Operations
Thirteen weeks ended August 3, 2002 and August 4, 2001............ 4
Twenty-six weeks ended August 3, 2002 and August 4, 2001.......... 5
Condensed Consolidated Statements of Comprehensive Income (Loss)
Thirteen and Twenty-six weeks ended August 3, 2002 and
August 4, 2001.............................................. 6
Condensed Consolidated Statements of Cash Flows
Twenty-six weeks ended August 3, 2002 and August 4, 2001.......... 7
Notes to Condensed Consolidated Financial Statements.................... 8-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking Statements.............................................. 18-19
Critical Accounting Policies............................................ 19-20
Results of Operations................................................... 20-25
Recent Developments..................................................... 26-27
Liquidity and Capital Resources......................................... 27-30
Financing............................................................... 30-31
Market Risk............................................................. 31
Impact of Recent Accounting Pronouncements.............................. 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 32
Item 4. Controls and Procedures........................................ 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 33
Item 2. Changes in Securities and Use of Proceeds...................... 33-34
Item 4. Submission of Matters to a Vote of Security Holders............ 34
Item 6. Exhibits and Reports on Form 8-K............................... 34-36
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
August 3, February 2,
(In thousands) 2002 2002
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents ........................................ $ 120,891 $ 36,640
Available-for-sale securities, including fair value adjustments of
$(38) and $24, respectively .................................. 61,008 48,351
Merchandise inventories .......................................... 308,351 300,407
Deferred taxes ................................................... 20,704 21,228
Prepayments and other ............................................ 106,793 78,118
---------- ----------
Total current assets ......................................... 617,747 484,744
---------- ----------
Property, equipment, and leasehold improvements .................. 652,024 657,067
Less: accumulated depreciation and amortization .................. 348,925 341,055
---------- ----------
Net property, equipment, and leasehold improvements .......... 303,099 316,012
---------- ----------
Trademarks and other intangible assets ........................... 171,459 171,794
Goodwill ......................................................... 65,444 110,243
Available-for-sale securities, including fair value adjustments of
$(133) and $(39), respectively ............................... 29,015 22,015
Other assets ..................................................... 15,117 27,869
---------- ----------
Total assets ..................................................... $1,201,881 $1,132,677
========== ==========
See Notes to Condensed Consolidated Financial Statements
2
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
August 3, February 2,
(In thousands except share and per-share amounts) 2002 2002
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings ............................................ $ 0 $ 54,296
Accounts payable ................................................. 141,119 107,891
Accrued expenses ................................................. 169,249 148,373
Income taxes payable ............................................. 16,209 0
Deferred taxes ................................................... 24,900 0
Accrued restructuring costs ...................................... 14,261 19,758
Current portion - long-term debt ................................. 10,334 9,379
---------- ----------
Total current liabilities .................................... 376,072 339,697
---------- ----------
Deferred taxes ................................................... 8,787 33,687
Long-term debt ................................................... 189,992 208,491
Minority interest ................................................ 549 1,000
Stockholders' equity
Common Stock $.10 par value
Authorized - 300,000,000 shares
Issued - 125,017,213 shares at August 3, 2002 and
111,891,156 shares at February 2, 2002 .................... 12,502 11,189
Additional paid-in capital ....................................... 199,213 103,267
Treasury stock at cost - 2,675,000 shares at August 3, 2002 ...... (18,271) 0
Deferred employee compensation ................................... (4,009) (3,741)
Accumulated other comprehensive loss ............................. (744) (818)
Retained earnings ................................................ 437,790 439,905
---------- ----------
Total stockholders' equity ................................... 626,481 549,802
---------- ----------
Total liabilities and stockholders' equity ....................... $1,201,881 $1,132,677
========== ==========
See Notes to Condensed Consolidated Financial Statements
3
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen Weeks Ended
August 3, August 4,
(In thousands except per-share amounts) 2002 2001
---- ----
Net sales ............................................... $ 638,307 $ 402,700
--------- ---------
Cost of goods sold, buying, and occupancy expenses ...... 441,246 291,881
Selling, general, and administrative expenses ........... 151,391 84,308
Amortization of goodwill ................................ 0 1,221
--------- ---------
Total operating expenses ................................ 592,637 377,410
--------- ---------
Income from operations .................................. 45,670 25,290
Other income, principally interest ...................... 719 1,377
Interest expense ........................................ (5,678) (2,386)
--------- ---------
Income before income taxes .............................. 40,711 24,281
Income tax provision .................................... 15,552 9,421
--------- ---------
Income before minority interest ......................... 25,159 14,860
Minority interest in net loss of consolidated subsidiary,
net of income taxes of $242 ......................... 390 0
--------- ---------
Net income .............................................. $ 25,549 $ 14,860
========= =========
Basic net income per share .............................. $ .22 $ .15
========= =========
Diluted net income per share ............................ $ .20 $ .14
========= =========
Certain prior-period amounts have been reclassified to conform to the current
presentation.
See Notes to Condensed Consolidated Financial Statements
4
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Twenty-six Weeks Ended
August 3, August 4,
(In thousands except per-share amounts) 2002 2001
---- ----
Net sales ................................................................ $ 1,268,923 $ 797,461
----------- -----------
Cost of goods sold, buying, and occupancy expenses ....................... 880,054 577,457
Selling, general, and administrative expenses ............................ 310,547 178,241
Amortization of goodwill ................................................. 0 2,443
----------- -----------
Total operating expenses ................................................. 1,190,601 758,141
----------- -----------
Income from operations ................................................... 78,322 39,320
Other income, principally interest ....................................... 1,163 3,405
Interest expense ......................................................... (12,480) (4,771)
----------- -----------
Income before income taxes and cumulative effect of accounting change .... 67,005 37,954
Income tax provision ..................................................... 25,596 14,726
----------- -----------
Income before minority interest and cumulative effect of accounting change 41,409 23,228
Minority interest in net loss of consolidated subsidiary,
net of income taxes of $279 .......................................... 451 0
----------- -----------
Income before cumulative effect of accounting change ..................... 41,860 23,228
Cumulative effect of accounting change ................................... (43,975) 0
----------- -----------
Net income (loss) ........................................................ $ (2,115) $ 23,228
=========== ===========
Basic net income (loss) per share:
Income before cumulative effect of accounting change ..................... $ .37 $ .23
Cumulative effect of accounting change ................................... (.39) .00
----------- -----------
Net income (loss) ........................................................ $ (.02) $ .23
=========== ===========
Net income (loss) per share, assuming dilution:
Income before cumulative effect of accounting change ..................... $ .33 $ .22
Cumulative effect of accounting change ................................... (.33) .00
----------- -----------
Net income (loss) ........................................................ $ .00 $ .22
=========== ===========
Certain prior-period amounts have been reclassified to conform to the current
presentation.
See Notes to Condensed Consolidated Financial Statements
5
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
August 3, August 4, August 3, August 4,
(In thousands) 2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) ................................... $ 25,549 $ 14,860 $ (2,115) $ 23,228
-------- -------- -------- --------
Unrealized losses on available-for-sale securities,
net of income taxes of $79, $9, $59, and $6,
respectively .................................... (112) (44) (97) (52)
Reclassification of realized losses on available-
for-sale securities, net of income taxes of $(4) 6
Unamortized deferred loss on termination of
derivative, net of income taxes of $620 ......... (1,152)
Reclassification of amortization of deferred loss on
termination of derivative, net of income taxes
of $(46), $(52), $(92) and $(92), respectively .. 85 97 171 171
-------- -------- -------- --------
Total other comprehensive income (loss),
net of taxes .................................... (27) 53 74 (1,027)
-------- -------- -------- --------
Comprehensive income (loss) ......................... $ 25,522 $ 14,913 $ (2,041) $ 22,201
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements
6
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six Weeks Ended
August 3, August 4,
(In thousands) 2002 2001
---- ----
Operating activities
Net income (loss) ......................................... $ (2,115) $ 23,228
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ......................... 38,813 25,750
Cumulative effect of accounting change ................ 43,975 0
Loss (gain) from disposition of capital assets ........ 1,870 (214)
Capitalized interest on conversion of convertible notes 3,026 0
Other, net ............................................ (484) 529
Changes in operating assets and liabilities:
Merchandise inventories ............................ (7,944) (16,883)
Accounts payable ................................... 33,228 10,579
Prepayments and other .............................. (14,172) (252)
Accrued expenses ................................... 22,224 (12,154)
Income taxes payable ............................... 16,209 8,351
Accrued restructuring costs ........................ (5,497) 0
--------- ---------
Net cash provided by operating activities ................. 129,133 38,934
--------- ---------
Investing activities
Investment in capital assets .............................. (24,829) (30,928)
Proceeds from sales of available-for-sale securities ...... 3,922 89,488
Gross purchases of available-for-sale securities .......... (23,735) (26,900)
Increase (decrease) in other assets ....................... 2,242 (489)
--------- ---------
Net cash (used in) or provided by investing activities .... (42,400) 31,171
--------- ---------
Financing activities
Proceeds from short-term borrowings ....................... 222,613 0
Repayments of short-term borrowings ....................... (276,909) 0
Proceeds from long-term borrowings ........................ 150,000 0
Repayments of long-term borrowings ........................ (79,079) (2,730)
Payments of deferred financing costs ...................... (5,378) 0
Purchases of treasury stock ............................... (18,271) 0
Proceeds from exercise of stock options ................... 4,542 1,617
--------- ---------
Net cash used in financing activities ..................... (2,482) (1,113)
--------- ---------
Increase in cash and cash equivalents ..................... 84,251 68,992
Cash and cash equivalents, beginning of period ............ 36,640 56,544
--------- ---------
Cash and cash equivalents, end of period .................. $ 120,891 $ 125,536
========= =========
Non-cash financing and investing activities
Common stock issued on conversion of convertible notes .... $ 92,131 $ 0
========= =========
Equipment acquired through capital leases ................. $ 640 $ 8,790
========= =========
See Notes to Condensed Consolidated Financial Statements
7
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of August 3, 2002, the
condensed consolidated statements of operations and comprehensive income (loss)
for the thirteen and twenty-six weeks ended August 3, 2002 and August 4, 2001,
and the condensed consolidated statements of cash flows for the twenty-six weeks
ended August 3, 2002 and August 4, 2001 have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include
normal recurring adjustments) necessary to present fairly the financial position
at August 3, 2002, the results of operations for the thirteen and twenty-six
weeks ended August 3, 2002 and August 4, 2001, and cash flows for the twenty-six
weeks ended August 3, 2002 and August 4, 2001 have been made. Certain prior-year
amounts in the condensed consolidated statements of operations have been
reclassified to conform to the current presentation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's February 2,
2002 Annual Report on Form 10-K. The results of operations for the thirteen and
twenty-six weeks ended August 3, 2002 and August 4, 2001 are not necessarily
indicative of operating results for the full fiscal year.
As used in these notes, the terms "Fiscal 2003" and "Fiscal 2002" refer to
the Company's fiscal year ending February 1, 2003 and fiscal year ended February
2, 2002, respectively. The terms "the Company", "we", "us", and "our" refer to
Charming Shoppes, Inc. and, where applicable, its consolidated subsidiaries.
2. Acquisition
On August 16, 2001, we acquired 100% of the outstanding stock of Lane
Bryant, Inc. ("Lane Bryant") from a subsidiary of Limited Brands, Inc. ("Limited
Brands"). The acquisition has been accounted for under the purchase method of
accounting, and the results of operations of Lane Bryant are included in our
results of operations for the thirteen and twenty-six weeks ended August 3,
2002. Prior-period results have not been restated.
The acquisition of Lane Bryant complements our long-term growth strategy of
becoming a leader in the sale of plus-size specialty apparel. Lane Bryant is a
premier brand in the plus-size market with an established customer base and
proprietary brand names, and operates profitably in multiple retail venues,
primarily in leading malls.
The following unaudited pro forma results of operations for the thirteen
and twenty-six weeks ended August 4, 2001 are based on historical data, and give
effect to our acquisition of Lane Bryant as if the acquisition had occurred on
February 4, 2001. The pro forma information includes adjustments having a
continuing impact on the consolidated company as a result of using the purchase
method of accounting for the acquisition. Pro forma adjustments consist of
additional depreciation from the step-up in value of property, equipment, and
leasehold improvements acquired, additional amortization expense related to
intangible assets acquired, additional interest expense and amortization of
deferred financing costs related to debt incurred to finance the acquisition,
and a reduction in interest income from the use of approximately $83,000,000 of
our cash and cash equivalents to fund a portion of the acquisition.
8
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Acquisition (continued)
The unaudited pro forma results of operations are not necessarily
indicative of the actual results of operations that would have occurred if the
acquisition had occurred as of February 4, 2001, and are not necessarily
indicative of the results that may be achieved in the future. The unaudited pro
forma information does not reflect adjustments for operating synergies that we
may realize as a result of the acquisition. No assurances can be given as to the
amount and timing of any financial benefits that we may realize as a result of
the acquisition.
Thirteen Twenty-six
Weeks Ended Weeks Ended
(In thousands) August 4, 2001 August 4, 2001
-------------- --------------
Net sales ........... $ 633,581 $ 1,265,054
Net income .......... 16,684 29,914
Net income per share:
Basic ........... $ .15 $ .27
Diluted ......... .14 .26
In connection with the acquisition of Lane Bryant, we recorded a liability
of $4,640,000 for estimated costs related to an unfavorable service contract.
During the twenty-six weeks ended August 3, 2002, we finalized the contract and
revised our estimate of costs related to the contract to $2,292,000. In
addition, we recorded a liability of $1,000,000 for severance in accordance with
an agreement entered into with an affiliate of Limited Brands at the time of the
acquisition to use the distribution center and receive related distribution
services on a transition basis. These changes resulted in a net reduction of
$824,000 (net of income taxes of $524,000) in the goodwill recognized in
connection with the Lane Bryant acquisition.
3. Trademarks and Other Intangible Assets
August 3, February 2,
(In thousands) 2002 2002
---- ----
Trademarks, tradenames, and internet domain names . $168,800 $168,800
Customer lists and covenant not to compete ........ 3,300 3,300
-------- --------
Total at cost ..................................... 172,100 172,100
Less accumulated amortization of customer lists and
covenant not to compete ....................... 641 306
-------- --------
Net trademarks and other intangible assets ........ $171,459 $171,794
======== ========
9
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Debt
Long-term debt:
August 4, February 2,
(In thousands) 2002 2002
---- ----
4.75% Senior Convertible Notes due 2012 .... $150,000 $ 0
7.5% Convertible Subordinated Notes due 2006 0 96,047
Term loan due August 16, 2004 .............. 0 67,500
Capital lease obligations .................. 29,129 32,256
7.77% mortgage note ........................ 10,686 10,885
8.15% mortgage note ........................ 4,341 4,908
7.5% mortgage note ......................... 6,162 6,261
Other ...................................... 8 13
-------- --------
Total long-term debt ................... 200,326 217,870
Less current portion ....................... 10,334 9,379
-------- --------
$189,992 $208,491
======== ========
On May 28, 2002, we completed a private placement of $130,000,000 of 4.75%
Senior Convertible Notes due 2012 (the "Senior Notes"). On June 20, 2002, the
initial purchasers of the private placement exercised their option to purchase
an additional $20,000,000 principal amount of the Senior Notes, resulting in the
private placement of Senior Notes in an aggregate principal amount of
$150,000,000.
The Senior Notes will mature on June 1, 2012 and are convertible at any
time prior to maturity into shares of our common stock at a conversion price of
$9.88, subject to adjustment upon certain events. The Senior Notes are
redeemable at our option, in whole or in part, at any time on or after June 4,
2007, at declining redemption prices, starting at 102.38% of principal and
decreasing to 100.48% on or after June 1, 2011. Under certain circumstances
involving a change in control of the Company, holders of the Senior Notes may
require us to repurchase all or a portion of the Senior Notes at 100% of the
principal amount plus accrued and unpaid interest, if any. Also, under such
circumstances we have the option of paying the repurchase price in shares of our
common stock, valued at 95% of the average of the closing prices of the common
stock for the five-day trading period immediately before and including the third
trading day preceding the repurchase date. There is no sinking fund for the
Senior Notes.
Net proceeds received from the issuance of the Senior Notes were
$145,500,000. We used a portion of the net proceeds to repay in full our
$67,500,000 term loan due August 16, 2004, $3,486,000 outstanding under our
revolving credit facility, and $6,942,000 of the 7.5% Convertible Subordinated
Notes due 2006 called for redemption (see below). We also used a portion of the
proceeds to purchase 2,675,000 shares of our common stock at a cost of
$18,271,000. The remaining proceeds ($49,301,000) were invested in cash and cash
equivalents pending their use for other corporate purposes. In addition, we
wrote off $951,000 of unamortized deferred financing costs related to the term
loan. The write-off of the deferred financing costs
10
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Debt (continued)
has been included in continuing operations in the Consolidated Statements of
Operations for the thirteen and twenty-six weeks ended August 3, 2002, in
accordance with the early-application provisions of SFAS No. 145 (see "Note 11.
Impact of Recent Accounting Pronouncements" below). The term loan that was
repaid had an 11.5% interest rate and various financial covenants.
On May 29, 2002, we called our 7.5% Convertible Subordinated Notes due
2006 (the "Subordinated Notes") for redemption on June 28, 2002. The redemption
price was 102.5% of the principal amount of the Subordinated Notes, plus accrued
and unpaid interest up to the date of redemption. The Subordinated Notes had an
original maturity date of July 15, 2006, and could be converted into shares of
our common stock until the close of business on June 27, 2002 at a conversion
price of $7.46. During the twenty-six weeks ended August 4, 2002, $89,105,000
principal amount of the Subordinated Notes were converted into 11,944,338 shares
of our common stock pursuant to the conversion terms of the Notes. Accrued
interest expense of $3,026,000 on the Subordinated Notes that were converted has
been reclassified to additional paid-in capital. On June 28, 2002, the remaining
Subordinated Notes, with an aggregate principal amount of $6,942,000, were
redeemed for $7,351,000, including the 2.5% redemption premium and accrued
interest of $236,000 to the date of redemption. The redemption premium of
$174,000 has been included in continuing operations in the Consolidated
Statements of Operations for the thirteen and twenty-six weeks ended August 3,
2002, in accordance with the early-application provisions of SFAS No. 145 (see
"Note 11. Impact of Recent Accounting Pronouncements" below).
5. Accrued Restructuring Costs
On January 28, 2002, we announced a restructuring plan, including a
number of initiatives designed to position the Company for increased
profitability and growth in the plus-size businesses. The major components of
the plan 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 included a $17,763,000 non-cash write-down of
fixed assets (primarily store fixtures and improvements) in the stores to be
closed, $18,500,000 of anticipated payments to landlords for the early
termination of existing store leases, $829,000 for severance costs, and $616,000
for sign removal and other costs. The fixtures and improvements have no
alternative use or salvage value, and we expect to scrap them at the time the
stores are closed. During the twenty-six weeks ended August 3, 2002, we closed
118 stores in connection with the restructuring plan. We expect to substantially
complete the restructuring plan by the end of Fiscal 2003.
11
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Accrued Restructuring Costs (continued)
The following is a summary of restructuring costs accrued in connection
with the plan and payments charged against the accrual during the twenty-six
weeks ended August 3, 2002:
Accrued At Accrued At
February 2, August 3,
(In thousands) 2002 Payments 2002
---- -------- ----
Lease terminations/amendments $ 18,500 $ (5,022) $ 13,478
Severance ................... 829 (449) 380
Sign removal and other costs 429 (26) 403
-------- -------- --------
$ 19,758 $ (5,497) $ 14,261
======== ======== ========
6. Stockholders' Equity
Twenty-six
Weeks Ended
(In thousands) August 3, 2002
--------------
Total stockholders' equity, beginning of period ...................... $ 549,802
Conversion of convertible notes ...................................... 92,131
Purchases of treasury stock .......................................... (18,271)
Net loss ............................................................. (2,115)
Exercises of stock options ........................................... 4,230
Amortization of deferred compensation expense ........................ 630
Amortization of deferred loss on termination of derivative, net of tax 171
Unrealized losses on available-for-sale securities, net of tax ....... (97)
---------
Total stockholders' equity, end of period ............................ $ 626,481
=========
Subsequent to the end of the quarter, we purchased 3,175,331 shares of our
common stock from Limited Brands for $21,291,000 and agreed to purchase an
additional 6,350,662 shares from Limited Brands for $44,137,000 (see "Note 12.
Subsequent Events" below).
7. Derivative Financial Instruments
We adopted the provisions of Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
as of the beginning of Fiscal 2002. During the fiscal year ended February 3,
2001 ("Fiscal 2001"), we terminated an interest rate swap agreement with a
notional principal amount of $50,000,000. In accordance with SFAS No. 133, we
recognized the deferred loss on termination of the swap as of February 4, 2001
($1,152,000 net of a tax benefit of $621,000) in "Accumulated other
comprehensive (loss) income" during the twenty-six weeks ended August 4, 2001.
We are amortizing the deferred loss to selling, general, and administrative
expenses over the 44-month remaining life of the original swap period.
12
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. Customer Loyalty Card Program
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. The program grants discounts on customer purchases over a
twelve-month period upon payment of a $25 annual fee. Revenues from card fees
under the program are recognized as sales over the life of the membership
dependent on 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. Costs we incur in connection
with administering the program are recognized in cost of goods sold as incurred.
During the thirteen weeks ended August 3, 2002 and August 4, 2001, we recognized
revenues of $6,096,000 and $2,882,000, respectively, in connection with this
program. During the twenty-six weeks ended August 3, 2002 and August 4, 2001, we
recognized revenues of $10,407,000 and $3,627,000, respectively, in connection
with this program.
9. Net Income Per Share
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
August 3, August 4, August 3, August 4,
(In thousands, except per-share amounts) 2002 2001 2002 2001
---- ---- ---- ----
Basic weighted average common shares
outstanding .................................... 115,621 101,377 113,681 101,311
Dilutive effect of assumed conversion of
4.75% senior convertible notes ................. 10,233 0 5,117 0
Dilutive effect of assumed conversion of
7.5% convertible subordinated notes ............ 9,148 12,875 11,012 12,875
Dilutive effect of stock options ................... 2,208 973 2,297 1,001
--------- --------- --------- ---------
Diluted weighted average common shares
and equivalents outstanding .................... 137,210 115,225 132,107 115,187
========= ========= ========= =========
Income before cumulative effect of
accounting change .............................. $ 25,549 $ 14,860 $ 41,860 $ 23,228
Decrease in interest expense from assumed
conversion of notes, net of income taxes ....... 1,352 1,114 2,472 2,229
--------- --------- --------- ---------
Income before cumulative effect of
accounting change used to determine
diluted earnings per share ..................... 26,901 15,974 44,332 25,457
Cumulative effect of accounting change ............. 0 0 (43,975) 0
--------- --------- --------- ---------
Net income used to determine diluted
earnings per share ............................. $ 26,901 $ 15,974 $ 357 $ 25,457
========= ========= ========= =========
Options with weighted average exercise price
greater than market price, excluded
from computation of diluted earnings per share:
Number of shares ............................... 1,075 4,710 951 5,181
Weighted average exercise price per share ...... $ 11.03 $ 7.76 $ 11.46 $ 7.58
13
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Net Income Per Share (continued)
Subsequent to the end of the quarter, we purchased 3,175,331 shares of our
common stock and agreed to purchase an additional 6,350,662 shares of our common
stock from Limited Brands (see "Note 12. Subsequent Events" below).
10. Cumulative Effect of Accounting Change
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." We
adopted the provisions of SFAS No. 142 in full as of February 3, 2002 (see "Note
11. Impact of Recent Accounting Pronouncements" below). Our consolidated balance
sheet as of February 2, 2002 included $87,205,000 of goodwill related to the
acquisition of Catherine's Stores Corporation ("Catherine's").
In accordance with the transition provisions of SFAS No. 142, we tested the
Catherine's goodwill for impairment during the thirteen weeks ended August 3,
2002. We determined that the carrying value of the Catherine's goodwill
(including the value of intangible assets not separately accounted for) exceeded
the estimated fair value of the Catherine's goodwill under SFAS No. 142. We
determined the estimated fair value of the Catherine's goodwill using the
present value of expected future cash flows associated with the Catherine's
assets, and we recorded a write-down, which is not deductible for income tax
purposes, of $43,975,000 to reduce the carrying value of the goodwill to its
estimated fair value. The majority of the write-down is attributable to the
value of unrecorded trademarks. The write-down has been presented as the
cumulative effect of an accounting change as of February 3, 2002 in our
Consolidated Statement of Operations for the twenty-six weeks ended August 3,
2002. The calculation of the estimated fair value of the Catherine's goodwill
required estimates, assumptions, and judgments, and results might have been
materially different if different estimates, assumptions, and judgments had been
used.
We also evaluated our goodwill, trademarks, tradenames, and internet domain
names related to the Lane Bryant acquisition as of February 3, 2002, and
determined that there has been no impairment of these assets.
11. 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. 142, 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 upon adoption of SFAS No. 142 and at least annually thereafter,
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
14
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
11. Impact of Recent Accounting Pronouncements (continued)
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.
We adopted the provisions of SFAS No. 142 in full as of February 3,
2002. During the thirteen and twenty-six weeks ended August 4, 2001, we
recognized amortization of Catherine's goodwill of $1,221,000 and $2,443,000,
respectively. Commencing February 3, 2002, we are no longer amortizing the
Catherine's goodwill. In accordance with the provisions of SFAS No. 142, we will
periodically review the value of the Catherine's goodwill and goodwill related
to our acquisition of Lane Bryant for impairment (see "Note 10. Cumulative
Effect of Accounting Change" above).
The pro forma effect of applying the non-amortization provisions of
SFAS No. 142 for the thirteen and twenty-six weeks ended August 4, 2001 is as
follows:
Thirteen Twenty-six
Weeks Ended Weeks Ended
(In thousands) August 4, 2001 August 4, 2001
-------------- --------------
Net income as reported .......................................... $ 14,860 $ 23,228
Amortization of goodwill (1) .................................... 1,221 2,443
---------- ----------
Pro forma net income excluding goodwill amortization ............ $ 16,081 $ 25,671
========== ==========
Fully diluted net income per share as reported .................. $ .14 $ .22
Pro forma per share effect of excluding goodwill amortization (1) .01 .02
---------- ----------
Pro forma fully diluted net income per share .................... $ .15 $ .24
========== ==========
----------
(1) The goodwill amortization is not deductible for tax purposes and therefore
has no related tax effect.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002, and addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. We do not expect adoption of SFAS No. 143 to
have a material impact on our 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. During the thirteen weeks ended August 3, 2002, we recorded a
$2,700,000 write-down of under-performing assets related to our joint venture
pursuant to SFAS No. 144. The amount of the write-down is the same as what would
have been recorded under previously applicable accounting standards. The
adoption of SFAS No. 144
15
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
11. Impact of Recent Accounting Pronouncements (continued)
did not have a material impact on our financial position or results of
operations for the thirteen and twenty-six weeks ended August 3, 2002.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 requires gains and losses on extinguishments of debt
to be classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS No. 4. Extraordinary
treatment will be required for certain extinguishments as provided in Accounting
Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." SFAS No. 145 also
amends SFAS No. 13, "Accounting for Leases" to require certain modifications to
capital leases to be treated as sale-leaseback transactions and modifies the
accounting for sub-leases when the original lessee remains a secondary obligor
(or guarantor). SFAS No. 145 also rescinded SFAS No. 44 "Accounting for
Intangible Assets of Motor Carriers," and made numerous technical corrections.
SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. Upon
adoption of SFAS No. 145, any gain or loss on extinguishment of debt previously
classified as an extraordinary item in prior periods that does not meet the
criteria of APB Opinion No. 30 for such classification should be reclassified to
conform with the provisions of SFAS No. 145. Earlier application of the
provisions of SFAS No. 145 related to the rescission of SFAS No. 4 is
encouraged.
On May 28, 2002 we repaid in full our $67,500,000 term loan due August 16,
2004. In connection with the repayment of the term loan, we wrote off $951,000
of unamortized deferred financing costs. On June 28, 2002, we redeemed
$6,942,000 of our 7.5% Convertible Subordinated Notes due 2006 at a redemption
premium of $174,000 (see "Note 4. Debt" above). In accordance with the
early-application provisions of SFAS No. 145, we included the $951,000 write-off
and the $174,000 redemption premium in income from continuing operations in the
Consolidated Statements of Operations for the thirteen and twenty-six weeks
ended August 3, 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under SFAS No. 146, an
entity's commitment to a plan, by itself, does not create an obligation that
meets the definition of a liability. SFAS No. 146 also establishes fair value as
the objective for initial measurement of the liability. Severance pay would be
recognized over time rather than up front if the benefit arrangement requires
employees to render future service beyond a "minimum retention period." The
liability for severance pay would be recognized as employees render service over
the future service period, even if the benefit formula used to calculate an
employee's termination benefit is based on length of service. The provisions of
SFAS No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged.
16
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
11. Impact of Recent Accounting Pronouncements (continued)
We have traditionally recognized certain costs associated with
restructuring plans as of the date of commitment to the plan. Adoption of SFAS
No. 146 could result in the deferral of recognition of such costs for
restructuring plans we initiate in periods subsequent to the effective date of
the statement from the date we commit to the plan to the date that we incur the
costs. We are not able to determine the specific impact, if any, that adoption
of SFAS No. 146 would have on our financial position or results of operations
for periods subsequent to the effective date of the statement.
12. Subsequent Events
On August 23, 2002, we entered into an agreement with Limited Brands to
purchase 3,175,331 shares of our common stock for $21,291,000 ($6.705 per
share). The transaction was completed on August 28, 2002, and was financed
through the use of existing cash and proceeds from the issuance of our 4.75%
Senior Convertible Notes (see "Note 4. Debt" above). On September 12, 2002, we
entered into an agreement with Limited Brands to purchase an additional
6,350,662 shares of our common stock for $44,137,000 ($6.95 per share). We
expect to complete this transaction on September 17, 2002, and expect to finance
it through the use of existing cash and proceeds from the issuance of our 4.75%
Senior Convertible Notes. We had previously issued 9,525,993 shares of our
common stock to Limited Brands in connection with our acquisition of Lane Bryant
in August 2001. The purchased shares will be held as treasury shares.
We have agreed to acquire a 392,500 square foot distribution center on 29
acres of land in Baltimore County, Maryland to replace the existing Lane Bryant
distribution center in Columbus, Ohio, which we are using under an agreement
with an affiliate of Limited Brands. In connection with our acquisition of Lane
Bryant from Limited Brands in August 2001, we entered into an agreement with an
affiliate of Limited Brands to use the Ohio distribution center and receive
related distribution services on a transition basis through August 2004, with
the right to terminate the services earlier upon notice. The Baltimore County
facility is expected to have sufficient capacity to service the entire chain of
Lane Bryant stores. Subject to satisfaction of customary closing conditions, we
expect to complete the acquisition of the Baltimore County facility by the end
of September 2002 at a cost of approximately $17,300,000. We also expect to
incur approximately $10,000,000 of additional capital expenditures over the next
twelve months for equipment for, and improvements to, the facility. We expect to
finance a majority of the acquisition cost, with the remainder of the purchase
price funded through the use of existing cash.
We are in discussions with the Internal Revenue Service regarding a
settlement of their audit of our corporate-owned life insurance ("COLI")
program. In anticipation of the proposed settlement, we have reclassified
$24,900,000 of deferred taxes from a long-term liability to a current liability.
As part of the proposed settlement, we will surrender existing COLI policies,
which have approximately $16,000,000 in cash value. We have reclassified the
cash value of the policies from other non-current assets to other current
assets. The estimated cash required to fund the settlement as proposed, after
receipt of the proceeds from the surrender of the COLI policies, would be
approximately $8,900,000, which would be funded from existing cash. Although
the ultimate outcome of this matter cannot be predicted with certainty, we do
not believe that settlement will have a material impact on our financial
condition or results of operations.
17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the financial
statements and accompanying notes appearing elsewhere in this report. It should
also be read in conjunction with the Management's Discussion and Analysis of
Financial Condition and Results of Operations, financial statements, and
accompanying notes appearing in the Company's Annual Report on Form 10-K for the
fiscal year ended February 2, 2002. As used herein, the terms "Fiscal 2003" and
"Fiscal 2002" refer to our fiscal year ending February 1, 2003 and fiscal year
ended February 2, 2002, respectively.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters contained in the
following analysis and elsewhere in this report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements may include, but are not limited to, projections of revenues, income
or loss, and capital expenditures, plans for future operations, and financing
needs or plans, as well as assumptions relating to the foregoing. The words
"expect," "project," "estimate," "predict," "anticipate," "believes," and
similar expressions are also intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results, performance, and achievements could differ materially from those set
forth in, contemplated by, or underlying the forward-looking statements. We
assume no obligation to update any forward-looking statement to reflect actual
results or changes in or additions to the factors affecting such forward-looking
statements.
Factors that could cause our actual results of operations or financial
condition to differ from those described in this report include, but are not
necessarily limited to, the following:
o Our business is dependent upon our being able to accurately predict
rapidly changing fashion trends, customer preferences and other
fashion-related factors, which we may not be able to successfully
accomplish in the future.
o The general slowdown in the United States economy and the uncertain
economic outlook has led to reduced consumer demand for our apparel and
accessories and may continue to do so in the future.
o The women's specialty retail apparel industry is highly competitive and
we may be unable to compete successfully against existing or future
competitors.
o We cannot assure the successful implementation of our business plan for
increased profitability and growth in our plus-sized women's apparel
business.
o Our business plan is largely dependent upon the continued growth in the
plus-sized women's apparel market, which may not continue.
o We depend on key personnel, particularly our Chief Executive Officer,
Dorrit J. Bern, and we may not be able to retain or replace these
employees or recruit additional qualified personnel.
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.
18
o We depend for our working capital needs on the availability of credit,
including credit we receive from our suppliers and their agents, and on
our credit card securitization program. If we were unable to obtain
sufficient financing at affordable cost, our ability to merchandise our
stores would be adversely affected.
o We rely significantly on foreign sources of production and face a
variety of risks (including political instability, imposition of duties
or quotas, increased security requirements applicable to imports,
delays in shipping, increased costs of transportation, and issues
relating to compliance with domestic or international labor standards)
generally associated with doing business in foreign markets and
importing merchandise from abroad.
o Our stores experience seasonal fluctuations in net sales and operating
income. Any decrease in sales or margins during our peak sales periods,
or in the availability of working capital needed in the months
preceding such periods, could have a material adverse effect on our
business. In addition, extreme or unseasonable weather conditions may
have an impact on our sales.
o War, acts of terrorism, or the threat of either may negatively impact
availability of merchandise and customer traffic to our stores, or
otherwise adversely affect our business.
o We may be unable to obtain adequate insurance for our operations at a
reasonable cost.
o We may be unable to protect our trademarks and other intellectual
property rights, which we believe are important to our success and our
competitive position.
o We may be unable to hire and retain suitable sales associates at our
stores.
o We may be unable to successfully implement our restructuring plan
described elsewhere in this report.
o Our manufacturers may be unable to manufacture and deliver merchandise
to us in a timely manner or to meet our quality standards.
o Our sales are dependent upon a high volume of traffic in the strip
centers and malls in which our stores are located, and our future
growth is dependent upon the availability of suitable locations for new
stores.
o We may be unable to successfully integrate Lane Bryant into our current
operating structure, and we currently rely on management information
systems and logistics services from Limited Brands, Inc. ("Limited
Brands") with respect to our Lane Bryant stores.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are discussed in the Management's
Discussion and Analysis of Financial Condition and Results of Operations and
notes accompanying the consolidated financial statements that appear in the
Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2002.
Except as otherwise disclosed in the financial statements and accompanying notes
included in this report, there were no material changes in our critical
accounting policies or in the assumptions or estimates we used to prepare the
financial information appearing in this report.
19
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." We
adopted the provisions of SFAS No. 142 in full as of February 3, 2002 (see "Item
1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited); Note 11.
Impact of Recent Accounting Pronouncements" above).
Our consolidated balance sheet as of February 2, 2002 included $87.2
million of goodwill related to the acquisition of Catherine's Stores Corporation
("Catherine's"). In accordance with the transition provisions of SFAS No. 142,
we tested the Catherine's goodwill for impairment during the thirteen weeks
ended August 3, 2002. We determined that the carrying value of the Catherine's
goodwill (including the value of the intangible assets not separately accounted
for) exceeded the estimated fair value of the Catherine's goodwill under SFAS
No. 142. We determined the estimated fair value of the Catherine's goodwill
using the present value of expected future cash flows associated with the
Catherine's assets, and we recorded a write-down, which is not deductible for
income tax purposes, of $44.0 million to reduce the carrying value of the
goodwill to its estimated fair value. The majority of the write-down is
attributable to the value of unrecorded trademarks. The write-down has been
presented as the cumulative effect of an accounting change as of February 3,
2002 in our Consolidated Statement of Operations for the twenty-six weeks ended
August 3, 2002. The calculation of the estimated fair value of the Catherine's
goodwill required estimates, assumptions, and judgments, and results might have
been materially different if different estimates, assumptions, and judgments had
been used.
We also evaluated our goodwill, trademarks, tradenames, and internet domain
names related to the Lane Bryant acquisition as of February 3, 2002 in
accordance with the provisions of SFAS No. 142, and determined that there has
been no impairment of these assets.
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a
percentage of net sales and on a comparative basis:
Thirteen Percentage Twenty-six Percentage
Weeks Ended Increase/ Weeks Ended Increase/
----------- (Decrease) ----------- (Decrease)
August 3, August 4, From Prior August 3, August 4, From Prior
2002 2001 Period 2002 2001 Period
---- ---- ------ ---- ---- ------
Net sales............................... 100.0% 100.0% 58.5% 100.0% 100.0% 59.1%
Cost of goods sold, buying, and
occupancy expenses.................. 69.1 72.5 51.2 69.3 72.4 52.4
Selling, general, and administrative
expenses............................ 23.7 20.9 79.6 24.5 22.4 74.2
Amortization of goodwill................ 0.0 0.3 (100.0) 0.0 0.3 (100.0)
Income from operations.................. 7.2 6.3 80.6 6.2 4.9 99.2
Other income, principally interest...... 0.1 0.3 (47.8) 0.1 0.4 (65.8)
Interest expense........................ 0.9 0.6 138.0 1.0 0.6 161.6
Income tax provision.................... 2.4 2.3 65.1 2.0 1.8 73.8
Minority interest in net loss of -- -- -- -- -- --
subsidiary..............................
Cumulative effect of accounting change.. -- -- -- (3.5) -- --
Net income (loss) 4.0 3.7 71.9 (0.2) 2.9 (109.1)
20
The following table sets forth our net sales by store brand:
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
August 3, August 4, August 3, August 4,
(in millions) 2002 2001 2002 2001
---- ---- ---- ----
Fashion Bug............. $320.6 $305.8 $ 610.5 $595.4
Lane Bryant............. 226.9 -- 465.7 --
Catherine's............. 89.8 96.5 190.8 201.5
Monsoon/Accessorize..... 1.0 0.4 1.9 0.6
------ ------ -------- ------
Total net sales......... $638.3 $402.7 $1,268.9 $797.5
====== ====== ======== ======
The following table sets forth certain additional information related to
changes in our net sales:
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
---- ---- ---- ----
(Decrease) increase in comparable store sales (1):
Fashion Bug.................................. 4% (8)% 0% (6)%
Catherine's.................................. 0 (2) (1) 0
Sales from new stores as a percentage of total
prior-period sales:
Fashion Bug.................................. 3 5 4 6
Catherine's.................................. 3 3 3 4
Lane Bryant.................................. 56 -- 58 --
Monsoon/Accessorize.......................... 0 0 0 0
Prior-period sales from closed stores as a
percentage of total prior-period sales:
Fashion Bug.................................. (3) (3) (3) (3)
Catherine's.................................. (5) (5) (4) (5)
Increase in total sales............................. 59 (6) 59 (1)
--------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation.
Comparison of Thirteen Weeks Ended August 3, 2002 and August 4, 2001
Net Sales
Net sales were $638.3 million for the quarter ended August 3, 2002 ("Fiscal
2003 Second Quarter"), an increase of 58.5% from net sales of $402.7 million for
the quarter ended August 4, 2001 ("Fiscal 2002 Second Quarter"), primarily due
to our acquisition of Lane Bryant in August 2001. The number of retail stores in
operation at the end of the Fiscal 2003 Second Quarter was 2,334 (including 650
Lane Bryant stores), compared to 1,771 stores at the end of the Fiscal 2002
Second Quarter. Including Lane Bryant comparable store sales on a pro forma
basis, we experienced a year-over-year increase in overall comparable store
sales of 1%. Fashion Bug stores experienced comparable store sales increases in
junior, missy, and plus sportswear, footwear, accessories, and intimate apparel.
Lane Bryant comparable store sales on a pro forma basis decreased 3%, with
comparable store sales increases in knit tops, skirts, and woven tops offset by
21
declines in other merchandise categories. For Catherine's Stores, comparable
store sales increases in casual sportswear were offset by declines in other
merchandise categories. During the quarter, we closed the remaining stores in
the Added Dimensions chain and liquidated the remaining Added Dimensions store
inventory.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. We recognized $6.1 million of revenues in the Fiscal 2003
Second Quarter and $2.9 million of revenues in the Fiscal 2002 Second Quarter in
connection with this program.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $441.2 million in
the Fiscal 2003 Second Quarter, an increase of 51.2% from $291.9 million in the
Fiscal 2002 Second Quarter, principally reflecting the increase in net sales. As
a percentage of net sales, these costs decreased 3.4% in the Fiscal 2003 Second
Quarter as compared to the Fiscal 2002 Second Quarter.
Cost of goods sold as a percentage of net sales decreased 5.5% in the
Fiscal 2003 Second Quarter as compared to the Fiscal 2002 Second Quarter. The
decrease was a result of higher merchandise margins in the Fashion Bug and
Catherine's chains, as well as the addition of higher gross margins from the
Lane Bryant stores. During the Fiscal 2003 second quarter, markdowns taken in
connection with the liquidation of the Added Dimensions inventories were offset
by $3.0 million of costs accrued during the fourth quarter of Fiscal 2002
related to the valuation of inventory for stores to be closed as the result of
our restructuring plan (see "Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited); Note 5. Accrued Restructuring Costs" above). Cost of
goods sold includes merchandise costs, net of discounts and allowances, freight,
and inventory shrinkage. Net merchandise costs and freight are capitalized as
inventory costs.
Buying and occupancy expenses as a percentage of net sales increased 2.1%
in the Fiscal 2003 Second Quarter as compared to the Fiscal 2002 Second Quarter.
The increase in buying and occupancy expenses as a percentage of sales was
primarily attributable to the lack of leverage on relatively fixed occupancy
costs as a result of relatively flat overall comparable store sales. Relatively
higher occupancy expenses for the mall-based Lane Bryant stores and a $2.7
million write-down of under-performing assets related to our joint venture also
contributed to the increase in buying and occupancy expenses as a percentage of
net sales. Buying expenses also increased as a result of higher merchandising
and design costs related to Lane Bryant's private label merchandise strategy.
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 $151.4 million in the
Fiscal 2003 Second Quarter, an increase of 79.6% from $84.3 million in the
Fiscal 2002 Second Quarter, principally reflecting the acquisition of Lane
Bryant. As a percentage of net sales, these costs increased by 2.8% in the
Fiscal 2003 Second Quarter as compared to the Fiscal 2002 Second Quarter.
Selling expenses increased 2.2% as a percentage of sales. The increase was
attributable to a number of factors, including higher store payroll and benefits
costs and the lack of leverage on relatively fixed store payroll expenses as a
result of relatively flat comparable store sales. Credit income (a component of
selling expenses) decreased in the Fiscal 2003 Second Quarter as a result of
increased credit losses and higher operating costs with respect to our Fashion
Bug proprietary credit card program. General and administrative expenses
increased 0.6% as a percentage of
22
sales, primarily as a result of accruals for incentive-based compensation plans,
higher employee benefit costs, and costs associated with transitional service
agreements related to the Lane Bryant acquisition.
Amortization of Goodwill
We recognized $1.2 million of amortization of goodwill during the Fiscal
2002 Second Quarter related to the Catherine's acquisition. We adopted the
provisions of Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," as of February 3, 2002, and we are no longer amortizing the Catherine's
goodwill. However, the Catherine's goodwill and goodwill related to our
acquisition of Lane Bryant are subject to periodic impairment reviews in
accordance with the provisions of SFAS No. 142 (see "CRITICAL ACCOUNTING
POLICIES" above and "Comparison of Twenty-six Weeks Ended August 3, 2002 and
August 4, 2001; Cumulative Effect of Accounting Change" below).
Other Income
Other income was $0.7 million in the Fiscal 2003 Second Quarter, a decrease
of 47.8% from $1.4 million in the Fiscal 2002 Second Quarter. This decrease was
primarily caused by a decrease in interest income. Interest income decreased as
a result of lower levels of invested funds and a decrease in the average yield
on investments during the Fiscal 2003 Second Quarter as compared to the Fiscal
2002 Second Quarter. During Fiscal 2002, investments in marketable securities
were converted into cash and cash equivalents, and we used $83.0 million of cash
and cash equivalents in connection with the acquisition of Lane Bryant.
Interest Expense
Interest expense was $5.7 million in the Fiscal 2003 Second Quarter, an
increase of 138.0% from $2.4 million in the Fiscal 2002 Second Quarter. This
increase was primarily the result of short-term and long-term borrowings
incurred in connection with the Lane Bryant acquisition, and to a lesser extent,
the result of additional long-term mortgage borrowings and acquisitions of
point-of-sale equipment under long-term capital leases. In addition, we wrote
off $951 thousand of unamortized deferred financing costs related to our $67.5
million term loan which was repaid during the period (see "RECENT DEVELOPMENTS"
below), which resulted in additional interest expense in the current-year
period.
Income Tax Provision
The income tax provision for the Fiscal 2003 Second Quarter was $15.6
million, resulting in a 38.2% effective tax rate, as compared to an income tax
provision for the Fiscal 2002 Second Quarter of $9.4 million, resulting in a
38.8% effective tax rate. The higher effective tax rate for the Fiscal 2002
Second Quarter was primarily a result of the non-deductibility for tax purposes
of goodwill related to our Catherine's acquisition.
Comparison of Twenty-six Weeks Ended August 3, 2002 and August 4, 2001
Net Sales
Net sales were $1,268.9 million for the twenty-six weeks ended August 3,
2002 ("first half of Fiscal 2003"), an increase of 59.1% from net sales of
$797.5 million for the twenty-six weeks ended August 4, 2001 ("first half of
Fiscal 2002"), primarily due to our acquisition of Lane Bryant in August 2001.
Including Lane Bryant comparable store sales on a pro forma basis, overall
comparable store sales were unchanged from the prior-year period. For Fashion
Bug stores, comparable store sales increases in junior, missy, and plus
sportswear, footwear, and accessories were offset by declines in dresses and
coats. For Lane Bryant stores,
23
comparable store sales increases in knit tops and skirts were offset by declines
in other merchandise categories. For Catherine's Stores, comparable store sales
increases in casual sportswear were offset by declines in other merchandise
categories. During the current year, we discontinued the Added Dimensions chain,
closed the remaining stores in the chain, and liquidated the remaining Added
Dimensions store inventory.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. We recognized $10.4 million of revenues in the first half
of Fiscal 2003 and $3.6 million of revenues in the first half of Fiscal 2002 in
connection with this program.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $880.1 million in
the first half of Fiscal 2003, an increase of 52.4% from $577.5 million in the
first half of Fiscal 2002, principally reflecting the increase in net sales. As
a percentage of net sales, these costs decreased 3.1% in the first half of
Fiscal 2003 as compared to the first half of Fiscal 2002.
Cost of goods sold as a percentage of net sales decreased 5.0% in the first
half of Fiscal 2003 as compared to the first half of Fiscal 2002. The higher
merchandise margins reflected the addition of the Lane Bryant chain, improved
gross margins for Fashion Bug and Catherine's spring merchandise offerings, and
improved inventory turns on summer and early fall merchandise in all chains.
During the Fiscal 2003 second quarter, markdowns taken in connection with the
liquidation of the Added Dimensions inventories were offset by $3.0 million of
costs accrued during the fourth quarter of Fiscal 2002 related to the valuation
of inventory for stores to be closed as the result of our restructuring plan.
Cost of goods sold includes merchandise costs, net of discounts and allowances,
freight, and inventory shrinkage. Net merchandise costs and freight are
capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales increased 1.9%
in the first half of Fiscal 2003 as compared to the first half of Fiscal 2002.
The increase in buying and occupancy expenses as a percentage of sales was
primarily attributable to the lack of leverage on relatively fixed occupancy
costs as a result of relatively flat comparable store sales. Relatively higher
occupancy expenses for the Lane Bryant stores and a $2.7 million write-down of
under-performing assets related to our joint venture also contributed to the
increase in buying and occupancy expenses as a percentage of net sales. Buying
expenses also increased as a result of higher merchandising and design costs
related to Lane Bryant's private label merchandise strategy. 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 $310.5 million in the
first half of Fiscal 2003, an increase of 74.2% from $178.2 million in the first
half of Fiscal 2002, principally reflecting the acquisition of Lane Bryant. As a
percentage of net sales, these costs increased by 2.1% in the first half of
Fiscal 2003 as compared to the first half of Fiscal 2002. Selling expenses
increased 1.6% as a percentage of sales. The increase was attributable to a
number of factors, including higher store payroll and benefits costs, new
point-of-sales systems at Fashion Bug, and the lack of leverage on relatively
fixed store payroll expenses as a result of relatively flat comparable store
sales. Credit income (a component of selling expenses) decreased in the first
half of Fiscal 2003 as a result of increased credit losses and higher operating
costs with respect to our Fashion Bug proprietary credit card program. General
and administrative expenses increased 0.5% as a
24
percentage of sales, primarily as a result of accruals for incentive-based
compensation plans, higher employee benefit costs, costs associated with
transitional service agreements related to the Lane Bryant acquisition, and the
lack of leverage on fixed costs at Fashion Bug and Catherine's.
Amortization of Goodwill
We recognized $2.4 million of amortization of goodwill during the first
half of Fiscal 2002 related to the Catherine's acquisition. We adopted the
provisions of SFAS No. 142 as of February 3, 2002, and we are no longer
amortizing the Catherine's goodwill. However, the Catherine's goodwill and
goodwill related to our acquisition of Lane Bryant are subject to periodic
impairment reviews in accordance with the provisions of SFAS No. 142 (see
"Cumulative Effect of Accounting Change" below).
Other Income
Other income was $1.2 million in the first half of Fiscal 2003, a decrease
of 65.8% from $3.4 million in the first half of Fiscal 2002. This decrease was
primarily caused by a decrease in interest income. Interest income decreased as
a result of lower levels of invested funds and a decrease in the average yield
on investments during the first half of Fiscal 2003 as compared to the first
half of Fiscal 2002. 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 $12.5 million in the first half of Fiscal 2003, an
increase of 161.6% from $4.8 million in the first half of Fiscal 2002. 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. In addition, we wrote
off $951 thousand of unamortized deferred financing costs related to our $67.5
million term loan which was repaid during the period (see "RECENT DEVELOPMENTS"
below), which resulted in additional interest expense in the current-year
period.
Income Tax Provision
The income tax provision for the first half of Fiscal 2003 was $25.6
million, resulting in a 38.2% effective tax rate, as compared to an income tax
provision for the first half of Fiscal 2002 of $14.7 million, resulting in a
38.8% effective tax rate. The higher effective tax rate for the first half of
Fiscal 2002 was primarily a result of the non-deductibility for tax purposes of
goodwill related to our Catherine's acquisition.
Cumulative Effect of Accounting Change
We adopted the provisions of SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets" in full as of February 3,
2002. In accordance with the transition provisions of SFAS No. 142, we tested
the Catherine's goodwill for impairment during the thirteen weeks ended August
3, 2002, and recorded a write-down of $44.0 million to reduce the carrying value
of the goodwill to its estimated fair value. The write-down has been presented
as the cumulative effect of an accounting change as of February 3, 2002 in our
Consolidated Statement of Operations for the twenty-six weeks ended August 3,
2002 (see "CRITICAL ACCOUNTING POLICIES" above).
25
RECENT DEVELOPMENTS
Issuance of 4.75% Senior Convertible Notes due 2012
On May 28, 2002, we completed a private placement of $130.0 million of
4.75% Senior Convertible Notes due 2012 (the "Senior Notes"). On June 20, 2002,
the initial purchasers of the private placement exercised their option to
purchase an additional $20.0 million principal amount of the Senior Notes,
resulting in the private placement of Senior Notes in an aggregate principal
amount of $150.0 million.
The Senior Notes will mature on June 1, 2012 and are convertible at any
time prior to maturity into shares of our common stock at a conversion price of
$9.88, subject to adjustment upon certain events. The Senior Notes are
redeemable at our option, in whole or in part, at any time on or after June 4,
2007, at declining redemption prices, starting at 102.38% of principal and
decreasing to 100.48% on or after June 1, 2011. Under certain circumstances
involving a change in control of the Company, holders of the Senior Notes may
require us to repurchase all or a portion of the Senior Notes at 100% of the
principal amount plus any accrued and unpaid interest. Also, under such
circumstances we have the option of paying the repurchase price in shares of our
common stock, valued at 95% of the average of the closing prices of the common
stock for a five-day trading period immediately before and including the third
trading day preceding the repurchase date. There is no sinking fund for the
Senior Notes.
Net proceeds received from the issuance of the Senior Notes were $145.5
million. We used a portion of the net proceeds to repay in full our $67.5
million term loan due August 16, 2004, $3.5 million outstanding under our
revolving credit facility, and $6.9 million of the 7.5% Convertible Subordinated
Notes due 2006 called for redemption (see below). We also used a portion of the
proceeds to purchase 2,675,000 shares of our common stock at a cost of $18.3
million. The remaining proceeds ($49.3 million) were invested in cash and cash
equivalents pending their use for other corporate purposes. In addition, we
wrote off $951 thousand of unamortized deferred financing costs related to the
term loan. The write-off of the deferred financing costs has been included in
continuing operations in the Consolidated Statements of Operations for the
thirteen and twenty-six weeks ended August 3, 2002, in accordance with the
early-application provisions of SFAS No. 145 (see "Item 1. NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited); Note 11. Impact of Recent
Accounting Pronouncements" above). The term loan that was repaid had an 11.5%
interest rate and various financial covenants.
Redemption of 7.5% Convertible Subordinated Notes due 2006
On May 29, 2002, we called our 7.5% Convertible Subordinated Notes due 2006
(the "Subordinated Notes") for redemption on June 28, 2002. The redemption price
was 102.5% of the principal amount of the Subordinated Notes, plus accrued and
unpaid interest up to the date of redemption. The Subordinated Notes had an
original maturity date of July 15, 2006, and could be converted into shares of
our common stock until the close of business on June 27, 2002 at a conversion
price of $7.46. During the twenty-six weeks ended August 3, 2002, $89.1 million
principal amount of the Subordinated Notes were converted into 11,944,338 shares
of our common stock pursuant to the conversion terms of the Notes. Accrued
interest expense of $3.0 million on the Subordinated Notes that were converted
has been reclassified to additional paid-in capital. On June 28, 2002, the
remaining Subordinated Notes, with an aggregate principal amount of $6.9
million, were redeemed for $7.4 million, including the 2.5% redemption premium
and accrued interest of $236 thousand to the date of redemption. The redemption
premium of $174 thousand has been included in continuing operations in the
Consolidated Statements of Operations for the thirteen and twenty-six weeks
ended August
26
3, 2002, in accordance with the early-application provisions of SFAS No. 145
(see "Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited);
Note 11. Impact of Recent Accounting Pronouncements" above).
Events Subsequent to the End of the Period
On August 23, 2002, we entered into an agreement with Limited Brands to
purchase 3,175,331 shares of our common stock for $21.3 million ($6.705 per
share). The transaction was completed on August 28, 2002, and was financed
through the use of existing cash and proceeds from the issuance of our 4.75%
Senior Convertible Notes (see "Issuance of 4.75% Senior Convertible Notes due
2012" above). On September 12, 2002, we entered into an agreement with Limited
Brands to purchase an additional 6,350,662 shares of our common stock for
$44.1 million ($6.95 per share). We expect to complete this transaction on
September 17, 2002, and expect to finance it through the use of existing cash
and proceeds from the issuance of our 4.75% Senior Convertible Notes. We had
previously issued 9,525,993 shares of our common stock to Limited Brands in
connection with our acquisition of Lane Bryant in August 2001. The purchased
shares will be held as treasury shares.
We have agreed to acquire a 392,500 square foot distribution center on 29
acres of land in Baltimore County, Maryland to replace the existing Lane Bryant
distribution center in Columbus, Ohio, which we are using under an agreement
with an affiliate of Limited Brands. In connection with our acquisition of Lane
Bryant from Limited Brands in August 2001, we entered into an agreement with an
affiliate of Limited Brands to use the Ohio distribution center and receive
related distribution services on a transition basis through August 2004, with
the right to terminate the services earlier upon notice. The Baltimore County
facility is expected to have sufficient capacity to service the entire chain of
Lane Bryant stores. Subject to satisfaction of customary closing conditions, we
expect to complete the acquisition of the Baltimore County facility by the end
of September 2002 at a cost of approximately $17.3 million. We also expect to
incur approximately $10.0 million of additional capital expenditures over the
next twelve months for equipment for, and improvements to, the facility. We
expect to finance a majority of the acquisition cost, with the remainder of the
purchase price funded through the use of existing cash.
We are in discussions with the Internal Revenue Service regarding a
settlement of their audit of our corporate-owned life insurance ("COLI")
program. In anticipation of the proposed settlement, we have reclassified $24.9
million of deferred taxes from a long-term liability to a current liability. As
part of the proposed settlement, we will surrender COLI policies, which have
approximately $16.0 million in cash value. We have reclassified the cash value
of the policies from other non-current assets to other current assets. The
estimated cash required to fund the settlement as proposed, after receipt of the
proceeds from the surrender of the COLI policies, would be approximately $8.9
million, which would be funded from existing cash. Although the ultimate outcome
of this matter cannot be predicted with certainty, we do not believe that
settlement will have a material impact on our financial condition or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of working capital are cash flow from operations, our
proprietary credit card receivables securitization agreements, our investment
portfolio, and our credit facility.
27
The following table highlights certain information related to our liquidity
and capital resources:
August 3, February 2,
(Dollars in thousands) 2002 2002
---- ----
Cash and cash equivalents........... $ 120,891 $ 36,640
Available-for-sale securities....... 90,023 70,366
Working capital..................... 241,675 145,047
Current ratio....................... 1.6 1.4
Long-term debt to equity ratio...... 30.3% 37.9%
Our net cash provided by operating activities was $129.1 million for the
first half of Fiscal 2003, as compared to $38.9 million for the first half of
Fiscal 2002. The increase was primarily a result of an increase in net income
before a non-cash write-down of goodwill and non-cash charges for depreciation
and amortization, and increases in accrued expenses and income taxes payable. In
addition, our investment in inventories, net of accounts payable, decreased
during the first half of Fiscal 2003 as compared to the first half of Fiscal
2002 as a result of inventory management initiatives and improved vendor terms
as a result of conforming Lane Bryant's vendor terms to our corporate terms.
These changes were partially offset by an increase in prepaid expenses and $5.5
million of accrued restructuring costs paid during the first half of Fiscal
2003.
Our capital expenditures were $24.8 million during the first half of Fiscal
2003. In addition, we acquired $0.6 million of point-of-sale equipment under
capital leases. During the remainder of Fiscal 2003, we anticipate incurring
additional capital expenditures of approximately $28.0-$38.0 million, excluding
expenditures in connection with the acquisition of a new distribution center
(see below). These capital expenditures will primarily be for the construction
and fixturing of new stores, remodeling and fixturing of existing stores,
investments in management information systems technology, and improvements to
our corporate offices and distribution centers. We expect to finance these
capital expenditures principally through internally generated funds. We have
agreed to acquire a 392,500 square foot distribution center to replace our
existing Lane Bryant distribution center in Columbus, Ohio (see "RECENT
DEVELOPMENTS -- Events Subsequent to the End of the Period" above). Subject to
satisfaction of customary closing conditions, we expect to complete the
acquisition by the end of September 2002 at a cost of approximately $17.3
million. We also expect to incur approximately $10.0 million of additional
capital expenditures over the next twelve months for equipment for, and
improvements to, the facility. We expect to finance a majority of the
acquisition cost, with the remainder of the purchase price financed through the
use of existing cash.
We plan to open approximately 55-60 new stores and relocate approximately
75 stores during Fiscal 2003. During the first half of Fiscal 2003, we closed 50
Fashion Bug stores (including 19 stores which will be converted to Lane Bryant
stores) and 68 Catherine's/Added Dimensions stores and converted 9 Added
Dimensions stores to Catherine's stores in connection with our restructuring
plan (see "Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited); Note 5. Accrued Restructuring Costs" above).
28
The following table sets forth information with respect to store activity
for the first half of Fiscal 2003:
Catherine's/
Fashion Lane Added Monsoon/
Bug Bryant Dimensions Accessorize
Stores Stores Stores Stores Total
------ ------ ------ ------ -----
Stores at February 2, 2002 ... 1,252 647 538 9 2,446
------ ------ ------ ------ ------
Stores opened ................ 6 12 14 0 32
Stores converted ............. (19) 0 0(2) (19)
Stores closed ................ (31) (9) (85) 0 (125)
------ ------ ------ ------ ------
Net change in stores ......... (44) 3 (71) 0 (112)
------ ------ ------ ------ ------
Stores at August 3, 2002 ..... 1,208 650 467 9 2,334
====== ====== ====== ====== ======
Stores relocated during period 8 0 6 14
Stores remodeled during period 3 4 4 11
-------------------
(1) During the first half of Fiscal 2003, 19 Fashion Bug stores closed in
preparation for conversion to Lane Bryant stores. As of August 3, 2002, these
stores had not yet re-opened as Lane Bryant stores.
(2) During the first half of Fiscal 2003, 9 Added Dimensions stores were
converted to Catherine's stores.
As part of our Fashion Bug proprietary credit card program, 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 Fashion Bug credit card receivables. 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 $179.5 million of credit card receivables during the first
half of Fiscal 2003 and had $290.1 million of securitized credit card
receivables outstanding as of August 3, 2002. We held retained interests in our
securitizations of $60.0 million as of August 3, 2002, which were generally
subordinated in right of payment to certificates issued by the trust to
third-party investors. Our obligation to repurchase receivables sold to the
trust is limited to those receivables that, at the time of their transfer, fail
to meet the trust's eligibility standards under normal representations and
warranties. To date, we have repurchased only a small amount of receivables
pursuant to this obligation. A securitization series in the aggregate principal
amount of $83.5 million is scheduled to mature before the end of Fiscal 2003. We
have entered into an agreement with a financial institution to replace the
series on a best-efforts basis. 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 August 3, 2002, Charming
Shoppes Receivables Corp. held $48.7 million of Charming Shoppes Master Trust
Certificates and Charming Shoppes Seller, Inc. held retained interests of $1.3
million (which are included in the $60.0 million of retained interests we held
at August 3, 2002). 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
29
cause the trust to require additional enhancement from proceeds within the trust
that would otherwise be available to be paid to us with respect to our
subordinated interests. Specifically, if either the trust or we fail to meet
certain financial performance standards, a credit enhancement condition would
occur and the trust would be required to retain amounts otherwise payable to us.
During Fiscal 2002, credit card receivable credit loss percentages exceeded a
specified threshold percentage, which obligated the trust to accumulate $9.5
million into such an enhancement account. As of August 3, 2002, the Charming
Shoppes Master Trust had all of the $9.5 million segregated for such additional
enhancement purposes. Amounts placed into enhancement accounts, if not required
to be paid to the other certificate holders, will be available to us at the
termination of the securitization series. The $9.5 million in the enhancement
accounts is classified as "prepaids and other" in current assets as of August 3,
2002. We do not expect the requirement to materially affect our liquidity or
results of operations. We have no obligation to directly fund the enhancement
account of the trust, other than for breaches of customary representations,
warranties, and covenants. These representations, warranties, covenants, and
related indemnities do not protect the trust or investors in the trust against
credit-related losses on the receivables. The providers of the credit
enhancements and trust investors have no other recourse to us.
These securitization agreements are intended to improve our overall
liquidity by providing short-term sources of funding. Additional information
regarding this program is included in "Part II, Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" of our Annual
Report on Form 10-K for the fiscal year ended February 2, 2002.
We also have non-recourse agreements under which third parties provide
accounts receivable proprietary credit card sales funding programs for both our
Catherine's and Lane Bryant stores. These funding programs expire in January
2005 for Catherine's and in January 2006 for Lane Bryant. Under these
agreements, the third parties reimburse us daily with respect to the proprietary
credit card sales generated by the respective store's credit card accounts.
Additional information regarding these agreements is included in "Part II, Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" of our Annual Report on Form 10-K for the fiscal year ended February
2, 2002.
We believe that our capital resources and liquidity position are sufficient
to support our current operations. Our requirements for working capital, capital
expenditures, and repayment of debt and other obligations are expected to be
funded from operations, supplemented as needed by short-term or long-term
borrowings available under our credit facility, our proprietary credit card
receivables securitization agreements, leases, and other available financing
sources.
FINANCING
As of August 3, 2002, we had a $300.0 million revolving credit facility,
which provides for cash borrowings and enables us to issue up to $150.0 million
of letters of credit for overseas purchases of merchandise. As of August 3,
2002, there were no borrowings outstanding under the revolving credit facility.
The availability of borrowings under our revolving credit facility is subject to
limitations based on eligible inventory and the value of certain real property.
The credit facility is secured by our general assets, except for certain assets
related to our credit card securitization program, certain real properties and
equipment subject to other mortgages, our interest in our joint venture with
Monsoon plc, and the assets of our non-U.S. subsidiaries. The credit facility
expires on August 16, 2004, and can be renewed for an additional year at our
option.
30
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.
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). As of August 3, 2002, we were not in violation of any of the
covenants included in the credit facility.
During the Fiscal 2003 Second Quarter, we completed a private placement of
$150.0 million of 4.75% Senior Convertible Notes due 2012 (the "Senior Notes").
We used a portion of the net proceeds to repay in full our $67.5 million term
loan due August 16, 2004 and $3.5 million outstanding under the revolving credit
facility. We also used a portion of the proceeds to purchase 2.7 million shares
of our common stock at a cost of $18.3 million. On May 29, 2002, we called our
7.5% Convertible Subordinated Notes due 2006 (the "Subordinated Notes") for
redemption on June 28, 2002. Prior to the redemption date, $89.1 million
principal amount of the Subordinated Notes were converted into 11,944,338 shares
of our common stock pursuant to the conversion terms of the Notes. On June 28,
2002, the remaining Subordinated Notes, with an aggregate principal amount of
$6.9 million, were redeemed for $7.4 million, including the 2.5% redemption
premium and accrued interest of $236 thousand to the date of redemption. See
"RECENT DEVELOPMENTS" above for additional information regarding the private
placement and redemption call.
MARKET RISK
We manage our Fashion Bug proprietary credit card program through various
operating entities that we own. The primary activity of these entities is to
service our proprietary credit card portfolio, the balances of which we sell
under a credit card securitization program. Under the securitization program, we
can be exposed to fluctuations in interest rates to the extent that the interest
rates charged to our customers vary from the rates paid on certificates issued
by the trust. Until November 2000, the credit card program billed finance
charges based on a fixed rate. As of November 2000, finance charges on all
accounts are billed using a floating rate index (the Prime lending rate),
subject to a floor and limited by legal maximums. The floating rate index on all
of the certificates is either one-month LIBOR or the commercial paper rate,
depending on the issuance. Consequently, we have reduced our exposure to
fluctuations in interest rates. However, we have exposure in the movement of
basis risk between the floating rate index on the certificates and the Prime
rate. As of August 3, 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 $400 thousand in
selling, general, and administrative expenses would result.
As of August 3, 2002, there were no borrowings outstanding under our
revolving credit facility. Should we incur borrowings under the revolving credit
facility, we would be exposed to variable interest rates. An increase in market
interest rates would increase our interest expense and decrease our cash flows.
A decrease in market interest rates would decrease our interest expense and
increase our cash flows.
We are not subject to material foreign exchange risk, as our foreign
transactions are primarily U.S. Dollar-denominated and our foreign operations do
not constitute a material part of our business.
31
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
See "Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited); Note 11. Impact of Recent Accounting Pronouncements" above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations; MARKET RISK," above.
Item 4. Controls and Procedures
Not applicable.
32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 26, 2001, a terminated employee filed a purported class action
suit in Alameda Superior Court, California against Lane Bryant, Inc. alleging
that she and all Lane Bryant store sales managers in California were
misclassified as exempt employees, and are actually nonexempt and entitled to be
paid overtime which they had not received. The plaintiff alleges violations of
Labor Code Sections 1194 and 515 and the Industrial Welfare Commission Order
promulgated pursuant to those Sections, as well as a violation of Business &
Professions Code Sections 17,200 et seq. The plaintiff seeks back pay and
injunctive relief for the misclassification, and reimbursement and disgorgement
of profits for the violation of the Business & Professions Code.
Lane Bryant is currently investigating whether the case would be
appropriate for class treatment. Lane Bryant will vigorously and aggressively
oppose class certification and the merits of the class case should it be
certified, or the individual case should it not be certified. Given the status
of the case, however, it is premature to speculate on the extent and likelihood
of liability, if any, of Lane Bryant.
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 2. Changes in Securities and Use of Proceeds
On May 28, 2002, we completed a private placement of $130.0 million of
4.75% Senior Convertible Notes due 2012 (the "Notes"). On June 20, 2002, the
initial purchasers exercised their option to purchase an additional $20.0
million principal amount of the Notes, resulting in $150.0 million principal
amount of Notes. Initially, holders have the right to convert the Notes into an
aggregate of 15,182,186 shares of common stock, as described below. The Notes
and the common stock issuable upon conversion were offered to qualified
institutional buyers in reliance on Rule 144A or Regulation S under the
Securities Act of 1933, as amended. The notes and common stock issuable upon
conversion are in the process of being registered under the Securities Act of
1933, as amended. We have filed a registration statement on Form S-3 with
respect to the Notes and the common stock issuable upon conversion of the Notes,
which we expect will become effective in the near future. Until so registered,
the Notes and common stock issued upon conversion of the Notes may not be
offered or sold in the United States except pursuant to an exemption from the
registration requirements of the Securities Act and applicable state securities
laws.
The Notes will mature on June 1, 2012 and are convertible at any time prior
to maturity into shares of our common stock at a conversion price of $9.88,
subject to adjustment upon certain events. The Notes are redeemable at our
option, in whole or in part, at any time on or after June 4, 2007, at declining
redemption prices, starting at 102.38% of principal and decreasing to 100.48% on
or after June 1, 2011. Under certain circumstances involving a change in control
of the Company, holders of the Notes may require us to repurchase all or a
portion of the Notes at 100% of the principal amount plus any accrued and unpaid
interest. Also, under such circumstances we have the option of paying the
repurchase price in shares of our common stock, valued at 95% of the average of
the closing prices of the common stock for a five-day trading period immediately
before and including the third trading day preceding the repurchase date. There
is no sinking fund for the Notes.
33
Net proceeds received from the issuance of the Notes were $145.5 million.
We used a portion of the net proceeds to repay in full amounts outstanding under
our term loan due August 16, 2004 totaling $67.5 million, $3.5 million
outstanding under our revolving credit facility, and $6.9 million of our 7.5%
Convertible Subordinated Notes due 2006, which were called for redemption. We
also used a portion of the proceeds to purchase 2.7 million shares of our common
stock at a cost of $18.3 million. The remaining proceeds ($49.3 million) were
invested in cash equivalents pending their use for other corporate purposes.
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on June 27, 2002.
Dorrit J. Bern, Alan Rosskamm, and Kenneth S. Olshan were nominated for
election, in our Proxy Statement, to serve three-year terms as Class C
Directors. The total number of shares represented at the Annual Meeting were
105,336,200 shares, representing 93.2% of the total number of shares outstanding
as of the close of business on May 10, 2002 (the record date fixed by the Board
of Directors). The following table indicates the number of votes cast in favor
of election and the number of votes withheld with respect to each of the Class C
Directors nominated:
Name Votes For Votes Withheld
---- --------- --------------
Dorrit J. Bern 103,237,936 2,098,264
Alan Rosskamm 103,237,884 2,098,316
Kenneth S. Olshan 77,859,980 27,476,220
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of Exhibits filed as part of this Quarterly Report
on Form 10-Q. Where so indicated, Exhibits that were previously filed are
incorporated by reference. For Exhibits incorporated by reference, the location
of the Exhibit in the previous filing is indicated in parenthesis.
3.1 Restated Articles of Incorporation, incorporated by reference to Form 10-K
of the Registrant for the fiscal year ended January 29, 1994. (Exhibit 3.1)
3.2 Bylaws, as Amended and Restated, incorporated by reference to Form 10-Q of
the Registrant for the quarter ended July 31, 1999. (Exhibit 3.2)
4.1 Indenture, dated as of May 28, 2002, between Charming Shoppes, Inc. and
Wachovia Bank, National Association, incorporated by reference to Form 10-Q
of the Registrant for the quarter ended May 4, 2002. (Exhibit 4.1)
4.2 Registration Rights Agreement, dated as of May 28, 2002, by and among
Charming Shoppes, Inc., as Issuer, and J. P. Morgan Securities, Inc., Bear
Stearns & Co., Inc., First Union Securities, Inc., Lazard Freres & Co.,
LLC, and McDonald Investments, Inc., as Initial Purchasers, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended May 4, 2002.
(Exhibit 4.2)
34
4.3 Amendment No. 2, dated May 17, 2002, to Loan and Security Agreement dated
as of August 16, 2001 by and among Charming Shoppes, Inc., Charming Shoppes
of Delaware, Inc., CSI Industries, Inc., Catherine Stores Corporation, Lane
Bryant, Inc. and FB Apparel, Inc., as Borrowers, Charming Shoppes of
Delaware, Inc., as Borrowers' Agent, Congress Financial Corporation, as
Administrative Agent, Collateral Agent, Joint Lead Arranger and Joint
Bookrunner, J.P. Morgan Business Credit Corp., as Co-Agent, Joint Lead
Arranger and Joint Bookrunner and The Financial Institutions named therein,
as Lenders, incorporated by reference to Form 10-Q of the Registrant for
the quarter ended May 4, 2002. (Exhibit 4.3)
4.4 Amendment No. 1, dated July 25, 2002, to Amendment No. 2, dated May 17,
2002, to Loan and Security Agreement dated as of August 16, 2001 by and
among Charming Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI
Industries, Inc., Catherine Stores Corporation, Lane Bryant, Inc. and FB
Apparel, Inc., as Borrowers, Charming Shoppes of Delaware, Inc., as
Borrowers' Agent, Congress Financial Corporation, as Administrative Agent,
Collateral Agent, Joint Lead Arranger and Joint Bookrunner, J.P. Morgan
Business Credit Corp., as Co-Agent, Joint Lead Arranger and Joint
Bookrunner and The Financial Institutions named therein, as Lenders.
4.5 Amendment No. 3, dated July 29, 2002, effective as of August 16, 2001, to
Loan and Security Agreement dated as of August 16, 2001 by and among
Charming Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI Industries,
Inc., Catherine Stores Corporation, Lane Bryant, Inc. and FB Apparel, Inc.,
as Borrowers, Charming Shoppes of Delaware, Inc., as Borrowers' Agent,
Congress Financial Corporation, as Administrative Agent, Collateral Agent,
Joint Lead Arranger and Joint Bookrunner, J.P. Morgan Business Credit
Corp., as Co-Agent, Joint Lead Arranger and Joint Bookrunner and The
Financial Institutions named therein, as Lenders.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350), executed by the Chief Executive Officer of the Company.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350), executed by the Chief Financial Officer of the Company.
(b) Reports on Form 8-K
On May 17, 2002, we filed an amendment on Form 8-K/A to amend and restate
in its entirety Item 7(b) of our Current Report on Form 8-K, dated August 16,
2001 and filed on August 31, 2001, as amended by a Form 8-K/A filed October 30,
2001. We filed the Form 8-K/A on May 17, 2002 to provide the financial
statements and pro forma financial information required by "Item 7. Financial
Statements, Pro Forma Financial Information, and Exhibits" of Form 8-K as of our
fiscal year ended February 2, 2002.
On May 21, 2002, we filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure" the text of a press release
we issued on May 20, 2002, announcing our intention to make a private offering
of senior convertible notes due 2012.
On May 22, 2002, we filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure" the text of a press release
we issued on May 22, 2002, announcing the terms of the private offering of
senior convertible notes due 2012 previously announced on May 20, 2002.
On May 28, 2002, we filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure" the text of a press release
we issued on May 28, 2002, announcing the completion of the private offering of
senior convertible notes due 2012 previously announced on May 20, 2002.
35
On May 30, 2002, we filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure" the text of a press release
we issued on May 29, 2002, announcing that we have called for redemption our
convertible subordinated notes due 2006.
On July 3, 2002, we filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure" the text of a press release
we issued on July 1, 2002, announcing that we have completed the redemption our
convertible subordinated notes due 2006.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARMING SHOPPES, INC.
----------------------
(Registrant)
Date: September 13, 2002 /S/DORRIT J. BERN
-----------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: September 13, 2002 /S/ERIC M. SPECTER
------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer
Certification By Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Dorrit J. Bern, Principal Executive Officer of Charming Shoppes, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Charming Shoppes, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 13, 2002 /S/DORRIT J. BERN
-----------------
Dorrit J. Bern
Chairman of the Board
President and Principal Executive Officer
37
Certification By Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Eric M. Specter, Principal Financial Officer of Charming Shoppes, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Charming Shoppes, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 13, 2002 /S/ERIC M. SPECTER
------------------
Eric M. Specter
Executive Vice President
Principal Financial Officer
38
Exhibit Index
Exhibit No. Item
3.1 Restated Articles of Incorporation, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended January 29,
1994. (Exhibit 3.1)
3.2 Bylaws, as Amended and Restated, incorporated by reference to
Form 10-Q of the Registrant for the quarter ended July 31, 1999.
(Exhibit 3.2)
4.1 Indenture, dated as of May 28, 2002, between Charming Shoppes,
Inc. and Wachovia Bank, National Association, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended
May 4, 2002. (Exhibit 4.1)
4.2 Registration Rights Agreement, dated as of May 28, 2002, by and
among Charming Shoppes, Inc., as Issuer, and J. P. Morgan
Securities, Inc., Bear Stearns & Co., Inc., First Union
Securities, Inc., Lazard Freres & Co., LLC, and McDonald
Investments, Inc., as Initial Purchasers, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended
May 4, 2002. (Exhibit 4.2)
4.3 Amendment No. 2, dated May 17, 2002, to Loan and Security
Agreement dated as of August 16, 2001 by and among Charming
Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI
Industries, Inc., Catherine Stores Corporation, Lane Bryant, Inc.
and FB Apparel, Inc., as Borrowers, Charming Shoppes of Delaware,
Inc., as Borrowers' Agent, Congress Financial Corporation, as
Administrative Agent, Collateral Agent, Joint Lead Arranger and
Joint Bookrunner, J.P. Morgan Business Credit Corp., as Co-Agent,
Joint Lead Arranger and Joint Bookrunner and The Financial
Institutions named therein, as Lenders, incorporated by reference
to Form 10-Q of the Registrant for the quarter ended May 4, 2002.
(Exhibit 4.3)
4.4 Amendment No. 1, dated July 25, 2002, to Amendment No. 2, dated
May 17, 2002, to Loan and Security Agreement dated as of August
16, 2001 by and among Charming Shoppes, Inc., Charming Shoppes of
Delaware, Inc., CSI Industries, Inc., Catherine Stores
Corporation, Lane Bryant, Inc. and FB Apparel, Inc., as
Borrowers, Charming Shoppes of Delaware, Inc., as Borrowers'
Agent, Congress Financial Corporation, as Administrative Agent,
Collateral Agent, Joint Lead Arranger and Joint Bookrunner, J.P.
Morgan Business Credit Corp., as Co-Agent, Joint Lead Arranger
and Joint Bookrunner and The Financial Institutions named
therein, as Lenders.
4.5 Amendment No. 3, dated July 29, 2002, effective as of August 16,
2001, to Loan and Security Agreement dated as of August 16, 2001
by and among Charming Shoppes, Inc., Charming Shoppes of
Delaware, Inc., CSI Industries, Inc., Catherine Stores
Corporation, Lane Bryant, Inc. and FB Apparel, Inc., as
Borrowers, Charming Shoppes of Delaware, Inc., as Borrowers'
Agent, Congress Financial Corporation, as Administrative Agent,
Collateral Agent, Joint Lead Arranger and Joint Bookrunner, J.P.
Morgan Business Credit Corp., as Co-Agent, Joint Lead Arranger
and Joint Bookrunner and The Financial Institutions named
therein, as Lenders.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. 1350), executed by the Chief Executive Officer
of the Company.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. 1350), executed by the Chief Financial Officer
of the Company.
39