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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended January 29, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to _____________ .
Commission File Number: 000-07258
CHARMING SHOPPES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-1721355
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
450 Winks Lane, Bensalem, Pennsylvania 19020
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (215) 245-9100
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.10 per share)
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(Title of Class)
Stock Purchase Rights
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [X] YES [ ] NO
The aggregate market value of the outstanding common stock of the
registrant held by non-affiliates as of July 31, 2004 (the last day of the
registrant's most recently completed second fiscal quarter), based on the
closing price on July 30, 2004, was approximately $857,971,000.
As of March 24, 2005, 119,815,703 shares of the registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of Form 10-K is incorporated by
reference herein from the registrant's definitive proxy statement for its 2005
annual shareholders meeting, which is expected to be filed within 120 days after
the end of the fiscal year covered by this Annual Report.
CHARMING SHOPPES, INC.
2005 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I Page
Item 1 Business
General.......................................................... 1
Stores........................................................... 1
Merchandising and Buying......................................... 3
Marketing and Promotions......................................... 4
Proprietary Credit Card Program.................................. 5
Sourcing......................................................... 5
Distribution and Logistics....................................... 6
Competition...................................................... 6
Employees........................................................ 6
Trademarks and Servicemarks...................................... 7
Executive Offices................................................ 7
Available Information............................................ 7
Item 2 Properties....................................................... 7
Item 3 Legal Proceedings................................................ 8
Item 4 Submission of Matters to a Vote of Security Holders.............. 9
Additional Part I Information - Our Executive Officers..................... 9
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities.......... 10
Item 6 Selected Financial Data.......................................... 12
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Forward-Looking Statements....................................... 14
Restatement of Financial Statements.............................. 16
Overview......................................................... 17
Critical Accounting Policies..................................... 18
Results of Operations............................................ 25
Financial Condition.............................................. 33
Market Risk...................................................... 40
Impact of Recent Accounting Pronouncements....................... 41
Item 7A Quantitative and Qualitative Disclosures About Market Risk....... 41
Item 8 Financial Statements and Supplementary Data...................... 42
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 89
Item 9A Controls and Procedures.......................................... 89
Item 9B Other Information................................................ 89
PART III
Item 10 Directors and Executive Officers of the Registrant............... 90
Item 11 Executive Compensation........................................... 90
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 90
Item 13 Certain Relationships and Related Transactions................... 91
Item 14 Principal Accountant Fees and Services........................... 91
PART IV
Item 15 Exhibits and Financial Statement Schedules....................... 92
SIGNATURES................................................................. 102
EXHIBIT INDEX.............................................................. 103
PART I
Item 1. Business
General
We are a leading specialty apparel retailer primarily focused on plus-size
women's apparel through our three distinct brands: LANE BRYANT(R), FASHION
BUG(R), and CATHERINES PLUS SIZES(R). During the year ended January 29, 2005
("Fiscal 2005"), the sale of plus-size apparel represented approximately 77% of
our total net sales. Through our fashion content, store layouts, and broad
merchandise assortments, we seek to appeal to customers from a broad range of
socioeconomic, demographic, and cultural groups. As of January 29, 2005, we
operated 2,221 stores in 48 states. Each of our brands is designed to attract a
distinct customer.
LANE BRYANT is a widely recognized name in plus-size fashion. Through
private labels, such as VENEZIA(R), CACIQUE(R), and LANE BRYANT(R), we offer
fashionable and sophisticated apparel in plus-sizes 14 - 28, including intimate
apparel, wear-to-work, and casual sportswear, as well as accessories. LANE
BRYANT has a loyal customer base, generally ranging in age from 25 to 45 years
old, that shops for fashionable merchandise in the moderate price range.
Primarily a mall-based destination store for the plus-size woman, LANE BRYANT
operates 722 stores in 46 states that average approximately 5,900 square feet.
In March 2003, we began E-commerce operations on our lanebryant.com website.
FASHION BUG stores specialize in selling a wide variety of plus-size,
misses and junior apparel, accessories, intimate apparel, and footwear. FASHION
BUG customers generally range in age from 20 to 49 years old and shop in the
low-to-moderate price range. Our 1,028 FASHION BUG stores are located in 45
states, primarily in strip shopping centers, and average approximately 8,900
square feet. In July 2004, we began E-commerce operations on our fashionbug.com
website.
CATHERINES PLUS SIZES is particularly known for extended sizes (over size
28) and petite plus-sizes. CATHERINES offers classic apparel and accessories for
wear-to-work and casual lifestyles. CATHERINES customers generally range in age
from 40 to 65 years old, shop in the moderate price range, and are concerned
with fit and value when purchasing clothes. Our 471 CATHERINES stores are
located in 44 states, primarily in strip shopping centers in the Southeast,
Mid-Atlantic, and Eastern Central regions of the United States, and average
approximately 4,100 square feet. In March 2002, we began E-commerce operations
on our catherines.com website.
Stores
Our 2,221 stores (as of January 29, 2005) are primarily located in suburban
areas and small towns. Approximately 70% of these stores are located in strip
shopping centers, with the remainder located in community and regional malls.
The majority of our FASHION BUG and CATHERINES stores are strip-center based.
Most of our LANE BRYANT stores are in malls. Over the past few years, LANE
BRYANT has expanded into strip and lifestyle centers, and has demonstrated
success in such locations. Approximately 25% of our LANE BRYANT stores are
currently located in strip and lifestyle shopping centers.
1
We believe that our customers visit strip shopping centers frequently as a
result of the tenant mix and convenience of strip shopping centers. Our
long-term store growth plans are to expand both LANE BRYANT and CATHERINES into
additional strip and lifestyle center locations. Availability of strip and
lifestyle center retail space continues to significantly outpace mall expansion.
In addition, we benefit in strip and lifestyle centers from substantially lower
occupancy costs as compared to occupancy costs in malls.
Our merchandise displays enable our customers to assemble coordinated and
complete outfits that satisfy many of their lifestyle needs. We relocate or
remodel our stores as appropriate to convey a fresh and contemporary shopping
environment. We frequently test and implement new store designs and fixture
packages that are aimed at providing an effective merchandise presentation. We
emphasize customer service, including the presence of helpful salespeople in the
stores, layaway plans, and acceptance of merchandise returns for cash or credit
within a reasonable time period. Typically, our stores are open seven days per
week, eleven hours per day Monday through Saturday, and seven hours on Sunday.
We continue to seek additional locations that meet our financial and
operational objectives. We plan to open approximately 70-80 stores and close
approximately 50 stores during Fiscal 2006. Planned store openings by brand are
approximately 50-60 LANE BRYANT stores, 5 CATHERINES stores, and 15 FASHION BUG
stores. Planned store closings by brand are approximately 15 LANE BRYANT stores,
15 CATHERINES stores, and 20 FASHION BUG stores. Additionally, we currently plan
to relocate approximately 40 LANE BRYANT stores, 15 CATHERINES stores, and 25
FASHION BUG stores during Fiscal 2006.
Our store openings, closings, and number of locations over the past five
fiscal years are as follows:
Year Ended
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Jan. 29, Jan. 31, Feb. 1, Feb. 2, Feb. 3,
2005 2004 2003 2002 2001
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Store Activity:
Number of stores open at beginning of period 2,227 2,248 2,446 1,755 1,740
Opened during period ....................... 51 50 57 125 106
Acquired during period ..................... 0 0 0 651 0
Closed during period ....................... (57) (71) (255)(1) (85) (91)(2)
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Number of stores open at end of period ..... 2,221 2,227 2,248 2,446 1,755
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Number of Stores by Brand:
FASHION BUG ................................ 1,028 1,051 1,083 1,252 1,230
LANE BRYANT ................................ 722 710 689 647 0
CATHERINES ................................. 471 466 467 461 414
Discontinued brands(3) ..................... 0 0 9 86 111
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Number of stores open at end of period ..... 2,221 2,227 2,248 2,446 1,755
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(1) Includes 124 FASHION BUG stores and 68 ADDED DIMENSIONS(R) stores that were
closed in connection with a restructuring plan announced on January 28,
2002.
(2) Includes 35 MODERN WOMANTM stores that were closed in connection with the
conversion of MODERN WOMAN stores into CATHERINES stores during the year
ended February 3, 2001.
(3) Includes THE ANSWER(R) and ADDED DIMENSIONS stores closed during 2003, and
MONSOON(R) and ACCESSORIZE(R) stores closed during 2004.
All stores are operated under our direct management. Each store has a
manager and an assistant manager or supervisor who is in daily operational
control of the location. We also employ district managers, who travel to all
stores in their district on a frequent basis, to supervise store operations.
Each district manager has responsibility for
2
an average of 12 stores. Regional managers, who report to a Director of Stores,
supervise the district managers. Generally, we appoint store managers from the
group of assistant managers and district managers from the group of store
managers. We seek to motivate our store personnel through internal advancement
and promotion, competitive wages, and various incentive, medical, and retirement
plans. We centrally develop store operations, merchandising, and buying
policies, and assign to individual store management the principal duties of
display, selling, and reporting through point-of-sale terminals.
Merchandising and Buying
We employ a merchandising and buying strategy that is focused on providing
an attractive selection of apparel and accessories that reflect the fashion
preferences of the target customer for each of our brands. Separate merchandise
groups for each of our brands conduct merchandise purchasing, using buyers
supervised by one or more merchandise managers. We believe that specialization
of buyers within our brands enhances the distinctiveness of the brands and their
offerings. In addition, we use domestic and international fashion market
guidance, fashion advisory services, proprietary design, and in-store testing to
determine the optimal product assortments for each of our brands. We believe
that this approach results in greater success in predicting customer preferences
while reducing our inventory investment and risk. We also seek to maintain high
quality standards with respect to merchandise fabrication, construction, and
fit.
We continually refine our merchandise assortments to reflect the needs and
demands of our diverse customer groups and the demographics of each store
location. At LANE BRYANT, we offer a combination of fashion basics, seasonal
fashions, and high fashion in casual and wear-to-work merchandise, intimate
apparel, and accessories. We strive to translate current trends into plus-sizes
and to be first to market with our styles. At FASHION BUG, we offer a broad
assortment of both casual and wear-to-work apparel, in plus, misses, and junior
sizes as well as girls and maternity, at low-to-moderate prices. FASHION BUG's
plus- and misses-size merchandise typically reflects established fashion trends
and includes a broad offering of ready-to-wear apparel as well as footwear,
accessories, intimate apparel, and seasonal items, such as outerwear. FASHION
BUG's junior merchandise reflects the latest fashion trends and includes a
significant amount of well-recognized third-party national brands. At
CATHERINES, we offer a broad assortment of plus-size merchandise in classic
styles designed to provide "head-to-toe" dressing for our customers. CATHERINES
features casual and career sportswear, dresses, intimate apparel, suits, and
accessories in a variety of plus-sizes, including petites and extended sizes.
CATHERINES has developed a unique expertise in the fit, design, and
manufacturing of extended sizes, making it one of the few retailers to emphasize
these sizes.
For stores that are identified as having certain attributes, we use our
distribution capabilities to stock the stores with products specifically
targeted to such attributes. Our merchandising staffs obtain store and
brand-wide inventory information generated by merchandise information systems
that use point-of-sale terminals. Through these terminals, merchandise can be
followed from the placement of our initial order for the merchandise to the
actual sale to our customer. Based upon this data, our merchandise managers
compare budgeted-to-actual sales and make merchandising decisions as needed,
including re-order, markdowns, and changes in the buying plans for upcoming
seasons. In addition, we continue to work to improve inventory turnover by
better managing the flow of seasonal merchandise to our stores across all
geographic regions.
Our merchandising and buying philosophy, coupled with enhancements in
inventory management, helps facilitate the timely and orderly purchase and flow
of merchandise. This enables our stores to offer fresh product assortments on a
regular basis.
3
We employ a realistic pricing strategy that is aimed at setting the initial
price markup of fashion merchandise in order to increase the percentage of sales
at the original ticketed price. We believe this strategy has resulted in a
greater degree of credibility with the customer, reducing the need for
aggressive price promotions. However, our pricing strategy typically does allow
sufficient margin to permit merchandise discounts in order to stimulate customer
purchases when necessary.
Our stores experience a normal seasonal sales pattern for the retail
apparel industry, with peak sales occurring during the spring and Christmas
seasons. We generally build inventory levels before these peak sales periods. To
maintain current and fashionable inventory, we reduce the price of slow-moving
merchandise throughout the year. Much of our merchandise is developed for one or
more of our six seasons: spring, summer, summer-fall transitional, fall,
holiday, and holiday-spring transitional. End-of-season sales are conducted with
the objective of carrying a minimal amount of seasonal merchandise over from one
season to another. Sales for the four quarters of Fiscal 2005, as a percent of
total sales, were 25.4%, 26.2%, 23.2%, and 25.2%, respectively.
Marketing and Promotions
We use several types of advertising to stimulate customer traffic. We use
targeted direct-mail advertising to preferred customers selected from a database
of approximately 27.5 million proprietary credit card, third-party credit card,
and cash customers. We may also use radio, television, and newspaper advertising
and fashion shows to stimulate traffic at certain strategic times of the year.
We also use pricing policies, displays, store promotions, and convenient store
hours to attract customers. We believe that, with the planning and guidance of
our specialized home-office personnel, each brand provides such displays and
advertising as may be necessary to feature certain merchandise or certain
promotional selling prices from time to time.
We maintain websites for our LANE BRYANT, FASHION BUG, and CATHERINES
brands that provide information regarding current fashions and promotions. We
began E-commerce operations on our CATHERINES website in March 2002, on our LANE
BRYANT website in March 2003, and on our FASHION BUG website in July 2004. Our
CATHERINES website averaged more than 300,000 unique visitors per month during
Fiscal 2005, our LANE BRYANT website enjoys more than 1.2 million unique
visitors per month and an established on-line community, and our FASHION BUG
website has averaged more than 500,000 unique visitors per month since we
commenced E-commerce operations.
In August 2003, we launched FIGURE(R) magazine, a periodic fashion and
lifestyle magazine for women. The magazine features clothing and fashions from
our LANE BRYANT, FASHION BUG, and CATHERINES brands, and also covers topics such
as: beauty; health and fitness; home, food and entertaining; relationships; and
social and community issues. FIGURE magazine is available by subscription, and
is also sold in all of our stores and at selected newsstands and supermarkets,
including certain national booksellers. Since its inception in August 2003, the
magazine has grown to a per-issue circulation of more than 400,000 copies.
We offer our customers various loyalty card programs. Customers who join
these programs are entitled to various benefits, including discounts and rebates
on purchases during the membership period. Customers generally join these
programs by paying an annual membership fee. Additional information on our
loyalty card programs is included in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations; CRITICAL ACCOUNTING
POLICIES; Revenue Recognition" below.
4
Proprietary Credit Card Program
We seek to encourage sales through the promotion of our proprietary credit
cards. We believe that our credit cards act as promotional vehicles by
engendering customer loyalty, creating a substantial base for targeted
direct-mail promotion, and encouraging incremental sales.
Our FASHION BUG credit card program accounted for approximately 28% of
FASHION BUG retail sales in Fiscal 2005, and has approximately 1.9 million
active accounts. We control credit policies and service the FASHION BUG
proprietary credit card file, and, through various agreements, we securitize and
sell the credit card receivables generated by this facility.
Our LANE BRYANT and CATHERINES brands also offer customers the convenience
of proprietary credit card programs. The LANE BRYANT credit card program
accounted for approximately 29% of LANE BRYANT retail sales during Fiscal 2005,
and has approximately 1.6 million active accounts. The CATHERINES credit card
program accounted for approximately 29% of CATHERINES retail sales during Fiscal
2005, and has approximately 537,000 active accounts. During Fiscal 2005, we used
third-party banks to finance and service the LANE BRYANT and CATHERINES credit
card programs. These third-party banks provide new account approval, credit
authorization, billing, and account collection services. Under non-recourse
agreements with the third-party banks, we are reimbursed with respect to sales
generated by the credit cards. In January 2004, in accordance with the terms of
the Merchant Services Agreement pursuant to which the CATHERINES proprietary
credit cards were issued, we provided one year's notice to the third party bank
in order to exercise our option to terminate the agreement and to purchase the
portfolio. Spirit of America National Bank (our wholly-owned credit card bank)
purchased the CATHERINES credit card portfolio in March 2005 for approximately
$56.6 million (subject to adjustment). The purchase was funded through our
securitization facilities, including a portion of the proceeds from the sale of
Series 2004-1 certificates under that securitization facility.
A more comprehensive description of our asset securitization process and
our commitments under the third-party bank agreements is included in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations; FINANCIAL CONDITION; Off-Balance-Sheet Arrangements" and "Item 8.
Financial Statements and Supplementary Data: Notes to Consolidated Financial
Statements; NOTE 16. ASSET SECURITIZATION" below.
Sourcing
To meet the demands of our customers, we access both the domestic wholesale
and overseas apparel markets for our merchandise purchases. This allows us to
maintain flexible lead times, respond quickly to current fashion trends, and
quickly replenish merchandise inventory as necessary. During Fiscal 2005, we
purchased merchandise from approximately 1,000 suppliers and factories located
throughout the world. We use our overseas sourcing operations, which generally
require longer lead times, primarily to purchase fashion-basic merchandise. In
Fiscal 2005, overseas sourcing accounted for approximately 21% of consolidated
merchandise purchases. Overseas sourcing as a percent of merchandise purchases
by brand, was approximately 26% for FASHION BUG, 19% for LANE BRYANT, and 11%
for CATHERINES. During Fiscal 2005, we purchased a portion of LANE BRYANT
merchandise from Mast Industries, Inc. ("Mast"). Mast, a contract manufacturer
and apparel importer, is a wholly-owned subsidiary of Limited Brands, Inc.
("Limited Brands"). These purchases from Mast accounted for approximately 15% of
our total consolidated merchandise purchases and approximately 42% of
merchandise purchases for LANE BRYANT during Fiscal 2005. No other vendor
accounted for more than 3% of total consolidated merchandise purchases during
Fiscal 2005.
5
We pay for merchandise purchases outside the United States using letters of
credit with third-party vendors where we are the importer of record. To date, we
have not experienced difficulties in purchasing merchandise overseas or
importing such merchandise into the United States. Should events such as
political instability or a natural disaster result in a disruption of normal
activities in any single country with which we do business, we believe that we
would have adequate alternative sources of supply.
Distribution and Logistics
We currently operate two distribution centers. For our FASHION BUG stores,
we operate a distribution center in Greencastle, Indiana. Located on a 150-acre
tract of land, this facility contains a building of approximately 1,000,000
square feet. We estimate that this facility has the capacity to service up to
approximately 1,800 stores. For our LANE BRYANT stores and CATHERINES stores, we
operate a distribution center in White Marsh, Maryland. Located on 29 acres of
land, the White Marsh facility contains a building of approximately 393,000
square feet, which is currently designed to service up to approximately 1,400
stores.
We acquired the White Marsh distribution center during Fiscal 2003 to
replace a leased distribution center in Reynoldsburg, Ohio that serviced our
LANE BRYANT stores. We completed the relocation of the Reynoldsburg distribution
center to our White Marsh distribution center in February 2004 and terminated
the lease for the Reynoldsburg distribution center and a related logistics and
transportation services agreement in accordance with early cancellation
provisions of the lease and agreement. We also consolidated a 213,000 square
foot Memphis, Tennessee distribution center that serviced our CATHERINES stores
into the White Marsh facility during Fiscal 2004.
Substantially all of our merchandise purchases are received at our
distribution facilities, where they are prepared for distribution to our stores.
Automated sorting systems in the distribution centers enhance the flow of
merchandise from receipt to quality control inspection, receiving, ticketing,
packing, and final shipment. Merchandise is shipped to each store principally by
common carriers. We use computerized automated distribution attributes to
combine shipments when possible and improve the efficiency of the distribution
operations.
Competition
The retail sale of women's apparel is a highly competitive business with
numerous competitors, including department stores, specialty apparel stores,
discount stores, and mail-order and E-commerce companies. We cannot reasonably
estimate the number of our competitors due to the large number of companies
selling women's apparel. The primary elements of competition are merchandise
style, size, selection, fit, quality, display, and price, as well as store
location, design, advertising, and promotion and personalized service to the
customers.
Employees
As of the end of Fiscal 2005, we employed approximately 27,000 associates,
which included approximately 17,800 part-time employees. In addition, we hire a
number of temporary employees during the Christmas season. Approximately 106 of
our employees are represented by unions. We believe that overall our
relationship with these unions, and our employees in general, is satisfactory.
6
Trademarks and Servicemarks
We own, or are in the process of obtaining, all rights to the trademarks
and trade names we believe are necessary to conduct our business as presently
operated. "FASHION BUG(R)", "FASHION BUG PLUS(R)", "BUNDLE OF JOY(TM)",
"FIGURE(R)", "L.A. BLUES(R)", "CATHERINES(R)", "CATHERINES PLUS SIZES(R)",
"C.S.T. STUDIO(R)", "C.S.T. SPORT(R)", "MAGGIE BARNES(R)", "ANNA MAXWELL(R)",
"LIZ & ME(R)", "SERENADA(R)", "CAPISTRANO(R)", "LANE BRYANT(R)", "VENEZIA(R)",
"CACIQUE(R)", "ELEMENTAL STRETCH(R)", "MODERN WOMAN(TM)", and several other
trademarks and servicemarks of lesser importance to us have been registered or
are in the process of being registered with the United States Patent and
Trademark Office and in other countries.
We also own the following internet domain name registrations:
catherines.com, charming.com, charmingshoppes.com, fashionbug.com,
fashionbugcard.com, fashionbugplus.com, figuremagazine.com, lanebryant.com,
modernwoman.com, and others of lesser importance.
Executive Offices
Charming Shoppes, Inc., was incorporated in Pennsylvania in 1969. Our
principal offices are located at 450 Winks Lane, Bensalem, Pennsylvania 19020.
Our telephone number is (215) 245-9100.
Available Information
We maintain an Internet website at charmingshoppes.com. As of March 25,
2003, copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, are available free of charge on or through this website as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission ("SEC"). Our historical
filings can also be accessed directly from the SEC's website at sec.gov. See
"PART III; Item 10. Directors and Executive Officers of the Registrant" below
for additional information that is available on our Internet website.
Item 2. Properties
We lease all our stores, with the exception of four stores that we own.
Typically, store leases have initial terms of 5 to 20 years and generally
contain provisions for co-tenancies, renewal options, additional rents based on
a percentage of sales, and payment of real estate taxes and common area charges.
7
With respect to leased stores open as of January 29, 2005, the following
table shows the number of store leases expiring during the calendar periods
indicated, assuming the exercise of our renewal options:
Number of
Period Leases Expiring
------ ---------------
2005 117(1)
2006 - 2010 726
2011 - 2015 401
2016 - 2020 369
2021 - 2025 486
2026 - 2030 93
Thereafter 29
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(1) Includes 46 stores on month-to-month leases
We own a 1,000,000 square foot distribution center in Greencastle, Indiana
that services our FASHION BUG stores and a 393,000 square foot distribution
center in White Marsh, Maryland that services our LANE BRYANT and CATHERINES
stores. We acquired the White Marsh distribution center during Fiscal 2003 to
replace a leased distribution center in Reynoldsburg, Ohio that serviced our
LANE BRYANT stores. We relocated the Reynoldsburg distribution center in
February 2004 and terminated the lease for the Reynoldsburg distribution center
and a related logistics and transportation services agreement in accordance with
early cancellation provisions of the lease and agreement. We also consolidated a
213,000 square foot Memphis, Tennessee distribution center that serviced our
CATHERINES stores into the White Marsh facility in June 2003. During the fourth
quarter of Fiscal 2005, we entered into an agreement to lease the Memphis,
Tennessee distribution center to a third party for a three-year period.
We lease 105,000 square feet of office space in Bensalem, Pennsylvania that
houses our corporate headquarters and certain FASHION BUG operations. We also
own approximately 22 acres in Bensalem with a 145,000 square foot office
building that houses our primary data processing facility and additional
administrative offices. We own a 63,000 square foot facility in Memphis,
Tennessee that houses our CATHERINES home office. We also lease 130,000 square
feet of office space near Reynoldsburg, Ohio that houses our LANE BRYANT home
office. In January 2005, we entered into an amendment to the lease on the
Reynoldsburg facility to extend the term of the lease from December 2005 to
February 2006. We also entered into an agreement with a separate third party
that provides for the leasing of a 135,000 square foot facility in Columbus,
Ohio, which will serve as a new LANE BRYANT home office. We expect to occupy the
Columbus facility by the first quarter of Fiscal 2007. Our credit operations,
including Spirit of America National Bank, our wholly-owned credit card bank
subsidiary, occupy 30,000 square feet of leased office space in Miami Township,
Ohio. We also maintain offices in New York City that occupy 13,000 square feet
of leased space, and we own or lease a total of 40,000 square feet of office and
warehouse space in Asia.
Item 3. Legal Proceedings
Other than ordinary routine litigation incidental to our business, there
are no other pending material legal proceedings that we or any of our
subsidiaries are a party to, or of which any of their property is the subject.
There are no proceedings that are expected to have a material adverse effect on
our financial condition or results of operations.
8
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
Additional Part I Information - Our Executive Officers
The following list contains certain information relative to our executive
officers. There are no family relationships among any of our executive officers.
Dorrit J. Bern, 54, has served as Chairman of the Board of Directors since
January 1997. She has also served as President and Chief Executive Officer since
September 1995. Ms. Bern's term as a Director expires in 2005.
Joseph M. Baron, 57, has served as Executive Vice President and Chief
Operating Officer since March 2002. Before that, he served as President and
Chief Executive Officer of Homelife Corporation from February 1999 to October
2001. Homelife Corporation filed a bankruptcy petition under Chapter 11 of the
U. S. Bankruptcy Code during July 2001.
Michel Bourlon, 45, has served as Executive Vice President - Sourcing since
March 2004. Before that, he served as Managing Director of Eddie Bauer
International (Hong Kong) Ltd., from September 1997 to February 2004.
Anthony A. DeSabato, 56, has served as Executive Vice President - Corporate
and Labor Relations, Business Ethics, and Loss Prevention since July 2003.
Before that, he served as Executive Vice President and Corporate Director of
Human Resources since 1990, and he has been employed by us since 1987.
Eric M. Specter, 47, has served as Executive Vice President - Chief
Financial Officer since January 1997, and he has been employed by us since 1983.
He also served as Treasurer from February 1998 to March 2000.
Colin D. Stern, 56, has served as Executive Vice President and General
Counsel since 1990, and he has been employed by us since 1989. He has also
served as Secretary since February 1998.
Gale H. Varma, 54, has served as Executive Vice President - Human Resources
since July 2003. Before that, she served as Division Vice President - Human
Resources and Ethics Officer for the Prudential Institutional Employee Benefits
division of Prudential Financial Services, a division of Prudential Insurance
Company of America, from September 1997 to April 2003.
Erna Zint, 61, served as Executive Vice President - Sourcing from January
1996 to March 2004.
Jonathon Graub, 46, has served as Senior Vice President - Real Estate,
since December 1999, and he has been employed by us since 1981.
John J. Sullivan, 58, has served as Vice President - Corporate Controller
since October 1998.
9
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities
Our common stock is traded on the over-the-counter market and quoted on the
NASDAQ National Market ("NASDAQ") under the symbol "CHRS," and is listed and
traded on the Chicago Board Options Exchange ("CBOE") and Pacific Stock Exchange
("PCX") under the symbol "QSR." The following table sets forth the high and low
sale prices for our common stock during the indicated periods, as reported by
NASDAQ.
Fiscal 2005 Fiscal 2004
----------- -----------
High Low High Low
---- --- ---- ---
1st Quarter ........ $8.22 $5.70 $4.75 $2.70
2nd Quarter ........ 9.19 6.48 5.72 3.94
3rd Quarter ........ 7.73 6.23 6.80 4.89
4th Quarter ........ 9.64 7.55 6.85 5.09
The approximate number of holders of record of our common stock as of March
24, 2005 was 2,059. This number excludes individual stockholders holding stock
under nominee security position listings.
We have not paid any dividends since 1995, and we do not expect to declare
or pay any dividends on our common stock in the near future. In addition, our
existing credit facility prohibits the payment of dividends on our common stock.
(See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations; FINANCIAL CONDITION; Financing; Long-term Debt and Equity
Financing" and "Item 8. Financial Statements and Supplementary Data; Notes to
Consolidated Financial Statements; NOTE 7. DEBT" below).
10
Purchases of Equity Securities by the Issuer and Affiliated Purchasers:
Total Maximum
Number Number of
of Shares Shares that
Total Purchased as May Yet be
Number Average Part of Publicly Purchased
of Shares Price Paid Announced Plans Under the Plans
Period Purchased per Share or Programs(2) or Programs(2)
------ --------- --------- ----------- -----------
October 31, 2004 through
November 27, 2004............ - - -
November 28, 2004 through
January 1, 2005.............. - - -
January 2, 2005 through
January 29, 2005............. 635(1) $8.01(1) -
--- -----
Total............................ 635 $8.01 -
=== =====
--------------------
(1) The shares of common stock we purchased during the four-week period ended
January 29, 2005 were shares withheld for the payment of payroll taxes on
employee stock awards that vested during the period.
(2) In Fiscal 1998, we publicly announced that our Board of Directors granted
authority to repurchase up to 10,000,000 shares of our common stock. In
Fiscal 2000, we publicly announced that our Board of Directors granted
authority to repurchase up to an additional 10,000,000 shares of our common
stock. In Fiscal 2003, the Board of Directors granted an additional
authorization to repurchase 6,350,662 shares of common stock issued to
Limited Brands in connection with our acquisition of LANE BRYANT. From
Fiscal 1998 through Fiscal 2003, we repurchased a total of 21,370,993
shares of common stock, which included shares purchased on the open market
as well as shares repurchased from Limited Brands. As of January 29, 2005,
4,979,669 shares of our common stock remain available for repurchase under
these programs. Our ability to exercise this authority is subject to
certain restrictions under the terms of our revolving credit facility. As
conditions may allow, and if any required consent is granted, we may from
time to time acquire additional shares of our common stock under these
programs. Such shares, if purchased, would be held as treasury shares. No
shares were acquired under these programs during the three months ended
January 29, 2005. The repurchase programs have no expiration date.
11
Item 6. Selected Financial Data
The following table presents selected financial data for each of our five
fiscal years ended as of February 3, 2001 through January 29, 2005. Certain
amounts for fiscal years 2001 through 2004 have been restated (see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations; RESTATEMENT OF FINANCIAL STATEMENTS" and "Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial Statements;
NOTE 2. RESTATEMENT OF FINANCIAL STATEMENTS" below). The selected financial data
is taken from our audited financial statements and should be read in conjunction
with "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements and accompanying notes
included under "Item 8. Financial Statements and Supplementary Data."
CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY
Year Ended
------------------------------------------------------------------
(Dollars in thousands, Jan. 29, Jan. 31, Feb. 1, Feb. 2, Feb. 3,
except per share amounts) 2005 2004 2003 2002(1) 2001(1)(2)
---- ---- ---- ------- ----------
Operating Statement Data:
Net sales............................... $2,332,334 $2,285,680 $2,412,409 $1,993,843 $1,607,079
---------- ---------- ---------- ---------- ----------
Cost of goods sold, buying, and
occupancy expenses................. 1,640,248 1,642,816(3) 1,726,306 1,460,256 1,136,530
Selling, general, and
administrative expenses............ 577,301 558,248(3) 603,502 486,204 382,398
Amortization of goodwill................ 0 0 0 4,885 4,885
Expenses related to cost
reduction plan..................... 605(4) 11,534(4) 0 0 0
Restructuring charge (credit)........... 0 0 (4,813)(5) 37,708(5) 0
---------- ---------- ---------- ---------- ----------
Total operating expenses................ 2,218,154 2,212,598 2,324,995 1,989,053 1,523,813
---------- ---------- ---------- ---------- ----------
Income from operations.................. 114,180 73,082 87,414 4,790 83,266
Other income, principally
interest........................... 3,098 2,050 2,328 4,730 8,304
Interest expense........................ (15,610) (15,609) (20,292) (18,701) (8,894)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes,
minority interest, and
cumulative effect of
accounting changes................. 101,668 59,523 69,450 (9,181) 82,676
Income tax provision (benefit).......... 37,142 21,623 27,117 (1,838) 32,286
---------- ---------- ---------- ---------- ----------
Income (loss) before minority
interest and cumulative effect
of accounting changes.............. 64,526 37,900 42,333 (7,343) 50,390
Minority interest in net loss of
consolidated subsidiary............ 0 142 679 0 0
Cumulative effect of accounting
changes, net of tax................ 0 0 (49,098)(6) 0 (540)(7)
---------- ---------- ---------- ---------- ----------
Net income (loss)....................... $ 64,526 $ 38,042 $ (6,086) $ (7,343) $ 49,850
========== ========== ========== ========== ==========
Basic net income (loss) per share:
Before cumulative effect of
accounting changes........... $ .56 $ .34 $ .38 $(.07) $ .50
Net income (loss).................. .56 .34 (.05) (.07) .49
Basic weighted average common shares
outstanding... 116,196 112,491 113,810 105,842 101,119
Net income (loss) per share,
assuming dilution:
Before cumulative effect of
accounting changes........... $ .52 $ .33 $ .36 $(.07) $ .48
Net income (loss).................. .52 .33 (.01) (.07) .47
Diluted weighted average common
shares and equivalents
outstanding........................ 133,174 128,558 130,937 105,842 115,027
(Table continued on next page)
12
CHARMING SHOPPES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARATIVE SUMMARY
(Continued)
Year Ended
------------------------------------------------------------------
Jan. 29, Jan. 31, Feb. 1, Feb. 2, Feb. 3,
(Dollars in thousands) 2005 2004 2003 2002(1) 2001(1)(2)
---- ---- ---- ------- ----------
Balance Sheet Data:
Total assets............................ $1,303,771 $1,173,070 $1,139,564 $1,147,911 $866,869
Current portion - long-term debt........ 16,419 17,278 12,595 9,379 4,954
Long-term debt.......................... 208,645 202,819 203,045 208,491 113,540
Working capital......................... 413,989 266,178 190,797 119,873 189,642
Stockholders' equity.................... 694,464 587,409 546,555 538,039 484,443
Performance Data:
Including cumulative effect of
accounting changes:
Net return on average
stockholders' equity.......... 10.1% 6.7% (1.1)% (1.4)% 10.9%
Net return on average
total assets.................. 5.2 3.3 (0.5) (0.7) 6.0
Before cumulative effect of
accounting changes:
Net return on average
stockholders' equity.......... 10.1% 6.7% 7.6% (1.4)% 11.0%
Net return on average
total assets.................. 5.2 3.3 3.7 (0.7) 6.1
--------------------
(1) Includes the results of operations of Lane Bryant, Inc., acquired August
16, 2001, and Catherines Stores Corporation, acquired January 7, 2000, from
the dates of their respective acquisitions.
(2) Fiscal 2001 consisted of 53 weeks.
(3) Includes reclassifications to conform to the current-year presentation.
(4) In March 2003, we announced a cost reduction plan designed to take
advantage of the centralization of corporate administrative services and to
realize certain efficiencies, in order to improve profitability. For
details of the program, see "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations; RESULTS OF OPERATIONS;
Comparison of Fiscal 2004 to Fiscal 2003; Expenses Related to Cost
Reduction Plan" and "Item 8. Financial Statements and Supplementary Data;
Notes to Consolidated Financial Statements; NOTE 14. EXPENSES RELATED TO
COST REDUCTION PLAN" below.
(5) In January 2002, our Board of Directors approved a restructuring plan that
included the closing of THE ANSWER/ADDED DIMENSIONS chain of 77 stores; the
conversion of approximately 20% of the ADDED DIMENSIONS stores to
CATHERINES stores; the closing of 130 under-performing FASHION BUG stores;
and the conversion of 44 FASHION BUG stores to LANE BRYANT stores. This
restructuring plan resulted in a pre-tax charge of $37,708,000 in Fiscal
2002. We completed the restructuring plan by the end of Fiscal 2003, and
recognized a pre-tax restructuring credit of $4,813,000, primarily as a
result of favorable negotiations of lease terminations.
(6) In Fiscal 2003, we fully adopted the provisions of SFAS No. 142, "Goodwill
and Other Intangible Assets." In accordance with the transition provisions
of SFAS No. 142, we tested goodwill related to our CATHERINES acquisition
for impairment, and recorded a write-down of $43,975,000 to reduce the
carrying value of the goodwill to its estimated fair value. In addition, we
recognized a charge of $5,123,000, net of income taxes of $2,758,000, in
connection with the adoption of FASB Emerging Issues Task Force ("EITF")
Issue 02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor." This charge represents a reduction
in inventory cost for the cumulative effect of cash received from vendors
as of the beginning of Fiscal 2003. Pro forma net income (loss) and per
share information as if we had applied the provisions of EITF Issue 02-16
for all years presented is as follows:
Year Ended
---------------------
Feb. 2, Feb. 3,
In thousands, except per share amounts) 2002 2001
---- ----
(Restated) (Restated)
Pro forma net income (loss)...................... $(8,126) $50,061
Basic net income (loss) per share................ (.08) .50
Net income (loss) per share, assuming dilution... (.08) .47
(7) We changed our method of accounting for sales returns and layaway sales in
accordance with the provisions of Securities and Exchange Commission Staff
Accounting Bulletin No. 101 ("SAB 101") effective as of January 30, 2000.
The cumulative effect of the change as of January 30, 2000 was a reduction
in income of $540,000, net of a tax benefit of $334,000.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") should be read in conjunction with the financial
statements and accompanying notes appearing elsewhere in this report. As used in
this report, the terms "Fiscal 2005," "Fiscal 2004," and "Fiscal 2003" refer to
our fiscal years ended January 29, 2005, January 31, 2004, and February 1, 2003,
respectively. The term "Fiscal 2006" refers to our fiscal year which will end on
January 28, 2006. The terms "the Company," "we," "us," and "our" refer to
Charming Shoppes, Inc. and, where applicable, its consolidated subsidiaries.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters contained in the
following analysis and elsewhere in this report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements may include, but are not limited to, projections of revenues, income
or loss, cost reductions, capital expenditures, liquidity, financing needs or
plans, and plans for future operations, as well as assumptions relating to the
foregoing. The words "expect," "should," "project," "estimate," "predict,"
"anticipate," "plan," "believes," and similar expressions are also intended to
identify forward-looking statements. Forward-looking statements are inherently
subject to risks and uncertainties, some of which we cannot predict or quantify.
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 A slowdown in the United States economy, an uncertain economic outlook, and
escalating energy costs could lead to reduced consumer demand for our
apparel and accessories in the future.
o Our business could be negatively affected by a deflationary pricing
environment in the apparel industry.
o The women's specialty retail apparel industry is highly competitive and we
may be unable to compete successfully against existing or future
competitors.
o We cannot assure the successful implementation of our business plan for
increased profitability and growth in our plus-size women's apparel
business.
o Our business plan is largely dependent upon continued growth in the
plus-size women's apparel market, which may not occur.
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 operations at any of these distribution centers were to be
disrupted for any reason.
14
o We depend on the availability of credit for our working capital needs,
including credit we receive from our suppliers and their agents, and on our
credit card securitization facility. If we were unable to obtain sufficient
financing at an affordable cost, our ability to merchandise our stores
would be adversely affected.
o We rely significantly on foreign sources of production and face a variety
of risks generally associated with doing business in foreign markets and
importing merchandise from abroad. Such risks include (but are not
necessarily limited to) political instability, imposition of, or changes
in, duties or quotas, trade restrictions, increased security requirements
applicable to imports, delays in shipping, increased costs of
transportation, and issues relating to compliance with domestic or
international labor standards.
o Our stores experience seasonal fluctuations in net sales and operating
income. Any decrease in sales or margins during our peak sales periods, or
in the availability of working capital during the months preceding such
periods, could have a material adverse effect on our business. In addition,
extreme or unseasonable weather conditions may have a negative impact on
our sales.
o Natural disasters, as well as war, acts of terrorism, or the threat of
either may negatively impact availability of merchandise and customer
traffic to our stores, or otherwise adversely affect our business.
o We may be unable to obtain adequate insurance for our operations at a
reasonable cost.
o We may be unable to protect our trademarks and other intellectual property
rights, which are important to our success and our competitive position.
o We may be unable to hire and retain a sufficient number of suitable sales
associates at our stores.
o Our manufacturers may be unable to manufacture and deliver merchandise to
us in a timely manner or to meet our quality standards.
o Our sales are dependent upon a high volume of traffic in the strip centers
and malls in which our stores are located, and our future growth is
dependent upon the availability of suitable locations for new stores.
o We may be unable to successfully implement our plan to improve merchandise
assortments in our brands.
o The carrying amount and/or useful life of intangible assets related to
acquisitions are subject to periodic valuation tests. An adverse change in
interest rates or other factors could have a significant impact on the
results of the valuation tests, resulting in a write-down of the carrying
value or acceleration of amortization of acquired intangible assets.
o Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required
to include our assessment of the effectiveness of our internal control over
financial reporting in our annual reports. Our independent registered
public accounting firm is also required to attest to whether or not our
assessment is fairly stated in all material respects and to separately
report on whether or not they believe that we maintained, in all material
respects, effective internal control over financial reporting. If we are
unable to maintain effective internal control over financial reporting, or
if our independent registered public accounting firm is unable to timely
attest to our assessment, we could be subject to regulatory sanctions and a
possible loss of public confidence in the reliability of our financial
reporting. Such a failure could result in our inability to provide timely
and/or reliable financial information and could adversely affect our
business.
15
RESTATEMENT OF FINANCIAL STATEMENTS
Our system of internal controls over financial reporting includes the
monitoring of emerging accounting issues and the reviewing of industry and peer
group filings and news releases. As a result of the publicity on the restaurant
industry financial statement restatements related to leases, we commenced a
review of certain of our accounting policies related to leases during January
2005. Subsequently, on February 7, 2005, the Office of the Chief Accountant of
the Securities and Exchange Commission ("SEC") issued a letter to the American
Institute of Certified Public Accountants expressing its views regarding certain
operating-lease-related accounting issues and their application under generally
accepted accounting principles in the United States of America ("GAAP"). Based
on our internal review, and after consultation with the Audit Committee of our
Board of Directors and our independent registered public accounting firm, we
restated our financial statements for years prior to Fiscal 2005 to correct our
accounting for landlord allowances, calculation of straight-line rent expense,
recognition of rent holiday periods, and depreciation of leasehold improvements
for our retail stores.
We lease substantially all of our stores under non-cancelable operating
lease agreements. These lease agreements generally include standard language on
landlord allowances for costs relating to the design, construction, fixturing,
and opening of stores. Construction allowances vary by store, and represent a
reimbursement from the landlord for a portion of the leasehold improvement costs
we incur. Historically, we classified construction allowances as a reduction of
property, equipment, and leasehold improvements on our consolidated balance
sheets and as a reduction of capital expenditures on our consolidated statements
of cash flows. In addition, when accounting for leases with renewal options, we
historically recorded rent expense on a straight-line basis over the initial
non-cancelable lease term, beginning with the lease commencement date. However,
we depreciated leasehold improvements over their estimated useful life of ten
years, which, in many cases, may have included both the initial non-cancelable
lease term and option renewal periods provided for in the lease. Also, we
historically recognized rent holiday periods on a straight-line basis over the
lease term commencing with the initial occupancy date, or the opening date of
the stores. Management re-evaluated FASB Technical Bulletin No. 85-3,
"Accounting for Operating leases with Scheduled Rent Increases," and determined
that the lease term should commence on the date we take possession of the leased
space for construction purposes, which is generally two months prior to a store
opening date.
As a result of the restatement, construction allowances have been recorded
as a deferred rent liability on our consolidated balance sheets instead of being
recorded as a reduction of the cost of leasehold improvements. In our
consolidated statements of cash flows, we have recognized construction
allowances as an operating activity instead of recognizing them as a reduction
of our investment in capital assets. In addition, the construction allowances
will be amortized over the related lease term as a reduction of rent expense
rather than as a reduction of depreciation expense commencing on the date we
take possession of the leased space for construction purposes.
We also corrected the lease term used to determine straight-line rent
expense and depreciation of leasehold improvements to include lease option
renewal periods only in instances in which the exercise of the option period is
reasonably assured and the failure to exercise such an option would result in an
economic penalty. Depreciation of leasehold improvements has been recognized
over the shorter of the corrected lease term or the assets' estimated useful
lives. Lease terms used to determine straight-line rent expense include
pre-opening store build-out periods (commonly referred to as "rent holidays"),
where applicable. These corrections resulted in the accelerated recognition of
certain annual rent expense and depreciation expense on leasehold improvements.
As a result of the above corrections, we recorded additional deferred rent
in "accrued expenses" and "deferred taxes and other non-current liabilities" and
we adjusted "retained earnings" on the consolidated balance sheet. We also
corrected amortization in "cost of goods sold, buying, and occupancy expenses"
on the consolidated statements of operations and comprehensive income (loss) for
each of our three fiscal years in the period ended
16
January 29, 2005. These accounting changes resulted in a decrease in retained
earnings of $11.8 million for the cumulative effect as of the beginning of
Fiscal 2003, and decreases in retained earnings of $3.3 million and $2.6 million
for Fiscal 2003 and Fiscal 2004, respectively. These corrections did not have
any impact on our previously reported comparable store sales, net sales, cash
flow, and actual lease payments, or on the economic value of our leasehold
improvements.
See "Item 8. Financial Statements and Supplementary Data; Notes to
Consolidated Financial Statements; NOTE 2. RESTATEMENT OF FINANCIAL STATEMENTS"
below for further details of the restatement.
OVERVIEW
We are a specialty apparel retailer primarily focused on serving the
plus-size woman through three distinct brands: LANE BRYANT, FASHION BUG, and
CATHERINES PLUS SIZES. We currently represent approximately 40% of the women's
plus-size specialty retail apparel market, and we are the third largest
specialty apparel retailer in the United States. Through our varied plus-size
fashion concepts, we cater to customers from a broad range of socioeconomic,
demographic, and cultural groups. As of January 29, 2005, we operated 2,221
stores in 48 states.
The apparel industry is highly competitive and is continuously faced with
new and existing competitors seeking areas of growth to expand their businesses.
Our strategy focuses on increasing our market share in the growing plus-size
women's apparel market through our three brands. Americans continue to gain
weight in all age groups, with an estimated 65% of American adults being
overweight and half of American women wearing size 14 or larger. Through our
three brands, we offer plus-size women's apparel to a broad range of age groups,
with varied fashion tastes and income levels, in multiple shopping venues. By
focusing on the plus-size market, we believe that we are well-positioned to meet
the demands of this growing demographic.
Our long-term plans are to continue to expand our market position in the
women's plus-size specialty apparel market. These plans include the addition of
new stores (primarily at our LANE BRYANT brand), continued growth in E-commerce,
entry into the catalog business, international expansion, and increasing our
relevance to our customer. In Fiscal 2005, we more than doubled our sales volume
in our E-commerce channel and expanded E-commerce into Canada. We view the
direct-to-consumer channels, including catalogs, to be disproportionately
important to the plus-size customer and a significant growth opportunity. In
October 2007, the Lane Bryant catalog trademark, which is currently licensed by
a third party, will revert back to Lane Bryant. We are currently building our
direct-to-consumer business organization for entry into catalog sales. We view
the growth in our store base and the extension into other direct-to-consumer
channels as an opportunity for us to maintain and increase our market share. We
continue to pursue ways to increase our relevance to our customer, and believe
that through factors such as our expertise in plus-size fit and our FIGURE
magazine (America's leading plus-size fashion and lifestyle magazine) we are
differentiating ourselves from our competitors.
With the addition of E-commerce at our FASHION BUG website in Fiscal 2005,
we now offer E-commerce at each of our three brands. Our Fiscal 2006 plan is to
increase our E-commerce sales volume more than 50% by continuing to broaden
category offerings at our websites. Our E-commerce sales in Fiscal 2004 and
Fiscal 2005 were less than one percent and two percent, respectively, of our
consolidated net sales, and we expect our E-commerce sales in Fiscal 2006 to
increase to more than two percent of consolidated net sales. Although our
websites primarily offer basic merchandise assortments, we see opportunities to
expand our product offerings into additional categories, such as hard-to-find
sizes. This will allow us to offer a greater variety of merchandise categories
than those currently offered in our stores.
17
Over the last three years, the retail apparel industry has been negatively
affected by the general slowdown in the U.S. economy, reduced levels of consumer
confidence, and the unstable geopolitical climate. We expect the deflationary
pricing environment to continue to impact the apparel industry. In addition, the
elimination of quota on imports in 2005 may create further downward pressure on
retail prices.
In Fiscal 2004 we initiated a cost reduction plan that decreased expenses
by a total of approximately $45 million on an annualized basis. In Fiscal 2005,
we completed the cost reduction initiative with the consolidation of our
CATHERINES and LANE BRYANT distribution centers into our new White Marsh
distribution center. In addition to our continuing focus on maintaining control
over expenses and inventories, another area of focus in Fiscal 2006 is the
continued improvement of gross margins at our three brands through improved
product mix and reduced markdowns.
We made significant progress in Fiscal 2005, particularly at our LANE
BRYANT brand. An improvement of 160 basis points in our consolidated gross
margin in Fiscal 2005 contributed to a 70% increase in our net income over the
prior year. The positive results achieved in Fiscal 2005 are primarily
attributable to plans implemented in Fiscal 2004 to improve merchandise
assortments at our LANE BRYANT brand. In Fiscal 2005, LANE BRYANT experienced a
3% increase in comparable store sales. However, our FASHION BUG brand
experienced only a modest 1% increase in comparable store sales, while our
CATHERINES brand experienced a 6% decrease in comparable store sales. Our Fiscal
2005 results were negatively impacted by disappointing sales performances at
each of our brands during the fourth quarter, mainly as a result of our lack of
a timely response to the competitive promotional environment that developed
during the 2004 Christmas holiday season. Our challenge in Fiscal 2006 will be
to improve the performance of our FASHION BUG and CATHERINES brands while
continuing to enhance our LANE BRYANT brand's performance.
Another area we focused on in Fiscal 2005 was inventory management.
Improved management of inventory during Fiscal 2005 resulted in a decrease in
inventory of $25 million, which allowed us to utilize our working capital more
effectively, while concurrently increasing comparable store sales. As a result,
we strengthened our balance sheet and increased our cash flows.
CRITICAL ACCOUNTING POLICIES
We have prepared the financial statements and accompanying notes included
elsewhere in this report in conformity with accounting principles generally
accepted in the United States. This requires us to make estimates and
assumptions that affect the amounts reported in our financial statements and
accompanying notes. These estimates and assumptions are based on historical
experience, analysis of current trends, and various other factors that we
believe to be reasonable under the circumstances. Actual results could differ
from those estimates under different assumptions or conditions.
We periodically reevaluate our accounting policies, assumptions, and
estimates and make adjustments when facts and circumstances warrant.
Historically, actual results have not differed materially from those determined
using required estimates. Our significant accounting policies are described in
the notes accompanying the financial statements included elsewhere in this
report. However, we consider the following accounting policies and related
assumptions to be more critical to, and involve the most significant management
judgments and estimates in, the preparation of our financial statements and
accompanying notes.
18
Revenue Recognition
We recognize revenue in accordance with SEC Staff Accounting Bulletin No.
101 ("SAB 101"), "Revenue Recognition in the Financial Statements" (as amended
by SAB 104). Our revenues from merchandise sales are net of returns and
allowances and exclude sales tax. We record a reserve for estimated future sales
returns based on an analysis of actual returns and we defer recognition of
layaway sales to the date of delivery. A change in our actual rates of sales
returns and layaway sales experience would affect the level of revenue
recognized.
Revenues from our E-commerce business include shipping and handling fees
billed to customers. E-commerce revenues are recognized after the following have
occurred: execution of the customer's order, authorization of the customer's
credit card has been received, and the product has been shipped and received by
the customer. We record a reserve for estimated future E-commerce sales returns
based on an analysis of actual returns.
We offer our customers various loyalty card programs. Customers that join
these programs are entitled to various benefits, including discounts and rebates
on purchases during the membership period. Customers generally join these
programs by paying an annual membership fee. We recognize revenue from these
loyalty programs as sales over the life of the membership period based on when
the customer earns the benefits and when the fee is no longer refundable. Costs
we incur in connection with administering these programs are recognized in cost
of goods sold as incurred.
During Fiscal 2004, we introduced a FASHION BUG customer loyalty card
program that we operate under our FASHION BUG proprietary credit card program.
This program provides customers with the option to cancel their membership
within 90 days, entitling them to a full refund of their annual fee.
Additionally, after 90 days, customers that cancel their membership are entitled
to a pro rata fee refund based on the number of months remaining on the annual
membership. Accordingly, we recognize 25% of the annual membership fee as
revenue after 90 days, with the remaining fee recognized on a pro rata basis
over nine months.
Under a previous FASHION BUG customer loyalty card program, we recognized
revenues from annual membership fees as sales over the life of the membership
based on discounts earned by the customer. For customers who did not earn
discounts during the membership period that exceeded the card fee, the
difference between the membership fee and discounts earned was recognized as
revenue upon the expiration of the annual membership period. Upon early
cancellation of the loyalty card, refunds of membership fees were reduced by the
amount of any discounts granted to the member under the program. We discontinued
the issuance of new cards under this program in December 2002, and we terminated
the program during the second quarter of Fiscal 2004.
Inventories
We value our merchandise inventories at the lower of cost or market under
the retail inventory method (average cost basis), which is an averaging method
that is widely used in the retail industry. Under the retail inventory method
("RIM"), the valuation of inventories at cost, and the resulting gross margins,
are adjusted in proportion to markdowns and shrinkage on our retail inventories.
The use of the RIM will result in valuing inventories at the lower of cost or
market if markdowns are currently taken as a reduction of the retail value of
inventories. The RIM calculation involves certain significant management
judgments and estimates including, among others, merchandise markon, markups,
markdowns, and shrinkage, which significantly affect the ending inventory
valuation at cost, as well as the resulting gross margins. Events such as store
closings, liquidations, and a weak general economic environment for retail
apparel sales could result in an increase in the level of markdowns. Such an
increase in the level of markdowns could result in lower inventory values and
increases to cost of goods sold as a percentage of net sales in future periods
under the RIM. Also, failure to properly estimate markdowns currently can result
in an overstatement or understatement of inventory cost under the lower of cost
or market
19
principle. At the end of Fiscal 2005 and Fiscal 2004, in addition to markdowns
that had been recorded in inventory, an additional $9.5 million and $10.1
million, respectively, of markdowns, representing markdowns not yet taken on
aged inventory, was recorded in order to properly reflect inventory at the lower
of cost or market.
We elected to adopt the provisions of Financial Accounting Standards Board
("FASB") Emerging Issues Task Force ("EITF") Issue No. 02-16 (see "Accounting
for Cash Consideration Received From a Vendor" below) as of the beginning of
Fiscal 2003. As of January 29, 2005 and January 31, 2004, $6.5 million and $9.5
million, respectively, of cash received from vendors was deferred into inventory
to be recognized as inventory is sold.
Impairment of Long-Lived Assets
We evaluate the recoverability of our long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." Under SFAS No. 144, we are
required to assess our long-lived assets for recoverability whenever events or
changes in circumstances indicate that the carrying amounts of long-lived assets
may not be recoverable. We consider historical performance and estimated future
results in our evaluation of potential impairment, and compare the carrying
amount of the asset to the estimated future undiscounted cash flows expected to
result from the use of the asset. If the estimated future undiscounted cash
flows are less than the carrying amount of the asset, we write down the asset to
its estimated fair value and recognize an impairment loss. Our estimate of fair
value is generally based on either appraised value or the present value of
future cash flows, based on a number of assumptions and estimates.
In accordance with the provisions of SFAS No. 144, we recorded a $2.7
million write-down of under-performing assets related to our consolidated
MONSOON joint venture during Fiscal 2003. The write-down is included in
occupancy expenses in our consolidated statement of operations.
We adopted SFAS No. 142, "Goodwill and Other Intangible Assets" as of the
beginning of Fiscal 2003. In accordance with the transition provisions of SFAS
No. 142, we performed a review of our goodwill and other intangible assets for
possible impairment. As a result, we determined that the carrying value of
goodwill related to our CATHERINES acquisition (which included the value of
intangible assets we did not separately account for at the date of the
CATHERINES acquisition) exceeded the estimated fair value of the goodwill under
SFAS No. 142. We determined the estimated fair value of the CATHERINES goodwill
using the present value of expected future cash flows associated with the
CATHERINES assets. We recorded a write-down, which was not deductible for income
tax purposes, of $44.0 million to reduce the carrying value of the goodwill to
its estimated fair value. The majority of the write-down was attributable to the
value of unrecorded trademarks. We also evaluated our goodwill, trademarks,
tradenames, and internet domain names related to our LANE BRYANT acquisition as
of February 3, 2002 in accordance with the provisions of SFAS No. 142, and
determined that there was no impairment of those assets. We have included the
write-down of the CATHERINES goodwill as the cumulative effect of an accounting
change as of February 3, 2002 in our Consolidated Statement of Operations and
Comprehensive Income (Loss) for Fiscal 2003. Our calculation of the estimated
fair value of the goodwill and other intangible assets required estimates,
assumptions, and judgments, and results might have been materially different if
other estimates, assumptions, and judgments had been used. We believe that the
estimates and assumptions we used were reasonable and appropriate.
In accordance with the provisions of SFAS No. 142, we re-evaluate goodwill
and other intangible assets for impairment at least annually or more frequently
if there is an indication of possible impairment. We performed this annual
review during the fourth quarters of Fiscal 2005, Fiscal 2004, and Fiscal 2003
and determined that there has been no additional impairment of these assets.
20
Acquisitions - Purchase Price Allocation
We account for acquisitions in accordance with the provisions of SFAS No.
141, "Business Combinations." We assign to all identifiable assets acquired
(including intangible assets), and to all identifiable liabilities assumed, a
portion of the cost of the acquired company equal to the estimated fair value of
such assets and liabilities at the date of acquisition. We record the excess of
the cost of the acquired company over the sum of the amounts assigned to
identifiable assets acquired less liabilities assumed, if any, as goodwill. We
make the initial purchase price allocation based on the evaluation of
information and estimates available at the date of the financial statements. As
final information regarding the fair value of assets acquired and liabilities
assumed is evaluated and estimates are refined, we make appropriate adjustments
to the amounts allocated to those assets and liabilities and make corresponding
changes to the amount allocated to goodwill. We use all available information to
make these fair value determinations and, for major business acquisitions,
typically engage an outside appraisal firm to assist in the fair value
determination of the acquired long-lived assets. We have, if necessary, up to
one year after the closing date of an acquisition to finish these fair value
determinations and finalize the purchase price allocation.
Asset Securitization
Asset securitization is a practice commonly used in the retail industry
that allows companies with proprietary credit card programs to finance credit
card receivables at attractive rates. Asset securitization primarily involves
the sale of proprietary credit card receivables to a special purpose entity,
which in turn transfers the receivables to a trust (the "Trust") that is a
qualified special purpose entity ("QSPE") and is administered by an independent
trustee. We use asset securitization to fund the credit card receivables
generated by our FASHION BUG credit card program. The FASHION BUG credit cards
are issued by Spirit of America National Bank, one of our subsidiaries.
Subsequent to the end of Fiscal 2005, Spirit of America National Bank acquired
the CATHERINES proprietary credit card portfolio and the right to operate the
program, and added the CATHERINES credit card receivables to the Trust. Because
the Trust qualifies as a QSPE, its assets and liabilities are not consolidated
in our balance sheet.
Investors purchase various forms of certificates or credit card receivable
interests (the "Certificates") issued by the Trust that represent undivided
interests in the Trust's underlying assets. The Trust pays to the Certificate
holders a portion of future scheduled cash flows from the credit card
receivables under preset terms and conditions. Payments to Certificate holders
are dependent upon actual cash flows generated by the underlying Trust assets.
We retain subordinated interests in certain securitization transactions
that effectively serve as a form of credit enhancement to the Certificates sold
to outside investors. To the extent that cash flows to the Trust from the credit
card receivables remain available after repayment of the outside investors'
interests, such amounts are paid to us. Neither the investors nor the Trust have
recourse against us beyond the combination of Trust assets and our subordinated
interests, other than for breaches of certain customary representations,
warranties, and covenants. These representations, warranties, covenants, and
related indemnities do not protect the Trust or the outside investors against
credit-related losses on the receivables.
In accordance with SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," we record an interest in
the estimated present value of cash flows we expect to receive over the period
the receivables are outstanding. These cash flows essentially represent finance
charges and late fees in excess of amounts paid to Certificate holders, credit
losses, and service fees, and are referred to as the interest-only strip ("I/O
strip"). In addition to the I/O strip, we recognize a servicing liability, since
the servicing fees we expect to receive from the securitizations do not provide
adequate compensation for servicing the receivables. The servicing liability
represents the present value of the excess of the costs of servicing over the
servicing fees we expect to receive, and is recorded at estimated fair value.
Since quoted market prices are generally not available, we
21
determine the fair value of the costs of servicing by calculating all costs
associated with billing, collecting, maintaining, and providing customer service
during the expected life of the securitized credit card receivable balances. We
discount the costs in excess of the servicing fees we expect to collect over the
estimated life of the receivables sold. The discount rate and estimated life
assumptions used in valuing the servicing liability are equivalent to those used
in valuing the I/O strip. We amortize the I/O strip and the servicing liability
on a straight-line basis over the expected life of the credit card receivables.
We use certain key valuation assumptions related to the average life of the
receivables sold and anticipated credit losses, as well as the appropriate
market discount rate in determining the estimated value of the I/O strip and the
servicing liability. We estimate the values for these assumptions using
historical data, the impact of the current economic environment on the
performance of the receivables sold, and the impact of the potential volatility
of the current market for similar instruments in assessing the fair value of the
retained interests. Changes in the average life of the receivables sold,
discount rate, and credit-loss percentage could cause actual results to differ
materially from the estimates, and changes in circumstances could result in
significant future changes to the assumptions currently being used.
The following table presents the decrease in our I/O strip receivable that
would result from hypothetical adverse changes of 10% and 20% in the assumptions
used to determine the fair value of the I/O strip:
(In millions) 10% Change 20% Change
---------- ----------
Assumption:
Payment rate................................. $0.9 $1.7
Residual cash flows discount rate............ 0.0 0.1
Credit loss percentage....................... 0.9 1.7
Costs Associated With Exit or Disposal Activities
We have traditionally recognized certain costs associated with
restructuring plans as of the date of commitment to the plan, in accordance with
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring)." In July 2002, the FASB issued SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities," which nullified EITF
Issue No. 94-3. Under SFAS No. 146, we are required to recognize liabilities for
costs associated with an exit or disposal activity initiated after December 31,
2002 when the liabilities are incurred. Commitment to a plan, by itself, does
not create an obligation that meets the definition of a liability. Under SFAS
No. 146, we are required to recognize severance pay over time rather than "up
front" if the benefit arrangement requires employees to render future service
beyond a "minimum retention period." The liability for severance pay is
recognized as employees render service over the future service period, even if
the benefit formula used to calculate an employee's termination benefit is based
on length of service. Fair value should be used for initial measurement of
liabilities under SFAS No. 146. Adoption of SFAS No. 146 results in the deferral
of recognition of certain costs for restructuring plans initiated subsequent to
December 31, 2002, from the date of commitment to such a plan to the date that
costs are incurred under the plan.
On March 18, 2003, we announced the implementation of a cost reduction plan
(see "RESULTS OF OPERATIONS; Comparison of Fiscal 2004 to Fiscal 2003; Expenses
Related to Cost Reduction Plan" below). Costs incurred in connection with the
implementation of this plan have been accounted for in accordance with the
provisions of SFAS No. 146.
22
Accounting for Cash Consideration Received From a Vendor
EITF Issue 02-16, "Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor," addresses the accounting for cash
consideration received from a vendor, including both a reseller of the vendor's
products and an entity that purchases the vendor's products from a reseller. We
adopted the provisions of EITF Issue No. 02-16 as of the beginning of Fiscal
2003. We recognized a charge of $5.1 million, net of income taxes of $2.8
million, for the cumulative effect of the deferral of cash received from vendors
as of the beginning of Fiscal 2003. As of January 29, 2005 and January 31, 2004,
$6.5 million and $9.5 million, respectively, of cash received from vendors has
been deferred into inventory and will be recognized as a reduction of cost of
goods sold as inventory is sold.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
allows two alternatives for accounting for stock-based compensation: the
"intrinsic value method" in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," or the "fair value"
method in accordance with SFAS No. 123. Companies electing to adopt the
intrinsic value method are required to provide pro forma disclosures of the
effect of adopting the fair value method.
We currently account for stock-based compensation using the intrinsic value
method. We recognize compensation expense for stock options and stock awards
that have an exercise price less than the market price of our common stock at
the date of grant of the option or award. We measure compensation expense based
on the difference between the market price and the exercise price of an option
or award at the date of grant. This compensation expense is recognized on a
straight-line basis over the vesting period of each option or award. We do not
recognize compensation expense for options having an exercise price equal to the
market price on the date of grant or for shares purchased under our Employee
Stock Purchase Plan.
Under the fair value method, we would be required to recognize compensation
expense for all stock options and stock awards. Compensation would be measured
based on an estimated fair value of the option or award, using an option pricing
model, such as the Black-Scholes or binomial pricing model. These models require
estimates or assumptions as to the dividend yield and price volatility of the
underlying stock, the expected life of the option or award, and a relevant
risk-free interest rate. For purposes of determining our pro forma disclosures
of the effect of adopting the fair value method, we use the Black-Scholes
option-pricing model and various assumptions that are detailed in "Item 8.
Financial Statements and Supplementary Data; Notes to Consolidated Financial
Statements; NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES; Common Stock
Plans" below. The use of different option-pricing models and different estimates
or assumptions could result in materially different estimates of compensation
expense under the fair value method.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"), a revision of SFAS No. 123. SFAS No. 123R supersedes
APB Opinion No. 25, and amends SFAS No. 95, "Statement of Cash Flows." We will
be required to adopt the provisions of SFAS No. 123R as of the beginning of the
third quarter of Fiscal 2006. See "Item 8. Financial Statements and
Supplementary Data; Notes to Consolidated Financial Statements; NOTE 1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES; Impact of Recent Accounting Pronouncements"
for a further discussion of SFAS No. 123R.
23
Insurance Liabilities
We use a combination of third-party insurance and/or self-insurance for
certain risks, including workers' compensation, medical, dental, automobile, and
general liability claims. Our insurance liabilities are a component of "Accrued
expenses" on our consolidated balance sheet, and represent our estimate of the
ultimate cost of uninsured claims incurred as of the balance sheet date. In
estimating our self-insurance liabilities, we use independent actuarial
estimates of expected losses, which are based on statistical analyses of
historical data. Loss estimates are adjusted based upon actual claim settlements
and reported claims. Although we do not expect the amounts ultimately paid to
differ significantly from our estimates, self-insurance liabilities could be
affected if future claim experience differs significantly from the historical
trends and the actuarial assumptions. We evaluate the adequacy of these
liabilities on a regular basis, modifying our assumptions as necessary, updating
our records of historical experience, and adjusting our liabilities as
appropriate.
Operating Leases
We lease substantially all of our store properties and account for our
store leases in accordance with SFAS No. 13, "Accounting for Leases." A majority
of our store leases contain lease options that we can unilaterally exercise. The
lease term we use for such operating leases includes lease option renewal
periods only in instances in which the failure to exercise such options would
result in an economic penalty for us and exercise of the renewal option is
therefore reasonably assured at the lease inception date.
Store leasehold improvement assets are depreciated over the shorter of
their useful life or the lease term, as determined above.
For leases that contain rent escalations, the lease term for recognition of
straight-line rent expense commences on the date we take possession of the
leased property for construction purposes, which is generally two months prior
to a store opening date. Similarly, landlord incentives or allowances under
operating leases (tenant improvement allowances) are recorded as a deferred rent
liability and recognized as a reduction of rent expense on a straight-line basis
over the lease term commencing on the date we take possession of the leased
property for construction purposes.
24
RESULTS OF OPERATIONS
Financial Summary
The following table shows our results of operations expressed as a
percentage of net sales and on a comparative basis:
Percentage Increase
(Decrease)
Percentage of Net Sales From Prior Year
---------------------------- ---------------------
Fiscal Fiscal Fiscal Fiscal Fiscal
2005 2004 2003 2005-2004 2004-2003
---- ---- ---- --------- ---------
Net sales.................................... 100.0% 100.0% 100.0% 2.0% (5.3)%
Cost of goods sold, buying, and occupancy.... 70.3 71.9 71.6 (0.2) (4.8)
Selling, general, and administrative......... 24.8 24.4 25.0 3.4 (7.5)
Expenses related to cost reduction plan...... 0.0 0.5 -- (94.8)
Restructuring charge (credit)................ -- -- (0.2) -- **
Income from operations....................... 4.9 3.2 3.6 56.2 (16.4)
Other income, principally interest........... 0.1 0.1 0.1 51.1 (11.9)
Interest expense............................. 0.7 0.7 0.8 0.0 (23.1)
Income tax provision (benefit)............... 1.6 0.9 1.1 71.8 (20.3)
Minority interest in net loss of subsidiary.. -- 0.0 0.0 (100.0) (79.1)
Cumulative effect of accounting changes...... -- -- (2.0) -- **
Net income (loss)............................ 2.8 1.7 (0.3) 69.6 **
--------------------
** Not meaningful
Results may not add due to rounding
The following table shows our net sales by store brand:
Year Ended Year Ended Year Ended
January 29, 2005 January 31, 2004 February 1, 2003
---------------- ---------------- ----------------
Fiscal Fourth Fiscal Fourth Fiscal Fourth
(In millions) Year Quarter Year Quarter Year Quarter
---- ------- ---- ------- ---- -------
FASHION BUG ... $1,045.4 $255.5 $1,057.1 $259.2 $1,156.0 $288.9
LANE BRYANT ... 974.2 259.4 903.6 251.0 906.9 236.1
CATHERINES .... 312.7 71.2 323.3 75.4 345.2 74.6
Other(1) ...... 0.0 0.0 1.7 0.0 4.3 1.5
-------- ------ -------- ------ -------- ------
Total net sales $2,332.3 $586.1 $2,285.7 $585.6 $2,412.4 $601.1
======== ====== ======== ====== ======== ======
--------------------
(1) Sales attributable to MONSOON/ACCESSORIZE stores, which were closed during
the first half of Fiscal 2004.
25
The following table shows additional information related to changes in our
net sales:
Year Ended Year Ended
January 29, 2005 January 31, 2004
---------------- ----------------
Fiscal Fourth Fiscal Fourth
Year Quarter Year Quarter
---- ------- ---- -------
Increase (decrease) in comparable store sales(1):
Consolidated Company ........................... 1% (2)% (2)% (1)%
FASHION BUG .................................... 1 (1) 0 (4)
LANE BRYANT .................................... 3 (1) (6) 1
CATHERINES ..................................... (6) (9) (1) 0
Sales from new stores as a percentage of total
consolidated prior-period sales:
FASHION BUG .................................... 1 1 1 1
LANE BRYANT .................................... 3 3 3 2
CATHERINES ..................................... 1 1 1 1
Prior-period sales from closed stores as a percentage
of total consolidated prior-period sales:
FASHION BUG .................................... (2) (2) (4) (3)
LANE BRYANT .................................... (1) (1) (1) (1)
CATHERINES ..................................... (1) 0 (2) 0
Increase (decrease) in total sales .................. 2% 0% (5)% (3)%
--------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation. Internet sales are
excluded from the computation of comparable store sales.
The following table sets forth information with respect to store activity
for Fiscal 2005 and planned store activity for Fiscal 2006:
FASHION LANE
BUG BRYANT CATHERINES Total
--- ------ ---------- -----
Fiscal 2005:
Stores at January 31, 2004 ... 1,051 710 466 2,227
----- --- --- -----
Stores opened ................ 5 31 15 51
Stores closed ................ (28) (19) (10) (57)
----- --- --- -----
Net changes in stores ........ (23) 12 5 (6)
----- --- --- -----
Stores at January 29, 2005 ... 1,028 722 471 2,221
===== === === =====
Stores relocated during period 23 15 9 47
Stores remodeled during period 4 9 0 13
Fiscal 2006:
Planned store openings ....... 15 50-60 5 70-80
Planned store relocations .... 25 40 15 80
Planned store closings ....... 20 15 15 50
26
Comparison of Fiscal 2005 to Fiscal 2004
Net Sales
Net sales increased from Fiscal 2004 to Fiscal 2005 primarily as a result
of sales from new stores, positive comparable store sales at our LANE BRYANT and
FASHION BUG brands, and increased E-commerce sales. These increases were
partially offset by negative comparable store sales results at our CATHERINES
brand.
LANE BRYANT stores experienced an increase in the average dollar sale per
transaction, which was partially offset by a decrease in the average number of
transactions per store. The average dollar sale per transaction benefited from
increases in both the average retail value per unit sold, reflecting reduced
levels of promotional pricing for the brand as compared to the prior-year
period, and the average number of units sold per customer ("UPC"). Except for
casual wear, LANE BRYANT experienced comparable store sales increases in all
major merchandise categories, especially wear-to-work and intimate apparel.
During Fiscal 2004, LANE BRYANT experienced poor customer acceptance of, and fit
and quality issues with, its product offering and had to maintain higher levels
of promotional pricing. Improvements in the merchandise assortments offered at
LANE BRYANT during Fiscal 2005 resulted in the brand's improved sales
performance during Fiscal 2005.
For FASHION BUG stores, an increase in the average number of transactions
per store during Fiscal 2005 was partially offset by a slightly lower average
dollar sale per transaction. For Fiscal 2005, an increase in the average UPC was
offset by a decrease in the average retail value per unit sold. FASHION BUG
stores experienced comparable store sales increases in plus-size sportswear and
accessories, which were offset by sales decreases in other categories. FASHION
BUG store sales for Fiscal 2005 also benefited from sales of maternity and
girls, two new categories added to the brand at the end of Fiscal 2004.
CATHERINES stores experienced a decrease in the average number of
transactions per store and a lower average dollar sale per transaction during
Fiscal 2005. An increase in the average UPC was more than offset by a decrease
in the average retail value per unit sold, reflecting higher levels of
promotional pricing during Fiscal 2005. The decrease in sales at CATHERINES was
primarily a result of disappointing performance in the dress and wear-to-work
categories.
During Fiscal 2005, we recognized revenues of $7.6 million in connection
with our FASHION BUG customer loyalty card program that we introduced during
Fiscal 2004, as compared to revenues of $7.8 million for Fiscal 2004. During
Fiscal 2005 and Fiscal 2004, we also recognized revenues of $7.5 million and
$7.5 million, respectively, in connection with our CATHERINES loyalty card
program. In addition, during Fiscal 2004, we recognized revenues of $6.4 million
in connection with a previous FASHION BUG loyalty card program that we
terminated during Fiscal 2004.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses for Fiscal 2005 were
approximately equal to Fiscal 2004, and were 1.6% lower as a percentage of sales
in the current year as compared to the prior year. Cost of goods sold as a
percentage of net sales was 1.0% lower in Fiscal 2005 as compared to Fiscal
2004. Improved merchandise margins, primarily at our LANE BRYANT brand and, to a
lesser extent, at our FASHION BUG brand, were partially offset by a decrease in
merchandise margins at our CATHERINES brand. Margins at the CATHERINES brand for
Fiscal 2005 were negatively affected by increased promotional activity that
resulted from reduced traffic levels and poor customer acceptance of CATHERINES
product offerings during the current year. As discussed above, Fiscal 2004
margins at our LANE BRYANT brand were negatively affected by higher levels of
promotional activity. Cost of goods sold includes merchandise costs net of
discounts and allowances, freight, inventory
27
shrinkage, and shipping and handling costs associated with our E-commerce
business. Net merchandise costs and freight are capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales were 0.6% lower
in Fiscal 2005 as compared to Fiscal 2004, primarily a result of leverage on
increased sales at LANE BRYANT and cost savings from the consolidation of our
LANE BRYANT and CATHERINES distribution operations into our White Marsh,
Maryland facility. 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 increased in Fiscal 2005 as
compared to Fiscal 2004, and were 0.3% higher as a percentage of net sales.
Selling expenses for Fiscal 2005 were 0.3 % lower as a percentage of net sales,
while general and administrative expenses were 0.6% higher as a percentage of
net sales. The increase in selling, general, and administrative expenses was
primarily a result of higher expenses related to incentive-based employee
compensation programs and the purchase during the Fiscal 2005 Third Quarter of
life insurance policies for certain executives to replace split-dollar life
insurance policies that were terminated as a result of the Sarbanes-Oxley Act of
2002, which prohibits loans to executive officers. As a result of terminating
the split-dollar program, the Company will receive the cash surrender value of
the policies. In return, we agreed to provide each of the affected executives
with an unconditional bonus to enable them to purchase a replacement life
insurance policy. This bonus will be payable in five equal annual installments
in an amount equal to the annual insurance premiums paid by the executive for
the new policy, plus a tax gross-up amount. These increases in selling, general,
and administrative expenses were partially offset by improved performance of our
FASHION BUG credit card operations, including favorable trends in delinquencies
during the current-year period. General and administrative expenses for Fiscal
2004 benefited from reduced medical benefits costs as a result of reduced
medical claims by employees covered by our self-insured employee benefit
program.
Expenses Related to Cost Reduction Plan
In March 2003, we announced a cost reduction plan designed to take
advantage of the centralization of all corporate administrative services
throughout the Company and to realize certain efficiencies, in order to improve
profitability (see "Comparison of Fiscal 2004 to Fiscal 2003" below). The cost
reduction plan was substantially completed during Fiscal 2004. We did not
experience a material after-tax cash impact from execution of this plan. At the
time we announced the plan, we expected this cost reduction plan to improve our
annualized pre-tax earnings by a total of approximately $45 million. During
Fiscal 2004, we realized cost reductions of more than $30 million as a result of
this plan. During Fiscal 2005, we realized the remaining benefits of the plan.
As of January 31, 2004, there was $2.6 million of accrued lease termination
costs related to the closing of our Hollywood, Florida credit facility. In
October 2004, in accordance with SFAS No. 146, we revised our estimated sublease
income on the remaining lease obligation for the Hollywood facility and
recognized an additional expense of $0.6 million. During the fourth quarter of
Fiscal 2005, we settled our remaining lease obligation for the Hollywood
facility for approximately $3.2 million. Also, during the fourth quarter of
Fiscal 2005, we entered into an agreement to lease the Memphis, Tennessee
distribution center to a third party for a three-year period.
28
Income Tax Provision
The effective income tax rate was 36.5% in Fiscal 2005, as compared to
36.3% in Fiscal 2004. On October 22, 2004, the President of the United States of
America signed into law H.R. 4250, "The American Jobs Creation Act of 2004" (the
"Act"), which includes among its provisions certain tax benefits related to the
repatriation to the United States of profits from a company's international
operations. The Act provides for the repatriation of profits from international
operations at a tax rate not to exceed 5.25% for approximately a one-year
period. These tax benefits are subject to various limitations, and, as of
January 29, 2005, the U.S. Treasury Department has not issued final guidelines
for applying the repatriation provisions of the Act. We are currently evaluating
the effects of the Act, and have not determined the effect, if any, that it will
have on our financial condition and results of operations. As of January 29,
2005, our consolidated cash balance of $273.0 million included approximately
$39.5 million of cash held by our international operations. We will finalize our
analysis before the end of Fiscal 2006.
Comparison of Fiscal 2004 to Fiscal 2003
Net Sales
The decrease in net sales from Fiscal 2003 to Fiscal 2004 resulted
primarily from a decrease in the number of operating stores at our FASHION BUG
brand and the closing of our THE ANSWER/ADDED DIMENSIONS stores following our
Fiscal 2003 store restructuring initiative, and negative comparable store sales
results at our LANE BRYANT brand. We operated 2,227 retail stores at the end of
Fiscal 2004, as compared to 2,248 stores at the end of Fiscal 2003.
FASHION BUG stores experienced mixed results in comparable store sales
during Fiscal 2004, with flat comparable store sales for the year. The average
number of transactions and average number of units sold per customer ("UPC")
increased 1% and 3%, respectively, in our FASHION BUG stores, while the average
dollar sale and average retail value per unit sold decreased 1% and 3%,
respectively. FASHION BUG stores experienced comparable store sales increases in
plus sportswear, accessories, intimate apparel, and footwear, which were
partially offset by decreases in sales of junior sportswear and dresses.
CATHERINES stores also experienced mixed results in comparable store sales
during Fiscal 2004, with a 1% decrease in comparable store sales for the year.
The average dollar sale and average UPC each increased 3% in our CATHERINES
stores, while the average number of transactions and average retail value per
unit sold decreased 2% and 1%, respectively. Comparable store sales increases in
denim, which performed strongly as a result of the brand's fit initiative, and
intimate apparel were offset by decreases in sales of dresses, career
sportswear, suits, sweaters, and hosiery.
Although LANE BRYANT stores experienced quarter-over-quarter improvements
in comparable store sales results during Fiscal 2004, they experienced an
overall decrease of 6% in comparable store sales for the year. The average UPC
increased 11% for LANE BRYANT stores, while the average dollar sale and average
retail value per unit sold decreased 4% and 14% respectively, reflecting the
brand's higher level of promotional pricing. The average number of transactions
at LANE BRYANT stores decreased 3%. LANE BRYANT experienced comparable store
sales decreases primarily in sweaters, casual woven tops, and denim separates,
which were partially offset by comparable store sales increases in other
merchandise categories. During the second half of Fiscal 2003 and the first half
of Fiscal 2004, LANE BRYANT experienced poor customer acceptance of, and fit and
quality issues with, its product offering, resulting in higher levels of
promotional pricing. In addition, certain basic products were under-stocked
during the second half of Fiscal 2003, resulting in missed sales opportunities.
Improved merchandise
29
assortments resulted in increased unit sales and improved sales performance for
the LANE BRYANT brand during the second half of Fiscal 2004.
During Fiscal 2004, we recognized revenues of $7.8 million in connection
with the FASHION BUG customer loyalty card program that we introduced in Fiscal
2004. During Fiscal 2004 and Fiscal 2003, we also recognized revenues of $6.4
million and $21.8 million, respectively, in connection with a previous Fashion
Bug loyalty card program that we terminated during Fiscal 2004. In addition,
during Fiscal 2004 and Fiscal 2003, we recognized revenues of $7.5 million and
$7.3 million, respectively, in connection with our CATHERINES loyalty card
program.
Cost of Goods Sold, Buying, and Occupancy
The decrease in cost of goods sold, buying, and occupancy expenses from
Fiscal 2003 to Fiscal 2004 principally reflects the decrease in net sales. Cost
of goods sold as a percentage of net sales was unchanged from Fiscal 2003 to
Fiscal 2004. Improvements in merchandise margins in our FASHION BUG brand were
offset by lower merchandise margins in our LANE BRYANT and CATHERINES brands.
Higher levels of promotional activity and poor customer acceptance of certain
LANE BRYANT products, as discussed above, also negatively affected merchandise
margins in both years. Cost of goods sold for Fiscal 2003 included $5.1 million
of costs related to the valuation of LANE BRYANT inventories. The $5.1 million
related to markdowns for inventory on hand as a result of the poor customer
acceptance of, and fit and quality issues with, certain of LANE BRYANT's
products, which resulted in higher levels of promotional pricing to liquidate
the product. Cost of goods sold includes merchandise costs net of discounts and
allowances, freight, inventory shrinkage, and shipping and handling costs
associated with our E-commerce business. Net merchandise costs and freight are
capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales increased 0.3%
in Fiscal 2004 as compared to Fiscal 2003. The increase in buying and occupancy
expenses as a percentage of net sales was primarily attributable to the lack of
leverage on relatively fixed occupancy costs as a result of negative comparable
store sales, particularly in our LANE BRYANT brand. Occupancy expenses for
Fiscal 2003 included a $2.7 million write-down of under-performing assets
related to our MONSOON/ACCESSORIZE stores. Buying expenses include payroll,
payroll-related costs, and operating expenses for our buying departments and
warehouses. Occupancy expenses include rent, real estate taxes, insurance,
common area maintenance, utilities, maintenance, and depreciation for our stores
and warehouse facilities and equipment. Buying and occupancy costs are treated
as period costs and are not capitalized as part of inventory.
Selling, General, and Administrative
The decrease in selling, general, and administrative expenses from Fiscal
2003 to Fiscal 2004 was primarily a result of reductions in store payroll and
the realization of cost reduction initiatives, including improved management of
controllable expenses (see "Expenses Related to Cost Reduction Plan" below).
Selling expenses were unchanged as a percentage of net sales, while general and
administrative expenses decreased 0.6% as a percentage of net sales. General and
administrative expenses for Fiscal 2004 benefited from reduced medical benefits
costs as a result of reduced medical claims by employees covered by our
self-insured employee benefit program. General and administrative expenses for
Fiscal 2003 were negatively affected by costs associated with transitional
service agreements related to the LANE BRYANT acquisition. We completed the
integration of LANE BRYANT's information systems during Fiscal 2003.
30
Expenses Related to Cost Reduction Plan
On March 18, 2003, we announced a cost reduction plan designed to take
advantage of the centralization of all corporate administrative services
throughout the Company and to realize certain efficiencies, in order to improve
profitability. Costs incurred in connection with this plan during Fiscal 2004
included $3.0 million of workforce reduction costs, $3.7 million of lease
termination and related costs, $4.2 million of accelerated depreciation (a
non-cash charge), and $0.6 million of other facility closure costs. During
Fiscal 2004, we paid or settled $8.9 million of these costs and had $2.6 million
of accrued costs at January 31, 2004.
Workforce reduction costs represent involuntary termination benefits and
retention bonuses. Employees affected by the plan were notified during the first
quarter of Fiscal 2004. During Fiscal 2004, we terminated 349 employees in
connection with workforce reductions at our corporate and brand home offices and
the closing of our Memphis, Tennessee distribution center, our Hollywood,
Florida credit operations, and our remaining MONSOON stores. We accrued the
severance benefit in accordance with SFAS No. 146 and recognized retention
bonuses ratably over the employees' remaining service period. Lease termination
and related costs mainly represent the estimated fair value of the remaining
lease obligations at the Hollywood, Florida facility, reduced by estimated
sublease income. In accordance with SFAS No. 146, we recognized the present
value of the remaining lease obligation less estimated sublease income related
to the Hollywood, Florida facility in June 2003 when we closed the facility.
Accelerated depreciation costs represent the acceleration of depreciation
of the net book value of the assets at our Memphis distribution center and our
Hollywood credit operations, which were closed in June 2003, to their estimated
net realizable values. During the first quarter of Fiscal 2004, we made the
decision to sell the Memphis, Tennessee distribution center, and began
accelerating the depreciation of the asset to its estimated net realizable value
as of its then-expected cease-use date of June 2003. During the third quarter of
Fiscal 2004, we began to evaluate alternative uses for the facility, and began
to depreciate the then-current carrying amount of the asset over its estimated
useful life.
Other Income/Interest Expense
The decrease in other income from Fiscal 2003 to Fiscal 2004 resulted from
a $0.8 million decrease in interest income. Interest income decreased as a
result of a decrease in the average yield on investments during Fiscal 2004 as
compared to Fiscal 2003. The decrease in interest expense from Fiscal 2003 to
Fiscal 2004 resulted primarily from lower interest rates on borrowings during
Fiscal 2004 as compared to Fiscal 2003. Interest expense for Fiscal 2003 also
included a write-off of $1.0 million of unamortized deferred financing costs
related to a $67.5 million term loan that was repaid during Fiscal 2003. During
Fiscal 2003, we replaced a $67.5 million 11.5% term loan and $96.0 million of
7.5% Convertible Subordinated Notes with $150.0 million of 4.75% Senior
Convertible Notes.
Income Tax Provision
The effective income tax rate was 36.3% in Fiscal 2004 as compared to 39.0%
in Fiscal 2003. The lower effective tax rate in Fiscal 2004 was due primarily to
changes in previously estimated full-year amounts, including our tax liability
related to insurance programs.
31
Comparison of Fourth Quarter 2005 to Fourth Quarter 2004
Net Sales
Net sales in the Fiscal 2005 fourth quarter were $586.1 million, an
increase of 0.1% from net sales of $585.6 million in the Fiscal 2004 fourth
quarter. Overall, comparable store sales decreased 2% in the Fiscal 2005 fourth
quarter. The decrease in comparable store sales was primarily attributable to
our lack of a timely response to the competitive promotional environment that
developed during the 2004 Christmas holiday season.
For our FASHION BUG stores, an increase in the average number of
transactions per store during the Fiscal 2005 fourth quarter was offset by a
slightly lower average dollar sale per transaction. The average dollar sale per
transaction reflected a flat average UPC and a slight decrease in the average
retail value per unit sold. FASHION BUG stores experienced comparable store
sales increases in plus-size apparel and coats, which were offset by sales
decreases in other merchandise categories. FASHION BUG sales for Fiscal 2005
also benefited from sales of maternity and girls, two new categories added to
the brand at the end of Fiscal 2004.
LANE BRYANT stores experienced an increase in the average dollar sale per
transaction, which was offset by a decrease in the average number of
transactions per store during the quarter. The average dollar sale per
transaction benefited from increases in both the average retail value per unit
sold, reflecting reduced levels of promotional pricing for the brand as compared
to the prior-year period, and the average UPC. LANE BRYANT experienced
comparable store sales decreases in casual sportswear and sleepwear, which were
partially offset by increases in wear-to-work and denim.
CATHERINES stores experienced decreases in the average number of
transactions per store and the average dollar sale per transaction during the
Fiscal 2005 fourth quarter. An increase in the average UPC was more than offset
by a decrease in the average retail value per unit sold. Poor customer
acceptance of CATHERINES product offerings resulted in higher levels of
promotional pricing during the Fiscal 2005 fourth quarter. CATHERINES
experienced disappointing performance in casual sportswear, dresses, and
wear-to-work.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $428.4 million in
the Fiscal 2005 fourth quarter, a decrease of 2.0% from $437.4 million in the
Fiscal 2004 fourth quarter. As a percentage of net sales, these costs decreased
by 1.6% in the Fiscal 2005 fourth quarter as compared to the Fiscal 2004 fourth
quarter. Cost of goods sold, as a percentage of net sales, decreased 1.3% in the
Fiscal 2005 fourth quarter as compared to the Fiscal 2004 fourth quarter.
Improved margins at our LANE BRYANT and FASHION BUG brands were partially offset
by reduced margins at our CATHERINES brand. Margins at the CATHERINES brand for
the Fiscal 2005 fourth quarter were negatively affected by the increase in
promotional activity as a result of the brand's disappointing sales performance.
Buying and occupancy expenses, expressed as a percentage of net sales, decreased
0.3% in the Fiscal 2005 fourth quarter as compared to the Fiscal 2004 fourth
quarter. The decrease in buying and occupancy expenses as a percent of sales was
primarily attributable to cost savings from the consolidation of our LANE BRYANT
and CATHERINES distribution centers into our White Marsh, Maryland facility.
32
Selling, General, and Administrative
Selling, general, and administrative expenses were $146.0 million in the
Fiscal 2005 fourth quarter, an increase of 10.9% from $131.6 million in the
Fiscal 2004 fourth quarter. As a percentage of net sales, these costs increased
by 2.4% in the Fiscal 2005 fourth quarter as compared to the Fiscal 2004 fourth
quarter. The increase is primarily a result of higher expenses related to
incentive-based employee compensation programs and negative leverage on a
comparable store sales decrease, which were partially offset by continued
favorable trends in delinquencies at our FASHION BUG credit card operations
during the Fiscal 2005 fourth quarter. General and administrative expenses for
the fourth quarter of Fiscal 2004 also benefited from reduced medical benefits
costs as a result of reduced medical claims by employees covered by our
self-insured employee benefit program.
Income Tax Provision
The effective income tax rate was 46.9% in the Fiscal 2005 fourth quarter
as compared to 26.7% in the Fiscal 2004 fourth quarter. The effective tax rate
in the Fiscal 2005 fourth quarter was negatively affected by the reconciliation
of our state tax provision to our filed state tax returns. The lower effective
tax rate in Fiscal 2004 was due primarily to changes in previously estimated
full-year amounts, including our tax liability related to insurance programs.
FINANCIAL CONDITION
Liquidity and Capital Resources
Our primary sources of working capital are cash flow from operations, our
proprietary credit card receivables securitization agreements, our investment
portfolio, and our credit facility described below. The following table
highlights certain information related to our liquidity and capital resources:
Fiscal Fiscal Fiscal
(Dollars in thousands) 2005 2004 2003
---- ---- ----
Cash and cash equivalents ............. $273,049 $123,781 $102,026
Long-term available-for-sale securities 240 14,521 16,202
Cash provided by operating activities . 167,122 99,300 212,963
Working capital ....................... 413,989 266,178 190,797
Current ratio ......................... 2.4 1.9 1.6
Long-term debt to equity ratio ........ 30.0% 34.5% 37.1%
Cash Provided by Operating Activities
Our net cash provided by operating activities in Fiscal 2005 was $167.1
million, an increase of $67.8 million from $99.3 million in Fiscal 2004. The
increase was a result of a $26.5 million increase in net income before non-cash
charges, a $6.5 million tax benefit related to our stock plans, a $52.6 million
decrease in our investment in inventories, net of accounts payable, and a $27.9
million increase in accrued expenses, income taxes, and other liabilities. These
increases were partially offset by a $45.7 million increase in prepaid expenses.
The decrease in the net investment in inventories was primarily a result of
tighter control over inventory levels during Fiscal 2005. Inventories decreased
8% from the end of Fiscal 2004 to the end of Fiscal 2005. Prepaid expenses
increased $28.9 million during Fiscal 2005, as compared to a decrease of $16.8
million during Fiscal 2004. The current year increase in prepaid expenses was
primarily a result of $11.5 million of prepaid income taxes at the
33
end of Fiscal 2005, the timing of payments for rent, and increases in other
current assets. The decrease in prepaid expenses in Fiscal 2004 was primarily a
result of our surrender of existing life insurance policies and receipt of the
related cash surrender value in connection with our settlement of an Internal
Revenue Service audit of our corporate-owned life insurance program. Accrued
expenses and other liabilities increased $17.2 million during Fiscal 2005, as
compared to a decrease of $5.8 million during Fiscal 2004, primarily as a result
of the timing of certain payments. Income taxes payable decreased $1.1 million
during Fiscal 2005, as compared to a decrease of $6.0 million during Fiscal
2004. The changes in prepaid income taxes and income taxes payable were
primarily the result of tax benefits associated with employee stock option
exercises and an Internal Revenue Service approved change in inventory
accounting for tax purposes.
Our net cash provided by operating activities in Fiscal 2004 was $99.3
million, a decrease of $113.7 million from $213.0 million in Fiscal 2003. The
decrease was primarily a result of an $81.8 million increase in our investment
in inventories, net of accounts payable. Net cash provided by operating
activities also decreased as a result of a $34.1 million decrease in net income
before non-cash charges, a $4.4 million net change in prepaid and accrued
expenses and other liabilities, and a $13.2 million change in income taxes
payable. These decreases were partially offset by a $19.8 million decrease in
accrued restructuring costs during Fiscal 2003.
The increase in the net investment in inventories in Fiscal 2004 was
primarily a result of a combination of slightly higher levels of store
inventories at the end of Fiscal 2004 due to lower-than-planned sales in the
Fiscal 2004 fourth quarter and a one-time benefit from improved vendor terms
received during Fiscal 2003 from conforming LANE BRYANT's vendor terms to our
corporate terms. During Fiscal 2004, we reached a settlement with the Internal
Revenue Service regarding its audit of our corporate-owned life insurance
("COLI") program, which resulted in a decrease in income taxes payable during
Fiscal 2004 that more than offset accrued taxes payable for the period. The
change in prepaid and accrued expenses and other liabilities was primarily a
result of the timing of certain payments.
Capital Expenditures
Our gross capital expenditures, excluding construction allowances received
from landlords, were $60.6 million, $54.0 million, and $81.3 million in Fiscal
2005, Fiscal 2004, and Fiscal 2003, respectively. Construction allowances
received from landlords were $9.3 million, $9.0 million, and $7.0 million in
Fiscal 2005, Fiscal 2004, and Fiscal 2003, respectively. In Fiscal 2005, our
capital expenditures were primarily for the construction, remodeling, and
fixturing of new and existing retail stores, corporate systems technology, and
improvements to our corporate and brand home offices and distribution centers.
In addition, pursuant to a program to replace point-of-sale ("POS") equipment in
our stores, we acquired $3.9 million, $8.5 million, and $3.5 million of POS
equipment under capital leases in Fiscal 2005, Fiscal 2004, and Fiscal 2003,
respectively. These leases generally have an initial lease term of 60 months and
contain a bargain purchase option. We also acquired $1.5 million, $9.0 million
and $3.5 million of material handling systems and related equipment and software
for our White Marsh, Maryland distribution center under capital leases in Fiscal
2005, Fiscal 2004, and Fiscal 2003, respectively. These capital leases generally
have an initial lease term of 60 months and contain a bargain purchase option.
Total gross investments in property, equipment, and leasehold improvements,
including cash expenditures and capital lease financing and excluding
construction allowances, were $66.0 million, $71.5 million, and $88.3 million in
Fiscal 2005, Fiscal 2004, and Fiscal 2003, respectively.
During Fiscal 2003, we acquired the 393,000 square foot White Marsh
distribution center at a cost of $17.3 million to replace our leased
distribution center in Reynoldsburg, Ohio. We relocated the Reynoldsburg
distribution center in February 2004. The lease for the Reynoldsburg
distribution center and a related logistics and transportation services
agreement were terminated in February 2004 in accordance with early cancellation
provisions of the lease and agreement. As a result of the use of automated
sorting systems and improved facility
34
design in the White Marsh facility, we were also able to consolidate our 213,000
square foot Memphis, Tennessee distribution center into the White Marsh facility
in June 2003. During the fourth quarter of Fiscal 2005, we entered into an
agreement to lease the Memphis, Tennessee distribution center to a third party
for a three-year period. The consolidation of the Memphis distribution center
into the White Marsh facility was part of a cost reduction plan announced in
March 2003. See "RESULTS OF OPERATIONS; Comparison of Fiscal 2004 to Fiscal
2003; Expenses Related to Cost Reduction Plan" above and "Item 8. Financial
Statements and Supplementary Data; Notes to Consolidated Financial Statements;
NOTE 14. EXPENSES RELATED TO COST REDUCTION PLAN" below for details of the cost
reduction plan.
We anticipate gross capital expenditures of approximately $95 - $100
million and construction allowances received from landlords of approximately $10
million during Fiscal 2006. These capital expenditures will primarily be for
construction and fixturing of new stores, remodeling and fixturing of existing
stores, and improvements in information technology. We expect to finance these
capital expenditures principally through internally-generated funds.
Long-term Debt, Lease, Dividend, and Purchase Commitments
At January 29, 2005, our commitments for future payments under our
long-term debt obligations, minimum lease payments under our capital leases and
operating leases, and payments due under our revolving credit facility, letters
of credit, long-term deferred compensation plans, and purchase obligations were
as follows:
Payments Due by Period
----------------------------------------------
Less One to Three More
Than Three to Five Than Five
(In millions) Total One Year Years Years Years
----- -------- ----- ----- -----
Long-term debt, including current
portion(1) .................. $ 203.1 $ 5.6 $ 14.8 $ 9.1 $173.6
Capital leases ................... 38.5 15.3 19.1 4.1 0.0
Operating leases(2) .............. 748.8 194.2 272.0 162.2 120.4
Revolving credit facility(3) ..... 0.0 0.0 0.0 0.0 0.0
Letters of credit(3) ............. 76.3 76.3 0.0 0.0 0.0
Stand-by letters of credit(3) .... 6.6 6.6 0.0 0.0 0.0
Long-term deferred compensation(4) 2.4 1.3 0.8 0.2 0.1
Purchase commitments(5) .......... 476.8 476.8 0.0 0.0 0.0
-------- ------ ------ ------ ------
Total ............................ $1,552.5 $776.1 $306.7 $175.6 $294.1
======== ====== ====== ====== ======
--------------------
(1) Amounts represent the expected cash payments of our long-term debt
(including our convertible debt through maturity) and do not include any
fair value adjustments, bond premiums, discounts or revolving credit
facilities.
(2) Commitments under operating leases include $37.0 million payable under the
LANE BRYANT master sublease with Limited Brands, which we have guaranteed.
(3) We currently have a $300 million revolving credit facility that expires on
August 15, 2008, which provides for cash borrowings and the ability to
issue up to $150 million of letters of credit. At January 29, 2005, there
were no borrowings under this facility.
(4) Long term compensation consists of our non-qualified deferred compensation
plan and supplemental retirement plan, which are included in "Deferred
taxes and other non-current liabilities" on our consolidated balance
sheets. We have developed estimates of projected payment obligations for
participant planned in-service distributions of the deferred compensation
plan liability as of January 29, 2005. We have excluded $17.9 million of
retirement/termination benefit distribution obligations as of January 29,
2005 from the above estimates. This amount has been excluded because the
value of the obligation and the timing of payments may vary annually due to
changes in the fair value of the plan assets and/or assumptions for
participant retirement/termination.
(5) Purchase commitments include agreements to purchase goods or services in
the ordinary course of business.
35
We have not paid any dividends since 1995, and we do not expect to declare
or pay any dividends on our common stock in the foreseeable future. The payment
of future dividends is within the discretion of our Board of Directors and will
depend upon our future earnings, if any, our capital requirements, financial
condition and other relevant factors. Additionally, our existing credit facility
prohibits the payment of dividends on our common stock.
Off-Balance-Sheet Arrangements
Spirit of America National Bank (our wholly-owned credit card bank)
transfers its interest in credit card receivables created under our FASHION BUG
proprietary credit card program and, subsequent to the end of Fiscal 2005,
receivables purchased and created under our CATHERINES proprietary credit card
program to the Charming Shoppes Master Trust (the "Trust") through a
special-purpose entity. The Trust is an unconsolidated qualified special purpose
entity. The Trust can sell interests in these receivables on a revolving basis
for a specified term. At the end of the revolving period, an amortization period
begins during which the Trust makes principal payments to the parties that have
entered into the securitization agreement with the Trust.
As of January 29, 2005, the Trust had the following securitization
facilities outstanding:
(Dollars in millions) Series 1999-1 Series 1999-2 Series 2002-1 Series 2004 Series 2004-1
------------- ------------- ------------- ----------- -------------
Date of facility................... July 1999 May 1999 November 2002 January 2004 August 2004
Type of facility................... Term Conduit Term Conduit Term
Maximum funding.................... $150.0 $50.0 $100.0 $100.0 $180.0
Funding as of January 29, 2005..... $15.8 $0.0 $100.0 $0.0 $180.0
First scheduled principal payment.. March 2004 Not applicable August 2007 Not applicable April 2009
Expected final principal payment... February 2005 Not applicable(1) May 2008 Not applicable(1) March 2010
Renewal............................ Not applicable Annual Not applicable Annual Not applicable
--------------------
(1) Series 1999-2 and Series 2004 have scheduled final payment dates that occur
in the twelfth month following the month in which the series begins
amortizing. These series generally begin amortizing 364 days after start of
the purchase commitment by the series purchaser currently in effect.
The Series 1999-1 securitization began its scheduled amortization period in
March 2004, and $134.2 million of principal was amortized in Fiscal 2005. The
remaining $15.8 million of principal was amortized in the Fiscal 2006 First
Quarter and was funded with the proceeds available from Series 2004-1, which was
issued on August 5, 2004 (see below).
On August 5, 2004 the Trust issued $180.0 million of new five-year
asset-backed certificates ("Series 2004-1") in a private placement under Rule
144A. Of the $180.0 million of certificates issued, $161.1 million were sold to
investors, and we held $18.9 million as a retained interest. The certificates
pay interest to investors on a floating-rate basis tied to one-month LIBOR.
Concurrently, the Trust entered into a series of fixed-rate interest rate hedge
agreements with respect to the $161.1 million of certificates sold to investors.
The blended weighted-average interest rate on the hedged certificates is 4.90%.
The Trust used $61.5 million of the proceeds to pay down other securitization
series and placed the remaining proceeds of $118.5 million into a pre-funding
cash account. We are using the proceeds from this pre-funding cash account to
pay down Series 1999-1 (which is currently in its amortization period) as well
as provide financing for additional receivables, including the acquisition of
the CATHERINES proprietary credit card portfolio in March 2005 (see below).
During the Fiscal 2005 Third and Fourth Quarters, the Trust used $72.8 million
of cash from the pre-funding cash account to fund the Series 1999-1
amortization.
36
During Fiscal 2005, we sold to investors $20.0 million of 2002-1 Series
certificates that we were previously holding as a retained interest. These
certificates were included in the $55.7 million of short-term available-for-sale
securities we held at January 31, 2004. On August 24, 2004, we sold to investors
$9.5 million of the $18.9 million of Series 2004-1 certificates we held as a
retained interest.
As these credit card receivables securitizations reach maturity, we plan to
obtain funding for the FASHION BUG and CATHERINES proprietary credit card
programs through additional securitizations. However, we can give no assurance
that we will be successful in securing financing through either replacement
securitizations or other sources of replacement financing.
We securitized $335.9 million and $331.7 million of credit card receivables
in Fiscal 2005 and Fiscal 2004, respectively, and had $249.2 million of
securitized credit card receivables outstanding as of January 29, 2005. We held
certificates and retained interests in our securitizations of $52.5 million as
of the end of Fiscal 2005, which were generally subordinated in right of payment
to certificates issued by the Trust to third-party investors. Our obligation to
repurchase receivables sold to the Trust is limited to those receivables that,
at the time of their transfer, fail to meet the Trust's eligibility standards
under normal representations and warranties. To date, our repurchases of
receivables pursuant to this obligation have been insignificant.
Charming Shoppes Receivables Corp. ("CSRC") and Charming Shoppes Seller,
Inc., our consolidated wholly owned indirect subsidiaries, are separate special
purpose entities created for the securitization facilities. As of January 29,
2005, CSRC held $17.3 million of Charming Shoppes Master Trust certificates and
retained interests and Charming Shoppes Seller, Inc. held retained interests of
$10.4 million (which are included in the $52.9 million of short-term
available-for-sale securities we held at January 29, 2005). 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. Additionally, if either the Trust or Charming
Shoppes, Inc. fails to meet certain financial performance standards, the Trust
would be obligated to reallocate to third-party investors holding certain
certificates issued by the Trust, collections in an amount up to $17.3 million
that otherwise would be available to CSRC. The result of this reallocation would
be to increase CSRC's retained interest in the Trust by the same amount.
Subsequent to such a transfer occurring, and upon certain conditions being met,
these same investors would be required to repurchase these interests. As of
January 29, 2005, there were no reallocated collections as the result of a
failure to meet these financial performance standards.
In addition to the above, we could be affected by certain other events that
would cause the Trust to hold proceeds of receivables, which would otherwise be
available to be paid to us with respect to our subordinated interests, within
the Trust as additional enhancement. For example, if we fail or the Trust fails
to meet certain financial performance standards, a credit enhancement condition
would occur and the Trust would be required to retain amounts otherwise payable
to us. In addition, the failure to satisfy certain financial performance
standards could further cause the Trust to stop using collections on Trust
assets to purchase new receivables, and would require such collections to be
used to repay investors on a prescribed basis, as provided in the Trust
agreements. If this were to occur, it could result in our having insufficient
liquidity; however, we believe we would have sufficient notice to seek
alternative forms of financing through other third-party providers. As of
January 29, 2005, the Trust was in compliance with all applicable financial
performance standards. Amounts placed into enhancement accounts, if any, that
are not required for payment to other certificate holders will be available to
us at the termination of the securitization series. We have no obligation to
directly fund the enhancement account of the Trust, other than for breaches of
customary representations, warranties, and covenants and for customary
indemnities. These representations, warranties, covenants, and indemnities do
not protect the Trust or investors in the Trust against credit-related losses on
the receivables. The providers of the credit enhancements and Trust investors
have no other recourse to us.
37
These securitization agreements are intended to improve our overall
liquidity by providing short-term sources of funding. The agreements provide
that we will continue to service the credit card receivables and control credit
policies. This control allows us, absent certain adverse events, to fund
continued credit card receivable growth and to provide the appropriate customer
service and collection activities. Accordingly, our relationship with our credit
card customers is not affected by these agreements. See "CRITICAL ACCOUNTING
POLICIES; Asset Securitizations" above, "MARKET RISK" below, and "Item 8.
Financial Statements and Supplementary Data; Notes to Consolidated Financial
Statements; NOTE 16. ASSET SECURITIZATION" below for additional discussion of
our asset securitization facility.
We have a non-recourse agreement under which a third party provides a
proprietary credit card sales accounts receivable funding facility that was
scheduled to expire in January 2006 for our LANE BRYANT brand. In January 2005,
we entered into an amendment to the agreement which, among other things, extends
the term of the agreement to October 2007. Under this agreement, the third party
reimburses us daily for sales generated by LANE BRYANT's proprietary credit card
accounts. Upon termination of this agreement, we have the right to repurchase
the receivables portfolio from the third party and operate the facility. The net
balances of LANE BRYANT accounts receivable held by the third party at January
29, 2005 and January 31, 2004 were approximately $199.1 million and $198.3
million, respectively.
We also had a similar non-recourse funding facility agreement for our
CATHERINES brand with a third party which was scheduled to expire in January
2005. In January 2004, in accordance with the terms of the Merchant Services
Agreement pursuant to which the CATHERINES proprietary credit cards were issued,
we provided one year's notice to the third party bank in order to exercise our
option to terminate the agreement and to purchase the portfolio. In July 2004,
we entered into an amendment to the agreement which, among other things,
extended the term of the agreement to March 2005. Spirit of America National
Bank (our wholly-owned credit card bank) purchased the CATHERINES credit card
portfolio in March 2005 for approximately $56.6 million (subject to adjustment).
The purchase was funded through our securitization facilities, including a
portion of the proceeds from the sale of Series 2004-1 certificates under that
securitization facility. The net balances of CATHERINES accounts receivable held
by the third party at January 29, 2005 and January 31, 2004 were approximately
$58.2 million and $70.4 million, respectively.
We lease substantially all of our operating stores and certain
administrative facilities under non-cancelable operating lease agreements. In
January 2005, we entered into an amendment to our lease agreement with Limited
Brands for our LANE BRYANT home office in Reynoldsburg, Ohio to extend the term
of the lease from December 2005 to February 2006. We also entered into an
agreement with a separate third party that provides for the leasing of a 135,000
square foot facility in Columbus, Ohio, which will serve as a new home office
for LANE BRYANT. Minimum annual rent under the lease for the Columbus facility
will be $1.7 million per annum in year one through year five and $1.76 million
per annum in year six through year ten. The lease will commence on the later of
January 20, 2006 or upon substantial completion of shell work and tenant
improvements. The Columbus lease provides for two five-year renewal periods and
an option to purchase, and contains customary termination rights. Additional
details on these leases, including minimum lease commitments, are included in
"Liquidity and Capital Resources" above, and in "Item 8. Financial Statements
and Supplementary Data; Notes to Consolidated Financial Statements; NOTE 17.
LEASES" below.
38
Financing
Revolving Credit Facility
We have a $300.0 million revolving credit facility (the "Facility") that
provides for cash borrowings and enables us to issue up to $150.0 million of
letters of credit for purchases of merchandise and for standby letters of
credit. As of January 29, 2005, there were no borrowings outstanding under the
Facility. The availability of borrowings under the Facility is subject to
limitations based on eligible inventory and, under certain circumstances, credit
card receivables and in-transit cash. The Facility is secured by our general
assets, except for (i) all assets related to our credit card securitization
facility, (ii) all real property, (iii) certain equipment subject to other
mortgages or capital leases, (iv) the assets of our non-U.S. subsidiaries, and
(v) certain other assets. The Facility expires on August 15, 2008. As of January
29, 2005, we had $3.3 million of unamortized deferred debt acquisition costs
related to the Facility, which we are amortizing on a straight-line basis over
the life of the Facility as interest expense.
The interest rate on borrowings under the Facility ranges from Prime to
Prime plus .50% per annum for Prime Rate Loans, and LIBOR plus 1.50% to LIBOR
plus 2.00% per annum for Eurodollar Rate Loans. The applicable rate is
determined quarterly, based on our average excess and suppressed availability,
as defined in the Facility. As of January 29, 2005, the interest rate on
borrowings under the Facility was 5.25% for Prime Rate Loans and 4.06% for
Eurodollar Rate Loans.
The Facility includes limitations on sales and leasebacks, the incurrence
of additional liens and debt, capital lease financing, and other limitations.
The Facility also requires, among other things, that we not pay dividends on our
common stock and, if our excess and suppressed availability (as defined in the
Facility) is less than $50.0 million at any time within a fiscal quarter, that
we maintain a minimum level of consolidated 12-month earnings before interest,
taxes, depreciation, and amortization ("EBITDA") (excluding non-recurring,
non-cash charges as defined in the Facility). During Fiscal 2005, our excess and
suppressed availability was above $50.0 million at all times. We had outstanding
letters of credit totaling $83.0 million as of January 29, 2005. As of the end
of Fiscal 2005, we were not in violation of any of the covenants included in the
Facility.
Long-term Debt and Equity Financing
Our $150.0 million 4.75% Senior Convertible Notes (the "Senior Notes")
mature on June 1, 2012 and are convertible at any time prior to maturity into
shares of our common stock at a conversion price of $9.88 per share, subject to
adjustment upon certain events. The Senior Notes are redeemable at our option,
in whole or in part, at any time on or after June 4, 2007, at declining
redemption prices, starting at 102.38% of principal and decreasing to 100.48% of
principal on or after June 1, 2011. Under certain circumstances involving a
change in control of the Company, holders of the Senior Notes may require us to
repurchase all or a portion of the Senior Notes at 100% of the principal amount
plus any accrued and unpaid interest. Also, under such circumstances we have the
option of paying the repurchase price in shares of our common stock, valued at
95% of the average of the closing prices of the common stock for a five-day
trading period immediately before and including the third trading day preceding
the repurchase date. There is no sinking fund for the Senior Notes.
In October 2004, we borrowed $13.0 million under a 6.07% mortgage note (the
"Note"). Repayment of the Note is based on a 15-year amortization schedule, with
119 monthly installments of principal and interest of $110 thousand and a
balloon payment of $5.8 million at the end of 10 years. The Note may be prepaid
after 2-1/2 years upon the payment of a premium, or, upon certain other events,
without the payment of a premium. The Note is secured by a mortgage on real
property at our distribution center in Greencastle, Indiana and an Assignment of
39
Lease and Rents and Security Agreement related to the Greencastle facility. The
proceeds from this borrowing will be used to repay the scheduled maturities of
other debt and for other general corporate purposes.
In December 2004, we refinanced certain material handling equipment at our
Greencastle distribution center. The lease obligation of $5.0 million is payable
over a term of 48 months at an interest rate of 6.86% and contains a bargain
purchase option.
As part of our acquisition of CATHERINES, we assumed a 7.5% mortgage note
of $6.9 million, of which $5.6 million of principal was outstanding as of
January 29, 2005. The note is secured by a mortgage on the land and buildings at
our CATHERINES office and distribution center in Memphis, Tennessee. The
remaining principal of $5.6 million and any unpaid interest on the note was due
in a single payment on March 1, 2005. The terms included a pre-payment penalty
of 1% of the outstanding principal. On January 27, 2005, we entered into an
amended and restated promissory note with the lender to extend the final due
date of the note, with monthly payments of principal and interest of $56
thousand commencing on February 1, 2005 and a final payment of unpaid principal
and interest on March 1, 2006. The interest rate on the amended and restated
promissory note is 7.5% through February 28, 2005 and thereafter is reset on
March 1, June 1, September 1, and December 1, based on 90-day LIBOR plus 2.25%.
There is no prepayment penalty on the amended and restated promissory note.
During Fiscal 2005, we received $33.2 million of cash in connection with
the issuance of approximately 6.5 million shares of our common stock as a result
of exercises of employee stock options and purchases of shares under our
employee stock purchase plan.
As of January 29, 2005, under authority granted by our Board of Directors
during prior fiscal years, we are authorized to repurchase approximately 5
million shares of our common stock. Our ability to exercise this authority is
currently subject to certain restrictions under the terms of our revolving
credit facility. As conditions may allow, and if any required consent is
granted, we may from time to time acquire shares of our common stock. Such
shares, if purchased, would be held as treasury shares. The repurchase program
has no expiration date.
MARKET RISK
We manage our FASHION BUG proprietary credit card program and, beginning in
March 2005, our CATHERINES proprietary credit card program through various
operating entities that we own. The primary activity of these entities is to
service the balances of our proprietary credit card receivables portfolio that
we sell under credit card securitization facilities. Under the securitization
facilities, we can be exposed to fluctuations in interest rates to the extent
that the interest rates charged to our customers vary from the rates paid on
certificates issued by the Trust. The finance charges on most of our proprietary
credit card accounts are billed using a floating rate index (the Prime Rate),
subject to a floor and limited by legal maximums. The certificates issued under
the securitization include both floating- and fixed-interest-rate certificates.
The floating-rate certificates are based on an index of either one-month LIBOR
or the commercial paper rate, depending on the issuance. Consequently, we have
basis risk exposure to the extent that the movement of the floating rate index
on the certificates varies from the movement of the Prime Rate. Additionally, as
of January 29, 2005, the floating finance charge rate on the credit cards was
below the contractual floor rate, thus exposing us to interest-rate risk on the
portion of certificates that are funded at floating rates. In addition, as a
result of the Trust entering into a series of fixed-rate interest rate hedge
agreements with respect to the $161.1 million of Series 2004-1certificates (see
"Off-Balance-Sheet Financing" above), we have significantly reduced the exposure
of floating-rate certificates outstanding to interest-rate risk. To the extent
that short-term interest rates were to increase by one percentage point by the
end of Fiscal 2006, an increase of approximately $151 thousand in selling,
general, and administrative expenses would result.
40
As of January 29, 2005, there were no borrowings outstanding under our
revolving credit facility. To the extent that there are borrowings outstanding
under our revolving credit facility, such borrowings would be exposed to
variable interest rates. An increase in market interest rates would increase our
interest expense and decrease our cash flows. Conversely, 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.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
See "Item 8. Financial Statements and Supplementary Data; Notes to
Consolidated Financial Statements; NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES; Impact of Recent Accounting Pronouncements."
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - MARKET RISK" above.
41
Item 8. Financial Statements and Supplementary Data
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
`
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. Our internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes those
policies and procedures that: (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect our transactions and
dispositions of our assets; (ii) provide reasonable assurance that our
transactions are recorded as necessary to permit preparation of our financial
statements in accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance with
authorizations of our management and our Board of Directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect
on our financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over
financial reporting as of January 29, 2005. In making this assessment, our
management used the criteria set forth in "Internal Control - Integrated
Framework," issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the "COSO criteria"). Based on this assessment, management concluded
that our internal control over financial reporting was effective as of January
29, 2005.
Our independent registered public accounting firm, Ernst & Young LLP, has
issued an attestation report on management's assessment of our internal control
over financial reporting, which appears on page 43 - 44.
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
Stockholders and Board of Directors
Charming Shoppes, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Charming
Shoppes, Inc. and subsidiaries maintained effective internal control over
financial reporting as of January 29, 2005, based on criteria established in
"Internal Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the "COSO criteria"). Charming
Shoppes, Inc. and subsidiaries' management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Charming Shoppes, Inc. and
subsidiaries maintained effective internal control over financial reporting as
of January 29, 2005 is fairly stated, in all material respects, based on the
COSO criteria. Also, in our opinion, Charming Shoppes, Inc. and subsidiaries
maintained, in all material respects, effective internal control over financial
reporting as of January 29, 2005, based on the COSO criteria.
43
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Charming Shoppes, Inc. and subsidiaries as of January 29, 2005 and
January 31, 2004, and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity, and cash flows for each of
the three fiscal years in the period ended January 29, 2005, and our report
dated April 11, 2005 expressed an unqualified opinion thereon.
/S/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
April 11, 2005
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Charming Shoppes, Inc.
We have audited the accompanying consolidated balance sheets of Charming
Shoppes, Inc. and subsidiaries as of January 29, 2005 and January 31, 2004, and
the related consolidated statements of operations and comprehensive income
(loss), stockholders' equity, and cash flows for each of the three fiscal years
in the period ended January 29, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Charming
Shoppes, Inc. and subsidiaries at January 29, 2005 and January 31, 2004, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended January 29, 2005, in conformity with
United States generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the
Company has restated its financial statements for the fiscal years ended January
31, 2004 and February 1, 2003.
As discussed in Note 1 to the consolidated financial statements, in the
fiscal year ended February 1, 2003, the Company changed its method of accounting
for goodwill and indefinite-lived intangible assets, in accordance with SFAS No.
142, "Goodwill and Other Intangible Assets," and changed its method of
accounting for cash consideration received from vendors in accordance with EITF
Issue 02-16, "Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor."
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
Charming Shoppes, Inc. and subsidiaries' internal control over financial
reporting as of January 29, 2005, based on criteria established in "Internal
Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated April 11, 2005
expressed an unqualified opinion thereon.
/S/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
April 11, 2005
45
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 29, January 31,
(Dollars in thousands, except share amounts) 2005 2004
---- ----
(Restated)
ASSETS
Current assets
Cash and cash equivalents........................................... $ 273,049 $ 123,781
Available-for-sale securities ...................................... 52,857 55,688
Merchandise inventories ............................................ 285,120 309,995
Deferred taxes ..................................................... 15,500 18,708
Prepayments and other .............................................. 86,382 57,494
----------- -----------
Total current assets ............................................... 712,908 565,666
----------- -----------
Property, equipment, and leasehold improvements - at cost .......... 786,028 775,500
Less accumulated depreciation and amortization ..................... 465,365 447,491
----------- -----------
Net property, equipment, and leasehold improvements ................ 320,663 328,009
----------- -----------
Trademarks and other intangible assets ............................. 169,818 170,478
Goodwill ........................................................... 66,666 66,956
Available-for-sale securities, including fair value adjustments of
$(390) as of January 31, 2004 ............................... 240 14,521
Other assets ....................................................... 33,476 27,440
----------- -----------
Total assets ....................................................... $ 1,303,771 $ 1,173,070
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................... $ 127,819 $ 135,777
Accrued expenses ................................................... 154,681 142,709
Income taxes payable ............................................... 0 1,128
Current portion - long-term debt ................................... 16,419 17,278
Accrued expenses related to cost reduction plan .................... 0 2,596
----------- -----------
Total current liabilities .......................................... 298,919 299,488
----------- -----------
Deferred taxes and other non-current liabilities ................... 101,743 83,354
Long-term debt ..................................................... 208,645 202,819
Stockholders' equity
Common stock $.10 par value
Authorized - 300,000,000 shares
Issued - 132,063,290 shares and 125,526,573 shares .......... 13,206 12,553
Additional paid-in capital ......................................... 249,485 201,798
Treasury stock at cost - 12,265,993 shares ......................... (84,136) (84,136)
Deferred employee compensation ..................................... (8,715) (2,539)
Accumulated other comprehensive loss ............................... 0 (365)
Retained earnings .................................................. 524,624 460,098
----------- -----------
Total stockholders' equity ......................................... 694,464 587,409
----------- -----------
Total liabilities and stockholders' equity ......................... $ 1,303,771 $ 1,173,070
=========== ===========
Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
See Notes to Consolidated Financial Statements.
46
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
Year Ended
----------------------------------------
January 29, January 31, February 1,
(In thousands, except per share amounts) 2005 2004 2003
---- ---- ----
(Restated) (Restated)
Net sales .............................................. $ 2,332,334 $ 2,285,680 $ 2,412,409
----------- ----------- -----------
Cost of goods sold, buying, and occupancy expenses ..... 1,640,248 1,642,816 1,726,306
Selling, general, and administrative expenses .......... 577,301 558,248 603,502
Expenses related to cost reduction plan ................ 605 11,534 0
Restructuring credit ................................... 0 0 (4,813)
----------- ----------- -----------
Total operating expenses ............................... 2,218,154 2,212,598 2,324,995
----------- ----------- -----------
Income from operations ................................. 114,180 73,082 87,414
Other income, principally interest ..................... 3,098 2,050 2,328
Interest expense ....................................... (15,610) (15,609) (20,292)
----------- ----------- -----------
Income before income taxes, minority interest,
and cumulative effect of accounting changes ....... 101,668 59,523 69,450
Income tax provision ................................... 37,142 21,623 27,117
----------- ----------- -----------
Income before minority interest and cumulative
effect of accounting changes ...................... 64,526 37,900 42,333
Minority interest in net loss of consolidated subsidiary 0 142 679
----------- ----------- -----------
Income before cumulative effect of accounting changes .. 64,526 38,042 43,012
Cumulative effect of accounting changes, net of
income tax benefit of $2,758 ...................... 0 0 (49,098)
----------- ----------- -----------
Net income (loss) ...................................... 64,526 38,042 (6,086)
----------- ----------- -----------
Other comprehensive income, net of tax:
Unrealized gains (losses) on available-for-sale
securities, net of income tax (provision) benefit
of $(92) in 2005, $100 in 2004, and $46 in 2003 ... 113 (156) (73)
Reclassification of realized losses on available-for-
sale securities included in net income, net of
income tax benefit of $61 in 2005 ................. 124 0 0
Reclassification of amortization of deferred loss on
termination of derivative, net of income tax
benefit of $68 in 2005 and $184 in 2004 and 2003 .. 128 341 341
----------- ----------- -----------
Total other comprehensive income ....................... 365 185 268
----------- ----------- -----------
Comprehensive income (loss) ............................ $ 64,891 $ 38,227 $ (5,818)
=========== =========== ===========
Basic net income (loss) per share:
Before cumulative effect of accounting changes.......... $ .56 $ .34 $ .38
Cumulative effect of accounting changes................. .00 .00 (.43)
----- ----- -----
Net income (loss)....................................... $ .56 $ .34 $(.05)
===== ===== =====
Diluted net income per share:
Before cumulative effect of accounting changes.......... $ .52 $ .33 $ .36
Cumulative effect of accounting changes................. .00 .00 (.37)
----- ----- -----
Net income.............................................. $ .52 $ .33 $(.01)
===== ===== =====
Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
See Notes to Consolidated Financial Statements.
47
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Treasury Stock
------------------- Paid-in ------------------
(Dollars in thousands) Shares Amount Capital Shares Amount
------ ------ ------- ------ ------
Balance, February 2, 2002................... 111,891,156 $11,189 $103,267 0 $ 0
Issued to employees......................... 189,266 19 1,329
Exercise of stock options................... 1,326,561 133 5,695
Shares withheld for payment of employee
payroll taxes due on shares issued
under employee stock plans............. (25,801) (2) (148)
Shares received in payment of stock
option exercises....................... (176,278) (18) (1,485)
Shares issued on conversion of convertible
debt................................... 11,944,338 1,194 89,877
Purchases of treasury stock................. (12,265,993) (84,136)
Tax benefit - employee stock programs....... 1,505
----------- ------- -------- ---------- --------
Balance, February 1, 2003................... 125,149,242 12,515 200,040 (12,265,993) (84,136)
Issued to employees......................... 179,506 18 991
Exercise of stock options................... 220,459 22 834
Shares withheld for payment of employee
payroll taxes due on shares issued
under employee stock plans............. (22,634) (2) (90)
Tax benefit - employee stock programs....... 23
----------- ------- -------- ---------- --------
Balance, January 31, 2004................... 125,526,573 12,553 201,798 (12,265,993) (84,136)
Issued to employees......................... 411,411 41 9,095
Exercise of stock options................... 6,249,634 625 33,062
Shares withheld for payment of employee
payroll taxes due on shares issued
under employee stock plans............. (15,082) (2) (92)
Shares received in payment of stock
option exercises....................... (109,246) (11) (847)
Tax benefit - employee stock programs....... 6,469
----------- ------- -------- ---------- --------
Balance, January 29, 2005................... 132,063,290 $13,206 $249,485 (12,265,993) $(84,136)
=========== ======= ======== ========== ========
Accumulated
Deferred Other
Employee Comprehensive Retained
Compensation Income (Loss) Earnings
------------ ------------- --------
(Restated)
Balance, February 2, 2002................... $(3,741) $(818) $428,142
Issued to employees......................... (844)
Amortization................................ 1,215
Unrealized gains, net of income taxes
of $139................................. 268
Net loss.................................... (6,086)
------- ----- --------
Balance, February 1, 2003................... (3,370) (550) 422,056
Issued to employees......................... (600)
Amortization................................ 1,431
Unrealized gains, net of income taxes
of $84.................................. 185
Net income.................................. 38,042
------- ----- --------
Balance, January 31, 2004................... (2,539) (365) 460,098
Issued to employees......................... (8,713)
Amortization................................ 2,537
Unrealized gains, net of income taxes
of $221................................. 365
Net income.................................. 64,526
------- ----- --------
Balance, January 29, 2005................... $(8,715) $ 0 $524,624
======= ===== ========
See Notes to Consolidated Financial Statements.
48
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
-------------------------------------
January 29, January 31, February 1,
(In thousands) 2005 2004 2003
---- ---- ----
(Restated) (Restated)
Operating activities
Net income (loss) .......................................... $ 64,526 $ 38,042 $ (6,086)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ......................... 79,606 84,534 88,492
Deferred income taxes ................................. 11,521 6,067 22,600
Write-down of Catherines goodwill ..................... 0 0 43,975
Cumulative effect of capitalization of cash received
from vendors ...................................... 0 0 7,881
Net loss from disposition of capital assets ........... 736 1,537 3,436
Capitalized interest on conversion of convertible notes 0 0 3,026
Tax benefit related to stock plans .................... 6,469 23 1,505
Other, net ............................................ 185 (142) (679)
Changes in operating assets and liabilities:
Merchandise inventories ........................... 24,875 (23,523) 6,054
Accounts payable .................................. (7,958) (12,175) 40,061
Prepayments and other ............................. (28,888) 16,802 16,583
Income taxes payable .............................. (1,128) (6,016) 7,144
Accrued expenses and other ........................ 19,774 (8,445) (1,271)
Accrued expenses related to cost reduction plan ... (2,596) 2,596 0
Accrued restructuring costs ....................... 0 0 (19,758)
--------- --------- ---------
Net cash provided by operating activities .................. 167,122 99,300 212,963
--------- --------- ---------
Investing activities
Gross purchases of available-for-sale securities ........... (30,887) (35,440) (58,308)
Proceeds from sales of available-for-sale securities ....... 48,206 31,463 54,797
Investment in capital assets ............................... (60,565) (54,028) (81,274)
Proceeds from sales of capital assets ...................... 0 500 801
Increase in other assets ................................... (6,984) (6,704) (4,150)
--------- --------- ---------
Net cash used by investing activities ...................... (50,230) (64,209) (88,134)
--------- --------- ---------
Financing activities
Proceeds from short-term borrowings ........................ 186,173 221,423 534,499
Repayments of short-term borrowings ........................ (186,173) (221,423) (588,795)
Proceeds from long-term borrowings ......................... 18,098 1,557 164,000
Repayments of long-term borrowings ......................... (18,530) (14,566) (84,122)
Payments of deferred financing costs ....................... (350) (1,500) (5,568)
Purchases of treasury stock ................................ 0 0 (84,136)
Proceeds from issuance of common stock ..................... 33,158 1,173 4,679
--------- --------- ---------
Net cash provided/(used) by financing activities ........... 32,376 (13,336) (59,443)
--------- --------- ---------
Increase in cash and cash equivalents ...................... 149,268 21,755 65,386
Cash and cash equivalents, beginning of year ............... 123,781 102,026 36,640
--------- --------- ---------
Cash and cash equivalents, end of year ..................... $ 273,049 $ 123,781 $ 102,026
========= ========= =========
Non-cash financing and investing activities
Common stock issued on conversion of convertible notes...... $ 0 $ 0 $ 89,105
========= ========= =========
Equipment acquired through capital leases ............... .. $ 5,399 $ 17,466 $ 6,997
========= ========= =========
Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
See Notes to Consolidated Financial Statements.
49
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
We operate retail specialty stores located throughout the continental
United States that merchandise plus-size, misses, and junior sportswear,
dresses, coats, and intimate apparel, as well as accessories and casual
footwear, at a wide range of prices.
Principles of Consolidation
The consolidated financial statements include the accounts of Charming
Shoppes, Inc. and our wholly-owned and majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. We have
a 52 - 53 week fiscal year ending on the Saturday nearest to January 31. As used
herein, the terms "Fiscal 2005," "Fiscal 2004," and "Fiscal 2003" refer to our
fiscal years ended January 29, 2005, January 31, 2004, and February 1, 2003,
respectively. The term "Fiscal 2006" refers to our fiscal year which will end on
January 28, 2006. The terms "the Company," "we," "us," and "our" refer to
Charming Shoppes, Inc., and, where applicable, our consolidated subsidiaries.
During Fiscal 2001, we entered into a joint venture agreement with MONSOON
plc. to open and operate MONSOON/ACCESSORIZE stores in the United States. We
invested $4,000,000 for an 80% controlling interest in the joint venture,
operated the joint venture as a consolidated operating unit, and accounted for
MONSOON plc.'s investment as a minority interest. In March 2003, we announced
that we would discontinue operation of the 9 MONSOON/ACCESSORIZE stores operated
under the joint venture, and we closed the stores during Fiscal 2004 (see
"Property and Depreciation" below).
Foreign Operations
We use a December 31 fiscal year for our foreign subsidiaries in order to
expedite our year-end closing. There were no intervening events or transactions
with respect to our foreign subsidiaries during the period from January 1, 2005
to January 29, 2005 that would have a material effect on our financial position
or results of operations.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires that our management
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications
Certain prior-year amounts in the consolidated balance sheet, statements of
operations and comprehensive income, and statements of cash flows for prior
years have been reclassified to conform to the current-year presentation.
Cash Equivalents
We consider all highly-liquid investments with a maturity of three months
or less when purchased to be cash equivalents. These amounts are stated at cost,
which approximates market value.
50
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
Available-for-Sale Securities
Our investments are classified as available for sale. Securities traded on
an established market are carried at fair value, and unrealized gains and losses
are reported in a separate component of stockholders' equity. We adjust the cost
of these investments for amortization of premiums and the accretion of discounts
to maturity where applicable. Such adjustments are included in interest income.
We include interest income and realized gains and losses from investments in
other income. The cost of securities sold is based on the specific
identification method.
Short-term available-for-sale securities include investments with an
original maturity of greater than three months and a remaining maturity of less
than one year, and consist primarily of retained interests in our asset
securitization facilities (see "NOTE 16. ASSET SECURITIZATION" below). Long-term
available-for-sale securities include investments that have an original maturity
of greater than one year, but are available on an as-needed basis to support our
working capital needs.
Inventories
We value our merchandise inventories at the lower of cost or market, using
the retail inventory method (average cost basis). Under the retail inventory
method, the valuation of inventories at cost and the resulting gross margins are
adjusted in proportion to markdowns currently taken and shrinkage on the retail
value of inventories. In addition to markdowns that have been taken (i.e.,
selling price permanently reduced on the selling floor), we accrue an estimate
for markdowns not yet recorded that we believe will be necessary to sell
end-of-season inventory on hand at the end of the period. We purchase inventory
by season and distinguish aged inventory by tracking inventory quantities on
hand by season. We liquidate aged seasonal inventory through markdowns or sale
to liquidators. We base our inventory shrinkage on periodic physical inventories
on a store-by-store basis, with supplemental observations in locations
exhibiting high shrinkage rates. We determine interim shrinkage estimates on a
store-by-store basis, based on our most recent physical inventory results.
Property and Depreciation
For financial reporting purposes, we compute depreciation and amortization
primarily using the straight-line method over the estimated useful lives of the
assets or, in the case of leasehold improvements, over the lease term as
determined under our operating lease accounting policy (see "Operating Leases"
below), if shorter. We use accelerated depreciation methods for income tax
reporting purposes. Depreciation and amortization of property, equipment
(including equipment acquired under capital leases), and leasehold improvements
was $72,437,000, $76,541,000, and $79,428,000 in Fiscal 2005, Fiscal 2004, and
Fiscal 2003, respectively (Fiscal 2004 and Fiscal 2003 amounts have been
restated - see "NOTE 2. RESTATEMENT OF FINANCIAL STATEMENTS" below).
We evaluate the recoverability of our long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." We assess our long-lived
assets for recoverability whenever events or changes in circumstances indicate
that the carrying amounts of long-lived assets may not be recoverable. We
consider historical performance and future estimated results when evaluating an
asset for potential impairment, then compare the carrying amount of the asset to
the estimated future undiscounted cash flows expected to result from the use of
the asset. If the estimated future undiscounted cash flows are less than the
carrying amount of the asset, we write down the asset to its estimated fair
51
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
value and recognize an impairment loss. Our estimate of fair value is generally
based on either appraised value or the present value of future cash flows.
Pursuant to SFAS No. 144, we recorded a $2,700,000 write-down of
under-performing assets related to our consolidated MONSOON joint venture during
Fiscal 2003. The amount of the write-down is included in occupancy expenses.
Lease Accounting
We lease substantially all of our store properties and account for our
store leases in accordance with SFAS No. 13, "Accounting for Leases." A majority
of our store leases contain lease options that we can unilaterally exercise. The
lease term we use for such operating leases includes lease option renewal
periods only in instances in which the failure to exercise such options would
result in an economic penalty for us and exercise of the renewal option is
therefore reasonably assured at the lease inception date.
For leases that contain rent escalations, the lease term for recognition of
straight-line rent expense commences on the date we take possession of the
leased property for construction purposes, which is generally two months prior
to a store opening date. Similarly, landlord incentives or allowances under
operating leases (tenant improvement allowances) are recorded as a deferred rent
liability and recognized as a reduction of rent expense on a straight-line basis
over the lease term commencing on the date we take possession of the leased
property for construction purposes.
Goodwill and Other Intangible Assets
As of the beginning of Fiscal 2003, we account for goodwill and other
intangible assets in accordance with the provisions of SFAS No. 142, "Goodwill
and Other Intangible Assets." We own trademarks, tradenames, internet domain
names, customer lists, and a covenant not to compete that we obtained in
connection with our acquisition of LANE BRYANT. The values of these intangible
assets were determined by an independent appraisal, using an after-tax
discounted cash flow method, based on the estimated future benefits to be
received from the assets. We allocated the excess of the cost of the LANE BRYANT
acquisition over the estimated fair value of the identifiable tangible and
intangible net assets acquired to goodwill. In accordance with the provisions of
SFAS No. 142, we are not amortizing the goodwill.
The LANE BRYANT trademarks, tradenames, and internet domain names are
well-recognized in the plus-size apparel market. We expect to renew and protect
these trademarks, tradenames, and internet domain names indefinitely, and expect
that they will generate positive cash flows for the Company for the foreseeable
future. Therefore, we are not amortizing the appraised value of the trademarks,
tradenames, and internet domain names. We periodically review the trademarks,
tradenames, and internet domain names for indicators of a limited useful life.
We are amortizing the customer lists and covenant not to compete over their
estimated useful life of five years.
52
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
In accordance with the provisions of SFAS No. 142, we are required to
re-evaluate goodwill and other indefinite-lived intangible assets annually, or
more frequently if there is an indication of possible impairment. During Fiscal
2003, we determined that the carrying value of goodwill related to our
CATHERINES acquisition (including the value of intangible assets we did not
separately account for at the date of the CATHERINES acquisition) exceeded the
estimated fair value of the CATHERINES goodwill under SFAS No. 142. We
determined the estimated fair value of the CATHERINES goodwill using the present
value of expected future cash flows associated with the CATHERINES assets. We
recorded a write-down (which was not deductible for income tax purposes) of
$43,975,000 to reduce the carrying value of the goodwill to its estimated fair
value. The majority of the write-down is attributable to the value of unrecorded
trademarks. The write-down of the CATHERINES goodwill is presented as the
cumulative effect of an accounting change, as of February 3, 2002, in our
Consolidated Statement of Operations and Comprehensive Income (Loss) for Fiscal
2003. We also evaluated the goodwill, trademarks, tradenames, and internet
domain names related to our LANE BRYANT acquisition as of February 3, 2002 in
accordance with the provisions of SFAS No. 142, and determined that there had
been no impairment of these assets. During the fourth quarters of Fiscal 2003,
Fiscal 2004, and Fiscal 2005, we conducted the annual re-evaluation of our
goodwill and other indefinite-lived intangible assets and determined that there
was no impairment of these assets. The calculation of the estimated fair value
of the goodwill and other intangible assets required estimates, assumptions, and
judgments, and results might have been materially different if different
estimates, assumptions, and judgments had been used.
Asset Securitization
We account for our asset securitization facilities in accordance with the
requirements of SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Asset securitization
involves the sale of proprietary credit card receivables by our credit card bank
to a special purpose entity, which in turn transfers the receivables to a
qualified special purpose entity (the "Trust") created for the securitization.
The Trust issues asset-backed certificates that represent undivided interests in
those credit card receivables transferred into the Trust. These certificates are
sold to investors, and we retain any undivided interests that remain unsold. We
include these remaining undivided interests, and any other retained interests,
in short-term available-for-sale securities in our accompanying consolidated
balance sheet. The carrying value of these retained interests approximates their
fair value. The assets and liabilities of the Trust are not included in our
consolidated balance sheet.
Transaction expenses related to securitizations are deferred and amortized
over the reinvestment period of the transaction. Net securitization income is
included as a reduction of selling, general, and administrative expenses in our
accompanying consolidated statements of operations and comprehensive income
(loss).
Deferred Debt Acquisition Costs
Debt acquisition costs are deferred and amortized to interest expense on a
straight-line basis over the life of the related debt agreement.
53
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
Insurance Liabilities
We use a combination of third-party insurance and/or self-insurance for
certain risks, including workers' compensation, medical, dental, automobile, and
general liability claims. Our insurance liabilities are a component of "Accrued
expenses" on our consolidated balance sheet, and represent an estimate of the
ultimate cost of uninsured claims incurred as of the balance sheet date. In
estimating our self insurance liabilities, we use independent actuarial
estimates of expected losses, which are based on statistical analyses of
historical data. Loss estimates are adjusted based upon actual claim settlements
and reported claims. Although we do not expect the amounts ultimately paid to
differ significantly from our estimates, self-insurance liabilities could be
affected if future claim experience differs significantly from the historical
trends and the actuarial assumptions. We evaluate the adequacy of these
liabilities on a regular basis, modifying our assumptions as necessary, updating
our records of historical experience, and adjusting our liabilities as
appropriate.
Common Stock Plans
We account for stock-based compensation using the intrinsic value method,
in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related interpretations. We
amortize deferred compensation expense attributable to stock awards and stock
options having an exercise price less than the market price on the date of grant
on a straight-line basis over the vesting period of the award or option. We do
not recognize compensation expense for options having an exercise price equal to
the market price on the date of grant or for shares purchased under our Employee
Stock Purchase Plan. We have elected to follow the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation." We adopted the
disclosure requirements of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," as of the beginning of Fiscal 2004.
54
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
The following table reconciles net income (loss) and net income (loss) per
share as reported, using the intrinsic value method under APB No. 25, to pro
forma net income (loss) and pro forma net income (loss) per share using the fair
value method under SFAS No. 123:
(In thousands, except per share amounts) 2005 2004 2003
---- ---- ----
(Restated) (Restated)
Net income (loss) as reported ......... $ 64,526 $ 38,042 $ (6,086)
Add stock-based employee compensation
as reported, using intrinsic value
method, net of income taxes ...... 1,649 930 790
Less stock-based employee compensation,
using fair-value method, net of
income taxes ..................... (3,862) (3,298) (5,864)
-------- -------- --------
Pro forma net income (loss) ........... $ 62,313 $ 35,674 $(11,160)
======== ======== ========
Basic net income (loss) per share:
As reported....................... $.56 $ .34 $(.05)
Pro forma......................... .54 .32 (.10)
Diluted net income (loss) per share:
As reported....................... .52 .33 (.01)
Pro forma......................... .50 .31 (.05)
For purposes of determining the pro forma disclosures, we estimate the fair
value of each option grant on the date of grant using the Black-Scholes
option-pricing model. In applying the Black-Scholes model, we used a range of
estimated stock price volatilities of 37.6 to 50.8, a dividend yield of 0.0%,
expected lives of 3 months for the Employee Stock Purchase Plan, 3 to 5 years
for stock award plans, and 3 to 7 years for stock option and stock incentive
plans, and the following risk-free interest rates:
(In percents) 2005 2004 2003
---- ---- ----
Risk-free interest rate:
Employee stock purchase plan...... 0.9 - 2.4 0.9 1.1
Stock award plans................. 1.9 - 3.9 2.8 3.1
Stock option and incentive plans.. 2.8 - 4.4 2.8 3.1
55
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"), a revision of SFAS No. 123. SFAS No. 123R supersedes
APB Opinion No. 25, and amends SFAS No. 95, "Statement of Cash Flows." We will
be required to adopt the provisions of SFAS No. 123R as of the beginning of the
third quarter of Fiscal 2006. See "Impact of Recent Accounting Pronouncements"
below for a further discussion of SFAS No. 123R.
Revenue Recognition
Revenues from merchandise sales are net of discounts, returns and
allowances, and coupons, and exclude sales tax. We record a reserve for
estimated future sales returns based on an analysis of actual returns received,
and we defer recognition of layaway sales to the date of delivery. Revenues from
sales of gift cards are recorded as deferred revenue and recognized upon the
redemption of the gift cards.
Revenues from our E-commerce business include shipping and handling fees
billed to customers. E-commerce revenues are recognized after the following have
occurred: execution of the customer's order, authorization of the customer's
credit card has been received, and the product has been shipped and received by
the customer. We record a reserve for estimated future E-commerce sales returns
based on an analysis of actual returns.
We offer our customers various loyalty card programs (see "NOTE 12.
CUSTOMER LOYALTY CARD PROGRAMS" below). Customers that join these programs are
entitled to various benefits, including discounts and rebates on purchases
during the membership period. Customers generally join these programs by paying
an annual membership fee. We recognize revenue from these loyalty programs as
sales over the life of the membership period based on when the customer earns
the benefits and when the fee is no longer refundable. Costs we incur in
connection with administering these programs are recognized in cost of goods
sold as incurred.
Cost of Goods Sold, Buying, and Occupancy Expenses
Cost of goods sold includes merchandise costs net of discounts and
allowances, freight, inventory shrinkage, and shipping and handling costs
associated with our E-commerce business. We capitalize net merchandise costs and
freight as inventory costs. Cost of goods sold also includes costs incurred in
connection with our customer loyalty card programs (see "Revenue Recognition"
above). Buying expenses include payroll, payroll-related costs, and operating
expenses for our buying departments and warehouses. Occupancy expenses include
rent, real estate taxes, insurance, common area maintenance, utilities,
maintenance, and depreciation for our stores and warehouse facilities and
equipment. Buying and occupancy costs are treated as period costs and are not
capitalized as part of inventory.
Advertising Costs
We expense advertising costs as incurred. Advertising costs charged to
expense were $66,666,000, $60,494,000, and $63,943,000 in Fiscal 2005, Fiscal
2004, and Fiscal 2003, respectively.
56
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
Costs Associated With Exit or Disposal Activities
We recognize liabilities for costs associated with exit or disposal
activities when the liabilities are incurred, and value the liabilities at fair
value, in accordance with SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." Severance pay is recognized as employees render
service over future periods if the severance arrangement requires employees to
render future service beyond a minimum retention period.
Income Taxes
We use the liability method of accounting for income taxes as prescribed by
SFAS No. 109, "Accounting for Income Taxes." Under the liability method, we
adjust deferred tax assets and liabilities to reflect the effect of changes in
enacted tax rates on expected reversals of financial statement and income tax
basis differences.
We have not provided U.S. income taxes on undistributed earnings of foreign
subsidiaries accumulated through January 31, 2004 because we intend to reinvest
such undistributed earnings in foreign operations.
On October 22, 2004, the President of the United States of America signed
into law H.R. 4250, "The American Jobs Creation Act of 2004" (the "Act"), which
includes among its provisions certain tax benefits related to the repatriation
to the United States of profits from a company's international operations. The
Act provides for the repatriation of profits from international operations at a
tax rate not to exceed 5.25% for approximately a one-year period. These tax
benefits are subject to various limitations, and, as of January 29, 2005, the
U.S. Treasury Department has not issued final guidelines for applying the
repatriation provisions of the Act. We are currently evaluating the effects of
the Act, and have not determined the effect, if any, that it will have on our
financial condition and results of operations. As of January 29, 2005, our
consolidated cash balance included approximately $39,500,000 of cash held by our
international operations. We will finalize our analysis before the end of Fiscal
2006.
Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted-average number of
common shares outstanding during each fiscal year. Net income per share assuming
dilution is based on the weighted-average number of common shares and share
equivalents outstanding. Common share equivalents include the effect of dilutive
stock options and stock awards, using the treasury stock method. Common share
equivalents also include the effect of assumed conversions of our convertible
debt, using the "if-converted" method, when the effect of such assumed
conversions is dilutive. Share equivalents are not included in the
weighted-average shares outstanding for determining net loss per share, as the
result would be anti-dilutive.
Comprehensive Income (Loss)
The consolidated statements of operations and comprehensive income (loss)
include transactions from non-owner sources that affect stockholders' equity.
Unrealized gains and losses recognized in comprehensive income are reclassified
to net income upon their realization.
57
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
Business Segments and Related Disclosures
Our LANE BRYANT, FASHION BUG, and CATHERINES stores are aggregated within a
single segment - retail sales of women's apparel, and within a single geographic
area - the continental United States. Our foreign sourcing operations do not
constitute a material geographic segment.
Costs of Computer Software Developed or Obtained for Internal Use
Costs related to the development of internal-use software, other than those
incurred during the application development stage, are expensed as incurred.
Costs incurred during the application development stage are capitalized and
amortized over the estimated useful life of the software.
Cash Consideration Received from Vendors
As of the beginning of Fiscal 2003, we record cash consideration received
from vendors as a reduction of inventory, and it is recognized in cost of goods
sold as inventory is sold, in accordance with EITF Issue 02-16, "Accounting by a
Customer (Including a Reseller) for Cash Consideration Received from a Vendor."
In Fiscal 2003, we recognized a charge of $5,123,000, net of income taxes of
$2,758,000, for the cumulative effect of the deferral of cash received from
vendors as of the beginning of Fiscal 2003. The impact of the adoption of EITF
02-16 on the year ended February 1, 2003 was an increase in cost of goods sold
of $216,000. As of January 29, 2005 and January 31, 2004, $6,465,000 and
$9,456,000, respectively, of cash received from vendors has been deferred into
inventory and will be recognized as inventory is sold. We defer the recognition
of markdown allowances during interim periods in order to better match the
recognition of markdown allowances to the period the related markdown expenses
are recorded.
Impact of Recent Accounting Pronouncements
We adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," as
of the beginning of Fiscal 2004. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Adoption of SFAS No. 143 did
not have a material impact on our financial position or results of operations.
In January 2003, the FASB issued Financial Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities," an interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements." A
variable interest entity ("VIE") is a legal entity used for business purposes
that either does not have equity investors with substantive voting rights or has
equity investors that do not provide sufficient financial resources for the
entity to finance its activities without additional subordinated financial
support from other parties. Consolidation of a VIE by a variable interest holder
is required if the variable interest holder is subject to a majority of the
VIE's residual returns, risk of loss, or both. Qualifying special purpose
entities ("QSPEs") subject to the requirements of SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
are excluded from the scope of FIN No. 46. Adoption of FIN No. 46 had no impact
on our financial position or results of operations.
58
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R" or the "Statement"), a revision of SFAS No. 123. SFAS
No. 123R supersedes APB Opinion No. 25, and amends SFAS No. 95, "Statement of
Cash Flows." The accounting for share-based payments under SFAS No. 123R is
similar to the fair value method in SFAS No. 123, except that we will be
required to recognize the fair value of share-based payments as compensation
expense in our financial statements (pro forma disclosure will no longer be
allowed).
Generally, under SFAS No. 123R, we will be required to determine the fair
value of employee stock options using an option pricing model, and the value of
non-vested stock awards will be based on the fair market value of our stock on
the date we grant the award, without regard to service or performance conditions
(as defined in the Statement). We will not be required to recognize compensation
cost for options or awards that do not vest as a result of a failure to satisfy
service or performance conditions. Instead, we will be required to estimate
forfeitures of options or awards due to the failure to satisfy service or
performance conditions in determining total compensation for the option or award
and to adjust such estimates to the extent that they differ from actual
forfeitures. The determination of the fair value of options or awards under SFAS
No. 123R may also be affected by "market conditions" or "other conditions" (as
defined in the Statement); however, recognition of compensation expense will not
be affected by the failure to satisfy a market or other condition. In addition
to recognizing compensation cost for our stock options and awards, we will be
required to recognize compensation cost related to our employee stock purchase
plan.
The period over which we will be required to recognize compensation expense
related to an option or award will be determined based on all the terms of the
option or award. For options or awards with graded vesting based on a service
condition (portions of the option or award vest ratably over the service
period), we will be required to elect either a straight-line recognition method
or the accelerated method specified in FASB Interpretation No. 28, "Accounting
for Stock Appreciation Rights and Other Variable Stock Option or Award Plans."
Under SFAS No. 123R, we will be required to present cash flows for excess
tax benefits related to share-based payments as financing cash flows in our
consolidated statements of cash flows, instead of as operating cash flows, as
currently permitted under EITF Issue No. 00-15, "Classification in the Statement
of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a
Nonqualified Employee Stock Option."
We will be required to adopt the provisions of SFAS No. 123R as of the
beginning of the third quarter of Fiscal 2006 for options and awards granted
after the date of adoption. Under the modified-prospective-transition method,
for unvested options and awards granted prior to the date of adoption of SFAS
No. 123R, we will be required to recognize compensation expense in our financial
statements as of the date of adoption in accordance with the provisions of SFAS
No. 123, adjusted to reflect estimated forfeitures in accordance with the
provisions of SFAS No. 123R. We will also recognize a cumulative effect of a
change in accounting principles as of the date of adoption to reflect the
reversal of any compensation expense for periods prior to the date of adoption
for such estimated forfeitures, if material. Under the
modified-retrospective-transition method, we will also have the option to
restate our financial statements, either for the first two quarters of Fiscal
2006 or for all periods prior to adoption presented for comparative purposes, to
recognize compensation cost previously reported in our pro forma footnote
59
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
disclosures in accordance with SFAS No. 123. We will be required to apply the
provisions of SFAS No. 123R related to cash flow reporting prospectively from
the date of adoption under the modified-prospective-transition method, and
retrospectively for the same periods for which the
modified-retrospective-transition method is applied.
Our adoption of SFAS No. 123R will result in the recognition of additional
compensation expense for stock-based compensation in interim and annual periods
subsequent to July 1, 2005. Because we are not able to reliably estimate the
nature and amounts of stock-based awards to be issued in future periods, the
future impact of adoption cannot be quantified. See "Common Stock Plans" above
for pro forma disclosure of stock-based compensation expense determined in
accordance with the provisions of SFAS No. 123 for Fiscal 2005, Fiscal 2004, and
Fiscal 2003. We have not yet determined whether we will adopt the
modified-prospective-transition method or one of the options under the
modified-retrospective-transition method.
NOTE 2. RESTATEMENT OF FINANCIAL STATEMENTS
Our system of internal controls over financial reporting includes the
monitoring of emerging accounting issues and the reviewing of industry and peer
group filings and news releases. As a result of the publicity on the restaurant
industry financial statement restatements related to leases, we commenced a
review of certain of our accounting policies related to leases during January
2005. Subsequently, on February 7, 2005, the Office of the Chief Accountant of
the Securities and Exchange Commission ("SEC") issued a letter to the American
Institute of Certified Public Accountants expressing its views regarding certain
operating-lease-related accounting issues and their application under generally
accepted accounting principles in the United States of America ("GAAP"). Based
on our internal review, and after consultation with the Audit Committee of our
Board of Directors and our independent registered public accounting firm, we
restated our financial statements for years prior to Fiscal 2005 to correct our
accounting for landlord allowances, calculation of straight-line rent expense,
recognition of rent holiday periods, and depreciation of leasehold improvements
for our retail stores.
We lease substantially all of our stores under non-cancelable operating
lease agreements. These lease agreements generally include standard language on
landlord allowances for costs relating to the design, construction, fixturing,
and opening of stores. Construction allowances vary by store, and represent a
reimbursement from the landlord for a portion of the leasehold improvement costs
we incur. Historically, we classified construction allowances as a reduction of
property, equipment, and leasehold improvements on our consolidated balance
sheets and as a reduction of capital expenditures on our consolidated statements
of cash flows. In addition, when accounting for leases with renewal options, we
historically recorded rent expense on a straight-line basis over the initial
non-cancelable lease term, beginning with the lease commencement date. However,
we depreciated leasehold improvements over their estimated useful life of ten
years, which, in many cases, may have included both the initial non-cancelable
lease term and option renewal periods provided for in the lease. Also, we
historically recognized rent holiday periods on a straight-line basis over the
lease term commencing with the initial occupancy date, or the opening date of
the stores. The store opening date coincided with the commencement of business
operations, which corresponds with the intended use of the property. Management
re-evaluated FASB Technical Bulletin No. 85-3, "Accounting for Operating leases
with Scheduled Rent Increases," and determined that the lease term should
commence on the date we take possession of the leased space for construction
purposes, which is generally two months prior to a store opening date.
60
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
As a result of the restatement, construction allowances have been recorded
as a deferred rent liability on our consolidated balance sheets instead of being
recorded as a reduction of the cost of leasehold improvements. In our
consolidated statements of cash flows, we have recognized construction
allowances as an operating activity instead of recognizing them as a reduction
of our investment in capital assets. In addition, the construction allowances
will be amortized over the related lease term as a reduction of rent expense
rather than as a reduction of depreciation expense commencing on the date we
take possession of the leased space for construction purposes.
We also corrected the lease term used to determine straight-line rent
expense and depreciation of leasehold improvements to include lease option
renewal periods only in instances in which the exercise of the option period is
reasonably assured and the failure to exercise such an option would result in an
economic penalty. Depreciation of leasehold improvements has been recognized
over the shorter of the corrected lease term or the assets' estimated useful
lives. Lease terms used to determine straight-line rent expense include
pre-opening store build-out periods (commonly referred to as "rent holidays"),
where applicable. These corrections resulted in the accelerated recognition of
certain annual rent expense and depreciation expense on leasehold improvements.
As a result of the above corrections, we recorded additional deferred rent
in "accrued expenses" and "deferred taxes and other non-current liabilities" and
we adjusted "retained earnings" on the consolidated balance sheet. We also
corrected amortization in "cost of goods sold, buying, and occupancy expenses"
on the consolidated statements of operations and comprehensive income (loss) for
each of our three fiscal years in the period ended January 29, 2005. These
corrections did not have any impact on our previously reported comparable store
sales, net sales, total cash flows, and actual lease payments, or on the
economic value of our leasehold improvements.
61
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
The effects of the restatement on our consolidated financial statements are
summarized as follows:
As Previously As
(In thousands, except per share amounts) Reported(1) Adjustments Restated
-------- ----------- --------
Consolidated Balance Sheet as of January 31, 2004:
Property, equipment, and leasehold improvements:
Cost .............................................. $ 705,257 $ 70,243 $ 775,500
Accumulated depreciation and amortization ......... 386,633 60,858 447,491
----------- ----------- -----------
Net property, equipment, and leasehold improvements 318,624 9,385 328,009
----------- ----------- -----------
Total assets ........................................... $ 1,163,685 $ 9,385 $ 1,173,070
=========== =========== ===========
Deferred taxes and other non-current liabilities ....... $ 56,293 $ 27,061 $ 83,354
Stockholders' equity:
Retained earnings ................................. 477,774 (17,676) 460,098
----------- ----------- -----------
Total stockholders' equity ........................ 605,085 (17,676) 587,409
----------- ----------- -----------
Total liabilities and stockholders' equity ............. $ 1,163,685 $ 9,385 $ 1,173,070
=========== =========== ===========
Consolidated Statement of Operations for Year Ended
January 31, 2004:
Cost of goods sold, buying, and occupancy expenses ..... $ 1,638,701 $ 4,115 $ 1,642,816
Income tax provision ................................... 23,141 (1,518) 21,623
Net income ............................................. 40,639 (2,597) 38,042
Basic net income per share ............................. $ .36 $ (.02) $ .34
Diluted net income per share ........................... $ .35 $ (.02) $ .33
Consolidated Statement of Operations for Year Ended
February 1, 2003:
Cost of goods sold, buying, and occupancy expenses ..... $ 1,721,052 $ 5,254 $ 1,726,306
Income tax provision ................................... 29,055 (1,938) 27,117
Income before cumulative effect of accounting changes .. 46,328 (3,316) 43,012
Net income (loss) ...................................... (2,770) (3,316) (6,086)
Basic net income (loss) per share:
Before cumulative effect of accounting changes .... $ .41 $ (.03) $ .38
Net income (loss) ................................. $ (.02) $ (.03) $ (.05)
Diluted net income per share:
Before cumulative effect of accounting changes .... $ .39 $ (.03) $ .36
Net income (loss) ................................. $ .01 $ (.03) $ (.01)
--------------------
(1) Certain amounts have been reclassified to conform to the current-year
presentation.
(Table continued on next page)
62
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
(Table continued from previous page):
As Previously As
(In thousands Reported(1) Adjustments Restated
-------- ----------- --------
Consolidated Statement of Cash flows for year ended
January 31, 2004:
Operating activities:
Net income ........................................... $ 40,639 $ (2,597) $ 38,042
Additions to reconcile net income to net cash provided
by operations:
Depreciation and amortization ................... 76,347 8,187 84,534
Deferred income taxes ........................... 7,585 (1,518) 6,067
Changes in operating assets and liabilities:
Accrued expenses and other .................. (13,387) 4,942 (8,445)
--------- --------- ---------
Net cash provided by operating activities ............ $ 90,286 $ 9,014 $ 99,300
--------- --------- ---------
Investing activities:
Investment in capital assets ......................... $ (45,014) $ (9,014) $ (54,028)
Consolidated Statement of Cash flows for year ended
February 1, 2003:
Operating activities:
Net income (loss) .................................... $ (2,770) $ (3,316) $ (6,086)
Additions to reconcile net income to net cash provided
by operations:
Depreciation and amortization ................... 79,421 9,071 88,492
Deferred income taxes ........................... 24,538 (1,938) 22,600
Changes in operating assets and liabilities:
Accrued expenses and other .................. (4,425) 3,154 (1,271)
--------- --------- ---------
Net cash provided by operating activities ............ $ 205,992 $ 6,971 $ 212,963
--------- --------- ---------
Investing activities:
Investment in capital assets ......................... $ (74,303) $ (6,971) $ (81,274)
-------------------
(1) Certain amounts have been reclassified to conform to the current-year
presentation.
Prior-year financial information and quarterly information for Fiscal 2004
and the first three quarters of Fiscal 2005 included in these Consolidated
Financial Statements and Notes has been restated as applicable and has been
indicated as such.
63
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
NOTE 3. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Lives
(Dollars in thousands) (Years) 2005 2004
------- ---- ----
(Restated)
Land .................................. $ 5,983 $ 5,983
Buildings and improvements ............ 10 to 40 70,549 70,538
Store fixtures ........................ 5 to 10 128,958 124,018
Equipment ............................. 3 to 10 179,358 195,195
Equipment acquired under capital leases 7 68,119 65,851
Leasehold improvements ................ 10 333,061 313,915
-------- --------
Total at cost ......................... 786,028 775,500
-------- --------
Less: Accumulated depreciation and
amortization ................... 440,551 425,001
Accumulated amortization of
capital lease assets ........... 24,814 22,490
-------- --------
Total accumulated depreciation and
amortization ................... 465,365 447,491
-------- --------
Net property, equipment, and
leasehold improvements ......... $320,663 $328,009
======== ========
NOTE 4. TRADEMARKS AND OTHER INTANGIBLE ASSETS
Lives
(Dollars in thousands) (Years) 2005 2004
------- ---- ----
Trademarks, tradenames, and internet domain names ... $168,800 $168,800
Customer lists and covenant not to compete .......... 5 3,300 3,300
-------- --------
Total at cost ....................................... 172,100 172,100
Less: accumulated amortization of customer lists and
covenant not to compete ...................... 2,282 1,622
-------- --------
Net trademarks and other intangible assets .......... $169,818 $170,478
======== ========
Total amortization of other intangible assets was $660,000 in Fiscal 2005
and Fiscal 2004, and $656,000 in Fiscal 2003. Estimated amortization of
intangible assets for the next five fiscal years is: 2006 - $660,000; 2007 -
$358,000; thereafter - $0.
64
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
NOTE 5. AVAILABLE-FOR-SALE SECURITIES
Unrealized
---------- Estimated
(In thousands) Cost Gains Losses Fair Value
---- ----- ------ ----------
January 29, 2005
Charming Shoppes Master Trust certificates and
retained interests(1) ................... $ 52,485 $ 0 $ 0 $ 52,485
Other ........................................ 612 0 0 612
-------- -------- -------- --------
$ 53,097 $ 0 $ 0 $ 53,097
======== ======== ======== ========
January 31, 2004
Government agency bonds ...................... $ 14,671 $ 0 $ (390) $ 14,281
Charming Shoppes Master Trust certificates and
retained interests(1) ................... 55,363 0 0 55,363
Other ........................................ 565 0 0 565
-------- -------- -------- --------
$ 70,599 $ 0 $ (390) $ 70,209
======== ======== ======== ========
--------------------
(1) Includes Master Trust certificates of $17,325,000, Interest-only strip of
$10,390,000, and retained interests of $24,770,000 at January 29, 2005, and
Master Trust certificates of $44,345,000, Interest-only strip of
$9,208,000, and retained interests of $1,810,000 at January 31, 2004.
During Fiscal 2005, there were $185,000 of realized losses on sales of
available-for-sale securities. There were no realized gains or (losses) on
available-for-sale securities during Fiscal 2004 or Fiscal 2003.
Contractual maturities of available-for-sale securities at January 29, 2005
were:
Estimated
(In thousands) Cost Fair Value
---- ----------
Due in one year or less(1)............... $52,857 $52,857
Due after ten years...................... 240 240
------- -------
$53,097 $53,097
======= =======
--------------------
(1) Includes Charming Shoppes Master Trust certificates and retained interests.
65
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
NOTE 6. INCOME TAXES
Income (loss) before income taxes, minority interest, and cumulative effect
of accounting changes:
(In thousands) 2005 2004 2003
---- ---- ----
(Restated) (Restated)
Domestic......................... $ 98,144 $56,181 $66,225
Foreign.......................... 3,524 3,342 3,225
-------- ------- --------
$101,668 $59,523 $69,450
======== ======= =======
Income tax provision (benefit):
(In thousands) 2005 2004 2003
---- ---- ----
(Restated) (Restated)
Current:
Federal.......................... $20,857 $14,973 $ 4,946
State............................ 6,275 1,913 2,779
Foreign.......................... 668 529 418
------- ------- -------
27,800 17,415 8,143
Deferred(1)...................... 9,342 4,208 18,974
------- ------- -------
$37,142 $21,623 $27,117
======= ======= =======
--------------------
(1) Primarily Federal
We made income tax payments of $30,829,000, $10,147,000 and $5,624,000
during Fiscal 2005, Fiscal 2004, and Fiscal 2003, respectively.
Reconciliation of the effective tax rate with the statutory Federal income
tax rate:
2005 2004 2003
---- ---- ----
(Restated) (Restated)
Statutory Federal income tax rate ......... 35.0% 35.0% 35.0%
State income tax, net of Federal income tax 2.2 1.9 2.5
Foreign income ............................ (0.6) (1.1) (1.0)
Employee benefits ......................... (1.0) (0.5) 2.0
Other, net ................................ 0.9 1.0 0.5
---- ---- ----
36.5% 36.3% 39.0%
==== ==== ====
66
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
Components of deferred tax assets and liabilities:
Net Current Net Long-Term
Assets Assets
(In thousands) (Liabilities) (Liabilities)
----------- -----------
January 29, 2005
Property, equipment, and leasehold improvements... $(19,374)
Tax net operating loss and credit carryforwards... 564
Prepaid and accrued expenses...................... $13,084
Inventory......................................... (1,902)
Deferred compensation............................. 8,662
Intangible assets................................. (26,524)
Investments....................................... (4,846)
Deferred rent..................................... 6,867
Other............................................. 4,318 3,006
------- --------
$15,500 $(31,645)
======= ========
January 31, 2004 (Restated)
Property, equipment, and leasehold improvements... $(13,223)
Tax net operating loss and credit carryforwards... 3,256
Prepaid and accrued expenses...................... $13,126
Inventory......................................... 5,320
Deferred compensation............................. 7,109
Intangible assets................................. (22,914)
Investments....................................... (3,612)
Deferred rent..................................... 6,226
Other............................................. 262 49
------- --------
$18,708 $(23,109)
======= ========
During Fiscal 2004, we reached a settlement with the Internal Revenue
Service regarding its audit of our corporate-owned life insurance ("COLI")
program. The settlement included $18,477,000 of income taxes and $4,038,000 of
interest, net of a tax benefit of $2,175,000. Of the $18,477,000 of income
taxes, $16,125,000 was satisfied through the use of existing operating losses
and tax credits. As part of the settlement, we surrendered our existing life
insurance policies and received their cash surrender value of $16,332,000. The
settlement had no impact on our current results of operations, as we had
previously provided for taxes to cover the settlement. The settlement had a net
positive impact of $7,767,000 on our Fiscal 2004 cash flows. The utilization of
the operating losses and tax credits to satisfy income taxes related to the COLI
settlement resulted in a decrease in net deferred tax assets.
67
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
NOTE 7. DEBT
Long-term debt at year end:
(In thousands) 2005 2004
---- ----
4.75% Senior Convertible Notes due June 2012 $150,000 $150,000
Capital lease obligations .................. 34,825 37,934
6.07% mortgage note, due October 2014 ...... 12,821 0
6.53% mortgage note, due November 2012 ..... 10,850 12,250
7.77% mortgage note due December 2011 ...... 9,564 10,039
7.5% mortgage note due March 2006 .......... 5,605 5,840
8.15% note due December 2004 ............... 0 2,494
Other long-term debt ....................... 1,399 1,540
-------- --------
Total long-term debt ....................... 225,064 220,097
Less current portion ....................... 16,419 17,278
-------- --------
$208,645 $202,819
======== ========
We have a $300,000,000 revolving credit facility (the "Facility") that
provides for cash borrowings and enables us to issue up to $150,000,000 of
letters of credit for purchases of merchandise and for standby letters of
credit. As of January 29, 2005, there were no borrowings outstanding under the
Facility. The availability of borrowings under the Facility is subject to
limitations based on eligible inventory and, under certain circumstances, credit
card receivables and in-transit cash. The Facility is secured by our general
assets, except for (i) all assets related to our credit card securitization
facilities, (ii) all real property, (iii) certain equipment subject to other
mortgages or capital leases, (iv) the assets of our non-U.S. subsidiaries, and
(v) certain other assets. The Facility expires on August 15, 2008. As of January
29, 2005, we had $3,267,000 of unamortized deferred debt acquisition costs
related to the Facility, which we are amortizing on a straight-line basis over
the life of the Facility as interest expense.
The interest rate on borrowings under the Facility ranges from Prime to
Prime plus .50% per annum for Prime Rate Loans, and LIBOR plus 1.5% to LIBOR
plus 2.00% per annum for Eurodollar Rate Loans. The applicable rate is
determined quarterly, based on our average excess and suppressed availability,
as defined in the Facility. As of January 29, 2005, the interest rate on
borrowings under the Facility was 5.25% for Prime Rate Loans and 4.06% for
Eurodollar Rate Loans. There is a fee of 1.0% to 1.25% per annum on outstanding
letters of credit and a fee of .375% per annum on the unused portion of the
Facility.
The Facility includes limitations on sales and leasebacks, the incurrence
of additional liens and debt, capital lease financing, and other limitations.
The Facility also requires, among other things, that we not pay dividends on our
common stock and, if our excess and suppressed availability (as defined in the
Facility) is less than $50,000,000 at any time within a fiscal quarter, that we
maintain a minimum level of consolidated 12-month earnings before interest,
taxes, depreciation, and amortization ("EBITDA") (excluding non-recurring,
non-cash charges as defined in the Facility). During Fiscal 2005, our excess and
suppressed availability was above $50,000,000 at all times. We had outstanding
letters of credit totaling $82,996,000 as of January 29, 2005. As of January 29,
2005, we were not in default with respect to any of the Facility's covenants.
68
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
The 4.75% Senior Convertible Notes will mature on June 1, 2012 and are
convertible at any time prior to maturity into shares of our common stock at a
conversion price of $9.88 per share, subject to adjustment upon certain events.
The Senior Notes are redeemable at our option, in whole or in part, at any time
on or after June 4, 2007, at declining redemption prices, starting at 102.38% of
principal and decreasing to 100.48% of principal on or after June 1, 2011. Under
certain circumstances involving a change in control of the Company, holders of
the Senior Notes may require us to repurchase all or a portion of the Senior
Notes at 100% of the principal amount plus accrued and unpaid interest, if any.
Also, under such circumstances, we have the option of paying the repurchase
price in shares of our common stock, valued at 95% of the average of the closing
prices of the common stock for the five-day trading period immediately before
and including the third trading day preceding the repurchase date. There is no
sinking fund for the Senior Notes.
Pursuant to a program to replace point-of-sale ("POS") equipment in our
stores, we acquired $3,899,000, $8,468,000, and $3,495,000 of POS equipment
under capital leases in Fiscal 2005, Fiscal 2004, and Fiscal 2003, respectively.
These leases generally have an initial lease term of 60 months and contain a
bargain purchase option. As of January 29, 2005, the imputed interest rates on
the capital leases ranged from 4.48% to 10.87%.
In December 2002, we entered into two financing leases for the purchase of
material handling systems and related equipment and software for the White Marsh
distribution center. The lease terms provide for the availability of funds as
the equipment and software is delivered and accepted. The first capital lease
obligation of $2,500,000 is payable over a term of 60 months at an interest rate
of 6.77%, and contains a bargain purchase option. We received all of the
equipment under this lease as of February 1, 2003. The second capital lease
obligation of $11,500,000 is payable over a term of 60 months at an interest
rate of 7.35% and contains a bargain purchase option. As of January 31, 2004, we
had acquired $10,000,000 of equipment under this lease. We received the
remaining $1,500,000 of equipment and related software under this lease during
Fiscal 2005.
In December 2004, we refinanced certain material handling equipment at our
Greencastle distribution center. The lease obligation of $5,000,000 is payable
over a term of 48 months at an interest rate of 6.86% and contains a bargain
purchase option.
In October 2004, we borrowed $13,000,000 under a 6.07% mortgage note (the
"Note"). Repayment of the Note is based on a 15-year amortization schedule, with
119 monthly installments of principal and interest of $110,000 and a balloon
payment of $5,800,000 at the end of 10 years. The Note may be prepaid after
2-1/2 years upon the payment of a premium, or, upon certain other events,
without the payment of a premium. The Note is secured by a mortgage on real
property at our distribution center in Greencastle, Indiana and an Assignment of
Lease and Rents and Security Agreement related to the Greencastle facility. The
proceeds from this borrowing will be used to repay the scheduled maturities of
other debt and for other general corporate purposes.
In October 2002, we borrowed $14,000,000 under a 6.53% mortgage note. The
note has a ten-year term with 120 monthly installments of principal of $117,000
plus interest. The mortgage note is secured by land, a building, and certain
fixtures we own at our distribution center in White Marsh, Maryland. The net
proceeds were used to finance a substantial portion of the acquisition of the
White Marsh facility.
69
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
The 7.77% mortgage note has a ten-year term with 119 monthly installments
of principal and interest of $103,000 commencing in January 2002 and a final
payment of any remaining unpaid principal and interest in December 2011. The
mortgage note is secured by land, buildings, and fixtures we own at our offices
in Bensalem, Pennsylvania and by leases and rents we own or receive from tenants
of the Bensalem facility. The net proceeds of $10,851,000 from the mortgage note
were used to repay a portion of borrowings that were outstanding under our
$300,000,000 revolving credit facility.
We assumed a 7.5% Mortgage Note in connection with our CATHERINES
acquisition. The mortgage financing agreement provided for a $6,919,000 mortgage
facility with a seven-year term and monthly payments based on a 20-year
amortization period. The mortgage included a final principal payment of
$5,585,000 on March 1, 2005. The note is secured by a mortgage on the land and
buildings at our CATHERINES office and distribution center in Memphis,
Tennessee. The terms included a pre-payment penalty of 1% of the outstanding
principal. On January 27, 2005, we entered into an amended and restated
promissory note with the lender to extend the final due date of the note, with
monthly payments of principal and interest of $56,000 commencing on February 1,
2005 and a final payment of unpaid principal and interest on March 1, 2006. The
interest rate on the amended and restated promissory note is 7.5% through
February 28, 2005 and thereafter is reset on March 1, June 1, September 1, and
December 1, based on 90-day LIBOR plus 2.25%. There is no prepayment penalty on
the amended and restated promissory note.
In December 2001, the Company borrowed $5.0 million under an 8.15% note.
The note had a three-year term with 35 monthly installments of principal and
interest of $126 thousand commencing in January 2002, and a final payment of any
remaining unpaid principal and interest in December 2004. The note was secured
by equipment and fixtures owned by the Company at its distribution center in
Greencastle, Indiana. The net proceeds from the note were used to repay a
portion of borrowings that were outstanding under our revolving credit facility.
During Fiscal 2005, Fiscal 2004, and Fiscal 2003, we made interest payments
of $13,609,000, $13,572,000, and $12,859,000, respectively. No interest expense
was capitalized during Fiscal 2005, $725,000 of interest expense was capitalized
during Fiscal 2004, and interest expense capitalized in Fiscal 2003 was
immaterial.
Aggregate maturities of long-term debt during the next five fiscal years
are as follows:
(In thousands) 2006 2007 2008 2009 2010
---- ---- ---- ---- ----
Capital lease obligations $13,397 $10,762 $ 6,755 $ 3,590 $ 321
Mortgage notes .......... 2,780 7,847 2,631 2,718 2,812
Other long-term debt .... 242 245 247 250 252
------- ------- ------- ------- -------
$16,419 $18,854 $ 9,633 $ 6,558 $ 3,385
======= ======= ======= ======= =======
Minimum lease payments under capital leases for the next five fiscal years
are: 2006 - $15,317,000; 2007 - $11,870,000; 2008 - $7,258,000; 2009 -
$3,734,000; 2010 - $323,000. Included in these minimum lease payments is
aggregate imputed interest of $3,677,000.
70
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
NOTE 8. STOCKHOLDERS' EQUITY
Our authorized shares consist of 1,000,000 shares of Series Participating
Preferred Stock, $1.00 par value, of which 500,000 shares of Participating
Series A Junior Preferred Stock, $1.00 par value, have been authorized; and
300,000,000 shares of common stock, $.10 par value.
During Fiscal 1998 and Fiscal 2000, our Board of Directors authorized the
repurchase of an aggregate of up to 20,000,000 shares of our common stock. Prior
to Fiscal 2002, we repurchased an aggregate total of 9,105,000 shares of our
common stock at a cost of $41,537,000, which we held as treasury stock. In
Fiscal 2002, we re-issued these treasury shares to Limited Brands in connection
with our acquisition of LANE BRYANT. In Fiscal 2003, our Board of Directors
authorized the repurchase of an additional 6,350,662 shares in connection with
our acquisition of LANE BRYANT from Limited Brands. During Fiscal 2003, we
repurchased an aggregate total of 9,525,993 shares of common stock issued in
connection with our acquisition of LANE BRYANT from Limited Brands for
$65,428,000, and repurchased an aggregate total of 2,740,000 shares of our
common stock on the open market for $18,708,000. The transactions were financed
through the use of existing cash and proceeds from the issuance of our 4.75%
Senior Convertible Notes. The repurchased shares are being held as treasury
shares.
NOTE 9. STOCK OPTION AND STOCK INCENTIVE PLANS
Our Amended and Restated Non-Employee Directors Program was adopted by the
Board of Directors on July 1, 1999, and provided for the grant of options or
awards of up to an aggregate total of 700,000 shares of common stock. This
program includes an automatic annual grant of options to purchase 20,000 shares
of common stock to each non-employee director. The options vest in equal
installments over five years. The exercise price of such options may not be less
than the fair market value of the stock on the date of grant. The program also
provided for a one-time grant of 10,000 shares of restricted common stock to
each newly elected non-employee director. The grants vest in equal amounts over
three years. In June 2002, this plan was amended to provide for annual grants of
3,000 restricted stock units ("RSUs") to each non-employee director. The RSUs
generally vest in full one year after grant. During Fiscal 2004, the RSUs for
24,000 shares that were granted during Fiscal 2003 were settled in cash or
deferred payment for $113,000, based on a market value of $4.72 per share on the
date of vesting.
71
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
Our 2003 Non-Employee Directors Compensation Plan was approved by
shareholders on June 26, 2003. This plan is an additional amendment and
restatement of the Amended and Restated Non-Employee Directors Program adopted
on July 1, 1999. Directors who are not employed by the Company are eligible for
participation in the plan. The Board of Directors administers the plan and
approves the form and amount of awards under the plan. This plan provides for
the grant of stock options, stock appreciation rights ("SARs"), restricted stock
awards, RSUs, or deferred shares of up to an aggregate total of 600,000 shares
of our common stock. No more than 50% of the shares reserved for issuance under
the plan may be issued as restricted stock awards or RSUs. The exercise price of
options or SARs granted under the plan may not be less than the fair market
value of our common stock on the date of grant. The maximum term of options and
SARs issued under the plan is ten years. Non-employee directors may also elect
to receive deferred shares of common stock of an equivalent market value instead
of cash director's fees. The plan includes a provision that options previously
granted under the plan will not be amended or replaced in a transaction that
constitutes a "re-pricing" (as defined in the plan) without shareholder
approval. The plan provides for a one-time restricted stock award of 10,000
shares of common stock that vest in equal amounts over three years to a newly
elected or appointed non-employee director. The plan also provides for annual
grants of options for 6,500 shares of common stock that vest in one year and
annual grants of 3,000 RSUs that vest in one year to each non-employee director
serving at the date of our Annual Meeting of Shareholders. Each RSU represents a
right to receive one share of common stock, or cash of equal value at the
Company's option, at the date of vesting, or, if deferred by the director, at a
later date after termination of service.
Additional information related to our Non-Employee Directors Compensation
Plan is as follows:
2005 2004 2003
---- ---- ----
One-time restricted stock awards granted ..... 10,000 10,000 0
Weighted average market price at date of grant $7.65 $4.57 0
Shares issued under stock awards ............. 13,333 3,334 10,001
Restricted awards outstanding at year-end .... 6,667 10,000 3,334
RSUs granted ................................. 24,658 21,000 24,000
Weighted average market price at date of grant $8.42 $4.78 $8.04
Shares issued under RSUs ..................... 15,658 0 0
RSUs outstanding at year-end ................. 30,000 21,000 24,000
Options exercisable at year-end .............. 333,325 282,400 180,000
Our 2004 Stock Award and Incentive Plan (the "2004 Plan") was approved by
our Board of Directors on April 30, 2004 and by our shareholders on June 24,
2004. This plan replaces our 1993 Employees' Stock Incentive Plan (the "1993
Plan"), our 1999 Associates' Stock Incentive Plan (the "1999 Plan"), and our
2000 Associates' Stock Incentive Plan (the "2000 Plan") (see below). This plan
provides for the grant of options (including both incentive and non-qualified
stock options), restricted stock, stock appreciation rights ("SARs"), restricted
stock units ("RSUs"), and a variety of other types of awards of up to an
aggregate of 6,500,000 shares of our common stock, together with shares
remaining available under the 1993 Plan and shares recaptured from outstanding
awards under the 1993 Plan, 1999 Plan, and 2000 Plan. Of the aggregate shares
available, up to 2,000,000 shares may be issued in connection with "full-value"
awards (equity awards other than options, SARs, or other awards for which a
participant does not pay at least the grant-date fair market value of the
award). Additional shares may be used for
72
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
full-value awards by reducing the number of shares that remain available for
options, SARs, and other non-full-value awards by three shares for each share to
be used for full-value awards in excess of the 2,000,000 share limit. The
aggregate number of shares subject to awards granted under the 2004 Plan in any
fiscal year will not exceed 2% of our common stock on a fully diluted basis as
of the last day of the preceding fiscal year. The 2004 Plan prohibits the
amendment or replacement of options or SARs granted under the plan in a
transaction that constitutes a re-pricing under generally accepted accounting
principles without shareholder approval. The plan will be administered by our
Board of Directors and its Compensation and Stock Option Committee. Additional
information related to the 2004 Plan is as follows:
2005
----
Restricted stock awards granted...................... 270,900
Weighted average market price at date of grant
for awards granted.............................. $9.00
Shares issued under stock awards..................... 0
Cancellations of restricted stock awards............. 0
Restricted awards outstanding at year-end............ 270,900
Options exercisable at year-end...................... 0
Our Board of Directors adopted the 2000 Associates' Stock Incentive Plan
(the "2000 Plan") on January 27, 2000. The 2000 Plan provided for the grant of
options, SARS, restricted stock awards, deferred stock, or other stock-based
awards of up to an aggregate total of 5,000,000 shares of our common stock. The
form of the grants, exercise price, and maximum term, where applicable, were at
the discretion of the Board of Directors and its Compensation and Stock Option
Committee. Additional information related to the 2000 Plan is as follows:
2005 2004 2003
---- ---- ----
Restricted stock awards granted .............. 439,500 97,000 111,000
Weighted average market price at date of grant
for awards granted ...................... $7.31 $3.36 $5.98
Shares issued under stock awards ............. 23,572 27,599 30,545
Cancellations of restricted stock awards ..... 21,903 28,450 35,180
Restricted awards outstanding at year-end .... 623,816 229,791 188,840
Options exercisable at year-end .............. 1,214,113 1,891,271 711,630
Our Board of Directors adopted the 1999 Associates' Stock Incentive Plan
(the "1999 Plan") in February 1999. The 1999 Plan provided for the grant of
options to purchase up to an aggregate total of 1,000,000 shares of our common
stock. The exercise price of such options could not be less than the fair market
value at the date of grant. The maximum term of options issued under the plan is
ten years. As of January 29, 2005, January 31, 2004, and February 1, 2003,
191,200 options, 321,800 options, and 250,800 options, respectively, were
exercisable under this plan.
73
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
As a result of our adoption of the 2004 Stock Award and Incentive Plan (see
above), no further options or awards may be granted under the 2000 Plan or the
1999 Plan.
Our 1993 Employees' Stock Incentive Plan provided for the grant of options
or awards for up to an aggregate total of 10,898,726 shares of common stock plus
1,843,258 shares available but unissued under our discontinued 1990 Employees'
Stock Incentive Plan. The form of the grants and exercise price, where
applicable, were at the discretion of our Board of Directors and its
Compensation and Stock Option Committee. The maximum term of options issued
under the 1993 Plan is ten years. As a result of the adoption of the 2004 Stock
Award and Incentive Plan on April 30, 2004, we no longer intend to issue options
or awards under this plan. Additional information related to this plan is as
follows:
2005 2004 2003
---- ---- ----
Restricted stock awards granted .............. 393,000 52,500 54,500
Weighted average market price at date of grant
for awards granted ...................... $7.20 $3.48 $6.34
Shares issued under stock awards ............. 157,760 88,060 95,278
Cancellations of restricted stock awards ..... 11,400 18,900 2,400
Restricted awards outstanding at year-end .... 730,120 506,280 560,740
Options exercisable at year-end .............. 2,127,498 6,398,767 4,681,587
Our 1988 Key Employee Stock Option Plan provides for the grant of options
to our key employees to purchase up to an aggregate total of 3,000,000 shares of
our common stock. The exercise price of options granted under this plan is $1.00
per share. As of January 29, 2005, January 31, 2004, and February 1, 2003,
32,245 options, 55,482 options, and 60,982 options, respectively, were
exercisable under this plan.
Our 1989 Non-Employee Director Stock Option Plan provided for the grant of
options to each member of our Board of Directors who is not an employee of the
Company to purchase up to 30,000 shares of common stock. The exercise price of
such options could not be less than the fair market value of the stock on the
date of grant. As of January 29, 2005, January 31, 2004, and February 1, 2003,
25,000 options, 25,000 options, and 49,000 options, respectively, were
exercisable under this plan. As a result of the adoption of the Amended and
Restated Non-Employee Directors Program on July 1, 1999, we no longer intend to
issue options under this plan.
74
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
The table below summarizes the activity in all Stock Option Plans:
Average Option
Option Option Prices
Shares Price Per Share
------ ----- ---------
Outstanding at February 2, 2002................ 11,070,130 $ 5.895 $ .500 - $15.813
Granted - option price equal to market price... 3,029,500 6.295 4.351 - 8.460
Granted - option price less than market price.. 11,100 1.000 1.000 - 1.000
Canceled/forfeited............................. (681,571) 8.156 1.000 - 15.813
Exercised...................................... (1,326,561) 4.393 .500 - 6.813
---------- ------- ----------------
Outstanding at February 1, 2003................ 12,102,598 6.028 1.000 - 15.813
Granted - option price equal to market price... 1,121,375 3.600 2.760 - 6.640
Granted - option price less than market price.. 44,300 1.000 1.000 - 1.000
Canceled/forfeited............................. (913,828) 8.517 1.000 - 15.125
Exercised...................................... (220,459) 3.882 1.000 - 6.000
---------- ------- ----------------
Outstanding at January 31, 2004................ 12,133,986 5.637 1.000 - 12.125
Granted - option price equal to market price... 101,925 7.573 6.590 - 8.440
Granted - option price less than market price.. 12,000 1.000 1.000 - 1.000
Canceled/forfeited............................. (493,811) 10.019 1.000 - 15.125
Exercised...................................... (6,249,634) 5.390 1.000 - 8.460
---------- ------- ----------------
Outstanding at January 29, 2005................ 5,504,466 $ 5.549 $1.000 - $ 8.460
========== ======= ================
The weighted average grant date fair values for options and awards granted,
using the Black-Scholes model and assumptions described under "NOTE 1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES; Common Stock Plans" above, are as follows:
2005 2004 2003
---- ---- ----
Option price equal to market price......... $2.44 $1.14 $2.34
Option price less than market price........ 7.70 3.51 6.23
75
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
The table below summarizes information regarding weighted average exercise
price and weighted average remaining contractual life in years for options
outstanding and options exercisable as of January 29, 2005 for the ranges of
exercise prices shown:
Weighted
Weighted Average
Average Remaining
Option Option Life
Ranges of Option Prices Shares Price (Years)
----------------------- ------ ----- -------
$0.00 - $1.00:
Options outstanding.............. 97,369 $1.000 6.32
Options exercisable.............. 32,245 1.000
$1.01 - $5.00:
Options outstanding.............. 1,518,246 $3.738 2.89
Options exercisable.............. 1,446,588 3.744
$5.01 - $8.46:
Options outstanding.............. 3,888,851 $6.370 4.89
Options exercisable.............. 2,444,548 6.350
At January 29, 2005, the following shares were available for grant under
our various stock plans: 2004 Stock Award and Incentive Plan - 9,028,954 shares;
2003 Non-Employee Directors Compensation Plan - 445,417 shares; and 1988 Key
Employee Stock Option Plan - 138,535 shares.
The shares issued and options granted under the above plans are subject to
forfeiture if the employees do not remain employed by us for a specified period
of time. Under the 1989 Non-Employee Director Stock Option Plan and the 2003
Non-Employee Directors Program, shares issued and options granted are subject to
forfeiture if the individual does not remain a Director of the Company for a
specified period of time except, under certain circumstances, in the case of
retirement or voluntary termination.
NOTE 10. EMPLOYEE STOCK PURCHASE PLAN
Our 1994 Employee Stock Purchase Plan permits employees to purchase shares
of our common stock during quarterly offering periods at a price equal to 85% of
the lower of the stock's market price on the first day of, or the fifth business
day after the end of, the offering period. Employees purchase shares through
accumulation of payroll deductions of up to 10% of the employee's compensation
during each offering period. An aggregate total of 2,000,000 shares are reserved
for grant under this plan. During Fiscal 2005, Fiscal 2004, and Fiscal 2003,
72,350 shares, 106,457 shares, and 109,269 shares, respectively, were purchased
under the plan. The weighted average grant date market value for shares
purchased during Fiscal 2005, Fiscal 2004, and Fiscal 2003 was $7.23, $4.57, and
$7.13 per share, respectively. At January 29, 2005, 1,303,704 shares were
available for future purchases under this plan.
76
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
NOTE 11. SHAREHOLDER RIGHTS PLAN
On April 12, 1999, pursuant to a Rights Agreement between the Company and
American Stock Transfer & Trust Company, as Rights Agent, our Board of Directors
declared a dividend distribution of one Right for each outstanding share of our
common stock, payable upon the close of business on April 26, 1999. Each Right
entitles the registered holder to purchase from us one three-hundredth of a
share of Series A Junior Participating Preferred Stock, or, under certain
circumstances, a combination of securities and assets of equivalent value, at a
purchase price of $20.00, subject to adjustment. The purchase price may be paid
in cash or, if we permit, by the delivery of Rights under certain circumstances.
The description and terms of the Rights are set forth in the Rights Agreement.
Initially, ownership of the Rights will be evidenced by the certificates
representing shares of common stock then outstanding, and no separate Rights
certificates will be distributed. The Rights will separate from the common stock
and a "Distribution Date" will occur upon the earlier of: (i) 10 days following
a public announcement that a person or group of affiliated or associated persons
(an "Acquiring Person") has acquired, or obtained the right to acquire,
beneficial ownership of 20% or more of our outstanding common stock (the "Stock
Acquisition Date"); or (ii) the close of business on such date as may be fixed
by our Board of Directors after the commencement of a tender offer or exchange
offer that would result in a person or group beneficially owning 20% or more of
our outstanding common stock. Until the Distribution Date: (i) the Rights will
be evidenced by the certificates representing shares of common stock and will be
transferred with, and only with, such certificates; (ii) certificates issued
after April 26, 1999 will contain a notation incorporating the Rights Agreement
by reference; and (iii) the surrender for transfer of any certificates for our
common stock outstanding will also constitute the transfer of the Rights
associated with the common stock represented by such certificate.
In the event that at any time following the Distribution Date a person
becomes an Acquiring Person, each holder of a Right will thereafter have the
right to receive, upon exercise, our common stock (or, in certain circumstances,
cash, property, or other securities of the Company) having a value equal to two
times the exercise price of the Right. In lieu of requiring payment of the
purchase price upon exercise of the Rights following any such event, we may
permit the holders simply to surrender the Rights under certain circumstances,
in which event they will be entitled to receive our common stock (and other
property, as the case may be) with a value of 50% of what could be purchased by
payment of the full purchase price. Notwithstanding any of the foregoing, all
Rights that are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by the Acquiring Person will be null and
void. Rights are not exercisable until such time as the Rights are no longer
redeemable by us as set forth in the Rights Agreement.
In the event that, at any time following the Stock Acquisition Date: (i) we
are acquired in a merger or other business combination transaction in which we
are not the surviving corporation (other than a merger that is described in, or
that follows a tender offer or exchange offer described above); or (ii) 50% or
more of our assets or earning power is sold or transferred, each holder of a
Right (except Rights that previously have been voided as set forth above) shall
thereafter have the right to receive, upon exercise, common shares of the
acquiring company having a value equal to two times the exercise price of the
Right. Again, provision is made to permit surrender of the Rights in exchange
for one-half of the value otherwise purchasable. The events set forth in this
paragraph and above are referred to as the "Triggering Events."
77
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
The purchase price payable and the number of shares of our common stock or
other securities or property to be issued upon exercise of the Rights are
subject to certain anti-dilution adjustments. With certain exceptions, no
adjustment in the purchase price will be required until cumulative adjustments
amount to at least 1% of the purchase price. Instead of fractional shares of our
common stock, an adjustment in cash will be made based on the market price of
our common stock on the last trading date before the date of exercise.
At any time until ten days following the Stock Acquisition Date, we may
redeem the Rights in whole, but not in part, at a redemption price of $.01 per
Right, subject to adjustment. Our Board of Directors may extend the ten-day
period as long as the Rights are still redeemable. Immediately upon the order of
our Board of Directors to redeem the Rights, the Rights will terminate and the
holders of Rights will only be able to receive the redemption price. Until a
Right is exercised, the holder of the Right will have no rights as a shareholder
of the Company, including, without limitation, the right to vote or to receive
dividends.
NOTE 12. CUSTOMER LOYALTY CARD PROGRAMS
We offer our customers various loyalty card programs. Customers that join
these programs are entitled to various benefits, including discounts and rebates
on purchases during the membership period. Customers generally join these
programs by paying an annual membership fee. We recognize revenue from these
loyalty programs as sales over the life of the membership period based on when
the customer earns the benefits and when the fee is no longer refundable. We
recognize costs we incur in connection with administering these programs as cost
of goods sold when incurred.
During Fiscal 2004, we introduced a FASHION BUG customer loyalty card
program that we operate under our FASHION BUG proprietary credit card program.
Like our other loyalty programs, this program entitles customers to various
rebates, discounts, and other benefits upon payment of an annual membership fee.
This program also provides customers with the option to cancel their membership
within 90 days, entitling them to a full refund of their annual fee.
Additionally, after 90 days, customers that cancel their membership are entitled
to a pro rata fee refund based on the number of months remaining on the annual
membership. Accordingly, we recognize 25% of the annual membership fee as
revenue after 90 days, with the remaining fee recognized on a pro rata basis
over nine months. During Fiscal 2005 and Fiscal 2004, we recognized revenues of
$7,594,000 and $7,750,000, respectively, in connection with this program. As of
the end of Fiscal 2005 and Fiscal 2004, we accrued $700,000 and $1,200,000,
respectively, for the estimated costs of discounts earned and coupons issued and
not redeemed.
Our CATHERINES brand also offers a loyalty card program. During Fiscal
2005, Fiscal 2004, and Fiscal 2003, we recognized revenues of $7,470,000,
$7,507,000, and $7,341,000, respectively, in connection with this program.
78
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
Under a previous FASHION BUG customer loyalty card program, we recognized
revenues from annual membership fees as sales over the life of the membership
based on discounts earned by the customer. For customers who did not earn
discounts during the membership period that exceeded the card fee, the
difference between the membership fee and discounts earned was recognized as
revenue upon the expiration of the annual membership period. Upon early
cancellation of the loyalty card, refunds of membership fees were reduced by the
amount of any discounts granted to the member under the program. During Fiscal
2004 and Fiscal 2003, we recognized revenues of $6,377,000 and $21,828,000,
respectively, in connection with this program. We discontinued the issuance of
new cards under this program in December 2002, and we terminated the program
during Fiscal 2004.
NOTE 13. EMPLOYEE RETIREMENT BENEFIT PLANS
We provide a comprehensive retirement benefit program for our employees.
This program provides for a noncontributory profit-sharing plan that covers
substantially all full-time employees who meet age and service requirements.
Contributions to this plan are completely discretionary and are determined by
our Board of Directors on an annual basis.
The program also includes a 401(k) employee savings plan under which
eligible participating employees may elect to contribute up to 80% of their
compensation to an investment trust. The 401(k) plan includes a matching Company
contribution of 50% of the participant's elective contribution on up to 6% of
the participant's compensation. Participating employees are immediately vested
in their own contributions. Full vesting in the matching Company contribution
occurs on the earlier of the participant's attainment of 6 years of service or
upon retirement, death, or disability, as defined in the plan. Company matching
contributions are made in cash, and the available trust investment options do
not include investment in our own common stock.
The total expense for the above plans was $2,317,000, $2,619,000, and
$2,582,000 for Fiscal 2005, Fiscal 2004, and Fiscal 2003, respectively.
We also provide a non-qualified deferred compensation plan to officers and
certain key executives. Under this plan, participants may contribute up to 77%
of their base compensation and 100% of bonus compensation. This plan includes a
matching Company contribution of 50% of the participant's contribution on up to
6% of the participant's compensation, less any matching contributions made for
the participant under our 401(k) plan. The total expense for this plan was
$1,153,000, $1,155,000, and $854,000 for Fiscal 2005, Fiscal 2004, and Fiscal
2003, respectively.
During Fiscal 2004, we established a non-qualified defined contribution
supplemental retirement plan for certain management and key executives. Under
this plan, we contribute amounts to participant accounts based on age and years
of plan service, as well as earnings as defined in the plan. The total expense
for this plan was $1,847,000 for Fiscal 2005 and $975,000 for Fiscal 2004.
79
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
NOTE 14. EXPENSES RELATED TO COST REDUCTION PLAN
On March 18, 2003, we announced a cost reduction plan, designed to take
advantage of the centralization of all corporate administrative services
throughout the Company and to realize certain efficiencies, in order to improve
profitability. We accounted for the plan in accordance with the provisions of
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." Costs incurred in connection with the plan, payments/settlements of
those costs, and the remaining accrual at year end, were as follows:
Expenses Payments/ Ending
(In thousands) Incurred Settlements Accrual
-------- ----------- -------
Fiscal 2005.............. $ 605 $(3,201) $ 0
Fiscal 2004.............. 11,534 (8,938) 2,596
Costs incurred in connection with this plan during Fiscal 2004 included
$2,980,000 of workforce reduction costs, $3,691,000 of lease termination and
related costs, $4,195,000 of accelerated depreciation (non-cash charge), and
$668,000 of other facility closure costs. Workforce reduction costs represent
involuntary termination benefits and retention bonuses. Employees affected by
the plan were notified during the first quarter of Fiscal 2004. During Fiscal
2004, we terminated 349 employees in connection with workforce reductions at our
corporate and brand home offices and the closing of our Memphis, Tennessee
distribution center, our Hollywood, Florida credit operations, and our remaining
MONSOON stores. We accrued the severance benefit in accordance with SFAS No. 146
and recognized retention bonuses ratably over the employees' remaining service
period. Lease termination and related costs mainly represent the estimated fair
value of the remaining lease obligations at the Hollywood, Florida facility,
reduced by estimated sublease income. In accordance with SFAS No. 146, we
recognized the present value of the remaining lease obligation less estimated
sublease income related to the Hollywood, Florida facility in June 2003 when we
closed the facility.
Accelerated depreciation costs represent the acceleration of depreciation
of the net book value of the assets at our Memphis distribution center and our
Hollywood credit operations, which were closed in June 2003, to their estimated
net realizable values. During the first quarter of Fiscal 2004, we made the
decision to sell the Memphis, Tennessee distribution center, and began
accelerating the depreciation of the asset to its estimated net realizable value
as of its expected cease-use date of June 2003. During the third quarter of
Fiscal 2004, we began to evaluate alternative uses for the facility, and began
to depreciate the then-current carrying amount of the asset over its estimated
useful life. During the fourth quarter of Fiscal 2005, we entered into an
agreement to lease the Memphis facility to a third party for a three-year
period.
As of January 31, 2004, the accrued lease termination costs related to the
closing of the Hollywood facility were $2,596,000. In October 2004, in
accordance with SFAS No. 146, we revised our estimated sublease income on the
remaining lease obligation and recognized an additional expense of $605,000. In
December 2004, we settled our remaining lease obligation for the Hollywood
facility.
80
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
NOTE 15. NET INCOME (LOSS) PER SHARE
(In thousands) 2005 2004 2003
---- ---- ----
(Restated) (Restated)
Basic weighted average common shares outstanding ................. 116,196 112,491 113,810
Dilutive effect of assumed conversion of convertible notes ....... 15,182 15,182 15,655
Dilutive effect of stock options ................................. 1,796 885 1,472
------- ------- -------
Diluted weighted average common shares and equivalents outstanding 133,174 128,558 130,937
======= ======= =======
Income before cumulative effect of accounting changes ............ $64,526 $38,042 $43,012
Decrease in interest expense from assumed conversion of notes,
net of income taxes ......................................... 4,539 4,334 4,700
------- ------- -------
Income before cumulative effect of accounting changes
used to determine diluted earnings per share ................ 69,065 42,376 47,712
Cumulative effect of accounting changes, net of income taxes ..... 0 0 (49,098)
------- ------- -------
Net income (loss) used to determine diluted earnings per share ... $69,065 $42,376 $(1,386)
======= ======= =======
Options with weighted average exercise price greater than market price,
excluded from computation of diluted earnings per share:
2005 2004 2003
---- ---- ----
Number of shares (thousands).................. 369 8,255 4,583
Weighted average exercise price per share..... $8.28 $6.63 $7.66
Grants of stock awards under our restricted stock award programs generally
require continuing employment for a specified period of time as a condition for
vesting of the award. Grants that have not vested and are subject to a risk of
forfeiture are included in the calculation of diluted earnings per share using
the treasury stock method if the impact of the award is dilutive. Upon vesting,
shares issued under these award programs are included in the calculation of
basic earnings per share.
81
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
NOTE 16. ASSET SECURITIZATION
We record gains or losses on the securitization of our FASHION BUG credit
card receivables based on the estimated fair value of the assets retained and
liabilities incurred in the sale. Gains represent the present value of the
estimated cash flows that we have retained over the estimated outstanding period
of the receivables. This excess cash flow essentially represents an
"interest-only" ("I/O") strip, consisting of the present value of the finance
charges and late fees in excess of the amounts paid to certificate holders,
credit losses, and service fees. During Fiscal 2005, Fiscal 2004, and Fiscal
2003, we recognized the following activity related to the I/O strip:
(In thousands) 2005 2004 2003
---- ---- ----
Additions to the I/O strip................. $12,396 $13,638 $18,447
Amortization and valuation adjustments..... 11,214 14,000 14,856
Value of the I/O strip at end of year...... 10,390 9,208 9,570
In addition, we recognized a servicing liability in Fiscal Years 2005,
2004, and 2003 because the servicing fees we expect to receive from the
securitizations do not provide adequate compensation for servicing the
receivables. The servicing liability represents the present value of the excess
of our cost of servicing over the servicing fees received, and is recorded at
its estimated fair value. Because quoted market prices are generally not
available for the servicing of proprietary credit card portfolios of comparable
credit quality, we determine the fair value of the cost of servicing by
calculating all costs associated with billing, collecting, maintaining and
providing customer service during the expected life of the securitized credit
card receivable balances. We discount the amount of these costs in excess of the
servicing fees over the estimated life of the receivables sold. The discount
rate and estimated life assumptions used for the present value calculation of
the servicing liability are consistent with those used for the I/O strip. During
Fiscal 2005, Fiscal 2004, and Fiscal 2003, we recognized the following activity
related to the servicing liability:
(In thousands) 2005 2004 2003
---- ---- ----
Additions to the servicing liability............ $2,828 $4,011 $2,496
Amortization of the servicing liability......... 3,474 2,141 3,375
Value of the servicing liability at end of year. 2,404 3,050 1,180
We amortize the I/O strip and servicing liability on a straight-line basis
over the expected life of the credit card receivables, which is generally less
than one year. We estimate the expected life primarily by using the historical
average of principal payments as a percent of outstanding trust receivables
sold.
82
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
The following table presents additional information relating to the Trust
for Fiscal 2005, Fiscal 2004, and Fiscal 2003:
(In thousands) 2005 2004 2003
---- ---- ----
Proceeds from sales of new receivables to Trust .............. $335,875 $331,718 $384,162
Collections reinvested in revolving-period securitizations ... 409,796 422,793 450,363
Cash flows received on retained interests .................... 46,999 41,951 45,708
Servicing fees received ...................................... 4,826 6,634 5,723
Net credit losses ............................................ 18,003 30,850 39,312
Investor certificates outstanding at end of year ............. 295,750 269,425 301,300
Credit card accounts 90 or more days delinquent at end of year 7,952 9,795 13,102
We are the servicer of the Trust, and we receive a servicing fee of
approximately 2% of the investor interest. The investor certificates outstanding
as of January 29, 2005 mature as follows: $15,750,000 in the fiscal year ending
January 28, 2006, $63,500,000 in the fiscal year ending February 2, 2008,
$36,500,000 in the fiscal year ending January 31, 2009, $144,900,000 in the
fiscal year ending January 30, 2010, and $35,100,000 in the fiscal year ending
January 29, 2011. Our certificates and retained interests in our
securitizations, which aggregated $52,485,000 and $55,363,000 at January 29,
2005 and January 31, 2004, respectively, are generally subordinated in right of
payment to certificates issued by the Trust to third-party investors. Our
obligation to repurchase receivables sold to the Trust is limited to those
receivables that, at the time of their transfer, fail to meet the Trust's
eligibility standards under normal representations and warranties. To date, our
repurchases of receivables pursuant to this obligation have been insignificant.
During Fiscal 2002, the Trust issued $100,000,000 of new five-year
asset-backed certificates ("Series 2002-1") in a private placement, of which
$80,000,000 had been sold to investors as of January 31, 2004. The
weighted-average fixed interest rate on the certificates sold is 4.68%. These
certificates replaced an $83,500,000 securitization series that matured during
the fourth quarter of Fiscal 2003. During Fiscal 2005, we sold the remaining
$20,000,000 of Series 2002-1 certificates that we had been holding as a retained
interest and were included in the $55,688,000 of short-term available-for-sale
securities we held at January 31, 2004. Of the $20,000,000 of Series 2002-1
certificates sold, $9,500,000 were sold at a fixed interest rate. The weighted
average interest rate on the fixed-rate certificates sold is 4.93%.
During Fiscal 2004, the Trust closed on a new conduit credit card
securitization facility of $132,000,000 that will provide additional funding of
up to $100,000,000 for a term of up to two years, subject to an annual renewal.
As of January 29, 2005, no credit card receivables were funded under this
facility.
On August 5, 2004, the Trust issued $180,000,000 of new five-year
asset-backed certificates ("Series 2004-1") in a private placement under Rule
144A. Of the $180,000,000 of certificates issued, $161,100,000 were sold to
investors and we held $18,900,000 as a retained interest. The certificates pay
interest to investors on a floating-rate basis tied to one-month LIBOR.
Concurrently, the Trust entered into a series of fixed-rate interest rate hedge
agreements with respect to the $161,100,000 of certificates sold to investors.
The blended weighted-average interest rate on the hedged certificates is 4.90%.
On August 5, 2004, the Trust used $61,500,000 of the proceeds to pay down other
securitization series and placed the remaining proceeds of $118,500,000 into a
pre-funding cash account. The Trust is using the proceeds from this pre-funding
cash account to pay down Series 1999-1 (which is
83
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
currently in its amortization period) as well as to provide financing for
additional receivables, including the acquisition of the CATHERINES proprietary
credit card portfolio in March 2005 (see below). During Fiscal 2005, the Trust
used $72,800,000 of cash from the pre-funding cash account to fund the Series
1999-1 amortization. On August 24, 2004, we sold to investors $9,450,000 of the
$18,900,000 we held as a retained interest.
Our management uses key valuation assumptions in determining the fair value
of our I/O strip. We estimate the values for these assumptions using historical
data, the impact of the current economic environment on the performance of the
receivables sold, and the impact of the potential volatility of the current
market for similar instruments in assessing the fair value of the retained
interests. The key assumptions used to value our retained interest were as
follows:
January 29, January 31,
2005 2004
---- ----
Payment rate........................... 11.1% 11.4%
Residual cash flows discount rate...... 14.5% 13.5%
Net credit loss percentage............. 10.5% 12.5%
Average life of receivables sold....... 0.8 years 0.7 years
The following table presents the decrease in our I/O strip receivable that
would result from hypothetical adverse changes of 10% and 20% in the assumptions
used to determine the fair value of the I/O strip. This information is presented
in accordance with the requirements of SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities."
(In thousands) 10% Change 20% Change
---------- ----------
Payment rate.......................... $888 $1,670
Residual cash flows discount rate..... 40 80
Credit loss percentage................ 879 1,746
Charming Shoppes Receivables Corp. ("CSRC") and Charming Shoppes Seller,
Inc. ("CSSI"), our consolidated wholly-owned indirect subsidiaries, are separate
special purpose entities created for the securitization facilities. As of
January 29, 2005, CSRC held $17,325,000 of Charming Shoppes Master Trust
certificates and retained interests and CSSI held retained interests of
$10,390,000 (both of which are included in the $52,857,000 of short-term
available-for-sale securities we held at January 29, 2005 - see "NOTE 5.
AVAILABLE-FOR-SALE SECURITIES" above). 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.
84
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
We have a non-recourse agreement under which a third party provides an
accounts receivable proprietary credit card sales accounts receivable funding
facility for our LANE BRYANT brand. This funding facility was scheduled to
expire in January 2006. In January 2005, we entered into an amendment to the
agreement which, among other things, extends the term of the agreement to
October 2007. Under this agreement, we have the right to repurchase the
receivables portfolio and the right to operate the LANE BRYANT proprietary
credit card program from the third party upon termination of the agreement. For
our CATHERINES brand, we also had a similar agreement with another third party
that was scheduled to expire in January 2005. In January 2004, in accordance
with the terms of the Merchant Services Agreement pursuant to which the
CATHERINES proprietary credit cards were issued, we provided one year's notice
to the third party bank in order to exercise our option to terminate the
agreement and to purchase the portfolio. In July 2004, we entered into an
amendment to the agreement which, among other things, extended the term of the
agreement to March 2005. Spirit of America National Bank (our wholly-owned
credit card bank) purchased the CATHERINES credit card portfolio in March 2005
for approximately $56,600,000 (subject to adjustment). The purchase was funded
through our securitization facilities, including a portion of the proceeds from
the sale of Series 2004-1 certificates under that securitization facility (see
above).
Under these agreements, the third parties reimburse(d) us daily with
respect to the proprietary credit card sales generated by the respective store's
credit card accounts. Additional information for Fiscal 2005, Fiscal 2004, and
Fiscal 2003 regarding these agreements is as follows:
(In thousands) 2005 2004 2003
---- ---- ----
Net funding received from sales of receivables:
LANE BRYANT .............................. $284,426 $262,004 $251,619
CATHERINES ............................... 96,717 98,900 113,526
Net accounts receivable balance held by third
party at end of year:
LANE BRYANT .............................. 199,098 198,272 195,326
CATHERINES ............................... 58,167 70,416 85,754
85
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
NOTE 17. LEASES
We lease substantially all of our stores under non-cancelable operating
lease agreements. Generally, these leases have initial periods of 5 to 20 years
and contain provisions for co-tenancies, renewal options, additional rents based
on a percentage of sales, and payment of real estate taxes and common area
charges. We also lease certain other buildings and equipment.
Our rent expense was:
(In thousands) 2005 2004 2003
---- ---- ----
(Restated) (Restated)
Minimum rent .. $193,256 $192,902 $199,429
Contingent rent 32,709 31,846 32,134
-------- -------- --------
$225,965 $224,748 $231,563
======== ======== ========
Minimum annual rent commitments for all non-cancelable leases for the next
five fiscal years and thereafter are: Fiscal 2006 - $194,163,000; Fiscal 2007 -
$151,414,000; Fiscal 2008 - $120,591,000; Fiscal 2009 - $95,639,000; Fiscal 2010
- $66,532,000; Thereafter - $120,403,000.
Rent expense includes charges from Limited Brands for office and
distribution center space in Reynoldsburg, Ohio under agreements which expire in
February 2006 for the office space, and which expired in February 2004 for the
distribution center space. These charges approximate market rates. The minimum
annual rent commitments shown above include $1,875,000 for Fiscal 2006 and
$156,000 for Fiscal 2007 to be paid under the office space agreement. The
distribution center in Reynoldsburg, Ohio was replaced by our White Marsh,
Maryland distribution center in February 2004.
In January 2005, we entered into an agreement with a separate third party
that provides for the leasing of a 135,000 square foot facility in Columbus,
Ohio, which will serve as a new home office for LANE BRYANT. Minimum annual rent
under the lease for the Columbus facility will be $1,704,000 per annum in year
one through year five and $1,759,000 in year six through year ten. The lease
will commence on the later of January 20, 2006 or upon substantial completion of
shell work and tenant improvements. The lease provides for two five-year renewal
periods and an option to purchase, and contains customary termination rights.
LANE BRYANT currently subleases 107 properties from Limited Brands pursuant
to a Master Sublease. The properties subject to the Master Sublease were
operated as LANE BRYANT stores prior to our acquisition of LANE BRYANT. We have
guaranteed the obligations of LANE BRYANT under the Master Sublease. In
connection with such guaranty, we have entered into an agreement with Limited
Brands that requires us to comply with certain financial covenants restricting
the incurrence of additional debt and payments to shareholders. The minimum
annual rent commitments shown above include amounts payable under the LANE
BRYANT master sublease with Limited Brands which we have guaranteed, as follows:
Fiscal 2006 - $12,962,000; Fiscal 2007 - $8,215,000; Fiscal 2008 - $4,791,000;
Fiscal 2009 - $4,098,000; Fiscal 2010 - $2,036,000; Thereafter - $4,920,000.
86
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of the carrying amounts and estimated fair
values of our financial instruments:
January 29, 2005 January 31, 2004
---------------- ----------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
------ ----- ------ -----
Assets:
Cash and cash equivalents ............. $273,049 $273,049 $123,781 $123,781
Available-for-sale securities ......... 53,097 53,097 70,209 70,209
Liabilities:
4.75% Senior Convertible Notes due 2012 150,000 164,115 150,000 150,164
6.07% mortgage note, due October 2014 . 12,821 12,869 0 0
6.53% mortgage note, due November 2012 10,850 10,858 12,250 12,205
7.77% mortgage note, due December 2011 9,564 10,072 10,039 10,531
7.5% mortgage note, due March 2006 .... 5,605 5,605 5,840 6,053
8.15% note, due December 2004 ......... 0 0 2,494 2,526
Other long-term debt .................. 1,399 1,201 1,540 1,278
The fair value of cash and cash equivalents approximates their carrying
amount because of the short maturities of such instruments. The fair value of
available-for-sale securities is based on quoted market prices of the
securities, except for certain low-income housing partnerships that have no
available bid/ask or sales prices as they are not traded in the open market. The
fair values of our convertible notes are based on quoted market prices for the
securities. The fair values of the mortgage notes and other long-term debt are
based on estimated current interest rates that we could obtain on similar
borrowings.
NOTE 19. RESTRUCTURING CREDIT
In January 2002, we announced a restructuring plan, including a number of
initiatives designed to position the Company for increased profitability and
growth in the plus-size businesses. The major components of the plan included:
(i) the closing of 77 THE ANSWER/ADDED DIMENSIONS stores and the conversion of
approximately 20% of the ADDED DIMENSIONS stores to CATHERINES stores; (ii) the
closing of 130 under-performing FASHION BUG stores; and (iii) the conversion of
44 FASHION BUG store locations to LANE BRYANT stores. The restructuring plan
resulted in a pre-tax charge of $37,708,000 in Fiscal 2002. In connection with
the restructuring plan, we closed 124 FASHION BUG stores, converted 30 FASHION
BUG stores to LANE BRYANT stores, closed 65 CATHERINES/ADDED DIMENSIONS stores,
and converted 12 ADDED DIMENSIONS stores to CATHERINES. We completed the
restructuring program during Fiscal 2003 and recognized a pre-tax restructuring
credit of $4,813,000, which was primarily a result of our ability to negotiate
lease terminations on terms more favorable than our original estimates.
87
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 29, 2005
(Continued)
NOTE 20. QUARTERLY FINANCIAL INFORMATION (Unaudited)
(In thousands, except First Second Third Fourth
per share amounts) Quarter(1) Quarter(1) Quarter(1) Quarter(1)
---------- ---------- ---------- ----------
Fiscal 2005
Net sales..................... $592,738 $611,737 $541,759 $586,100
Gross profit.................. 190,964(2) 180,224(2) 163,226 157,672
Net income.................... 26,249 27,059 6,353 4,865
Basic net income per share.... .23 .23 .05 .04
Diluted net income per share.. .21 .21 .05 .04
Fiscal 2004
Net sales..................... $564,286 $605,456 $530,291 $585,647
Gross profit.................. 167,769 176,002 150,839(3) 148,254(3)
Net income.................... 9,040(4) 17,996(4) 1,510(4) 9,496(4)
Basic net income per share.... .08 .16 .01 .08
Diluted net income per share.. .08 .15 .01 .08
--------------------
(1) Gross profit, net income, and per-share amounts for the first three
quarters of Fiscal 2005 and the four quarters of Fiscal 2004 have been
restated (See "NOTE 2. RESTATEMENT OF FINANCIAL STATEMENTS" above.
(2) Includes reclassifications to conform to third-quarter and full-year
presentation.
(3) Includes reclassifications to conform to Fiscal 2005 presentation.
(4) Includes expenses related to cost reduction plan of $4,431 ($2,707
after-tax) in First Quarter, $6,389 ($3,904 after-tax) in Second Quarter,
$148 ($91 after-tax) in Third Quarter, and $566 ($410 after-tax) in Fourth
Quarter.
88
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in reports we file under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized,
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), as appropriate and in such a manner as to
allow timely decisions regarding required disclosure. We have a Disclosure
Committee, which is made up of several key management employees and reports
directly to the CEO and CFO, to centralize and enhance these controls and
procedures and assist our management, including our CEO and CFO, in fulfilling
their responsibilities for establishing and maintaining such controls and
procedures and providing accurate, timely, and complete disclosure.
As of the end of the period covered by this report on Form 10-K (the
"Evaluation Date"), our Disclosure Committee, under the supervision and with the
participation of management, including our CEO and CFO, carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our management, including our
CEO and CFO, has concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective.
Evaluation of Internal Control Over Financial Reporting
Management's Report on Internal Control Over Financial Reporting as of
January 29, 2005 appears on page 42 of this Report on Form 10-K, and is
incorporated herein by reference. The Report of our Independent Registered
Public Accounting Firm on Internal Control Over Financial Reporting appears on
pages 43 - 44 of this Report on Form 10-K, and is incorporated herein by
reference.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting
that occurred during the fiscal quarter ended January 29, 2005 except for
additional review procedures over the selection and monitoring of appropriate
assumptions and factors affecting our lease accounting that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other Information
Not applicable.
89
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding our directors and executive officers is included
under the captions "Directors Standing for Election", "Biographies of
Directors", "Corporate Governance at Charming Shoppes", "Compensation of
Directors", and "Section 16(a) Beneficial Ownership Reporting Compliance" in our
definitive proxy statement to be filed with the Securities and Exchange
Commission within 120 days of the end of our fiscal year, which is incorporated
herein by reference. Information regarding Executive Officers is included under
"Additional Part I Information - Our Executive Officers," in Part I of this
Report.
We have adopted the Charming Shoppes, Inc. Business Ethics and Standards of
Conduct Policy (the "Policy"), that applies to all of our directors, officers,
and associates, including our principal executive officer, principal financial
officer, and principal accounting officer. The Policy has been filed as Exhibit
14 to this report on Form 10-K. We have also adopted corporate governance
guidelines (the "Guidelines") and charters (the "Charters") for the audit
committee, the compensation and stock option committee, the corporate governance
and nominating committee, and the finance committee of our Board of Directors.
The Policy, Guidelines, and Charters are available on our Internet website,
www.charmingshoppes.com, in the "About Us" section. A copy of the Policy,
Guidelines, and Charters are also available, at no charge, upon written request
to Charming Shoppes, Inc., Attn. Director of Investor Relations, 450 Winks Lane,
Bensalem, PA, 19020.
Our Board of Directors has sole authority for making any amendments to, or
granting waivers from, any provision of the Policy that affects our executive
officers or directors, including our principal executive officer, principal
financial officer, or principal accounting officer. We intend to satisfy the
disclosure requirement under Item 5.05 of Form 8-K regarding any such amendment
or waiver by disclosing the nature of such amendment or waiver in a report on
Form 8-K within four days.
Item 11. Executive Compensation
Information regarding executive compensation is included under the captions
"Management Compensation" and "Report of the Compensation and Stock Option
Committees of the Board of Directors on Executive Compensation", and a five-year
graph of cumulative total shareholder return on our common stock is included
under the caption "Stock Performance Chart," in our definitive proxy statement
to be filed with the Securities and Exchange Commission within 120 days of the
end of our fiscal year, which is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information regarding the security ownership of certain beneficial owners
and management and securities authorized for issuance under equity compensation
plans is included under the captions "Equity Compensation Plan Information" and
"Principal Shareholders and Management Ownership" in our definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days of the end of our fiscal year, which is incorporated herein by reference.
90
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships is included under the caption
"Compensation Committee Interlocks and Insider Participation" in our definitive
proxy statement to be filed with the Securities and Exchange Commission within
120 days of the end of our fiscal year, which is incorporated herein by
reference.
Item 14. Principal Accountant Fees and Services
Information regarding principal accountant fees and services is included
under the caption "Audit and Other Fees" in our definitive proxy statement to be
filed with the Securities and Exchange Commission within 120 days of the end of
our fiscal year, which is incorporated herein by reference.
91
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
The following Consolidated Financial Statements of Charming Shoppes, Inc.
and its subsidiaries are included in Part II, Item 8:
Page
----
Management's Report on Internal Control over Financial Reporting ......... 42
Report of Independent Registered Public Accounting Firm on Internal
Control Over Financial Reporting .................................... 43-44
Report of Independent Registered Public Accounting Firm .................. 45
Consolidated Balance Sheets - January 29, 2005 and January 31, 2004 ...... 46
Consolidated Statements of Operations and Comprehensive Income (Loss) -
Years Ended January 29, 2005, January 31, 2004, and February 1, 2003 47
Consolidated Statements of Stockholders' Equity - Years Ended
January 29, 2005, January 31, 2004, and February 1, 2003 ............ 48
Consolidated Statements of Cash Flows - Years Ended
January 29, 2005, January 31, 2004, and February 1, 2003 ............ 49
Notes to Consolidated Financial Statements ............................... 50
(a)(2) Financial Statement Schedules
All schedules required by Rule 5-04 of Regulation S-X have been omitted as
they are not applicable or are not required.
92
(b) Exhibits, including those incorporated by reference
The following is a list of Exhibits filed as part of this Annual Report on
Form 10-K. Where so indicated, Exhibits that were previously filed are
incorporated by reference. For Exhibits incorporated by reference, the location
of the Exhibit in the previous filing is indicated in parenthesis.
Plan of Acquisition, Reorganization, Arrangement, Liquidation, or Succession
2.1 Stock Purchase Agreement, dated as of July 9, 2001, among Charming
Shoppes, Inc., Venice Acquisition Corporation, LFAS, Inc. and Limited
Brands, Inc., incorporated by reference to Form 8-K of the Registrant
dated August 16, 2001, filed on August 31, 2001. (Exhibit 2.1).
2.2 Services Agreement, dated as of August 16, 2001, between LBH, Inc. and
Limited Brands, Inc., incorporated by reference to Form 8-K of the
Registrant dated August 16, 2001, filed on August 31, 2001. (Exhibit
2.2).
2.3 Covenant Agreement, dated as of August 16, 2001, between Charming
Shoppes, Inc. and Limited Brands, Inc., incorporated by reference to
Form 8-K of the Registrant dated August 16, 2001, filed on August 31,
2001. (Exhibit 2.3).
2.4 Master Sublease, dated as of August 16, 2001, between Limited Brands,
Inc. and Lane Bryant, Inc., incorporated by reference to Form 8-K of the
Registrant dated August 16, 2001, filed on August 31, 2001. (Exhibit
2.4).
2.5 Lease Agreement, dated as of August 16, 2001, by and between
Distribution Land Corp. and Lane Bryant, Inc., incorporated by reference
to Form 8-K of the Registrant dated August 16, 2001, filed on August 31,
2001. (Exhibit 2.5).
2.6 Agreement and Plan of Merger, dated as of November 15, 1999, by and
among Catherines Stores Corporation, Charming Shoppes, Inc., and Rose
Merger Sub, Inc., incorporated by reference to Schedule 14(D)-1 of the
Registrant filed on November 19, 1999. (Item 11(c)(1)).
Articles of Incorporation and By-Laws
3.1 Restated Articles of Incorporation, incorporated by reference to Form
10-K of the Registrant for the fiscal year ended January 29, 1994. (File
No. 000-07258, Exhibit 3.1).
3.2 By-Laws, as Amended and Restated, incorporated by reference to Form 10-Q
of the Registrant for the quarter ended July 31, 1999. (File No.
000-07258, Exhibit 3.2).
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Instruments Defining the Rights of Security Holders, Including Indentures
4.1 Amended and Restated Rights Agreement, dated as of February 1, 2001,
between Charming Shoppes, Inc. and American Stock Transfer & Trust
Company, as Rights Agent, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended February 3, 2001. (File No.
000-07258, Exhibit 4.1).
4.2 Registration Agreement, dated as of August 16, 2001, between Charming
Shoppes, Inc. and Limited Brands, Inc., incorporated by reference to
Form 8-K of the Registrant dated August 16, 2001, filed on August 31,
2001. (File No. 000-07258, Exhibit 4.1).
4.3 Indenture, dated as of May 28, 2002, between Charming Shoppes, Inc. and
Wachovia Bank, National Association, incorporated by reference to Form
10-Q of the Registrant for the quarter ended May 4, 2002. (File No.
000-07258, Exhibit 4.1).
4.4 Registration Rights Agreement, dated as of May 28, 2002, by and among
Charming Shoppes, Inc., as Issuer, and J. P. Morgan Securities, Inc.,
Bear Stearns & Co., Inc., First Union Securities, Inc., Lazard Freres &
Co., LLC, and McDonald Investments, Inc., as Initial Purchasers,
incorporated by reference to Form 10-Q of the Registrant for the quarter
ended May 4, 2002. (File No. 000-07258, Exhibit 4.2).
4.5 Amended and Restated Loan and Security Agreement, dated as of January
29, 2004, by and among Charming Shoppes, Inc., Charming Shoppes of
Delaware, Inc., CSI Industries, Inc., Catherine Stores Corporation, Lane
Bryant, Inc. and FB Apparel, Inc., as Borrowers; Charming Shoppes of
Delaware, Inc., as Borrowers' Agent; Congress Financial Corporation, as
Administrative Agent, Collateral Agent, and Joint Bookrunner; J.P.
Morgan Business Credit Corp., as Co-Documentation Agent, Joint Lead
Arranger, and Joint Bookrunner; Wachovia Bank, National Association, as
Joint Lead Arranger; Bank of America, N.A. and Fleet Retail Group, Inc.,
as Co-Documentation Agents; and The Financial Institutions named
therein, as Lenders, incorporated by reference to Form 8-K of the
Registrant dated February 4, 2004. (File No. 000-07258, Exhibit 99.2).
Our miscellaneous long-term debt instruments and credit facility
agreements, under which the underlying authorized debt is equal to less than 10%
of our consolidated total assets, may not be filed as exhibits to this report.
We agree to furnish to the Commission, upon request, copies of any such
instruments not filed.
Material Contracts
10.1.1 Second Amended and Restated Pooling and Servicing Agreement, dated as of
November 25, 1997, as amended on July 22, 1999, among Charming Shoppes
Receivables Corp., as Seller, Spirit of America, Inc., as Servicer, and
First Union National Bank as Trustee, incorporated by reference to Form
8-K of Charming Shoppes Master Trust and Charming Shoppes Receivables
Corp., (File No. 333-71757) dated July 22, 1999. (Exhibit No. 4.1).
10.1.2 Fourth Amendment, dated as of August 5, 2004, to Second Amended and
Restated Pooling and Servicing Agreement, dated as of November 25, 1997,
as amended on July 22, 1999 and on May 8, 2001, among Charming Shoppes
Receivables Corp., as Seller, Spirit of America, Inc., as Servicer, and
Wachovia Bank, National Association (formerly known as First Union
National Bank) as Trustee, incorporated by reference to Form 10-Q of the
Registrant for the quarter ended July 31, 2004 (File No. 000-07258,
Exhibit 10.4).
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10.1.3 Amendment, dated as of March 18, 2005, to Second Amended and Restated
Pooling and Servicing Agreement, dated as of November 25, 1997, as
amended on July 22, 1999, May 8, 2001, and August 5, 2004, among
Charming Shoppes Receivables Corp., as Seller, Spirit of America, Inc.,
as Servicer, and Wachovia Bank, National Association, as Trustee.
10.1.4 Series 1999-1 Supplement, dated as of July 22, 1999, to Second Amended
and Restated Pooling and Service Agreement, dated as of November 25,
1997, as amended on July 22, 1999, among Charming Shoppes Receivables
Corp., as Seller, Spirit of America, Inc., as Servicer, and First Union
National Bank, as Trustee, for $150,000,000 Charming Shoppes Master
Trust Asset-Backed Certificates Series 1999-1, incorporated by reference
to Form 8-K of Charming Shoppes Master Trust and Charming Shoppes
Receivables Corp., (File No. 333-71757) dated July 22, 1999. (Exhibit
No. 4.2).
10.1.5 Receivables Purchase Agreement, dated as of May 28, 1999, among Charming
Shoppes Seller, Inc. as Seller, Spirit of America, Inc., as Servicer,
Clipper Receivables Corporation, as Purchaser, State Street Capital
Corporation, as Administrator, and State Street Bank & Trust Company, as
Relationship Bank, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended February 2, 2002. (File No.
000-07258, Exhibit 10.1.4).
10.1.6 Series 1999-2 Supplement, dated as of May 28, 1999, to Second Amended
and Restated Pooling and Service Agreement, dated as of November 25,
1997, as amended on July 22, 1999, among Charming Shoppes Receivables
Corp., as Seller, Spirit of America, Inc., as Servicer, and First Union
National Bank, as Trustee, for $55,750,000 Charming Shoppes Master Trust
Asset-Backed Certificates Series 1999-2, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended January 29, 2000.
(File No. 000-07258, Exhibit 10.1.23).
10.1.7 Series 2000-VFC Supplement, dated as of November 9, 2000, to Second
Amended and Restated Pooling and Service Agreement, dated as of November
25, 1997, among Charming Shoppes Receivables Corp., as Seller, Spirit of
America, Inc., as Servicer, and First Union National Bank, as Trustee,
on behalf of the Series 2000-VFC Certificateholders, for up to
$60,122,700 Charming Shoppes Master Trust Series 2000-VFC, incorporated
by reference to Form 10-K of the Registrant for the fiscal year ended
February 3, 2001. (File No. 000-07258, Exhibit 10.1.16).
10.1.8 Certificate Purchase Agreement, dated as of November 9, 2000, among
Charming Shoppes Receivables Corp. as Seller and as the Class B
Purchaser, Spirit of America, Inc. as Servicer, Monte Rosa Capital
Corporation as the Conduit Purchaser, and ING Baring (U.S.) Capital
Markets LLC as Administrator for the Conduit Purchaser, incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended
February 3, 2001. (File No. 000-07258, Exhibit 10.1.17).
10.1.9 Merchant Services Agreement, between Hurley State Bank and Catherines,
Inc., incorporated by reference to Form 10-Q of Catherines Stores Corp.
for the quarter ended May 1, 1999. (File No. 000-19372, Exhibit 1).
10.1.10 Purchase Agreement dated as of March 14, 2005 between Citibank USA,
N.A., Spirit of America National Bank and Catherines, Inc., incorporated
by reference to Form 8-K of the Registrant dated March 18, 2005, filed
on March 22, 2005. (File No. 000-07258, Exhibit 99).
10.1.11 Credit Card Processing Agreement, among World Financial Network National
Bank, Lane Bryant, Inc. and Sierra Nevada Factoring, Inc., dated as of
January 31, 1996, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended February 2, 2002. (File No.
000-07258, Exhibit 10.1.9).
10.1.12 Amendment to Credit Card Processing Agreement, among World Financial
Network National Bank, Lane Bryant, Inc., and Sierra Nevada Factoring,
Inc., dated as of January 28, 2005.
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10.1.13 Purchase and Sale Agreement, among Spirit of America National Bank, as
Seller, and Charming Shoppes Receivables Corp., as Purchaser, dated as
of November 25, 1997, incorporated by reference to Form S-1/A of
Charming Shoppes Receivables Corp. (File No. 333-71757) (Exhibit
10.1(a)).
10.1.14 First Amendment to Purchase and Sale Agreement, among Spirit of America
National Bank, as Seller, and Charming Shoppes Receivables Corp., as
Purchaser, dated as of July 22, 1999, incorporated by reference to Form
8-K of Charming Shoppes Receivables Corp. (File No. 333-71757) (Exhibit
10.1).
10.1.15 Series 2002-1 Supplement, dated as of November 20, 2002, to Second
Amended and Restated Pooling and Service Agreement, dated as of November
25, 1997, as amended on July 22, 1999 and on May 8, 2001, among Charming
Shoppes Receivables Corp., as Seller, Spirit of America, Inc., as
Servicer, and Wachovia Bank, National Association, as Trustee, for
$100,000,000 Charming Shoppes Master Trust Asset-Backed Certificates
Series 2002-1, incorporated by reference to Form 10-Q of the Registrant
for the quarter ended November 2, 2002. (File No. 000-07258, Exhibit
10.1).
10.1.16 Charming Shoppes Master Trust $63,500,000 Fixed Rate Class A Asset
Backed Certificates, Series 2002-1 and $16,500,000 Fixed Rate Class B
Asset Backed Certificates, Series 2002-1 Certificate Purchase Agreement,
dated as of November 22, 2002, incorporated by reference to Form 10-Q of
the Registrant for the quarter ended November 2, 2002. (File No.
000-07258, Exhibit 10.2).
10.1.17 Certificate Purchase Agreement, dated as of November 22, 2002, among
Wachovia Bank, National Association, as Trustee, Charming Shoppes
Receivables Corp., as Seller, Spirit of America, Inc., as Servicer, and
The Class C Holders described therein, incorporated by reference to Form
10-Q of the Registrant for the quarter ended November 2, 2002. (File No.
000-07258, Exhibit 10.3).
10.1.18 Certificate Purchase Agreement, dated as of November 22, 2002, among
Wachovia Bank, National Association, as Trustee, Charming Shoppes
Receivables Corp., as Seller, Spirit of America, Inc., as Servicer, and
The Class D Holders described therein, incorporated by reference to Form
10-Q of the Registrant for the quarter ended November 2, 2002. (File No.
000-07258, Exhibit 10.4).
10.1.19 $14,000,000 Promissory Note, dated October 2002, between White Marsh
Distribution, LLC., as Borrower, and General Electric Capital Business
Asset Funding Corporation, as Payee and Holder, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended November
2, 2002. (File No. 000-07258, Exhibit 10.5).
10.1.20 Commercial Deed of Trust, Security Agreement, Assignment of Leases and
Rents, and Fixture Filing, made as of October 2002, among the Grantor,
White Marsh Distribution, LLC, as Borrower, in favor of James M. Smith,
as Trustee, for the benefit of the Beneficiary, General Electric Capital
Business Asset Funding Corporation, as Lender, incorporated by reference
to Form 10-Q of the Registrant for the quarter ended November 2, 2002.
(File No. 000-07258, Exhibit 10.6).
10.1.21 Certificate Purchase Agreement, dated as of January 21, 2004, among
Charming Shoppes Receivables Corp., as Seller and as the Class B
Purchaser, Spirit of America, Inc., as Servicer, Sheffield Receivables
Corporation, as the Conduit Purchaser, and Barclay's Bank PLC as
Administrator for the Conduit Purchaser, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended January 31, 2004.
(File No. 000-07258, Exhibit 10.1.17).
96
10.1.22 Series 2004-VFC Supplement, dated as of January 21, 2004, to Second
Amended and Restated Pooling and Service Agreement, dated as of November
25, 1997 and amended as of July 22, 1999 and as of May 8, 2001, among
Charming Shoppes Receivables Corp., as Seller, Spirit of America, Inc.,
as Servicer, and Wachovia Bank, National Association, as Trustee on
behalf of the Series 2004-VFC Certificateholders, for up to $132,000,000
Charming Shoppes Master Trust Asset-Backed Certificates Series 2004-VFC,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended January 31, 2004. (File No. 000-07258, Exhibit 10.1.18).
10.1.23 Series 2004-1 Supplement, dated as of August 5, 2004, to Second Amended
and Restated Pooling and Service Agreement, dated as of November 25,
1997 (as amended on July 22, 1999, on May 8, 2001 and on August 5,
2004), among Charming Shoppes Receivables Corp., as Seller, Spirit of
America, Inc., as Servicer, and Wachovia Bank, National Association, as
Trustee, on behalf of the Series 2004-1 Certificateholders, for
$180,000,000 Charming Shoppes Master Trust Series 2004-1, incorporated
by reference to Form 10-Q of the Registrant for the quarter ended July
31, 2004 (File No. 000-07258, Exhibit 10.5).
10.1.24 Certificate Purchase Agreement, dated as of July 21, 2004, among
Charming Shoppes Receivables Corp., Fashion Service Corp., Spirit of
America, Inc., and Barclay's Capital Inc. (as representative of the
Initial Purchasers), incorporated by reference to Form 10-Q of the
Registrant for the quarter ended July 31, 2004 (File No. 000-07258,
Exhibit 10.6).
10.1.25 Certificate Purchase Agreement, dated as of August 5, 2004, among
Wachovia Bank, National Association as Trustee, Charming Shoppes
Receivables Corp. as Seller, Spirit of America, Inc. as Servicer, and
Clipper Receivables Company LLC as Initial Class C Holder, incorporated
by reference to Form 10-Q of the Registrant for the quarter ended July
31, 2004 (File No. 000-07258, Exhibit 10.7).
10.1.26 Mortgage, Assignment of Leases and Rents and Security Agreement, dated
as of October 6, 2004, between FB Distro Distribution Center, LLC, as
Mortgagor, and BankAtlantic Commercial Mortgage Capital, LLC, as
Mortgagee, incorporated by reference to Form 10-Q of the Registrant for
the quarter ended October 30, 2004 (File No. 000-07258, Exhibit 10.9).
10.1.27 $13,000,000 Mortgage Note, dated October 6, 2004, between FB Distro
Distribution Center, LLC, as Maker, and BankAtlantic Commercial Mortgage
Capital, LLC, as Payee, incorporated by reference to Form 10-Q of the
Registrant for the quarter ended October 30, 2004 (File No. 000-07258,
Exhibit 10.10).
10.1.28 Guaranty, executed as of October 6, 2004, by Charming Shoppes, Inc., as
Guarantor, for the benefit of BankAtlantic Commercial Mortgage Capital,
LLC, as Lender, incorporated by reference to Form 10-Q of the Registrant
for the quarter ended October 30, 2004 (File No. 000-07258, Exhibit
10.11).
10.1.29 Hazardous Substances Indemnity Agreement, dated October 6, 2004, by FB
Distro Distribution Center, LLC and by Charming Shoppes, Inc., jointly
and severally as Indemnitors, in favor of BankAtlantic Commercial
Mortgage Capital, LLC, as Holder, incorporated by reference to Form 10-Q
of the Registrant for the quarter ended October 30, 2004 (File No.
000-07258, Exhibit 10.12).
10.1.30 Amended and Restated Class D Certificate Purchase Agreement, dated as of
August 25, 2004, among Wachovia Bank, National Association as Trustee,
Charming Shoppes Receivables Corp. as Seller and as Initial Class D-1
Holder, Spirit of America, Inc. as Servicer, and Clipper Receivables
Company LLC, as the Class D-1 Holder, incorporated by reference to Form
8-K of the Registrant dated August 24, 2004, filed on August 27, 2004.
(File No. 000-07258, Exhibit 99.1).
97
10.1.31 Amended and Restated Certificate Purchase Agreement, dated as of
November 22, 2004 and Amended and Restated as of November 18, 2004,
among Wachovia Bank, National Association as Trustee, Charming Shoppes
Receivables Corp. as Seller, Spirit of America, Inc. as Servicer, and
the Class D-2 Certificateholders Described Herein, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended October
30, 2004 (File No. 000-07258, Exhibit 10.13).
Management Contracts and Compensatory Plans and Arrangements
10.2.1 The 1988 Key Employee Stock Option Plan of Charming Shoppes, Inc., as
amended, incorporated by reference to Form 10-K of the Registrant for
the fiscal year ended January 30, 1993. (File No. 000-07258, Exhibit
10.2.3).
10.2.2 The 1989 Non-Employee Director Stock Option Plan of Charming Shoppes,
Inc., as amended, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended January 30, 1993. (File No.
000-07258, Exhibit 10.2.5).
10.2.3 Non-Employee Directors' Restricted Stock Plan of Charming Shoppes, Inc.,
as amended, incorporated by reference to Form 10-K of the Registrant for
the fiscal year ended January 30, 1993. (File No. 000-07258, Exhibit
10.2.6).
10.2.4 The Charming Shoppes, Inc. Non-Employee Directors Compensation Program,
incorporated by reference to Registration Statement on Form S-8 of the
Registrant, dated February 25, 1997. (Registration No. 333-22323,
Exhibit 4.1).
10.2.5 The Charming Shoppes, Inc. Non-Employee Directors Compensation Program,
As Amended and Restated, incorporated by reference to Form 10-Q of the
Registrant for the quarter ended July 31, 1999. (File No. 000-07258,
Exhibit 10.1).
10.2.6 The Charming Shoppes, Inc. Non-Employee Directors Compensation Program,
As Amended and Restated at June 27, 2002, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended February 1, 2003.
(File No. 000-07258, Exhibit 10.2.6).
10.2.7 The Charming Shoppes, Inc. Non-Employee Directors Compensation Program
Stock Option Agreement, incorporated by reference to Form 10-Q of the
Registrant for the quarter ended July 31, 1999. (File No. 000-07258,
Exhibit 10.2).
10.2.8 The Charming Shoppes, Inc. Non-Employee Directors Compensation Program
Restricted Stock Agreement, incorporated by reference to Form 10-Q of
the Registrant for the quarter ended July 31, 1999. (File No. 000-07258,
Exhibit 10.3).
10.2.9 The 1993 Employees' Stock Incentive Plan of Charming Shoppes, Inc.,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended January 29, 1994. (File No. 000-07258, Exhibit 10.2.10).
10.2.10 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Restricted Stock Agreement, dated as of February 11, 2002, incorporated
by reference to Form 10-K of the Registrant for the fiscal year ended
February 2, 2002. (File No. 000-07258, Exhibit 10.2.8).
10.2.11 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan Stock
Option Agreement (regular vesting schedule), incorporated by reference
to Form 10-K of the Registrant for the fiscal year ended February 2,
2002. (File No. 000-07258, Exhibit 10.2.20).
98
10.2.12 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan Stock
Option Agreement (accelerated vesting schedule), incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended
February 2, 2002. (File No. 000-07258, Exhibit 10.2.21).
10.2.13 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Performance-Accelerated Stock Option Agreement, incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended
February 2, 2002. (File No. 000-07258, Exhibit 10.2.22).
10.2.14 The Charming Shoppes, Inc. Employee Stock Purchase Plan, as amended,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended February 3, 1996. (File No. 000-07258, Exhibit 10.2.10).
10.2.15 The Charming Shoppes, Inc. Restricted Stock Award Plan for Associates,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended February 3, 1996. (File No. 000-07258, Exhibit 10.2.11).
10.2.16 The Charming Shoppes, Inc. 1996 Restricted Stock Award Program,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended February 3, 1996. (File No. 000-07258, Exhibit 10.2.12).
10.2.17 The Charming Shoppes, Inc. 1996 Restricted Stock Award Program
Restricted Stock Agreement, incorporated by reference to Form 10-K of
the Registrant for the fiscal year ended February 3, 1996. (File No.
000-07258, Exhibit 10.2.13).
10.2.18 The Charming Shoppes, Inc. 1998 Restricted Award Program, incorporated
by reference to Form 10-K of the Registrant for the fiscal year ended
January 31, 1998. (File No. 000-07258, Exhibit 10.2.22).
10.2.19 The Charming Shoppes Inc. 1999 Associates' Stock Incentive Plan,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended January 30, 1999. (File No. 000-07258, Exhibit 10.2.24).
10.2.20 Charming Shoppes, Inc. 1999 Associates' Stock Incentive Plan Stock
Option Agreement, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended January 30, 1999. (File No.
000-07258, Exhibit 10.2.25).
10.2.21 The Charming Shoppes, Inc. Amended and Restated 2000 Associates' Stock
Incentive Plan, incorporated by reference to Form 10-K of the Registrant
for the fiscal year ended February 3, 2001. (File No. 000-07258, Exhibit
10.2.29).
10.2.22 The Charming Shoppes, Inc. Amended and Restated 2000 Associates' Stock
Incentive Plan Stock Option Agreement (regular vesting schedule) ,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended February 2, 2002. (File No. 000-07258, Exhibit 10.2.23).
10.2.23 The Charming Shoppes, Inc. Amended and Restated 2000 Associates' Stock
Incentive Plan Stock Option Agreement (accelerated vesting schedule),
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended February 2, 2002. (File No. 000-07258, Exhibit 10.2.24).
10.2.24 The Charming Shoppes, Inc. Amended and Restated 2000 Associates' Stock
Incentive Plan Restricted Stock Agreement, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended February 2, 2002.
(File No. 000-07258, Exhibit 10.2.25).
10.2.25 2004 Stock Award and Incentive Plan, incorporated by reference to
Appendix B of the Registrant's Proxy Statement Pursuant to Section 14 of
the Securities Exchange Act of 1934, filed on May 19, 2004.
99
10.2.26 Charming Shoppes, Inc. 2004 Stock Award and Incentive Plan Stock Option
Agreement, incorporated by reference to Form 10-Q of the Registrant for
the quarter ended October 30, 2004 (File No. 000-07258, Exhibit 10.15).
10.2.27 Form of Charming Shoppes, Inc. 2004 Stock Award and Incentive Plan
Restricted Stock Agreement - Section 16 Officers, incorporated by
reference to Form 8-K of the Registrant dated February 7, 2005, filed on
February 11, 2005. (File No. 000-07258, Exhibit 99.2)
10.2.28 Form of Charming Shoppes, Inc. 2004 Stock Award and Incentive Plan
Performance Share Agreement, incorporated by reference to Form 8-K of
the Registrant dated February 7, 2005, filed on February 11, 2005. (File
No. 000-07258, Exhibit 99.4)
10.2.29 Charming Shoppes, Inc. 2004 Stock Award and Incentive Plan Restricted
Stock Agreement - Associates Other Than Section 16 Officers,
incorporated by reference to Form 10-Q of the Registrant for the quarter
ended October 30, 2004 (File No. 000-07258, Exhibit 10.17).
10.2.30 Charming Shoppes, Inc. Supplemental Retirement Plan, effective February
1, 2003, incorporated by reference to Form 10-Q of the Registrant for
the quarter ended May 3, 2003. (File No. 000-07258, Exhibit 10.1).
10.2.31 2003 Incentive Compensation Plan, incorporated by reference to Appendix
C of the Registrant's Proxy Statement Pursuant to Section 14 of the
Securities Exchange Act of 1934, filed on May 22, 2003.
10.2.32 Amended and Restated Variable Deferred Compensation Plan for Executives,
effective December 23, 2003, incorporated by reference to Form 10-Q of
the Registrant for the quarter ended July 31, 2004 (File No. 000-07258,
Exhibit 10.3).
10.2.33 Form of Bonus Agreement by and between Charming Shoppes, Inc. and the
Executive Officer named in the Agreement, incorporated by reference to
Form 10-Q of the Registrant for the quarter ended October 30, 2004 (File
No. 000-07258, Exhibit 10.14).
10.2.34 Charming Shoppes, Inc. Annual Incentive Program As Amended and Restated
January 19, 2005, incorporated by reference to Form 8-K of the
Registrant dated January 19, 2005, filed January 25, 2005. (File No.
000-07258, Exhibit 99.1).
10.2.35 Employment Agreement, dated as of January 1, 2005, by and between
Charming Shoppes, Inc. and Dorrit J. Bern, incorporated by reference to
Form 8-K of the Registrant dated January 3, 2005, filed on January 4,
2005. (File No. 000-07258, Exhibit 99.1)
10.2.36 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Restricted Stock Agreement, dated as of May 13, 2004, between Charming
Shoppes, Inc. and Dorrit J. Bern, incorporated by reference to Form 10-Q
of the Registrant for the quarter ended July 31, 2004 (File No.
000-07258, Exhibit 10.8).
10.2.37 Charming Shoppes, Inc. 2004 Stock Award and Incentive Plan Restricted
Stock Agreement, dated as of January 3, 2005, between Charming Shoppes,
Inc. and Dorrit J. Bern.
10.2.38 Form of Charming Shoppes, Inc. 2004 Stock Award and Incentive Plan
Restricted Stock Agreement between Charming Shoppes, Inc. and Dorrit J.
Bern, incorporated by reference to Form 8-K of the Registrant dated
February 7, 2005, filed on February 11, 2005. (File No. 000-07258,
Exhibit 99.1)
100
10.2.39 Form of Charming Shoppes, Inc. 2004 Stock Award and Incentive Plan
Performance Share Agreement between Charming Shoppes, Inc. and Dorrit J.
Bern, incorporated by reference to Form 8-K of the Registrant dated
February 7, 2005, filed on February 11, 2005. (File No. 000-07258,
Exhibit 99.3)
10.2.40 Employment Agreement, dated as of March 12, 2003, by and between
Charming Shoppes, Inc. and Erna Zint, incorporated by reference to Form
10-K of the Registrant for the fiscal year ended February 1, 2003. (File
No. 000-07258, Exhibit 10.2.17).
10.2.41 Forms of Executive Severance Agreements by and between Charming Shoppes,
Inc., the named executive officers in the company's Proxy Statement for
the Annual Meeting held on June 15, 2000, and certain other executive
officers and officers of Charming Shoppes, Inc. and its subsidiaries,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended January 29, 2000. (File No. 000-07258, Exhibit 10.2.33).
10.2.42 Forms of First Amendment, dated as of February 6, 2003, to Forms of
Executive Severance Agreements, dated July 15, 1999, by and between
Charming Shoppes, Inc., and the executive officers and officers named in
the Agreements, incorporated by reference to Form 10-K of the Registrant
for the fiscal year ended February 1, 2003. (File No. 000-07258, Exhibit
10.2.30).
10.2.43 Form of Executive Severance Agreement, dated February 6, 2003, by and
between Charming Shoppes, Inc. and certain executive officers and
officers of Charming Shoppes, Inc. and its subsidiaries, incorporated by
reference to Form 10-K of the Registrant for the fiscal year ended
February 1, 2003. (File No. 000-07258, Exhibit 10.2.31).
Other Exhibits
14 Charming Shoppes, Inc. Business Ethics and Standards of Conduct Policy,
incorporated by reference to Form 10-K of the Registrant for the fiscal
year ended January 31, 2004. (File No. 000-07258, Exhibit 14).
21 Subsidiaries of Registrant
23 Consent of independent registered public accounting firm
31.1 Certification by Principal Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification by Principal Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Charming Shoppes, Inc., has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CHARMING SHOPPES, INC.
----------------------
Date: April 14, 2005 /S/ DORRIT J. BERN
------------------
By: Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Charming
Shoppes, Inc. and in the capacities and on the dates indicated:
/S/ DORRIT J. BERN /S/ ERIC M. SPECTER
------------------ -------------------
Dorrit J. Bern Eric M. Specter
Chairman of the Board Executive Vice President
President and Chief Executive Officer Chief Financial Officer
April 14, 2005 April 14, 2005
/S/ JOHN J. SULLIVAN /S/ JOSEPH L. CASTLE II
-------------------- -----------------------
John J. Sullivan Joseph L. Castle II
Vice President, Corporate Controller Director
Chief Accounting Officer April 14, 2005
April 14, 2005
/S/ ALAN ROSSKAMM /S/ WILLIAM O. ALBERTINI
----------------- ------------------------
Alan Rosskamm William O. Albertini
Director Director
April 14, 2005 April 14, 2005
/S/ KATHERINE M. HUDSON /S/ PAMELA S. LEWIS
----------------------- -------------------
Katherine M. Hudson Pamela S. Lewis
Director Director
April 14, 2005 April 14, 2005
/S/ KENNETH S. OLSHAN /S/ CHARLES T. HOPKINS
--------------------- ----------------------
Kenneth S. Olshan Charles T. Hopkins
Director Director
April 14, 2005 April 14, 2005
/S/ YVONNE M. CURL
------------------
Yvonne M. Curl
Director
April 14, 2005
102
Exhibit Index
Exhibit No. Item
----------- ----
2.1 Stock Purchase Agreement, dated as of July 9, 2001, among
Charming Shoppes, Inc., Venice Acquisition Corporation, LFAS,
Inc. and Limited Brands, Inc., incorporated by reference to Form
8-K of the Registrant dated August 16, 2001, filed on August 31,
2001. (Exhibit 2.1).
2.2 Services Agreement, dated as of August 16, 2001, between LBH,
Inc. and Limited Brands, Inc., incorporated by reference to Form
8-K of the Registrant dated August 16, 2001, filed on August 31,
2001. (Exhibit 2.2).
2.3 Covenant Agreement, dated as of August 16, 2001, between Charming
Shoppes, Inc. and Limited Brands, Inc., incorporated by reference
to Form 8-K of the Registrant dated August 16, 2001, filed on
August 31, 2001. (Exhibit 2.3).
2.4 Master Sublease, dated as of August 16, 2001, between Limited
Brands, Inc. and Lane Bryant, Inc., incorporated by reference to
Form 8-K of the Registrant dated August 16, 2001, filed on August
31, 2001. (Exhibit 2.4).
2.5 Lease Agreement, dated as of August 16, 2001, by and between
Distribution Land Corp. and Lane Bryant, Inc., incorporated by
reference to Form 8-K of the Registrant dated August 16, 2001,
filed on August 31, 2001. (Exhibit 2.5).
2.6 Agreement and Plan of Merger, dated as of November 15, 1999, by
and among Catherines Stores Corporation, Charming Shoppes, Inc.,
and Rose Merger Sub, Inc., incorporated by reference to Schedule
14(D)-1 of the Registrant filed on November 19, 1999. (Item
11(c)(1)).
3.1 Restated Articles of Incorporation, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended January 29,
1994. (File No. 000-07258, Exhibit 3.1).
3.2 By-Laws, as Amended and Restated, incorporated by reference to
Form 10-Q of the Registrant for the quarter ended July 31, 1999.
(File No. 000-07258, Exhibit 3.2).
4.1 Amended and Restated Rights Agreement, dated as of February 1,
2001, between Charming Shoppes, Inc. and American Stock Transfer
& Trust Company, as Rights Agent, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended February 3,
2001. (File No. 000-07258, Exhibit 4.1).
4.2 Registration Agreement, dated as of August 16, 2001, between
Charming Shoppes, Inc. and Limited Brands, Inc., incorporated by
reference to Form 8-K of the Registrant dated August 16, 2001,
filed on August 31, 2001. (File No. 000-07258, Exhibit 4.1).
4.3 Indenture, dated as of May 28, 2002, between Charming Shoppes,
Inc. and Wachovia Bank, National Association, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended
May 4, 2002. (File No. 000-07258, Exhibit 4.1).
103
4.4 Registration Rights Agreement, dated as of May 28, 2002, by and
among Charming Shoppes, Inc., as Issuer, and J. P. Morgan
Securities, Inc., Bear Stearns & Co., Inc., First Union
Securities, Inc., Lazard Freres & Co., LLC, and McDonald
Investments, Inc., as Initial Purchasers, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended
May 4, 2002. (File No. 000-07258, Exhibit 4.2).
4.5 Amended and Restated Loan and Security Agreement, dated as of
January 29, 2004, by and among Charming Shoppes, Inc., Charming
Shoppes of Delaware, Inc., CSI Industries, Inc., Catherine Stores
Corporation, Lane Bryant, Inc. and FB Apparel, Inc., as
Borrowers; Charming Shoppes of Delaware, Inc., as Borrowers'
Agent; Congress Financial Corporation, as Administrative Agent,
Collateral Agent, and Joint Bookrunner; J.P. Morgan Business
Credit Corp., as Co-Documentation Agent, Joint Lead Arranger, and
Joint Bookrunner; Wachovia Bank, National Association, as Joint
Lead Arranger; Bank of America, N.A. and Fleet Retail Group,
Inc., as Co-Documentation Agents; and The Financial Institutions
named therein, as Lenders, incorporated by reference to Form 8-K
of the Registrant dated February 4, 2004. (File No. 000-07258,
Exhibit 99.2).
10.1.1 Second Amended and Restated Pooling and Servicing Agreement,
dated as of November 25, 1997, as amended on July 22, 1999, among
Charming Shoppes Receivables Corp., as Seller, Spirit of America,
Inc., as Servicer, and First Union National Bank as Trustee,
incorporated by reference to Form 8-K of Charming Shoppes Master
Trust and Charming Shoppes Receivables Corp., (File No.
333-71757) dated July 22, 1999. (Exhibit No. 4.1).
10.1.2 Fourth Amendment, dated as of August 5, 2004, to Second Amended
and Restated Pooling and Servicing Agreement, dated as of
November 25, 1997, as amended on July 22, 1999 and on May 8,
2001, among Charming Shoppes Receivables Corp., as Seller, Spirit
of America, Inc., as Servicer, and Wachovia Bank, National
Association (formerly known as First Union National Bank) as
Trustee, incorporated by reference to Form 10-Q of the Registrant
for the quarter ended July 31, 2004 (File No. 000-07258, Exhibit
10.4).
10.1.3 Amendment, dated as of March 18, 2005, to Second Amended and
Restated Pooling and Servicing Agreement, dated as of November
25, 1997, as amended on July 22, 1999, May 8, 2001, and August 5,
2004, among Charming Shoppes Receivables Corp., as Seller, Spirit
of America, Inc., as Servicer, and Wachovia Bank, National
Association, as Trustee.
10.1.4 Series 1999-1 Supplement, dated as of July 22, 1999, to Second
Amended and Restated Pooling and Service Agreement, dated as of
November 25, 1997, as amended on July 22, 1999, among Charming
Shoppes Receivables Corp., as Seller, Spirit of America, Inc., as
Servicer, and First Union National Bank, as Trustee, for
$150,000,000 Charming Shoppes Master Trust Asset-Backed
Certificates Series 1999-1, incorporated by reference to Form 8-K
of Charming Shoppes Master Trust and Charming Shoppes Receivables
Corp., (File No. 333-71757) dated July 22, 1999. (Exhibit No.
4.2).
10.1.5 Receivables Purchase Agreement, dated as of May 28, 1999, among
Charming Shoppes Seller, Inc. as Seller, Spirit of America, Inc.,
as Servicer, Clipper Receivables Corporation, as Purchaser, State
Street Capital Corporation, as Administrator, and State Street
Bank & Trust Company, as Relationship Bank, incorporated by
reference to Form 10-K of the Registrant for the fiscal year
ended February 2, 2002. (File No. 000-07258, Exhibit 10.1.4).
104
10.1.6 Series 1999-2 Supplement, dated as of May 28, 1999, to Second
Amended and Restated Pooling and Service Agreement, dated as of
November 25, 1997, as amended on July 22, 1999, among Charming
Shoppes Receivables Corp., as Seller, Spirit of America, Inc., as
Servicer, and First Union National Bank, as Trustee, for
$55,750,000 Charming Shoppes Master Trust Asset-Backed
Certificates Series 1999-2, incorporated by reference to Form
10-K of the Registrant for the fiscal year ended January 29,
2000. (File No. 000-07258, Exhibit 10.1.23).
10.1.7 Series 2000-VFC Supplement, dated as of November 9, 2000, to
Second Amended and Restated Pooling and Service Agreement, dated
as of November 25, 1997, among Charming Shoppes Receivables
Corp., as Seller, Spirit of America, Inc., as Servicer, and First
Union National Bank, as Trustee, on behalf of the Series 2000-VFC
Certificateholders, for up to $60,122,700 Charming Shoppes Master
Trust Series 2000-VFC, incorporated by reference to Form 10-K of
the Registrant for the fiscal year ended February 3, 2001. (File
No. 000-07258, Exhibit 10.1.16).
10.1.8 Certificate Purchase Agreement, dated as of November 9, 2000,
among Charming Shoppes Receivables Corp. as Seller and as the
Class B Purchaser, Spirit of America, Inc. as Servicer, Monte
Rosa Capital Corporation as the Conduit Purchaser, and ING Baring
(U.S.) Capital Markets LLC as Administrator for the Conduit
Purchaser, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended February 3, 2001. (File No.
000-07258, Exhibit 10.1.17).
10.1.9 Merchant Services Agreement, between Hurley State Bank and
Catherines, Inc., incorporated by reference to Form 10-Q of
Catherines Stores Corp. for the quarter ended May 1, 1999. (File
No. 000-19372, Exhibit 1).
10.1.10 Purchase Agreement dated as of March 14, 2005 between Citibank
USA, N.A., Spirit of America National Bank and Catherines, Inc.,
incorporated by reference to Form 8-K of the Registrant dated
March 18, 2005, filed on March 22, 2005. (File No. 000-07258,
Exhibit 99).
10.1.11 Credit Card Processing Agreement, among World Financial Network
National Bank, Lane Bryant, Inc. and Sierra Nevada Factoring,
Inc., dated as of January 31, 1996, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended February 2,
2002. (File No. 000-07258, Exhibit 10.1.9).
10.1.12 Amendment to Credit Card Processing Agreement, among World
Financial Network National Bank, Lane Bryant, Inc., and Sierra
Nevada Factoring, Inc., dated as of January 28, 2005.
10.1.13 Purchase and Sale Agreement, among Spirit of America National
Bank, as Seller, and Charming Shoppes Receivables Corp., as
Purchaser, dated as of November 25, 1997, incorporated by
reference to Form S-1/A of Charming Shoppes Receivables Corp.
(File No. 333-71757) (Exhibit 10.1(a)).
10.1.14 First Amendment to Purchase and Sale Agreement, among Spirit of
America National Bank, as Seller, and Charming Shoppes
Receivables Corp., as Purchaser, dated as of July 22, 1999,
incorporated by reference to Form 8-K of Charming Shoppes
Receivables Corp. (File No. 333-71757) (Exhibit 10.1).
105
10.1.15 Series 2002-1 Supplement, dated as of November 20, 2002, to
Second Amended and Restated Pooling and Service Agreement, dated
as of November 25, 1997, as amended on July 22, 1999 and on May
8, 2001, among Charming Shoppes Receivables Corp., as Seller,
Spirit of America, Inc., as Servicer, and Wachovia Bank, National
Association, as Trustee, for $100,000,000 Charming Shoppes Master
Trust Asset-Backed Certificates Series 2002-1, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended
November 2, 2002. (File No. 000-07258, Exhibit 10.1).
10.1.16 Charming Shoppes Master Trust $63,500,000 Fixed Rate Class A
Asset Backed Certificates, Series 2002-1 and $16,500,000 Fixed
Rate Class B Asset Backed Certificates, Series 2002-1 Certificate
Purchase Agreement, dated as of November 22, 2002, incorporated
by reference to Form 10-Q of the Registrant for the quarter ended
November 2, 2002. (File No. 000-07258, Exhibit 10.2).
10.1.17 Certificate Purchase Agreement, dated as of November 22, 2002,
among Wachovia Bank, National Association, as Trustee, Charming
Shoppes Receivables Corp., as Seller, Spirit of America, Inc., as
Servicer, and The Class C Holders described therein, incorporated
by reference to Form 10-Q of the Registrant for the quarter ended
November 2, 2002. (File No. 000-07258, Exhibit 10.3).
10.1.18 Certificate Purchase Agreement, dated as of November 22, 2002,
among Wachovia Bank, National Association, as Trustee, Charming
Shoppes Receivables Corp., as Seller, Spirit of America, Inc., as
Servicer, and The Class D Holders described therein, incorporated
by reference to Form 10-Q of the Registrant for the quarter ended
November 2, 2002. (File No. 000-07258, Exhibit 10.4).
10.1.19 $14,000,000 Promissory Note, dated October 2002, between White
Marsh Distribution, LLC., as Borrower, and General Electric
Capital Business Asset Funding Corporation, as Payee and Holder,
incorporated by reference to Form 10-Q of the Registrant for the
quarter ended November 2, 2002. (File No. 000-07258, Exhibit
10.5).
10.1.20 Commercial Deed of Trust, Security Agreement, Assignment of
Leases and Rents, and Fixture Filing, made as of October 2002,
among the Grantor, White Marsh Distribution, LLC, as Borrower, in
favor of James M. Smith, as Trustee, for the benefit of the
Beneficiary, General Electric Capital Business Asset Funding
Corporation, as Lender, incorporated by reference to Form 10-Q of
the Registrant for the quarter ended November 2, 2002. (File No.
000-07258, Exhibit 10.6).
10.1.21 Certificate Purchase Agreement, dated as of January 21, 2004,
among Charming Shoppes Receivables Corp., as Seller and as the
Class B Purchaser, Spirit of America, Inc., as Servicer,
Sheffield Receivables Corporation, as the Conduit Purchaser, and
Barclay's Bank PLC as Administrator for the Conduit Purchaser,
incorporated by reference to Form 10-K of the Registrant for the
fiscal year ended January 31, 2004. (File No. 000-07258, Exhibit
10.1.17).
10.1.22 Series 2004-VFC Supplement, dated as of January 21, 2004, to
Second Amended and Restated Pooling and Service Agreement, dated
as of November 25, 1997 and amended as of July 22, 1999 and as of
May 8, 2001, among Charming Shoppes Receivables Corp., as Seller,
Spirit of America, Inc., as Servicer, and Wachovia Bank, National
Association, as Trustee on behalf of the Series 2004-VFC
Certificateholders, for up to $132,000,000 Charming Shoppes
Master Trust Asset-Backed Certificates Series 2004-VFC,
incorporated by reference to Form 10-K of the Registrant for the
fiscal year ended January 31, 2004. (File No. 000-07258, Exhibit
10.1.18).
106
10.1.23 Series 2004-1 Supplement, dated as of August 5, 2004, to Second
Amended and Restated Pooling and Service Agreement, dated as of
November 25, 1997 (as amended on July 22, 1999, on May 8, 2001
and on August 5, 2004), among Charming Shoppes Receivables Corp.,
as Seller, Spirit of America, Inc., as Servicer, and Wachovia
Bank, National Association, as Trustee, on behalf of the Series
2004-1 Certificateholders, for $180,000,000 Charming Shoppes
Master Trust Series 2004-1, incorporated by reference to Form
10-Q of the Registrant for the quarter ended July 31, 2004 (File
No. 000-07258, Exhibit 10.5).
10.1.24 Certificate Purchase Agreement, dated as of July 21, 2004, among
Charming Shoppes Receivables Corp., Fashion Service Corp., Spirit
of America, Inc., and Barclay's Capital Inc. (as representative
of the Initial Purchasers), incorporated by reference to Form
10-Q of the Registrant for the quarter ended July 31, 2004 (File
No. 000-07258, Exhibit 10.6).
10.1.25 Certificate Purchase Agreement, dated as of August 5, 2004, among
Wachovia Bank, National Association as Trustee, Charming Shoppes
Receivables Corp. as Seller, Spirit of America, Inc. as Servicer,
and Clipper Receivables Company LLC as Initial Class C Holder,
incorporated by reference to Form 10-Q of the Registrant for the
quarter ended July 31, 2004 (File No. 000-07258, Exhibit 10.7).
10.1.26 Mortgage, Assignment of Leases and Rents and Security Agreement,
dated as of October 6, 2004, between FB Distro Distribution
Center, LLC, as Mortgagor, and BankAtlantic Commercial Mortgage
Capital, LLC, as Mortgagee, incorporated by reference to Form
10-Q of the Registrant for the quarter ended October 30, 2004
(File No. 000-07258, Exhibit 10.9).
10.1.27 $13,000,000 Mortgage Note, dated October 6, 2004, between FB
Distro Distribution Center, LLC, as Maker, and BankAtlantic
Commercial Mortgage Capital, LLC, as Payee, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended
October 30, 2004 (File No. 000-07258, Exhibit 10.10).
10.1.28 Guaranty, executed as of October 6, 2004, by Charming Shoppes,
Inc., as Guarantor, for the benefit of BankAtlantic Commercial
Mortgage Capital, LLC, as Lender, incorporated by reference to
Form 10-Q of the Registrant for the quarter ended October 30,
2004 (File No. 000-07258, Exhibit 10.11).
10.1.29 Hazardous Substances Indemnity Agreement, dated October 6, 2004,
by FB Distro Distribution Center, LLC and by Charming Shoppes,
Inc., jointly and severally as Indemnitors, in favor of
BankAtlantic Commercial Mortgage Capital, LLC, as Holder,
incorporated by reference to Form 10-Q of the Registrant for the
quarter ended October 30, 2004 (File No. 000-07258, Exhibit
10.12).
10.1.30 Amended and Restated Class D Certificate Purchase Agreement,
dated as of August 25, 2004, among Wachovia Bank, National
Association as Trustee, Charming Shoppes Receivables Corp. as
Seller and as Initial Class D-1 Holder, Spirit of America, Inc.
as Servicer, and Clipper Receivables Company LLC, as the Class
D-1 Holder, incorporated by reference to Form 8-K of the
Registrant dated August 24, 2004, filed on August 27, 2004. (File
No. 000-07258, Exhibit 99.1).
10.1.31 Amended and Restated Certificate Purchase Agreement, dated as of
November 22, 2004 and Amended and Restated as of November 18,
2004, among Wachovia Bank, National Association as Trustee,
Charming Shoppes Receivables Corp. as Seller, Spirit of America,
Inc. as Servicer, and the Class D-2 Certificateholders Described
Herein, incorporated by reference to Form 10-Q of the Registrant
for the quarter ended October 30, 2004 (File No. 000-07258,
Exhibit 10.13).
107
10.2.1 The 1988 Key Employee Stock Option Plan of Charming Shoppes,
Inc., as amended, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended January 30, 1993. (File No.
000-07258, Exhibit 10.2.3).
10.2.2 The 1989 Non-Employee Director Stock Option Plan of Charming
Shoppes, Inc., as amended, incorporated by reference to Form 10-K
of the Registrant for the fiscal year ended January 30, 1993.
(File No. 000-07258, Exhibit 10.2.5).
10.2.3 Non-Employee Directors' Restricted Stock Plan of Charming
Shoppes, Inc., as amended, incorporated by reference to Form 10-K
of the Registrant for the fiscal year ended January 30, 1993.
(File No. 000-07258, Exhibit 10.2.6).
10.2.4 The Charming Shoppes, Inc. Non-Employee Directors Compensation
Program, incorporated by reference to Registration Statement on
Form S-8 of the Registrant, dated February 25, 1997.
(Registration No. 333-22323, Exhibit 4.1).
10.2.5 The Charming Shoppes, Inc. Non-Employee Directors Compensation
Program, As Amended and Restated, incorporated by reference to
Form 10-Q of the Registrant for the quarter ended July 31, 1999.
(File No. 000-07258, Exhibit 10.1).
10.2.6 The Charming Shoppes, Inc. Non-Employee Directors Compensation
Program, As Amended and Restated at June 27, 2002, incorporated
by reference to Form 10-K of the Registrant for the fiscal year
ended February 1, 2003. (File No. 000-07258, Exhibit 10.2.6).
10.2.7 The Charming Shoppes, Inc. Non-Employee Directors Compensation
Program Stock Option Agreement, incorporated by reference to Form
10-Q of the Registrant for the quarter ended July 31, 1999. (File
No. 000-07258, Exhibit 10.2).
10.2.8 The Charming Shoppes, Inc. Non-Employee Directors Compensation
Program Restricted Stock Agreement, incorporated by reference to
Form 10-Q of the Registrant for the quarter ended July 31, 1999.
(File No. 000-07258, Exhibit 10.3).
10.2.9 The 1993 Employees' Stock Incentive Plan of Charming Shoppes,
Inc., incorporated by reference to Form 10-K of the Registrant
for the fiscal year ended January 29, 1994. (File No. 000-07258,
Exhibit 10.2.10).
10.2.10 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Restricted Stock Agreement, dated as of February 11, 2002,
incorporated by reference to Form 10-K of the Registrant for the
fiscal year ended February 2, 2002. (File No. 000-07258, Exhibit
10.2.8).
10.2.11 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Stock Option Agreement (regular vesting schedule), incorporated
by reference to Form 10-K of the Registrant for the fiscal year
ended February 2, 2002. (File No. 000-07258, Exhibit 10.2.20).
10.2.12 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Stock Option Agreement (accelerated vesting schedule),
incorporated by reference to Form 10-K of the Registrant for the
fiscal year ended February 2, 2002. (File No. 000-07258, Exhibit
10.2.21).
108
10.2.13 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Performance-Accelerated Stock Option Agreement, incorporated by
reference to Form 10-K of the Registrant for the fiscal year
ended February 2, 2002. (File No. 000-07258, Exhibit 10.2.22).
10.2.14 The Charming Shoppes, Inc. Employee Stock Purchase Plan, as
amended, incorporated by reference to Form 10-K of the Registrant
for the fiscal year ended February 3, 1996. (File No. 000-07258,
Exhibit 10.2.10).
10.2.15 The Charming Shoppes, Inc. Restricted Stock Award Plan for
Associates, incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended February 3, 1996. (File No.
000-07258, Exhibit 10.2.11).
10.2.16 The Charming Shoppes, Inc. 1996 Restricted Stock Award Program,
incorporated by reference to Form 10-K of the Registrant for the
fiscal year ended February 3, 1996. (File No. 000-07258, Exhibit
10.2.12).
10.2.17 The Charming Shoppes, Inc. 1996 Restricted Stock Award Program
Restricted Stock Agreement, incorporated by reference to Form
10-K of the Registrant for the fiscal year ended February 3,
1996. (File No. 000-07258, Exhibit 10.2.13).
10.2.18 The Charming Shoppes, Inc. 1998 Restricted Award Program,
incorporated by reference to Form 10-K of the Registrant for the
fiscal year ended January 31, 1998. (File No. 000-07258, Exhibit
10.2.22).
10.2.19 The Charming Shoppes Inc. 1999 Associates' Stock Incentive Plan,
incorporated by reference to Form 10-K of the Registrant for the
fiscal year ended January 30, 1999. (File No. 000-07258, Exhibit
10.2.24).
10.2.20 Charming Shoppes, Inc. 1999 Associates' Stock Incentive Plan
Stock Option Agreement, incorporated by reference to Form 10-K of
the Registrant for the fiscal year ended January 30, 1999. (File
No. 000-07258, Exhibit 10.2.25).
10.2.21 The Charming Shoppes, Inc. Amended and Restated 2000 Associates'
Stock Incentive Plan, incorporated by reference to Form 10-K of
the Registrant for the fiscal year ended February 3, 2001. (File
No. 000-07258, Exhibit 10.2.29).
10.2.22 The Charming Shoppes, Inc. Amended and Restated 2000 Associates'
Stock Incentive Plan Stock Option Agreement (regular vesting
schedule), incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended February 2, 2002. (File No.
000-07258, Exhibit 10.2.23).
10.2.23 The Charming Shoppes, Inc. Amended and Restated 2000 Associates'
Stock Incentive Plan Stock Option Agreement (accelerated vesting
schedule), incorporated by reference to Form 10-K of the
Registrant for the fiscal year ended February 2, 2002. (File No.
000-07258, Exhibit 10.2.24).
10.2.24 The Charming Shoppes, Inc. Amended and Restated 2000 Associates'
Stock Incentive Plan Restricted Stock Agreement, incorporated by
reference to Form 10-K of the Registrant for the fiscal year
ended February 2, 2002. (File No. 000-07258, Exhibit 10.2.25).
109
10.2.25 2004 Stock Award and Incentive Plan, incorporated by reference to
Appendix B of the Registrant's Proxy Statement Pursuant to
Section 14 of the Securities Exchange Act of 1934, filed on May
19, 2004.
10.2.26 Charming Shoppes, Inc. 2004 Stock Award and Incentive Plan Stock
Option Agreement, incorporated by reference to Form 10-Q of the
Registrant for the quarter ended October 30, 2004 (File No.
000-07258, Exhibit 10.15).
10.2.27 Form of Charming Shoppes, Inc. 2004 Stock Award and Incentive
Plan Restricted Stock Agreement - Section 16 Officers,
incorporated by reference to Form 8-K of the Registrant dated
February 7, 2005, filed on February 11, 2005. (File No.
000-07258, Exhibit 99.2)
10.2.28 Form of Charming Shoppes, Inc. 2004 Stock Award and Incentive
Plan Performance Share Agreement, incorporated by reference to
Form 8-K of the Registrant dated February 7, 2005, filed on
February 11, 2005. (File No. 000-07258, Exhibit 99.4)
10.2.29 Charming Shoppes, Inc. 2004 Stock Award and Incentive Plan
Restricted Stock Agreement - Associates Other Than Section 16
Officers, incorporated by reference to Form 10-Q of the
Registrant for the quarter ended October 30, 2004 (File No.
000-07258, Exhibit 10.17).
10.2.30 Charming Shoppes, Inc. Supplemental Retirement Plan, effective
February 1, 2003, incorporated by reference to Form 10-Q of the
Registrant for the quarter ended May 3, 2003. (File No.
000-07258, Exhibit 10.1).
10.2.31 2003 Incentive Compensation Plan, incorporated by reference to
Appendix C of the Registrant's Proxy Statement Pursuant to
Section 14 of the Securities Exchange Act of 1934, filed on May
22, 2003.
10.2.32 Amended and Restated Variable Deferred Compensation Plan for
Executives, effective December 23, 2003, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended
July 31, 2004 (File No. 000-07258, Exhibit 10.3).
10.2.33 Form of Bonus Agreement by and between Charming Shoppes, Inc. and
the Executive Officer named in the Agreement, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended
October 30, 2004 (File No. 000-07258, Exhibit 10.14).
10.2.34 Charming Shoppes, Inc. Annual Incentive Program As Amended and
Restated January 19, 2005, incorporated by reference to Form 8-K
of the Registrant dated January 19, 2005, filed January 25, 2005.
(File No. 000-07258, Exhibit 99.1).
10.2.35 Employment Agreement, dated as of January 1, 2005, by and between
Charming Shoppes, Inc. and Dorrit J. Bern, incorporated by
reference to Form 8-K of the Registrant dated January 3, 2005,
filed on January 4, 2005. (File No. 000-07258, Exhibit 99.1)
10.2.36 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Restricted Stock Agreement, dated as of May 13, 2004, between
Charming Shoppes, Inc. and Dorrit J. Bern, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended
July 31, 2004 (File No. 000-07258, Exhibit 10.8).
110
10.2.37 Charming Shoppes, Inc. 2004 Stock Award and Incentive Plan
Restricted Stock Agreement, dated as of January 3, 2005, between
Charming Shoppes, Inc. and Dorrit J. Bern.
10.2.38 Form of Charming Shoppes, Inc. 2004 Stock Award and Incentive
Plan Restricted Stock Agreement between Charming Shoppes, Inc.
and Dorrit J. Bern, incorporated by reference to Form 8-K of the
Registrant dated February 7, 2005, filed on February 11, 2005.
(File No. 000-07258, Exhibit 99.1)
10.2.39 Form of Charming Shoppes, Inc. 2004 Stock Award and Incentive
Plan Performance Share Agreement between Charming Shoppes, Inc.
and Dorrit J. Bern, incorporated by reference to Form 8-K of the
Registrant dated February 7, 2005, filed on February 11, 2005.
(File No. 000-07258, Exhibit 99.3)
10.2.40 Employment Agreement, dated as of March 12, 2003, by and between
Charming Shoppes, Inc. and Erna Zint, incorporated by reference
to Form 10-K of the Registrant for the fiscal year ended February
1, 2003. (File No. 000-07258, Exhibit 10.2.17).
10.2.41 Forms of Executive Severance Agreements by and between Charming
Shoppes, Inc., the named executive officers in the company's
Proxy Statement for the Annual Meeting held on June 15, 2000, and
certain other executive officers and officers of Charming
Shoppes, Inc. and its subsidiaries, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended January 29,
2000. (File No. 000-07258, Exhibit 10.2.33).
10.2.42 Forms of First Amendment, dated as of February 6, 2003, to Forms
of Executive Severance Agreements, dated July 15, 1999, by and
between Charming Shoppes, Inc., and the executive officers and
officers named in the Agreements, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended February 1,
2003. (File No. 000-07258, Exhibit 10.2.30).
10.2.43 Form of Executive Severance Agreement, dated February 6, 2003, by
and between Charming Shoppes, Inc. and certain executive officers
and officers of Charming Shoppes, Inc. and its subsidiaries,
incorporated by reference to Form 10-K of the Registrant for the
fiscal year ended February 1, 2003. (File No. 000-07258, Exhibit
10.2.31).
14 Charming Shoppes, Inc. Business Ethics and Standards of Conduct
Policy, incorporated by reference to Form 10-K of the Registrant
for the fiscal year ended January 31, 2004. (File No. 000-07258,
Exhibit 14).
21 Subsidiaries of Registrant
23 Consent of independent registered public accounting firm
31.1 Certification by Principal Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by Principal Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
111