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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File No. 000-07258
CHARMING SHOPPES, INC.
----------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1721355
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 WINKS LANE, BENSALEM, PA 19020
------------------------- -----
(Address of principal executive offices) (Zip Code)
(215) 245-9100
--------------
(Registrant's telephone number, including Area Code)
NOT APPLICABLE
--------------
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of the issuer's Common Stock (par
value $.10 per share), as of August 24, 2004, was 118,078,888 shares.
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CHARMING SHOPPES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
July 31, 2004 and January 31, 2004................................ 2
Condensed Consolidated Statements of Operations and Comprehensive Income
Thirteen weeks ended July 31, 2004 and August 2, 2003............. 3
Twenty-six weeks ended July 31, 2004 and August 2, 2003........... 4
Condensed Consolidated Statements of Cash Flows
Twenty-six weeks ended July 31, 2004 and August 2, 2003........... 5
Notes to Condensed Consolidated Financial Statements.................... 6 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking Statements.............................................. 13 - 14
Critical Accounting Policies............................................ 15
Results of Operations................................................... 15 - 21
Liquidity and Capital Resources......................................... 22 - 25
Financing............................................................... 25 - 26
Market Risk............................................................. 26 - 27
Impact of Recent Accounting Pronouncements.............................. 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 27
Item 4. Controls and Procedures........................................ 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 28
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and
Issuer Purchases of Equity Securities........................... 28
Item 4. Submission of Matters to a Vote of Security Holders............ 29
Item 6. Exhibits....................................................... 29 - 30
SIGNATURES.............................................................. 31
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, January 31,
(Dollars in thousands, except share amounts) 2004 2004
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents .......................................... $ 223,856 $ 123,781
Available-for-sale securities ...................................... 66,438 55,688
Merchandise inventories ............................................ 307,244 309,995
Deferred taxes ..................................................... 19,820 19,902
Prepayments and other .............................................. 79,447 57,494
----------- -----------
Total current assets ........................................... 696,805 566,860
----------- -----------
Property, equipment, and leasehold improvements - at cost .......... 725,682 705,257
Less accumulated depreciation and amortization ..................... 415,626 386,633
----------- -----------
Net property, equipment, and leasehold improvements ............ 310,056 318,624
----------- -----------
Trademarks and other intangible assets ............................. 170,148 170,478
Goodwill ........................................................... 66,956 66,956
Available-for-sale securities ...................................... 5,249 14,521
Other assets ....................................................... 31,361 27,440
----------- -----------
Total assets ....................................................... $ 1,280,575 $ 1,164,879
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................... $ 163,195 $ 135,777
Accrued expenses ................................................... 138,254 138,166
Income taxes payable ............................................... 8,238 1,128
Current portion - long-term debt ................................... 22,828 17,278
Accrued expenses related to cost reduction plan .................... 2,455 2,596
----------- -----------
Total current liabilities ...................................... 334,970 294,945
----------- -----------
Deferred taxes and other non-current liabilities ................... 62,704 62,030
Long-term debt ..................................................... 194,177 202,819
Stockholders' equity
Common Stock $.10 par value:
Authorized - 300,000,000 shares
Issued - 130,344,247 shares and 125,526,573 shares, respectively 13,034 12,553
Additional paid-in capital ......................................... 235,291 201,798
Treasury stock at cost - 12,265,993 shares ......................... (84,136) (84,136)
Deferred employee compensation ..................................... (7,810) (2,539)
Accumulated other comprehensive loss ............................... (95) (365)
Retained earnings .................................................. 532,440 477,774
----------- -----------
Total stockholders' equity ..................................... 688,724 605,085
----------- -----------
Total liabilities and stockholders' equity ......................... $ 1,280,575 $ 1,164,879
=========== ===========
See Notes to Condensed Consolidated Financial Statements
2
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
Thirteen Weeks Ended
--------------------
July 31, August 2,
(In thousands, except per share amounts) 2004 2003
---- ----
Net sales ......................................................... $ 611,737 $ 605,456
--------- ---------
Cost of goods sold, buying, and occupancy expenses ................ 430,028 428,425
Selling, general, and administrative expenses ..................... 133,361 136,899
Expenses related to cost reduction plan ........................... 0 6,389
--------- ---------
Total operating expenses .......................................... 563,389 571,713
--------- ---------
Income from operations ............................................ 48,348 33,743
Other income, principally interest ................................ 415 540
Interest expense .................................................. (3,880) (3,849)
--------- ---------
Income before income taxes and minority interest .................. 44,883 30,434
Income tax provision .............................................. 17,145 11,838
--------- ---------
Income before minority interest ................................... 27,738 18,596
Minority interest in net loss of consolidated subsidiary .......... 0 49
--------- ---------
Net income ........................................................ 27,738 18,645
--------- ---------
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale securities, net of income
taxes of $76 and $13, respectively ............................ 142 20
Reclassification of amortization of deferred loss on termination of
derivative, net of income taxes of $23 and $46, respectively .. 43 85
--------- ---------
Total other comprehensive income, net of taxes .................... 185 105
--------- ---------
Comprehensive income .............................................. $ 27,923 $ 18,750
========= =========
Basic net income per share ........................................ $ .24 $ .17
========= =========
Diluted net income per share ...................................... $ .22 $ .15
========= =========
See Notes to Condensed Consolidated Financial Statements
3
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
Twenty-six Weeks Ended
----------------------
July 31, August 2,
(In thousands, except per share amounts) 2004 2003
---- ----
Net sales ............................................................... $ 1,204,475 $ 1,169,742
----------- -----------
Cost of goods sold, buying, and occupancy expenses ...................... 830,415 823,913
Selling, general, and administrative expenses ........................... 282,211 282,164
Expenses related to cost reduction plan ................................. 0 10,820
----------- -----------
Total operating expenses ................................................ 1,112,626 1,116,897
----------- -----------
Income from operations .................................................. 91,849 52,845
Other income, principally interest ...................................... 809 964
Interest expense ........................................................ (7,763) (7,654)
----------- -----------
Income before income taxes and minority interest ........................ 84,895 46,155
Income tax provision .................................................... 30,229 17,954
----------- -----------
Income before minority interest ......................................... 54,666 28,201
Minority interest in net loss of consolidated subsidiary ................ 0 133
----------- -----------
Net income .............................................................. 54,666 28,334
----------- -----------
Other comprehensive income, net of tax:
Unrealized gains (losses) on available-for-sale securities, net of income
tax (provision) benefit of $(97) and $11, respectively .............. 153 (18)
Reclassification of amortization of deferred loss on termination of
derivative, net of income taxes of $(63) and $(92), respectively .... 117 171
----------- -----------
Total other comprehensive income, net of taxes .......................... 270 153
----------- -----------
Comprehensive income .................................................... $ 54,936 $ 28,487
=========== ===========
Basic net income per share .............................................. $ .48 $ .25
=========== ===========
Diluted net income per share ............................................ $ .43 $ .24
=========== ===========
See Notes to Condensed Consolidated Financial Statements
4
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six Weeks Ended
----------------------
July 31, August 2,
(In thousands) 2004 2003
---- ----
Operating activities
Net income ........................................... $ 54,666 $ 28,334
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................... 34,383 39,226
Tax benefit related to stock plans ............... 4,187 0
Deferred income taxes ............................ (236) 2,240
Loss from disposition of capital assets .......... 422 1,342
Other, net ....................................... 185 (133)
Changes in operating assets and liabilities:
Merchandise inventories ....................... 2,751 (20,580)
Accounts payable .............................. 27,418 36,061
Prepayments and other ......................... (21,953) (2,873)
Accrued expenses and other .................... 920 (15,286)
Income taxes payable .......................... 7,110 2,415
Accrued expenses related to cost reduction plan (141) 3,678
--------- ---------
Net cash provided by operating activities ............ 109,712 74,424
--------- ---------
Investing activities
Investment in capital assets ......................... (19,397) (25,914)
Proceeds from sales of available-for-sale securities . 20,494 19,735
Gross purchases of available-for-sale securities ..... (21,907) (21,507)
Increase in other assets ............................. (3,734) (3,144)
--------- ---------
Net cash used in investing activities ................ (24,544) (30,830)
--------- ---------
Financing activities
Proceeds from short-term borrowings .................. 94,706 111,069
Repayments of short-term borrowings .................. (94,706) (111,069)
Proceeds from long-term borrowings ................... 98 1,050
Repayments of long-term borrowings ................... (8,589) (7,172)
Proceeds from issuance of common stock ............... 23,398 376
--------- ---------
Net cash provided by (used in) financing activities .. 14,907 (5,746)
--------- ---------
Increase in cash and cash equivalents ................ 100,075 37,848
Cash and cash equivalents, beginning of period ....... 123,781 102,026
--------- ---------
Cash and cash equivalents, end of period ............. $ 223,856 $ 139,874
========= =========
Non-cash financing and investing activities
Equipment acquired through capital leases ............ $ 5,399 $ 9,210
========= =========
Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
See Notes to Condensed Consolidated Financial Statements
5
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Condensed Consolidated Financial Statements
We have prepared our condensed consolidated balance sheet as of July
31, 2004, and our condensed consolidated statements of operations and
comprehensive income and cash flows for the thirteen weeks and twenty-six weeks
ended July 31, 2004 and August 2, 2003, without audit. In our opinion, we have
made all adjustments (which include only normal recurring adjustments) necessary
to present fairly our financial position at July 31, 2004, and the results of
our operations and cash flows for the thirteen weeks and twenty-six weeks ended
July 31, 2004 and August 2, 2003. We have condensed or omitted certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States. These financial statements and related notes should be read in
conjunction with our financial statements and related notes included in our
January 31, 2004 Annual Report on Form 10-K. The results of operations for the
thirteen weeks and twenty-six weeks ended July 31, 2004 and August 2, 2003 are
not necessarily indicative of operating results for the full fiscal year.
As used in these notes, the terms "Fiscal 2005" and "Fiscal 2004" refer
to our fiscal year ending January 29, 2005 and our fiscal year ended January 31,
2004, respectively. The terms "Fiscal 2005 Second Quarter" and "Fiscal 2004
Second Quarter" refer to the thirteen weeks ended July 31, 2004 and August 2,
2003, respectively. The terms "Fiscal 2005 First Quarter" and "Fiscal 2004 First
Quarter" refer to the thirteen weeks ended May 1, 2004 and May 3, 2003,
respectively. The term "Fiscal 2004 Third Quarter" refers to the thirteen weeks
ended October 1, 2003. The terms "the Company," "we," "us," and "our" refer to
Charming Shoppes, Inc. and, where applicable, its consolidated subsidiaries.
We account for cash consideration received from vendors in accordance
with the provisions of EITF Issue 02-16, "Accounting by a Customer (Including a
Reseller) for Cash Consideration Received from a Vendor." For interim reporting,
we generally defer markdown allowances and recognize them in the period in which
markdown expenses are recognized. Inasmuch as the markdown allowances at the
date of purchase are intended to compensate us for future markdowns taken at the
time of sale, we defer the recognition of markdown allowances during the interim
periods in order to better match the recognition of markdown allowances to the
period the related markdown expenses are recorded.
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.
6
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 1. Condensed Consolidated Financial Statements (Continued)
The following table reconciles net income and net income per share as
reported, using the intrinsic value method under APB No. 25, to pro forma net
income and net income per share using the fair value method under Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-based Compensation":
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
(In thousands, except per July 31, August 2, July 31, August 2,
share amounts) 2004 2003 2004 2003
---- ---- ---- ----
Net income as reported ............... $ 27,738 $ 18,645 $ 54,666 $ 28,334
Add stock-based employee compensation
using intrinsic value method, net
of income taxes ................. 377 230 764 500
Less stock-based employee compensation
using fair value method, net of
income taxes .................... (956) (695) (1,797) (1,684)
---------- ---------- ---------- ----------
Pro forma net income ................. $ 27,159 $ 18,180 $ 53,633 $ 27,150
========== ========== ========== ==========
Basic net income per share:
As reported ..................... $ .24 $ .17 $ .48 $ .25
Pro forma ....................... .23 .16 .47 .24
Diluted net income per share:
As reported ..................... .22 .15 .43 .24
Pro forma ....................... .21 .15 .42 .23
Note 2. Trademarks and Other Intangible Assets
July 31, January 31,
(In thousands) 2004 2004
---- ----
Trademarks, tradenames, and internet domain names . $168,800 $168,800
Customer lists and covenant not to compete ........ 3,300 3,300
-------- --------
Total at cost ..................................... 172,100 172,100
Less accumulated amortization of customer lists and
covenant not to compete ....................... 1,952 1,622
-------- --------
Net trademarks and other intangible assets ........ $170,148 $170,478
======== ========
7
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 3. Long-term Debt
July 31, January 31,
(In thousands) 2004 2004
---- ----
4.75% Senior Convertible Notes due 2012 $150,000 $150,000
Capital lease obligations ............. 36,577 37,934
6.53% mortgage note ................... 11,550 12,250
7.77% mortgage note ................... 9,806 10,039
7.5% mortgage note .................... 5,725 5,840
8.15% note ............................ 1,827 2,494
Other long-term debt .................. 1,520 1,540
-------- --------
Total long-term debt .................. 217,005 220,097
Less current portion .................. 22,828 17,278
-------- --------
Long-term debt ........................ $194,177 $202,819
======== ========
Note 4. Stockholders' Equity
Twenty-six
Weeks Ended
July 31,
(Dollars in thousands) 2004
----
Total stockholders' equity, beginning of period ...................... $605,085
Net income ........................................................... 54,666
Issuance of common stock (4,817,674 shares) .......................... 23,398
Tax benefit related to stock plans ................................... 4,187
Amortization of deferred compensation expense ........................ 1,118
Amortization of deferred loss on termination of derivative, net of tax 117
Unrealized gains on available-for-sale securities, net of tax ........ 153
--------
Total stockholders' equity, end of period ............................ $688,724
========
Note 5. 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.
8
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 5. Customer Loyalty Card Programs (Continued)
During the Fiscal 2004 First Quarter, we introduced a new FASHION
BUG(R) 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 the thirteen weeks and
twenty-six weeks ended July 31, 2004, we recognized revenues of $2,290,000 and
$3,705,000, respectively, in connection with this program. During the thirteen
weeks and twenty-six weeks ended August 2, 2003, we recognized revenues of
$2,791,000 in connection with this program. No revenues were recognized during
the Fiscal 2004 First Quarter. As of July 31, 2004 and January 31, 2004, we
accrued $700,000 and $1,200,000, respectively, for the estimated costs of
discounts earned and coupons issued and not redeemed.
Under a previous FASHION BUG store loyalty card program, we recognized
revenues from annual membership fees as sales over the life of the membership
based on discounts earned by the customer. For customers who did not earn
discounts during the membership period that exceeded the card fee, the
difference between the membership fee and discounts earned was recognized as
revenue upon the expiration of the annual membership period. Upon early
cancellation of the loyalty card, refunds of membership fees were reduced by the
amount of any discounts granted to the member under the program. During the
thirteen weeks and twenty-six weeks ended August 2, 2003, we recognized revenues
of $2,135,000 and $6,308,000, respectively, in connection with this program. We
discontinued the issuance of new cards under this program in December 2002, and
we terminated the program during the Fiscal 2004 Second Quarter. Our
CATHERINES(R) brand currently offers a similar loyalty program. During the
thirteen weeks and twenty-six weeks ended July 31, 2004, we recognized revenues
of $1,892,000 and $3,741,000, respectively, in connection with this program.
During the thirteen weeks and twenty-six weeks ended August 2, 2003, we
recognized revenues of $1,903,000 and $3,806,000, respectively in connection
with this program.
Note 6. 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." The total costs recognized during Fiscal 2004 related to this plan
were $11,534,000, with $4,431,000 of the costs recognized during the Fiscal 2004
First Quarter and $6,389,000 of the costs recognized during the Fiscal 2004
Second Quarter.
9
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 6. Expenses Related to Cost Reduction Plan (Continued)
Costs incurred during the thirteen weeks and twenty-six weeks ended
August 2, 2003 consisted of the following:
Thirteen Twenty-six
Weeks Ended Weeks Ended
August 2, August 2,
(In thousands) 2003 2003
---- ----
Workforce reduction costs .......................... $ 650 $ 3,059
Lease termination and related costs ................ 3,139 3,440
Acceleration of depreciation of property, equipment, 2,340 3,703
and leasehold improvements
Other facility closure costs ....................... 260 618
------- -------
Total costs ........................................ $ 6,389 $10,820
======= =======
Workforce reduction costs represent involuntary termination benefits
and retention bonuses. Employees affected by the plan were notified during the
Fiscal 2004 First Quarter. During the Fiscal 2004 First Quarter, we terminated
118 employees at our corporate and divisional home offices. During the Fiscal
2004 Second Quarter, we terminated 231 employees in connection with the closing
of our Memphis, Tennessee distribution center, our Hollywood, Florida credit
operations, and our remaining Monsoon(R) 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 our Hollywood, Florida credit facility, reduced by estimated
sublease income. We recognized the present value of the remaining lease
obligations, less sublease income, related to the Hollywood facility in June
2003 when we closed the facility.
Accelerated depreciation costs mainly represent the acceleration of
depreciation of the net book value of the assets at our Memphis, Tennessee
distribution center and our Hollywood, Florida credit facility, which we closed
in June 2003, to their estimated fair values. During the Fiscal 2004 First
Quarter, we made the decision to sell our 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
Fiscal 2004 Third Quarter, 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.
As of July 31, 2004 and January 31, 2004, there were $2,455,000 and
$2,596,000, respectively, of accrued lease termination costs related to the
closing of the Hollywood facility.
10
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 7. Net Income Per Share
Thirteen Weeks Ended Twenty-six Weeks Ended
July 31, August 2, July 31, August 2,
(In thousands) 2004 2003 2004 2003
---- ---- ---- ----
Basic weighted average common shares
outstanding .................................... 115,908 112,421 114,603 112,391
Dilutive effect of assumed conversion of
convertible notes .............................. 15,182 15,182 15,182 15,182
Dilutive effect of stock options and awards ........ 1,913 807 1,908 496
-------- -------- -------- --------
Diluted weighted average common shares and
equivalents outstanding ........................ 133,003 128,410 131,693 128,069
======== ======== ======== ========
Net income ......................................... $ 27,738 $ 18,645 $ 54,666 $ 28,334
Decrease in interest expense from assumed
conversion of notes, net of income taxes ....... 1,135 1,062 2,269 2,161
-------- -------- -------- --------
Net income used to determine diluted net
income per share ............................... $ 28,873 $ 19,707 $ 56,935 $ 30,495
======== ======== ======== ========
Options with weighted average exercise price greater
than market price, excluded
from computation of net income per share:
Number of shares (in thousands) ................ 424 8,430 428 10,342
Weighted average exercise price per share ...... $ 8.24 $ 6.44 $ 8.29 $ 6.14
Note 8. Income Taxes
The effective income tax rate was 35.6% for the twenty-six weeks ended
July 31, 2004, as compared to 38.9% for the twenty-six weeks ended August 2,
2003. The lower effective tax rate for the twenty-six weeks ended July 31, 2004
is primarily the result of finalizing certain prior year tax audits. The tax
rate for the twenty-six weeks ended August 2, 2003 was affected by a provision
for taxes related to one of our insurance programs, which we settled with the
Internal Revenue Service during the second half of Fiscal 2004.
11
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 9. Impact of Recent Accounting Pronouncements
In January 2003, the FASB issued Financial Interpretation ("FIN") No.
46, "Consolidation of Variable Interest Entities," an interpretation of
Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial
Statements." A variable interest entity ("VIE") is a corporation, trust,
partnership, or other legal entity used for business purposes that either does
not have equity investors with substantive voting rights or has equity investors
that do not provide sufficient financial resources for the entity to finance its
activities without additional subordinated financial support from other parties.
Consolidation of a VIE by a variable interest holder is required if the variable
interest holder is subject to a majority of the VIE's risk of loss, is entitled
to receive a majority of the VIE's residual returns, or both. The variable
interest holder that consolidates the VIE is the primary beneficiary. FIN No. 46
also requires that the primary beneficiary and all other enterprises with a
significant variable interest in a VIE provide certain additional disclosures.
FIN No. 46 provides certain exceptions to these rules, including qualifying
special purpose entities ("QSPEs") subject to the requirements of SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities."
FIN No. 46 is effective for all VIEs created after January 31, 2003.
The disclosure provisions of FIN No. 46 apply to financial statements issued
after January 31, 2003, regardless of when the VIE was established. For VIEs
created before February 1, 2003, the consolidation provisions of FIN No. 46, as
originally issued, were to be applied in the first interim or annual reporting
period beginning after June 15, 2003. In October 2003, the FASB postponed the
implementation date for VIEs created before February 1, 2003 to the first
interim or annual period ending after December 15, 2003, provided that the
reporting entity has not issued financial statements reporting the VIE in
accordance with FIN No. 46. In December 2003, the FASB revised FIN No. 46 to
delay the required implementation date for entities that are not special purpose
entities ("SPEs"), such as equity method investments in operating companies.
Adoption of FIN No. 46 did not have a material impact on our financial position
or results of operations.
Note 10. Subsequent Event
On August 5, 2004, in connection with our asset securitization program,
the Charming Shoppes Master Trust (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. This pre-funding cash
account will replace Series 1999-1 (which is currently in its amortization
period) as well as provide financing for additional receivables. On August 24,
2004, we sold to investors $9,450,000 of the $18,900,000 we held as a retained
interest.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This management's discussion and analysis of financial condition and
results of operations should be read in conjunction with the financial
statements and accompanying notes included in Item 1 of this report. It should
also be read in conjunction with the management's discussion and analysis of
financial condition and results of operations, financial statements, and
accompanying notes appearing in our Annual Report on Form 10-K for the fiscal
year ended January 31, 2004. As used in this management's discussion and
analysis, the terms "Fiscal 2005," "Fiscal 2004," and "Fiscal 2003" refer to our
fiscal year ending January 29, 2005 and our fiscal years ended January 31, 2004
and February 1, 2003, respectively. The terms "Fiscal 2005 Second Quarter" and
"Fiscal 2004 Second Quarter" refer to the thirteen weeks ended July 31, 2004 and
August 2, 2003, respectively. The terms "Fiscal 2005 Third Quarter," and "Fiscal
2005 Fourth Quarter" refer to the thirteen weeks ending October 30, 2004, and
January 29, 2005, respectively. The term "Fiscal 2006 First Quarter" refers to
the thirteen weeks ending April 30, 2005. The terms "Fiscal 2004 First Quarter,"
"Fiscal 2004 Third Quarter," and "Fiscal 2004 Fourth Quarter" refer to the
thirteen weeks ended May 3, 2003, November 1, 2003, and January 31, 2004,
respectively. 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 gasoline prices could lead to reduced consumer demand
for our apparel and accessories in the future.
o The women's specialty retail apparel industry is highly competitive and
we may be unable to compete successfully against existing or future
competitors.
o We cannot assure the successful implementation of our business plan for
increased profitability and growth in our plus-size women's apparel
business.
o Our business plan is largely dependent upon the continued growth in the
plus-size women's apparel market, which may not continue.
o We depend on key personnel, particularly our Chief Executive Officer,
Dorrit J. Bern, and we may not be able to retain or replace these
employees or recruit additional qualified personnel.
13
o We depend on our distribution centers and could incur significantly
higher costs and longer lead times associated with distributing our
products to our stores if any of these distribution centers were to
shut down for any reason.
o We depend 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 program. If we were unable to obtain
sufficient financing at affordable cost, our ability to merchandise our
stores would be adversely affected.
o We rely significantly on foreign sources of production and face a
variety of risks generally associated with doing business in foreign
markets and importing merchandise from abroad. Such risks include (but
are not necessarily limited to) political instability, imposition of,
or changes in, duties or quotas, increased security requirements
applicable to imports, delays in shipping, increased costs of
transportation, and issues relating to compliance with domestic or
international labor standards.
o Our stores experience seasonal fluctuations in net sales and operating
income. Any decrease in sales or margins during our peak sales periods,
or in the availability of working capital during the months preceding
such periods, could have a material adverse effect on our business. In
addition, extreme or unseasonable weather conditions may have a
negative impact on our sales.
o War, acts of terrorism, or the threat of either may negatively impact
availability of merchandise and customer traffic to our stores, or
otherwise adversely affect our business.
o We may be unable to obtain adequate insurance for our operations at a
reasonable cost.
o We may be unable to protect our trademarks and other intellectual
property rights, which are important to our success and our competitive
position.
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.
14
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are discussed in the management's
discussion and analysis of financial condition and results of operations and
notes accompanying the consolidated financial statements that appear in our
Annual Report on Form 10-K for the fiscal year ended January 31, 2004. Except as
otherwise disclosed in the financial statements and accompanying notes included
in this report, there were no material changes in our critical accounting
policies or in the assumptions or estimates we used to prepare the financial
information appearing in this report.
RESULTS OF OPERATIONS
The following table shows our results of operations expressed as a
percentage of net sales and on a comparative basis:
Thirteen Weeks Ended Percentage Twenty-six Weeks Ended Percentage
-------------------- Change ---------------------- Change
July 31, August 2, From Prior July 31, August 2, From Prior
2004 2003 Period 2004 2003 Period
---- ---- ------ ---- ---- ------
Net sales........................... 100.0% 100.0% 1.0% 100.0% 100.0% 3.0%
Cost of goods sold, buying, and
occupancy expenses.............. 70.3 70.8 0.4 68.9 70.4 0.8
Selling, general, and administrative
expenses........................ 21.8 22.6 (2.6) 23.4 24.1 -
Expenses related to cost reduction
plan............................ - 1.1 (100.0) - 0.9 (100.0)
Income from operations.............. 7.9 5.6 43.3 7.6 4.5 73.8
Other income, principally interest.. 0.1 0.1 (23.2) 0.1 0.1 (16.1)
Interest expense.................... 0.6 0.6 0.8 0.6 0.7 1.4
Income tax provision................ 2.8 2.0 44.8 2.5 1.5 68.4
Net income.......................... 4.5 3.1 48.8 4.5 2.4 92.9
--------------------
Results may not add due to rounding.
The following table shows our net sales by store brand:
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
July 31, August 2, July 31, August 2,
(In millions) 2004 2003 2004 2003
---- ---- ---- ----
FASHION BUG(R) $ 290.1 $ 297.1 $ 552.4 $ 550.0
LANE BRYANT(R) 238.2 221.0 484.8 445.9
CATHERINES(R) . 83.4 86.4 167.3 172.1
Other (1) ..... 0.0 1.0 0.0 1.7
-------- -------- ---------- ----------
Total net sales $ 611.7 $ 605.5 $ 1,204.5 $ 1,169.7
======== ======== ========== ==========
--------------------
(1) Sales attributable to Monsoon/Accessorize stores, which were closed during
Fiscal 2004.
15
The following table shows additional information related to changes in
our net sales:
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
---- ---- ---- ----
Increase (decrease) in comparable store
sales(1):
Consolidated Company....................... 0% (1)% 3% (4)%
FASHION BUG................................ 0 3 4 0
CATHERINES................................. (6) 4 (4) 1
LANE BRYANT................................ 3 (9) 4 (10)
Sales from new stores as a percentage of total
consolidated prior-period sales:
FASHION BUG................................ 1 1 1 1
CATHERINES................................. 1 1 1 1
LANE BRYANT................................ 3 3 3 3
Prior-period sales from closed stores as a
percentage of total consolidated
prior-period sales:
FASHION BUG................................ (1) (5) (2) (5)
CATHERINES................................. (1) (2) (1) (2)
LANE BRYANT................................ (1) (1) (1) (1)
Increase (decrease) in total sales............. 1 (5) 3 (8)
--------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation.
The following table sets forth information with respect to our store
activity for the first half of Fiscal 2005 and planned store activity for all of
Fiscal 2005 (including the first half of Fiscal 2005):
FASHION LANE
BUG BRYANT CATHERINES Total
--- ------ ---------- -----
Fiscal 2005 First Half:
Stores at January 31, 2004 ... 1,051 710 466 2,227
------ ------ ------ ------
Stores opened ................ 1 10 8 19
Stores closed ................ (5) (5) (4) (14)
------ ------ ------ ------
Net change in stores ......... (4) 5 4 5
------ ------ ------ ------
Stores at July 31, 2004 ...... 1,047 715 470 2,232
====== ====== ====== ======
Stores relocated during period 11 8 3 22
Stores remodeled during period 3 7 -- 10
Fiscal 2005:
Planned store openings ....... 5 32 15 52
Planned store closings ....... 25 15 10 50
Planned store relocations .... 20 15 15 55
16
Comparison of Thirteen Weeks Ended July 31, 2004 and August 2, 2003
Net Sales
The increase in net sales from the Fiscal 2004 Second Quarter to the
Fiscal 2005 Second Quarter resulted primarily from positive results at our LANE
BRYANT brand, which were partially offset by lower sales at our FASHION BUG and
CATHERINES brands. Comparable store sales increased at LANE BRYANT, were flat
for FASHION BUG, and decreased for CATHERINES. We operated 2,232 retail stores
at the end of the Fiscal 2005 Second Quarter, as compared to 2,240 stores at the
end of the Fiscal 2004 Second Quarter.
The increase in LANE BRYANT comparable store sales met our sales plan
for the quarter. LANE BRYANT stores experienced slightly weaker traffic levels
during the current-year quarter, with the average number of transactions per
store decreasing 1%. The slightly weaker traffic levels were offset by increases
of 4% in the average dollar sale and 6% in the average number of units sold per
customer ("UPC"). The average retail value per unit sold decreased 2% as
compared to the prior-year period. LANE BRYANT experienced comparable store
sales increases for the quarter in intimate apparel and wear-to-work tops and
separates, partially offset by decreases in sales of denim and casual woven
tops. During the second quarter of 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. Continued improvements
in the merchandise assortments offered at LANE BRYANT resulted in improved sales
performance during the Fiscal 2005 Second Quarter.
FASHION BUG comparable store sales did not meet our sales plan for the
quarter. FASHION BUG experienced strong sales of its summer merchandise in May,
but sales slowed in June and July. FASHION BUG store traffic levels were flat
during the current-year quarter, with the average UPC, the average number of
transactions per store, the average dollar sale, and the average retail value
per unit sold increasing or decreasing less than 1%. FASHION BUG stores
experienced decreases in sales of junior and plus sportswear and dresses, which
were partially offset by increases in sales of misses and intimate apparel.
FASHION BUG store sales also benefited from sales of maternity and girls, two
new categories added to the FASHION BUG brand during the Fiscal 2004 Fourth
Quarter.
CATHERINES stores experienced a decrease in comparable store sales
during the Fiscal 2005 Second Quarter, and were below our sales plan for the
quarter. The decrease in sales at CATHERINES was primarily a result of
disappointing performance in the dress and wear-to-work categories. Traffic
levels were down from the prior-year period, with the average number of
transactions per store decreasing 4%. The average dollar sale decreased 2% as
compared to the prior-year quarter, with a 4% increase in the average UPC offset
by a 5% decrease in the average retail value per unit sold, reflecting higher
levels of promotional pricing during the current quarter.
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. We recognize revenue on 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. See "Item 1. Notes To Condensed Consolidated
Financial Statements (Unaudited); Note 5. Customer Loyalty Card Program" above
for further information on our loyalty card programs.
17
During the Fiscal 2004 First Quarter, we introduced a new FASHION BUG
customer loyalty card program that is being operated under our FASHION BUG
proprietary credit card program. During the Fiscal 2005 Second Quarter, we
recognized revenues of $2.3 million in connection with this loyalty card
program. During the Fiscal 2004 Second Quarter, we recognized $2.8 million of
revenues in connection with this program. During the Fiscal 2005 Second Quarter
and Fiscal 2004 Second Quarter, we also recognized revenues of $1.9 million and
$1.9 million, respectively, in connection with our CATHERINES loyalty card
program.
During the Fiscal 2004 Second Quarter, we recognized revenues of $2.1
million in connection with a previous FASHION BUG loyalty card program. We
discontinued the issuance of new cards under this program at the end of Fiscal
2003, and we terminated this program during the Fiscal 2004 Second Quarter.
Cost of Goods Sold, Buying, and Occupancy
The increase in cost of goods sold, buying, and occupancy expenses from
the Fiscal 2004 Second Quarter to the Fiscal 2005 Second Quarter principally
reflects the increase in net sales. Cost of goods sold as a percentage of net
sales decreased 0.2% from the Fiscal 2004 Second Quarter to the Fiscal 2005
Second Quarter. Improvements in merchandise margins at our LANE BRYANT and
FASHION BUG brands were offset by decreased margins at our CATHERINES brand.
Margins at the CATHERINES brand were negatively affected by the increased
promotional activity that resulted from reduced traffic levels during the
current quarter. Higher levels of promotional activity at our LANE BRYANT brand
negatively affected merchandise margins in the Fiscal 2004 Second Quarter. 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 decreased
0.3% from the Fiscal 2004 Second Quarter to the Fiscal 2005 Second Quarter. The
decrease was primarily a result of leverage on relatively fixed occupancy costs
as a result of the increase in net sales, and cost savings from the
consolidation of our LANE BRYANT and CATHERINES distribution centers 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 decreased from the Fiscal
2004 Second Quarter to the Fiscal 2005 Second Quarter, and decreased 0.8% as a
percentage of net sales. The decrease was primarily a result of continued tight
control of store expenses and improved performance of our FASHION BUG credit
card operations, which experienced favorable trends in delinquencies during the
Fiscal 2005 Second Quarter. Selling expenses and general and administrative
expenses each decreased 0.4% as a percentage of net sales.
18
Expenses Related to Cost Reduction Plan
On March 18, 2003, we announced a cost reduction plan designed to take
advantage of the centralization of all corporate administrative services
throughout the Company and to realize certain efficiencies, in order to improve
profitability. See "Item 1. Notes To Condensed Consolidated Financial Statements
(Unaudited); Note 6. 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" in our Annual
Report on Form 10-K for the fiscal year ended January 31, 2004 for details of
this program. We accounted for the plan in accordance with the provisions of
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The cost reduction plan was substantially completed during Fiscal
2004. The total costs recognized during Fiscal 2004 related to this plan were
$11.5 million, with $6.4 million of the costs recognized during the Fiscal 2004
Second Quarter.
This cost reduction plan is expected to improve annualized pre-tax
earnings by a total of approximately $45 million. During Fiscal 2004, we
realized cost reductions of more than $30 million. Except for the remaining
benefits to be realized from the consolidation of our distribution centers,
which we expect to realize by the end of Fiscal 2005, we have realized the
remaining benefits of the cost reduction plan.
During the Fiscal 2004 First Quarter, we made the decision to sell our
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 Fiscal 2004 Third Quarter, we began to evaluate
alternative uses for the facility, and began to depreciate the then-current
carrying amount of the asset over its estimated useful life.
Expenses related to the plan incurred during the Fiscal 2004 Second
Quarter are included in "Expenses related to cost reduction plan" in the
accompanying Condensed Consolidated Statements of Operations and Comprehensive
Income.
Income Tax Provision
The effective income tax rate was 38.2% in the Fiscal 2005 Second
Quarter, as compared to 38.9% in the Fiscal 2004 Second Quarter. The tax rate
for the Fiscal 2004 Second Quarter was affected by a provision for taxes related
to one of our insurance programs, which we settled with the Internal Revenue
Service during the second half of Fiscal 2004.
Comparison of Twenty-six Weeks Ended July 31, 2004 and August 2, 2003
Net Sales
The increase in net sales from the first half of Fiscal 2004 to the
first half of Fiscal 2005 resulted primarily from positive comparable store
sales results at our LANE BRYANT and FASHION BUG brands, which were partially
offset by negative comparable store sales results at our CATHERINES brand.
19
LANE BRYANT stores experienced stronger traffic levels during the
current-year period, with both the average number of transactions per store and
average dollar sale increasing 2%, and the average number of units sold per
customer ("UPC") increasing 1%. The average retail value per unit sold increased
1%, reflecting reduced levels of promotional pricing for the brand as compared
to the prior-year period. LANE BRYANT experienced comparable store sales
increases in most major merchandise categories, especially wear-to-work and
intimate apparel, partially offset by decreases in casual woven tops and denim
separates. During the first half of 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. Continued improvements
in the merchandise assortments offered at LANE BRYANT resulted in improved sales
performance during the first half of Fiscal 2005.
For FASHION BUG stores, stronger traffic levels during the first four
months of the current-year period were offset by reduced traffic levels during
June and July. For the twenty-six week period, the average number of
transactions per store and average UPC increased 4% and 2%, respectively, while
the average dollar sale decreased less than 1% and the average retail value per
unit sold decreased 3%. FASHION BUG stores experienced increases in sales of
misses sportswear, misses and plus wear-to-work, accessories, and intimate
apparel, which were partially offset by decreases in sales of junior and plus
sportswear and dresses. FASHION BUG store sales also benefited from sales of
maternity and girls, two new categories added to the FASHION BUG brand during
the Fiscal 2004 Fourth Quarter.
CATHERINES stores experienced weaker traffic levels during the
current-year period, with the average number of transactions per store and
average dollar sale decreasing 4% and 1%, respectively. A 3% increase in the
average UPC was offset by a 4% decrease in the average retail value per unit
sold, reflecting higher levels of promotional pricing during the current period.
The decrease in sales at CATHERINES was primarily a result of disappointing
performance in the dress and wear-to-work categories.
During the first half of Fiscal 2005, we recognized revenues of $3.7
million in connection with our FASHION BUG customer loyalty card program. During
the first half of Fiscal 2004, we recognized $2.8 million of revenues in
connection with this program. During the first half of Fiscal 2005 and Fiscal
2004, we also recognized revenues of $3.7 million and $3.8 million,
respectively, in connection with our CATHERINES loyalty card program. During the
first half of Fiscal 2004, we also recognized revenues of $6.3 million in
connection with our previous Fashion Bug loyalty card program, which was
terminated during the Fiscal 2004 Second Quarter.
Cost of Goods Sold, Buying, and Occupancy
The increase in cost of goods sold, buying, and occupancy expenses from
the first half of Fiscal 2004 to the first half of Fiscal 2005 principally
reflects the increase in net sales. Cost of goods sold as a percentage of net
sales decreased 0.6% from the first half of Fiscal 2004 to the first half of
Fiscal 2005. Improvement in merchandise margins at our LANE BRYANT brand was
offset by decreased margins at our FASHION BUG and CATHERINES brands. Margins at
the CATHERINES brand for the first half of Fiscal 2005 were negatively affected
by the increased promotional activity that resulted from reduced traffic levels
during the current period. As discussed above, margins at our LANE BRYANT brand
for the first half of Fiscal 2004 were negatively affected by higher levels of
promotional activity. 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.
20
Buying and occupancy expenses as a percentage of net sales decreased
0.9% from the first half of Fiscal 2004 to the first half of Fiscal 2005. The
decrease was primarily a result of leverage on relatively fixed occupancy costs
as a result of the increase in net sales, and cost savings from the
consolidation of our LANE BRYANT and CATHERINES distribution centers 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 for the first half of
Fiscal 2005 were comparable to the first half of Fiscal 2004, and decreased 0.7%
as a percentage of net sales. The decrease in selling, general, and
administrative expenses as a percentage of net sales was primarily a result of
continued tight control of store expenses, improved performance of our FASHION
BUG credit card operations, which experienced favorable trends in delinquencies
during the current-year period, and leverage from the increase in net sales.
Selling expenses decreased 0.5% as a percentage of net sales, and general and
administrative expenses decreased 0.2% as a percentage of net sales.
Expenses Related to Cost Reduction Plan
On March 18, 2003, we announced a cost reduction plan designed to take
advantage of the centralization of all corporate administrative services
throughout the Company and to realize certain efficiencies, in order to improve
profitability. See "Comparison of Thirteen Weeks Ended July 31, 2004 and August
2, 2003: Expenses Related to Cost Reduction Plan" above for further details
related to this plan. The total costs recognized during Fiscal 2004 related to
this plan were $11.5 million, with $10.8 million of the costs recognized during
the first half of Fiscal 2004. Expenses related to the plan incurred during the
first half of Fiscal 2004 are included in "Expenses related to cost reduction
plan" in the accompanying Condensed Consolidated Statements of Operations and
Comprehensive Income.
Income Tax Provision
The effective income tax rate was 35.6% in the first half of Fiscal
2005, as compared to 38.9% in the first half of Fiscal 2004. The lower effective
tax rate in the first half of Fiscal 2005 is primarily the result of finalizing
certain prior-year tax audits. We expect the effective income tax rate for the
year to be approximately 36.3%. The tax rate for the first half of Fiscal 2004
was affected by a provision for taxes related to one of our insurance programs,
which we settled with the Internal Revenue Service during the second half of
Fiscal 2004.
21
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 revolving credit facility. The following table
highlights certain information related to our liquidity and capital resources:
July 31, January 31,
(Dollars in millions) 2004 2004
---- ----
Cash and cash equivalents............................ $223.9 $123.8
Long-term available-for-sale securities.............. $5.2 $14.5
Working capital...................................... $361.8 $271.9
Current ratio........................................ 2.1 1.9
Long-term debt to equity ratio....................... 28.2% 33.5%
Our net cash provided by operating activities was $109.7 million for
the first half of Fiscal 2005, as compared to $74.4 million for the first half
of Fiscal 2004. The increase was a result of a $22.6 million increase in net
income before non-cash charges, a decrease of $14.7 million in our investment in
inventories (net of accounts payable), and a $17.1 million increase in accrued
expenses, income taxes, and other liabilities. These increases were partially
offset by a $19.1 million increase in prepaid expenses.
The decrease in the net investment in inventories was primarily a
result of tighter control over inventory levels during the first half of Fiscal
2005. Prepaid expenses increased $22.0 million during the first half of Fiscal
2005, as compared to an increase of $2.9 million during the first half of Fiscal
2004. The increase was primarily a result of the timing of payments for rent and
increases in certain advances related to our securization program. Accrued
expenses and other liabilities increased $0.8 million during the first half of
Fiscal 2005, as compared to a decrease of $11.6 million during the first half of
Fiscal 2004, primarily as a result of the timing of certain payments. Income
taxes payable increased $7.1 million during the first half of Fiscal 2005, as
compared to an increase of $2.4 million during the first half of Fiscal 2004.
The increase in income taxes payable was primarily a result of an increase in
taxable income for the first half of Fiscal 2005, as compared to the first half
of Fiscal 2004.
Capital Expenditures
Our capital expenditures were $19.4 million during the first half of
Fiscal 2005. In addition, we acquired $3.9 million of point-of-sale equipment
for our CATHERINES stores and $1.5 million of equipment for our White Marsh,
Maryland distribution center under capital leases. The total investment in
property, equipment, and leasehold improvements, including cash expenditures and
capital lease financing, was $24.8 million. During the remainder of Fiscal 2005,
we anticipate incurring additional capital expenditures of approximately $40 -
$45 million, primarily for the construction and fixturing of new stores,
remodeling and fixturing of existing stores, and improvements to our corporate
offices and distribution centers. We expect to finance these additional capital
expenditures primarily through internally generated funds.
Common Stock and Dividends
During the first half of Fiscal 2005, we received $23.4 million of cash
in connection with the issuance of approximately 4.5 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.
22
We have not paid any dividends since 1995. 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, our financial
condition, and other relevant factors. Additionally, our existing credit
facility prohibits the payment of dividends on our common stock.
Off-Balance-Sheet Financing
We have formed a trust called the Charming Shoppes Master Trust (the
"Trust") to which Spirit of America National Bank, our credit card bank, has
transferred, through a special-purpose entity, its interest in credit card
receivables created under our FASHION BUG proprietary credit card program. We,
together with the Trust, have entered into various agreements under which the
Trust can sell, on a revolving basis, interests in these receivables for a
specified term. When the revolving period terminates, an amortization period
begins during which principal payments are made to the parties with whom the
Trust has entered into the securitization agreement.
As of July 31, 2004, the Trust had the following securitization
facilities outstanding:
(Dollars in millions) Series 1999-1 Series 2002-1 Series 1999-2 Series 2004
------------- ------------- ------------- -----------
Date of facility..................... July 1999 November 2002 May 1999 January 2004
Type of facility..................... Term Term Conduit Conduit
Maximum funding...................... $150.0 $100.0 $50.0 $100.0
Funding as of July 31, 2004.......... $88.6 $100.0 $33.0 $28.5
First scheduled principal payment.... March 2004 August 2007 Not applicable Not applicable
Expected final principal payment..... February 2005 May 2008 Not applicable Not applicable
Renewal.............................. Not applicable Not applicable Annual Annual(1)
--------------------
(1) This facility has an initial term of two years, subject to an annual
renewal.
The Series 1999-1 securitization began its scheduled amortization
period in March 2004, and $61.4 million of principal was amortized in the first
half of Fiscal 2005. The remainder of the principal is scheduled to amortize as
follows: $36.8 million in the Fiscal 2005 Third Quarter; $36.0 million in the
Fiscal 2005 Fourth Quarter; and $15.8 million in the Fiscal 2006 First Quarter.
We will fund this remaining amortization through the issuance of Series 2004-1,
which closed on August 5, 2004 and provides $180.0 million of funding through a
five-year term facility (see below).
During the first half of Fiscal 2005, we sold to investors an
additional $9.5 million of certificates under the 2002-1 Series that we were
previously holding as a retained interest. These certificates were included in
our short-term available-for-sale securities as of January 31, 2004.
On August 5, 2004, in connection with our asset securitization program,
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%. On August 5, 2004, 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.
This pre-funding cash account will replace Series 1999-1 (which is currently in
its amortization period) as well as provide financing for additional
receivables. On August 24, 2004, we sold to investors $9.5 million of the $18.9
million we held as a retained interest.
23
As these credit card receivables securitizations reach maturity, we
plan to obtain funding for the FASHION BUG proprietary credit card program
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 $161.6 million of private label credit card receivables
in the first half of Fiscal 2005 and had $249.6 million of securitized credit
card receivables outstanding as of July 31, 2004. We held certificates and
retained interests in our securitizations of $64.9 million as of July 31, 2004,
which were generally subordinated in right of payment to certificates issued by
the Trust to third-party investors. Our obligation to repurchase receivables
sold to the Trust is limited to those receivables that, at the time of their
transfer, fail to meet the Trust's eligibility standards under normal
representations and warranties. To date, our repurchases of receivables pursuant
to this obligation have been insignificant.
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 program. As of July 31,
2004, CSRC held $20.6 million of Charming Shoppes Master Trust certificates and
retained interests and Charming Shoppes Seller, Inc. held retained interests of
$7.9 million (which are included in the $66.4 million of short-term
available-for-sale securities we held at July 31, 2004). These assets are first
and foremost available to satisfy the claims of the respective creditors of
these separate corporate entities, including certain claims of investors in the
Charming Shoppes Master Trust. 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 $7.9 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 July
31, 2004, there were no reallocated collections as the result of a failure to
meet these financial performance standards. As a result of the sale to investors
on August 24, 2004 of $9.5 million of certificates we held as a retained
interest as discussed above, the potential reallocation of collections subject
to these financial performance standards increased from $7.9 million to $17.3
million on that date. As of August 24, 2004, there were no reallocated
collections as a result of a failure to meet these financial performance
standards.
We could be affected by certain events that would cause the Trust to
hold proceeds of receivables, which would otherwise be available to be paid to
us with respect to our subordinated interests, within the Trust as additional
enhancement. For example, if we fail or the Trust fails to meet certain
financial performance standards, a credit enhancement condition would occur and
the Trust would be required to retain amounts otherwise payable to us. In
addition, the failure to satisfy certain financial performance standards could
further cause the Trust to stop using collections on Trust assets to purchase
new receivables, and would require such collections to be used to repay
investors on a prescribed basis, as provided in the Trust agreements. If this
were to occur, it could result in our having insufficient liquidity; however, we
believe we would have sufficient notice to seek alternative forms of financing
through other third-party providers. As of July 31, 2004, the Trust was in
compliance with all applicable financial performance standards. Amounts placed
into enhancement accounts, if any, that are not required for payment to other
certificate holders will be available to us at the termination of the
securitization series. We have no obligation to directly fund the enhancement
account of the Trust, other than for breaches of customary representations,
warranties, and covenants and for customary indemnities. These representations,
warranties, covenants, and indemnities do not protect the Trust or investors in
the Trust against credit-related losses on the receivables. The providers of the
credit enhancements and Trust investors have no other recourse to us.
24
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. Additional information
regarding this program is included in "Part II, Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Part II,
Item 8. Financial Statements and Supplementary Data; Notes to Consolidated
Financial Statements; Note 16. Asset Securitization" of our Annual Report on
Form 10-K for the fiscal year ended January 31, 2004.
We also have non-recourse agreements under which third parties provide
accounts receivable proprietary credit card sales accounts receivable funding
programs for both our CATHERINES and LANE BRYANT brands. These funding programs
expire in January 2005 for CATHERINES and in January 2006 for LANE BRYANT. Under
these agreements, the third parties reimburse us daily for sales generated by
the respective store's credit card accounts. Additional information regarding
these agreements is included in "Part II, Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Part II, Item 8.
Financial Statements and Supplementary Data; Notes to Consolidated Financial
Statements; Note 16. Asset Securitization" of our Annual Report on Form 10-K for
the fiscal year ended January 31, 2004.
On January 28, 2004, in accordance with the terms of the Merchant
Services Agreement pursuant to which the CATHERINES proprietary credit cards are
issued, we gave notification of termination and election to purchase the
CATHERINES credit card portfolio to the third-party provider. In accordance with
the terms of the Merchant Services Agreement, the purchase option required us to
provide one year's notice in order to terminate the agreement and to purchase
the portfolio, subject to the negotiation of the final purchase agreement. We
expect to purchase the CATHERINES credit card portfolio during the Fiscal 2006
First Quarter, and expect to fund the purchase using our securitization program,
including a portion of the proceeds from the Series 2004-1 securitization.
We lease substantially all of our operating stores under non-cancelable
operating lease agreements. Additional details on these leases, including
minimum lease commitments, are included in "Item 8. Financial Statements and
Supplementary Data; Notes to Consolidated Financial Statements; Note 17. Leases"
of our Annual Report on Form 10-K for the fiscal year ended January 31, 2004.
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 July 31, 2004, there were no borrowings outstanding under the
Facility. The availability of borrowings under the Facility is subject to
limitations based on eligible inventory and, under certain circumstances, credit
card receivables and in-transit cash. The Facility is secured by our general
assets, except for (i) all assets related to our credit card securitization
program, (ii) all real property, (iii) certain equipment subject to other
mortgages or capital leases, (iv) the assets of our non-U.S. subsidiaries, and
(v) certain other assets. The Facility expires on August 15, 2008.
25
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 July 31, 2004, the interest rate on borrowings
under the Facility was 4.25% for Prime Rate Loans and 2.98% 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 the Fiscal
2005 Second Quarter, our excess and suppressed availability was above $50.0
million at all times. As of July 31, 2004, we were not in violation of any of
the covenants included in the Facility.
Additional information regarding our long-term borrowings is included
in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Part II, Item 8. Financial Statements and
Supplementary Data; Notes to Consolidated Financial Statements; Note 7. Debt" of
our Annual Report on Form 10-K for the fiscal year ended January 31, 2004.
We believe that our capital resources and liquidity position are
sufficient to support our current operations. Our requirements for working
capital, capital expenditures, and repayment of debt and other obligations are
expected to be funded from operations, supplemented as needed by short-term or
long-term borrowings available under our credit facility, our proprietary credit
card receivables securitization agreements, leases, and other available
financing sources.
MARKET RISK
We manage our FASHION BUG proprietary credit card program through
various operating entities that we own. The primary activity of these entities
is to service our proprietary credit card receivables portfolio, the balances of
which we sell under a credit card securitization program. Under the
securitization program, we can be exposed to fluctuations in interest rates to
the extent that the interest rates charged to our customers vary from the rates
paid on certificates issued by the Trust. The finance charges on most of our
proprietary credit card accounts are billed using a floating-rate index (the
Prime lending rate), subject to a floor and limited by legal maximums. The
certificates issued under the securitization include both floating- and
fixed-interest-rate certificates. The floating-rate certificates are based on an
index of either one-month LIBOR or the commercial paper rate, depending on the
issuance. Consequently, we have basis risk exposure to the extent that the
movement of the floating-rate index on the certificates varies from the movement
of the Prime rate. Additionally, as of July 31, 2004, the floating finance
charge rate on the credit cards was below the contractual floor rate, thus
exposing us to interest-rate risk on the portion of certificates that are funded
at floating rates. 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 certificates related to the issuance of Series 2004-1 (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
2005, an increase of approximately $206 thousand in selling, general, and
administrative expenses would result.
26
As of July 31, 2004, there were no borrowings outstanding under our
revolving credit facility. To the extent that there are borrowings outstanding
under our revolving credit facility, such borrowings would be exposed to
variable interest rates. An increase in market interest rates would increase our
interest expense and decrease our cash flows. A decrease in market interest
rates would decrease our interest expense and increase our cash flows.
We are not subject to material foreign exchange risk, as our foreign
transactions are primarily U.S. Dollar-denominated and our foreign operations do
not constitute a material part of our business.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
See "Item 1. Notes To Condensed Consolidated Financial Statements
(Unaudited); Note 9. Impact of Recent Accounting Pronouncements" above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations; MARKET RISK," above.
Item 4. Controls and Procedures
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-Q (the
"Evaluation Date"), our Disclosure Committee, under the supervision and with the
participation of management, including our CEO and CFO, carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our management, including our
CEO and CFO, has concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective. Furthermore, there has been no change in
our internal control over financial reporting that occurred during the period
covered by this report on Form 10-Q that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in legal proceedings involving
the Company or its subsidiaries since those reported in our Annual Report on
Form 10-K for the fiscal year ended January 31, 2004.
Other than ordinary routine litigation incidental to our business,
there are no other pending material legal proceedings that we or any of our
subsidiaries are a party to, and there are no other proceedings that are
expected to have a material adverse effect on our financial condition or results
of operations.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer
Purchases of Equity Securities
(c) 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)
------ --------- --------- ----------- -----------
May 2, 2004 through
May 29, 2004........ 109,373(1) $7.85(1) - -
May 30, 2004 through
July 3, 2004........ 0 - - -
July 4, 2004 through
July 31, 2004....... 0 - - -
------- -----
Total................... 109,373 $7.85 - -
======= =====
--------------------
(1) The shares of common stock we purchased during the four-week period ended
May 29, 2004 include 109,246 shares at an average price of $7.85 per share
received for payment of the exercise price of certain stock options
exercised during the period, and 127 shares at an average price of $6.90
per share withheld for payment of payroll taxes on the issuance of employee
stock awards issued during the period.
(2) In November 1997, we publicly announced that our Board of Directors granted
authority to repurchase up to 10,000,000 shares of our common stock. In
March 1999, we publicly announced that our Board of Directors granted
authority to repurchase up to an additional 10,000,000 shares of our common
stock. As of July 31, 2004, approximately 5,000,000 shares of our common
stock remain available for repurchase under these programs. Our ability to
exercise this authority is currently subject to certain restrictions by the
terms of our revolving credit facility. As conditions may allow, and if
consent is required or 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 this
program during the three months ended July 31, 2004. The repurchase program
has no expiration date.
28
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on June 24, 2004.
Joseph L. Castle II, Pamela S. Lewis, and Katherine M. Hudson were
nominated for election, in our Proxy Statement, to serve three-year terms as
Class B Directors. The total number of shares represented at the Annual Meeting
were 107,958,296 shares, representing 94.0% of the total number of shares
outstanding as of the close of business on May 5, 2004 (the record date fixed by
the Board of Directors). The following table indicates the number of votes cast
in favor of election and the number of votes withheld with respect to each of
the Class B Directors nominated:
Name Votes For Votes Withheld
---- --------- --------------
Joseph L. Castle, II 100,277,757 7,680,539
Pamela S. Lewis 100,284,429 7,673,867
Katherine M. Hudson 100,267,011 7,691,285
A proposal to approve the 2004 Stock Award and Incentive Plan, which
was approved by the Board of Directors on April 30, 2004, was approved, with
75,350,784 votes for the proposal, 16,685,976 votes against the proposal,
259,165 abstentions, and 15,662,371 broker non-votes.
Item 6. Exhibits
(a) Exhibits
The following is a list of Exhibits filed as part of this Quarterly
Report on Form 10-Q. Where so indicated, Exhibits that were previously filed are
incorporated by reference. For Exhibits incorporated by reference, the location
of the Exhibit in the previous filing is indicated in parenthesis.
3.1 Restated Articles of Incorporation, incorporated by reference to Form
10-K of the Registrant for the fiscal year ended January 29, 1994.
(File No. 000-07258, Exhibit 3.1)
3.2 Bylaws, as Amended and Restated, incorporated by reference to Form 10-Q
of the Registrant for the quarter ended July 31, 1999. (Exhibit 3.2)
10.1 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 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.
10.3 Amended and Restated Variable Deferred Compensation Plan for
Executives, Effective December 23, 2003.
10.4 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.
29
10.5 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.
10.6 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).
10.7 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.
10.8 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.
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.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARMING SHOPPES, INC.
----------------------
(Registrant)
Date: August 27, 2004 /S/ Dorrit J. Bern
------------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: August 27, 2004 /S/ Eric M. Specter
-------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer
31
Exhibit Index
Exhibit No. Item
----------- ----
3.1 Restated Articles of Incorporation, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended January 29,
1994. (File No. 000-07258, Exhibit 3.1)
3.2 Bylaws, as Amended and Restated, incorporated by reference to Form
10-Q of the Registrant for the quarter ended July 31, 1999.
(Exhibit 3.2)
10.1 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 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.
10.3 Amended and Restated Variable Deferred Compensation Plan for
Executives, Effective December 23, 2003.
10.4 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.
10.5 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.
10.6 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).
10.7 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.
10.8 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.
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.
32