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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 November 2, 2002
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File No. 000-07258
CHARMING SHOPPES, INC.
----------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1721355
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 WINKS LANE, BENSALEM, PA 19020
---------------------------- -----
(Address of principal executive office (Zip Code)
(215) 245-9100
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(Registrant's telephone number, including Area Code)
NOT APPLICABLE
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(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, as of
November 2, 2002, was 112,840,144 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
November 2, 2002 and February 2, 2002............................. 2 - 3
Condensed Consolidated Statements of Operations
Thirteen weeks ended November 2, 2002 and November 3, 2001........ 4
Thirty-nine weeks ended November 2, 2002 and November 3, 2001..... 5
Condensed Consolidated Statements of Comprehensive Income (Loss)
Thirteen and Thirty-nine weeks ended November 2, 2002 and
November 3, 2001.................................................. 6
Condensed Consolidated Statements of Cash Flows
Thirty-nine weeks ended November 2, 2002 and November 3, 2001..... 7
Notes to Condensed Consolidated Financial Statements.................... 8 - 18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking Statements.............................................. 19 - 20
Critical Accounting Policies............................................ 20 - 21
Results of Operations................................................... 21 - 27
Recent Developments..................................................... 27 - 28
Liquidity and Capital Resources......................................... 28 - 31
Financing............................................................... 31 - 32
Market Risk............................................................. 32 - 33
Impact of Recent Accounting Pronouncements.............................. 33
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 33
Item 4. Controls and Procedures........................................ 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 34
Item 6. Exhibits and Reports on Form 8-K............................... 34 - 35
SIGNATURES AND CERTIFICATIONS........................................... 36 - 38
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
November 2, February 2,
(In thousands) 2002 2002
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents ........................................ $ 46,256 $ 36,640
Available-for-sale securities, including fair value adjustments of
$0 and $24, respectively ..................................... 51,566 48,351
Merchandise inventories .......................................... 383,057 300,407
Deferred taxes ................................................... 19,960 21,228
Prepayments and other ............................................ 93,877 78,118
---------- ----------
Total current assets ......................................... 594,716 484,744
---------- ----------
Property, equipment, and leasehold improvements .................. 672,005 657,067
Less: accumulated depreciation and amortization .................. 348,114 341,055
---------- ----------
Net property, equipment, and leasehold improvements .......... 323,891 316,012
---------- ----------
Trademarks and other intangible assets ........................... 171,294 171,794
Goodwill ......................................................... 69,159 110,243
Available-for-sale securities, including fair value adjustments of
$(221) and $(39), respectively ............................... 33,814 22,015
Other assets ..................................................... 17,586 27,869
---------- ----------
Total assets ..................................................... $1,210,460 $1,132,677
========== ==========
See Notes to Condensed Consolidated Financial Statements
2
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
November 2, February 2,
(In thousands, except share and per-share amounts) 2002 2002
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings ............................................ $ 26,195 $ 54,296
Accounts payable ................................................. 180,308 107,891
Accrued expenses ................................................. 169,889 148,373
Income taxes payable ............................................. 15,990 0
Deferred taxes ................................................... 24,900 0
Accrued restructuring costs ...................................... 7,783 19,758
Current portion - long-term debt ................................. 11,711 9,379
---------- ----------
Total current liabilities .................................... 436,776 339,697
---------- ----------
Deferred taxes ................................................... 8,787 33,687
Long-term debt ................................................... 202,608 208,491
Minority interest ................................................ 513 1,000
Stockholders' equity
Common Stock $.10 par value
Authorized - 300,000,000 shares
Issued - 125,106,137 shares at November 2, 2002 and
111,891,156 shares at February 2, 2002 .................... 12,511 11,189
Additional paid-in capital ....................................... 199,465 103,267
Treasury stock at cost - 12,265,993 shares at November 2, 2002 ... (84,136) 0
Deferred employee compensation ................................... (3,665) (3,741)
Accumulated other comprehensive loss ............................. (691) (818)
Retained earnings ................................................ 438,292 439,905
---------- ----------
Total stockholders' equity ................................... 561,776 549,802
---------- ----------
Total liabilities and stockholders' equity ....................... $1,210,460 $1,132,677
========== ==========
See Notes to Condensed Consolidated Financial Statements
3
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen Weeks Ended
November 2, November 3,
(In thousands, except per-share amounts) 2002 2001
---- ----
Net sales ............................................... $ 542,332 $ 549,295
--------- ---------
Cost of goods sold, buying, and occupancy expenses ...... 389,748 396,026
Selling, general, and administrative expenses ........... 148,323 146,248
Restructuring credit .................................... (1,351) 0
Amortization of goodwill ................................ 0 1,221
--------- ---------
Total operating expenses ................................ 536,720 543,495
--------- ---------
Income from operations .................................. 5,612 5,800
Other income, principally interest ...................... 698 1,098
Interest expense ........................................ (4,667) (6,636)
--------- ---------
Income before income taxes .............................. 1,643 262
Income tax provision .................................... 1,177 102
--------- ---------
Income before minority interest ......................... 466 160
Minority interest in net loss of consolidated subsidiary,
net of income taxes of $22 .......................... 36 0
--------- ---------
Net income .............................................. $ 502 $ 160
========= =========
Basic net income per share .............................. $ .00 $ .00
===== =====
Diluted net income per share ............................ $ .00 $ .00
===== =====
See Notes to Condensed Consolidated Financial Statements
4
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Thirty-nine Weeks Ended
November 2, November 3,
(In thousands, except per-share amounts) 2002 2001
---- ----
Net sales ................................................................ $ 1,811,255 $ 1,346,756
----------- -----------
Cost of goods sold, buying, and occupancy expenses ....................... 1,269,802 973,483
Selling, general, and administrative expenses ............................ 458,870 324,489
Restructuring credit ..................................................... (1,351) 0
Amortization of goodwill ................................................. 0 3,664
----------- -----------
Total operating expenses ................................................. 1,727,321 1,301,636
----------- -----------
Income from operations ................................................... 83,934 45,120
Other income, principally interest ....................................... 1,861 4,503
Interest expense ......................................................... (17,147) (11,407)
----------- -----------
Income before income taxes and cumulative effect of accounting change .... 68,648 38,216
Income tax provision ..................................................... 26,773 14,828
----------- -----------
Income before minority interest and cumulative effect of accounting change 41,875 23,388
Minority interest in net loss of consolidated subsidiary,
net of income taxes of $301 .......................................... 487 0
----------- -----------
Income before cumulative effect of accounting change ..................... 42,362 23,388
Cumulative effect of accounting change ................................... (43,975) 0
----------- -----------
Net income (loss) ........................................................ $ (1,613) $ 23,388
=========== ===========
Basic net income (loss) per share:
Income before cumulative effect of accounting change ..................... $ .37 $ .22
Cumulative effect of accounting change ................................... (.38) .00
------ -----
Net income (loss) ........................................................ $ (.01) $ .22
====== =====
Net income (loss) per share, assuming dilution:
Income before cumulative effect of accounting change ..................... $ .35 $ .22
Cumulative effect of accounting change ................................... (.33) .00
------ -----
Net income (loss) ........................................................ $ .01(1) $ .22
====== =====
(1) Results do not add due to rounding.
See Notes to Condensed Consolidated Financial Statements
5
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
November 2, November 3, November 2, November 3,
(In thousands) 2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) ........................... $ 502 $ 160 $ (1,613) $ 23,388
-------- -------- -------- --------
Unrealized losses on available-for-sale
securities, net of income taxes of $18,
$0, $77, and $5, respectively ........... (32) (1) (129) (53)
Reclassification of realized losses on
available-for-sale securities, net of
income taxes of $0, $0, $0 and $(4),
respectively ............................ 0 0 0 6
Unamortized deferred loss on termination of
derivative, net of income taxes of $621 . (1,152)
Reclassification of amortization of deferred
loss on termination of derivative, net of
income taxes of $(47), $(46), $(139) and
$(138), respectively .................... 85 85 256 256
-------- -------- -------- --------
Total other comprehensive income (loss),
net of taxes ............................ 53 84 127 (943)
-------- -------- -------- --------
Comprehensive income (loss) ................. $ 555 $ 244 $ (1,486) $ 22,445
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements
6
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-nine Weeks Ended
November 2, November 3,
(In thousands) 2002 2001
---- ----
Operating activities
Net income (loss) ......................................... $ (1,613) $ 23,388
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ......................... 58,263 43,982
Cumulative effect of accounting change ................ 43,975 0
Loss (gain) from disposition of capital assets ........ 2,667 (182)
Capitalized interest on conversion of convertible notes 3,026 0
Other, net ............................................ (547) 484
Changes in operating assets and liabilities:
Merchandise inventories ............................ (82,651) (66,660)
Accounts payable ................................... 72,417 29,001
Prepayments and other .............................. (1,500) (10,245)
Accrued expenses ................................... 20,864 2,101
Income taxes payable ............................... 15,990 7,965
Accrued restructuring costs ........................ (11,975) 0
--------- ---------
Net cash provided by operating activities ................. 118,916 29,834
--------- ---------
Investing activities
Investment in capital assets .............................. (64,575) (48,369)
Proceeds from sales of capital assets ..................... 801 0
Acquisition of Lane Bryant, Inc., net of cash acquired .... 0 (280,841)
Proceeds from sales of available-for-sale securities ...... 15,973 105,931
Gross purchases of available-for-sale securities .......... (31,193) (31,866)
Decrease in other assets .................................. (374) (3,481)
--------- ---------
Net cash used in investing activities ..................... (79,368) (258,626)
--------- ---------
Financing activities
Proceeds from short-term borrowings ....................... 362,358 370,994
Repayments of short-term borrowings ....................... (390,460) (218,491)
Proceeds from long-term borrowings ........................ 164,000 85,950
Repayments of long-term borrowings ........................ (81,296) (4,299)
Payments of deferred financing costs ...................... (5,491) (7,541)
Purchases of treasury stock ............................... (84,136) 0
Proceeds from exercise of stock options ................... 5,093 2,213
--------- ---------
Net cash (used in) provided by financing activities ....... (29,932) 228,826
--------- ---------
Increase in cash and cash equivalents ..................... 9,616 34
Cash and cash equivalents, beginning of period ............ 36,640 56,544
--------- ---------
Cash and cash equivalents, end of period .................. $ 46,256 $ 56,578
========= =========
Non-cash financing and investing activities
Common stock issued on conversion of convertible notes .... $ 92,131 $ 0
========= =========
Common stock issued for acquisition of Lane Bryant, Inc. .. $ 0 $ 55,000
========= =========
Equipment acquired through capital leases ................. $ 2,850 $ 12,650
========= =========
See Notes to Condensed Consolidated Financial Statements
7
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of November 2, 2002, the
condensed consolidated statements of operations and comprehensive income (loss)
for the thirteen and thirty-nine weeks ended November 2, 2002 and November 3,
2001, and the condensed consolidated statements of cash flows for the
thirty-nine weeks ended November 2, 2002 and November 3, 2001 have been prepared
by the Company without audit. In the opinion of management, all adjustments
(which include only normal recurring adjustments, except for a cumulative effect
of accounting change and a restructuring credit) necessary to present fairly the
financial position at November 2, 2002, the results of operations for the
thirteen and thirty-nine weeks ended November 2, 2002 and November 3, 2001, and
cash flows for the thirty-nine weeks ended November 2, 2002 and November 3, 2001
have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's February 2,
2002 Annual Report on Form 10-K. The results of operations for the thirteen and
thirty-nine weeks ended November 2, 2002 and November 3, 2001 are not
necessarily indicative of operating results for the full fiscal year.
As used in these notes, the terms "Fiscal 2003" and "Fiscal 2002" refer to
the Company's fiscal year ending February 1, 2003 and fiscal year ended February
2, 2002, respectively. The terms "the Company", "we", "us", and "our" refer to
Charming Shoppes, Inc. and, where applicable, its consolidated subsidiaries.
2. Acquisition
On August 16, 2001, we acquired 100% of the outstanding stock of Lane
Bryant, Inc. ("Lane Bryant") from a subsidiary of Limited Brands, Inc. ("Limited
Brands") (formerly The Limited, Inc.). The acquisition has been accounted for
under the purchase method of accounting. The results of operations of Lane
Bryant are included in our results of operations for the thirteen and
thirty-nine weeks ended November 2, 2002. Our results of operations for the
thirteen and thirty-nine weeks ended November 3, 2001 include the results of
operations of Lane Bryant from the date of acquisition.
The acquisition of Lane Bryant complements our long-term growth strategy of
becoming a leader in the sale of plus-size specialty apparel. Lane Bryant is a
premier brand in the plus-size market with an established customer base and
proprietary brand names, and operates in multiple retail venues, primarily in
leading malls.
8
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Acquisition (continued)
The following unaudited pro forma results of operations for the thirteen
and thirty-nine weeks ended November 3, 2001 are based on historical data, and
give effect to our acquisition of Lane Bryant as if the acquisition had occurred
on February 4, 2001. The pro forma information includes adjustments having a
continuing impact on the consolidated company as a result of using the purchase
method of accounting for the acquisition. Pro forma adjustments consist of
additional depreciation from the step-up in value of property, equipment, and
leasehold improvements acquired, additional amortization expense related to
intangible assets acquired, additional interest expense and amortization of
deferred financing costs related to debt incurred to finance the acquisition,
and a reduction in interest income from the use of approximately $83,000,000 of
our cash and cash equivalents to fund a portion of the acquisition.
The unaudited pro forma results of operations are not necessarily
indicative of the actual results of operations that would have occurred if the
acquisition had occurred as of February 4, 2001, and are not necessarily
indicative of the results that may be achieved in the future. The unaudited pro
forma information does not reflect adjustments for operating synergies that we
may realize as a result of the acquisition. No assurances can be given as to the
amount and timing of any financial benefits that we may realize as a result of
the acquisition.
Thirteen Thirty-nine
Weeks Ended Weeks Ended
November 3, November 3,
(In thousands) 2001 2001
---- ----
Net sales ........... $574,037 $1,839,091
Net income (loss) ... (800) 29,485
Net income per share:
Basic ........... $ (.01) $ .26
Diluted ......... (.01) .26
In connection with the acquisition of Lane Bryant, we recorded a liability
of $4,640,000 for estimated costs related to an unfavorable service contract.
During the first quarter of the current fiscal year, we finalized the contract
and revised our estimate of costs related to the contract to $2,292,000, which
resulted in a decrease in the goodwill recognized in connection with the Lane
Bryant acquisition of $1,435,000, net of deferred income taxes of $913,000 .
During the second quarter of the current fiscal year, we recorded a liability
for severance in accordance with an agreement entered into with an affiliate of
Limited Brands at the time of the acquisition to use the existing Lane Bryant
distribution center and receive related distribution services on a transition
basis, which resulted in an increase in Lane Bryant goodwill of $611,000, net of
deferred income taxes of $389,000. During the third quarter of the current
fiscal year, we reduced the acquisition value assigned to equipment and
leasehold improvements in the existing Lane Bryant distribution center, which
will be abandoned at the end of the transition period as a result of our
acquisition of a replacement distribution center in White Marsh, Maryland,
increased a liability for future claims related to Lane Bryant's pre-acquisition
operations, and decreased deferred tax assets as a result of a correction of the
effective tax rate used to determine deferred taxes related to certain assets
acquired, which resulted in an increase in Lane Bryant goodwill of $3,715,000,
including net deferred income taxes of $744,000.
9
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Trademarks and Other Intangible Assets
November 2, February 2,
(In thousands) 2002 2002
---- ----
Trademarks, tradenames, and internet domain names . $168,800 $168,800
Customer lists and covenant not to compete ........ 3,300 3,300
-------- --------
Total at cost ..................................... 172,100 172,100
Less accumulated amortization of customer lists and
covenant not to compete ....................... 806 306
-------- --------
Net trademarks and other intangible assets ........ $171,294 $171,794
======== ========
4. Debt
Long-term debt:
November 2, February 2,
(In thousands) 2002 2002
---- ----
4.75% Senior Convertible Notes due 2012 .... $150,000 $ 0
7.5% Convertible Subordinated Notes due 2006 0 96,047
Term loan due August 16, 2004 .............. 0 67,500
Capital lease obligations .................. 29,577 32,256
6.53% mortgage note ........................ 14,000 0
7.77% mortgage note ........................ 10,583 10,885
8.15% mortgage note ........................ 4,048 4,908
7.5% mortgage note ......................... 6,111 6,261
Other ...................................... 0 13
-------- --------
Total long-term debt ................... 214,319 217,870
Less current portion ....................... 11,711 9,379
-------- --------
$202,608 $208,491
======== ========
On May 28, 2002, we completed a private placement of $130,000,000 of 4.75%
Senior Convertible Notes due 2012 (the "Senior Notes"). On June 20, 2002, the
initial purchasers of the private placement exercised their option to purchase
an additional $20,000,000 principal amount of the Senior Notes, resulting in the
private placement of Senior Notes in an aggregate principal amount of
$150,000,000.
The Senior Notes will mature on June 1, 2012 and are convertible at any
time prior to maturity into shares of our common stock at a conversion price of
$9.88, subject to adjustment upon certain events. The Senior Notes are
redeemable at our option, in whole or in part, at any time on or after June 4,
2007, at declining redemption prices, starting at 102.38% of principal and
decreasing to 100.48% on or after June 1, 2011. Under certain circumstances
involving a change in control of the Company, holders of the Senior Notes may
require us to repurchase all or a portion of the Senior Notes at 100% of the
principal amount plus accrued and
10
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Debt (continued)
unpaid interest, if any. Also, under such circumstances we have the option of
paying the repurchase price in shares of our common stock, valued at 95% of the
average of the closing prices of the common stock for the five-day trading
period immediately before and including the third trading day preceding the
repurchase date. There is no sinking fund for the Senior Notes.
Net proceeds received from the issuance of the Senior Notes were
$145,500,000. We used a portion of the net proceeds to repay in full our
$67,500,000 term loan due August 16, 2004, $3,486,000 outstanding under our
revolving credit facility, and $6,942,000 of the 7.5% Convertible Subordinated
Notes due 2006 called for redemption (see below). We also used a portion of the
proceeds to purchase 2,740,000 shares of our common stock at a cost of
$18,708,000. The remaining proceeds ($48,864,000) were invested in cash and cash
equivalents pending their use toward the purchase of 9,525,993 shares of our
common stock from Limited Brands (see "Note 6. Stockholders' Equity" below). In
addition, we wrote off $951,000 of unamortized deferred financing costs related
to the term loan. The write-off of the deferred financing costs has been
included in continuing operations in the Consolidated Statements of Operations
for the thirty-nine weeks ended November 2, 2002, in accordance with the
early-application provisions of SFAS No. 145 (see "Note 11. Impact of Recent
Accounting Pronouncements" below). The term loan that was repaid had an 11.5%
interest rate and various financial covenants.
On May 29, 2002, we called our 7.5% Convertible Subordinated Notes due 2006
(the "Subordinated Notes") for redemption on June 28, 2002. The redemption price
was 102.5% of the principal amount of the Subordinated Notes, plus accrued and
unpaid interest to the date of redemption. The Subordinated Notes had an
original maturity date of July 15, 2006, and could be converted into shares of
our common stock until the close of business on June 27, 2002 at a conversion
price of $7.46. During the thirty-nine weeks ended November 2, 2002, $89,105,000
principal amount of the Subordinated Notes were converted into 11,944,338 shares
of our common stock pursuant to the conversion terms of the Notes. Accrued
interest expense of $3,026,000 on the Subordinated Notes that were converted has
been reclassified to additional paid-in capital. On June 28, 2002, the remaining
Subordinated Notes, with an aggregate principal amount of $6,942,000, were
redeemed for $7,351,000, including the 2.5% redemption premium and accrued
interest of $236,000 to the date of redemption. The redemption premium of
$174,000 has been included in continuing operations in the Consolidated
Statements of Operations for the thirty-nine weeks ended November 2, 2002, in
accordance with the early-application provisions of SFAS No. 145 (see "Note 11.
Impact of Recent Accounting Pronouncements" below).
In October 2002, we borrowed $14,000,000 under a 6.53% mortgage note. The
note has a ten-year term with 120 monthly installments of principal in the
amount of $117,000 plus interest. The mortgage note is secured by land, a
building, and certain fixtures we own at our distribution center in White Marsh,
Maryland, which we acquired on September 24, 2002. The net proceeds were used to
finance a substantial portion of the White Marsh acquisition.
11
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Accrued Restructuring Costs
On January 28, 2002, we announced a restructuring plan, including a number
of initiatives designed to position the Company for increased profitability and
growth in the plus-size businesses. The major components of the plan included
(1) the closing of The Answer/Added Dimensions chain of 77 stores and the
conversion of approximately 20% of the Added Dimensions stores to Catherine's
stores, (2) the closing of 130 under-performing Fashion Bug stores, and (3) the
conversion of 44 Fashion Bug store locations to Lane Bryant stores. The
restructuring plan resulted in a pre-tax charge of $37,708,000 in the fourth
quarter of Fiscal 2002. The restructuring charge included a $17,763,000 non-cash
write-down of fixed assets (primarily store fixtures and improvements) in the
stores to be closed, $18,500,000 of anticipated payments to landlords for the
early termination of existing store leases, $829,000 for severance costs, and
$616,000 for sign removal and other costs. The fixtures and improvements have no
alternative use or salvage value, and we expect to scrap them at the time the
stores are closed.
During the thirty-nine weeks ended November 2, 2002, we closed 97 Fashion
Bug stores (including 33 stores to be converted to Lane Bryant stores) and 68
Catherine's/Added Dimensions stores, and converted 9 Added Dimensions stores to
Catherine's stores, in connection with the restructuring plan. During the
thirteen weeks ended November 2, 2002 we completed the closing and conversion of
The Answer/Added Dimensions stores, and we recognized a pre-tax restructuring
credit of $1,351,000. The restructuring credit was primarily a result of our
ability to negotiate lease terminations and amendments on terms more favorable
than our original estimates. We expect to substantially complete the remainder
of the restructuring plan by the end of Fiscal 2003.
The following is a summary of restructuring costs accrued in connection
with the plan and amounts charged against the accrual during the thirty-nine
weeks ended November 2, 2002:
Accrued At Revision Accrued At
February 2, of Cost November 2,
(In thousands) 2002 Payments Estimate 2002
---- -------- -------- ----
Lease terminations/amendments $ 18,500 $ (9,880) $ (1,351) $ 7,269
Severance ................... 829 (529) 0 300
Sign removal and other costs 429 (215) 0 214
-------- -------- -------- --------
$ 19,758 $(10,624) $ (1,351) $ 7,783
======== ======== ======== ========
12
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Stockholders' Equity
Thirty-nine
Weeks Ended
November 2,
(In thousands) 2002
----
Total stockholders' equity, beginning of period ...................... $ 549,802
Conversion of convertible notes ...................................... 92,131
Purchases of treasury stock .......................................... (84,136)
Net loss ............................................................. (1,613)
Exercises of stock options ........................................... 4,538
Amortization of deferred compensation expense ........................ 927
Amortization of deferred loss on termination of derivative, net of tax 256
Unrealized losses on available-for-sale securities, net of tax ....... (129)
---------
Total stockholders' equity, end of period ............................ $ 561,776
=========
On August 28, 2002, we purchased 3,175,331 shares of our common stock from
Limited Brands for $21,291,000 ($6.705 per share). On September 17, 2002, we
purchased an additional 6,350,662 shares of our common stock from Limited Brands
for $44,137,000 ($6.95 per share). We had previously issued 9,525,993 shares of
our common stock to Limited Brands in connection with our acquisition of Lane
Bryant in August 2001. During the thirty-nine weeks ended November 2, 2002, we
also purchased an aggregate total of 2,740,000 shares of our common stock on the
open market for $18,708,000 (an average cost of $6.828 per share). The
transactions were financed through the use of existing cash and proceeds from
the issuance of our 4.75% Senior Convertible Notes (see "Note 4. Debt" above).
The purchased shares will be held as treasury shares.
7. Derivative Financial Instruments
We adopted the provisions of Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
as of the beginning of Fiscal 2002. During the fiscal year ended February 3,
2001 ("Fiscal 2001"), we terminated an interest rate swap agreement with a
notional principal amount of $50,000,000. In accordance with SFAS No. 133, we
recognized the deferred loss on termination of the swap as of February 4, 2001
($1,152,000 net of a tax benefit of $621,000) in "Accumulated other
comprehensive (loss) income" during the thirty-nine weeks ended November 3,
2001. We are amortizing the deferred loss to selling, general, and
administrative expenses over the 44-month remaining life of the original swap
period.
13
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. Customer Loyalty Card Program
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. The program grants discounts on customer purchases over a
twelve-month period upon payment of a $25 annual fee. Revenues from card fees
under the program are recognized as sales over the life of the membership
dependent on discounts being earned by the customer. If a customer does not earn
discounts in an amount that exceeds the card fee, such difference is recognized
as revenue upon the expiration of the annual period. Upon early cancellation of
a loyalty card, refunds of membership fees are reduced by the amount of any
discounts granted to the member under the program. Costs we incur in connection
with administering the program are recognized in cost of goods sold as incurred.
During the thirteen weeks ended November 2, 2002 and November 3, 2001, we
recognized revenues of $5,804,000 and $4,433,000, respectively, in connection
with this program. During the thirty-nine weeks ended November 2, 2002 and
November 3, 2001, we recognized revenues of $16,211,000 and $8,060,000,
respectively, in connection with this program. As of December 1, 2002, no new
cards will be issued under this program.
9. Net Income Per Share
Thirteen Weeks Ended Thirty-nine Weeks Ended
November 2, November 3, November 2, November 3,
(In thousands, except per-share amounts) 2002 2001 2002 2001
---- ---- ---- ----
Basic weighted average common shares
outstanding .............................. 115,605 109,579 114,322 104,067
Dilutive effect of assumed conversion of
convertible notes ........................ 0 0 15,813 0
Dilutive effect of stock options ............. 1,006 964 1,867 989
------- ------- ------- -------
Diluted weighted average common shares
and equivalents outstanding .............. 116,611 110,543 132,002 105,056
======= ======= ======= =======
Income before cumulative effect of
accounting change ........................ $502 $160 $42,362 $23,388
Decrease in interest expense from assumed
conversion of notes, net of income taxes . 0 0 3,556 0
---- ---- ------- -------
Income before cumulative effect of
accounting change used to determine
diluted earnings per share ............... 502 160 45,918 23,388
Cumulative effect of accounting change ....... 0 0 (43,975) 0
---- ---- ------- -------
Net income used to determine diluted
earnings per share ....................... $502 $160 $ 1,943 $23,388
==== ==== ======= =======
Options with weighted average exercise price
greater than market price, excluded from
computation of diluted earnings per share:
Number of shares ......................... 4,910 6,417 1,008 5,593
Weighted average exercise price per share $7.58 $7.32 $11.23 $7.48
14
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. Cumulative Effect of Accounting Change
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." We
adopted the provisions of SFAS No. 142 in full as of February 3, 2002 (see "Note
11. Impact of Recent Accounting Pronouncements" below). Our consolidated balance
sheet as of February 2, 2002 included $87,205,000 of goodwill related to the
acquisition of Catherine's Stores Corporation ("Catherine's").
In accordance with the transition provisions of SFAS No. 142, we tested the
Catherine's goodwill for impairment. We determined that the carrying value of
the Catherine's goodwill (including the value of intangible assets not
separately accounted for) exceeded the estimated fair value of the Catherine's
goodwill under SFAS No. 142. We determined the estimated fair value of the
Catherine's goodwill using the present value of expected future cash flows
associated with the Catherine's assets, and we recorded a write-down, which is
not deductible for income tax purposes, of $43,975,000 to reduce the carrying
value of the goodwill to its estimated fair value. The majority of the
write-down is attributable to the value of unrecorded trademarks. The write-down
has been presented as the cumulative effect of an accounting change as of
February 3, 2002 in our Consolidated Statement of Operations for the thirty-nine
weeks ended November 2, 2002. The calculation of the estimated fair value of the
Catherine's goodwill required estimates, assumptions, and judgments, and results
might have been materially different if different estimates, assumptions, and
judgments had been used.
We also evaluated our goodwill, trademarks, tradenames, and internet domain
names related to the Lane Bryant acquisition as of February 3, 2002 in
accordance with the provisions of SFAS No. 142, and determined that there has
been no impairment of these assets.
11. Impact of Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the
use of the purchase method of accounting for business combinations initiated
after June 30, 2001, and expands the definition of intangible assets that are to
be recorded separately from goodwill. For business combinations accounted for
under the purchase method that were completed prior to July 1, 2001, previously
recorded goodwill and intangibles are to be evaluated against the criteria in
SFAS No. 142, which may result in the reclassification of certain intangible
assets into or out of recorded goodwill. SFAS No. 142 requires that goodwill and
intangible assets with an indefinite useful life not be amortized, but reviewed
for impairment upon adoption of SFAS No. 142 and at least annually thereafter,
and written down in periods in which the recorded value of the goodwill or
intangible asset exceeds its fair value. The transition provisions of SFAS No.
142 require the continuation of amortization of goodwill acquired prior to June
30, 2001, and require non-amortization of goodwill and indefinite-lived
intangible assets acquired subsequent to June 30, 2001, until the provisions of
SFAS No. 142 are adopted in full.
15
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
11. Impact of Recent Accounting Pronouncements (continued)
We adopted the provisions of SFAS No. 142 in full as of February 3, 2002.
During the thirteen and thirty-nine weeks ended November 3, 2001, we recognized
amortization of Catherine's goodwill of $1,221,000 and $3,664,000, respectively.
Commencing February 3, 2002, we are no longer amortizing the Catherine's
goodwill. In accordance with the provisions of SFAS No. 142, we will
periodically review the value of the Catherine's goodwill and goodwill related
to our acquisition of Lane Bryant for impairment (see "Note 10. Cumulative
Effect of Accounting Change" above).
The pro forma effect of applying the non-amortization provisions of SFAS
No. 142 for the thirteen and thirty-nine weeks ended November 3, 2001 is as
follows:
Thirteen Thirty-nine
Weeks Ended Weeks Ended
November 3, November 3,
(In thousands) 2001 2001
---- ----
Net income as reported .......................................... $ 160 $ 23,388
Amortization of goodwill (1) .................................... 1,221 3,664
--------- ----------
Pro forma net income excluding goodwill amortization ............ $ 1,381 $ 27,052
========= ==========
Fully diluted net income per share as reported .................. $ .00 $ .22
Pro forma per share effect of excluding goodwill amortization (1) .01 .04
----- -----
Pro forma fully diluted net income per share .................... $ .01 $ .26
===== =====
- --------------------
(1) The goodwill amortization is not deductible for tax purposes and therefore
has no related tax effect.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002, and addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. We do not expect adoption of SFAS No. 143 to
have a material impact on our financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" related to the disposal of a segment of a
business. SFAS No. 144 also resolves certain implementation issues related to
SFAS No. 121. During the thirty-nine weeks ended November 2, 2002, we recorded a
$2,700,000 write-down of under-performing assets related to our joint venture
pursuant to SFAS No. 144. The amount of the write-down is the same as what would
have been recorded under previously applicable accounting standards. The
adoption of SFAS No. 144 did not have a material impact on our financial
position or results of operations for the thirteen and thirty-nine weeks ended
November 2, 2002.
16
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
11. Impact of Recent Accounting Pronouncements (continued)
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 requires gains and losses on extinguishments of debt
to be classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS No. 4. Extraordinary
treatment will be required for certain extinguishments as provided in Accounting
Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." SFAS No. 145 also
amends SFAS No. 13, "Accounting for Leases" to require certain modifications to
capital leases to be treated as sale-leaseback transactions and modifies the
accounting for sub-leases when the original lessee remains a secondary obligor
(or guarantor). SFAS No. 145 also rescinded SFAS No. 44 "Accounting for
Intangible Assets of Motor Carriers," and made numerous technical corrections.
SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. Upon
adoption of SFAS No. 145, any gain or loss on extinguishment of debt previously
classified as an extraordinary item in prior periods that does not meet the
criteria of APB Opinion No. 30 for such classification should be reclassified to
conform with the provisions of SFAS No. 145. Earlier application of the
provisions of SFAS No. 145 related to the rescission of SFAS No. 4 is
encouraged.
On May 28, 2002 we repaid in full our $67,500,000 term loan due August 16,
2004. In connection with the repayment of the term loan, we wrote off $951,000
of unamortized deferred financing costs. On June 28, 2002, we redeemed
$6,942,000 of our 7.5% Convertible Subordinated Notes due 2006 at a redemption
premium of $174,000 (see "Note 4. Debt" above). In accordance with the
early-application provisions of SFAS No. 145, we included the $951,000 write-off
and the $174,000 redemption premium in income from continuing operations in the
Consolidated Statements of Operations for the thirty-nine weeks ended November
2, 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under SFAS No. 146, an
entity's commitment to a plan, by itself, does not create an obligation that
meets the definition of a liability. SFAS No. 146 also establishes fair value as
the objective for initial measurement of the liability. Severance pay would be
recognized over time rather than up front if the benefit arrangement requires
employees to render future service beyond a "minimum retention period." The
liability for severance pay would be recognized as employees render service over
the future service period, even if the benefit formula used to calculate an
employee's termination benefit is based on length of service. The provisions of
SFAS No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged.
We have traditionally recognized certain costs associated with
restructuring plans as of the date of commitment to the plan. Adoption of SFAS
No. 146 could result in the deferral of recognition of such costs for
restructuring plans we initiate in periods subsequent to the effective date of
the statement from the date we commit to the plan to the date that we incur the
costs. We are not able to determine the specific impact, if any, that adoption
of SFAS No. 146 would have on our financial position or results of operations
for periods subsequent to the effective date of the statement.
17
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
12. Subsequent Event
We are in discussions with the Internal Revenue Service regarding a
settlement of their audit of our corporate-owned life insurance ("COLI")
program. In anticipation of the proposed settlement, we have reclassified
$24,900,000 of deferred taxes from a long-term liability to a current liability.
As part of the proposed settlement, we will surrender existing COLI policies,
which have approximately $16,000,000 in cash value. We have reclassified the
cash value of the policies from other non-current assets to other current
assets. The estimated cash required to fund the settlement as proposed, after
receipt of the proceeds from the surrender of the COLI policies, would be
approximately $8,900,000, which would be funded from internally generated funds
or borrowings under our credit facility. Although the ultimate outcome of this
matter cannot be predicted with certainty, we do not believe that settlement
will have a material impact on our financial condition or results of operations.
In connection with the securitization of credit card receivables under our
Fashion Bug proprietary credit card program, on November 22, 2002, we issued
$100.0 million of five-year asset-backed certificates in a private placement, of
which $80.0 million have been sold to investors to-date. To the extent that the
remaining certificates are not sold, we will hold them as a retained interest.
The weighted average fixed interest rate on the certificates is 4.68%. These
certificates will replace an $83.5 million securitization series that is
scheduled to mature during the quarter ended February 1, 2003.
18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the financial
statements and accompanying notes appearing elsewhere in this report. It should
also be read in conjunction with the Management's Discussion and Analysis of
Financial Condition and Results of Operations, financial statements, and
accompanying notes appearing in the Company's Annual Report on Form 10-K for the
fiscal year ended February 2, 2002. As used herein, the terms "Fiscal 2003" and
"Fiscal 2002" refer to our fiscal year ending February 1, 2003 and fiscal year
ended February 2, 2002, respectively.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters contained in the
following analysis and elsewhere in this report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements may include, but are not limited to, projections of revenues, income
or loss, and capital expenditures, plans for future operations, and financing
needs or plans, as well as assumptions relating to the foregoing. The words
"expect," "project," "estimate," "predict," "anticipate," "believes," and
similar expressions are also intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results, performance, and achievements could differ materially from those set
forth in, contemplated by, or underlying the forward-looking statements. We
assume no obligation to update any forward-looking statement to reflect actual
results or changes in or additions to the factors affecting such forward-looking
statements.
Factors that could cause our actual results of operations or financial
condition to differ from those described in this report include, but are not
necessarily limited to, the following:
o Our business is dependent upon our being able to accurately predict rapidly
changing fashion trends, customer preferences and other fashion-related
factors, which we may not be able to successfully accomplish in the future.
o The general slowdown in the United States economy and the uncertain
economic outlook has led to reduced consumer demand for our apparel and
accessories and may continue to do so in the future.
o The women's specialty retail apparel industry is highly competitive and we
may be unable to compete successfully against existing or future
competitors.
o We cannot assure the successful implementation of our business plan for
increased profitability and growth in our plus-sized women's apparel
business.
o Our business plan is largely dependent upon the continued growth in the
plus-sized women's apparel market, which may not continue.
o We depend on key personnel, particularly our Chief Executive Officer,
Dorrit J. Bern, and we may not be able to retain or replace these employees
or recruit additional qualified personnel.
o We depend on our distribution centers and could incur significantly higher
costs and longer lead times associated with distributing our products to
our stores if any of these distribution centers were to shut down for any
reason.
19
o We depend for our working capital needs on the availability of credit,
including credit we receive from our suppliers and their agents, and on our
credit card securitization program. If we were unable to obtain sufficient
financing at affordable cost, our ability to merchandise our stores would
be adversely affected.
o We rely significantly on foreign sources of production and face a variety
of risks (including political instability, imposition of duties or quotas,
increased security requirements applicable to imports, delays in shipping,
increased costs of transportation, and issues relating to compliance with
domestic or international labor standards) generally associated with doing
business in foreign markets and importing merchandise from abroad.
o Our stores experience seasonal fluctuations in net sales and operating
income. Any decrease in sales or margins during our peak sales periods, or
in the availability of working capital needed in the months preceding such
periods, could have a material adverse effect on our business. In addition,
extreme or unseasonable weather conditions may have an impact on our sales.
o War, acts of terrorism, or the threat of either may negatively impact
availability of merchandise and customer traffic to our stores, or
otherwise adversely affect our business.
o We may be unable to obtain adequate insurance for our operations at a
reasonable cost.
o We may be unable to protect our trademarks and other intellectual property
rights, which we believe are important to our success and our competitive
position.
o We may be unable to hire and retain suitable sales associates at our
stores.
o We may be unable to successfully implement our restructuring plan described
elsewhere in this report.
o Our manufacturers may be unable to manufacture and deliver merchandise to
us in a timely manner or to meet our quality standards.
o Our sales are dependent upon a high volume of traffic in the strip centers
and malls in which our stores are located, and our future growth is
dependent upon the availability of suitable locations for new stores.
o We may be unable to successfully integrate Lane Bryant into our current
operating structure, and we currently rely on logistics services from
Limited Brands, Inc. ("Limited Brands") with respect to our Lane Bryant
stores.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are discussed in the Management's
Discussion and Analysis of Financial Condition and Results of Operations and
notes accompanying the consolidated financial statements that appear in the
Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2002.
Except as otherwise disclosed in the financial statements and accompanying notes
included in this report, there were no material changes in our critical
accounting policies or in the assumptions or estimates we used to prepare the
financial information appearing in this report.
20
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." We
adopted the provisions of SFAS No. 142 in full as of February 3, 2002 (see "Item
1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited); Note 11.
Impact of Recent Accounting Pronouncements" above).
Our consolidated balance sheet as of February 2, 2002 included $87.2
million of goodwill related to the acquisition of Catherine's Stores Corporation
("Catherine's"). In accordance with the transition provisions of SFAS No. 142,
we tested the Catherine's goodwill for impairment during the thirteen weeks
ended August 3, 2002. We determined that the carrying value of the Catherine's
goodwill (including the value of the intangible assets not separately accounted
for) exceeded the estimated fair value of the Catherine's goodwill under SFAS
No. 142. We determined the estimated fair value of the Catherine's goodwill
using the present value of expected future cash flows associated with the
Catherine's assets, and we recorded a write-down, which is not deductible for
income tax purposes, of $44.0 million to reduce the carrying value of the
goodwill to its estimated fair value. The majority of the write-down is
attributable to the value of unrecorded trademarks. The write-down has been
presented as the cumulative effect of an accounting change as of February 3,
2002 in our Consolidated Statement of Operations for the thirty-nine weeks ended
November 2, 2002. The calculation of the estimated fair value of the Catherine's
goodwill required estimates, assumptions, and judgments, and results might have
been materially different if different estimates, assumptions, and judgments had
been used.
We also evaluated our goodwill, trademarks, tradenames, and internet domain
names related to the Lane Bryant acquisition as of February 3, 2002 in
accordance with the provisions of SFAS No. 142, and determined that there has
been no impairment of these assets.
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a
percentage of net sales and on a comparative basis:
Percentage Percentage
Increase/ Increase/
Thirteen Weeks Ended (Decrease) Thirty-nine Weeks Ended (Decrease)
November 2, November 3, From Prior November 2, November 3, From Prior
2002 2001 Period 2002 2001 Period
---- ---- ------ ---- ---- ------
Net sales.................. 100.0% 100.0% (1.3)% 100.0% 100.0% 34.5%
Cost of goods sold,
buying, and
occupancy expenses..... 71.9 72.1 (1.6) 70.1 72.3 30.4
Selling, general, and
administrative expenses 27.3 26.7 1.4 25.4 24.1 41.4
Restructuring credit....... 0.2 -- -- 0.1 -- --
Amortization of goodwill... -- 0.2 (100.0) -- 0.2 (100.0)
Income from operations..... 1.0 1.0 (3.2) 4.6 3.4 86.0
Other income, principally
interest............... 0.1 0.2 (36.4) 0.1 0.3 (58.7)
Interest expense........... 0.8 1.2 (29.7) 0.9 0.9 50.3
Income tax provision....... 0.2 0.0 -- 1.5 1.1 80.6
Minority interest in net
loss of subsidiary..... -- -- -- -- -- --
Cumulative effect of
accounting change...... -- -- -- (2.4) -- --
Net income (loss).......... 0.1 0.0 213.8 (0.0) 1.7 (106.9)
21
The following table sets forth our net sales by store brand:
Thirteen Weeks Ended Thirty-nine Weeks Ended
November 2, November 3, November 2, November 3,
(in millions) 2002 2001 2002 2001
---- ---- ---- ----
Fashion Bug ....... $256.6 $265.3 $ 867.1 $ 860.7
Lane Bryant ....... 205.0 191.2(1) 670.8 191.2(1)
Catherine's ....... 79.8 92.2 270.6 293.7
Monsoon/Accessorize 0.9 0.6 2.8 1.2
------ ------ -------- --------
Total net sales ... $542.3 $549.3 $1,811.3 $1,346.8
====== ====== ======== ========
- --------------------
(1) Sales from date of acquisition on August 16, 2001.
The following table sets forth certain additional information related to
changes in our net sales:
Thirteen Weeks Ended Thirty-nine Weeks Ended
November 2, November 3, November 2, November 3,
2002 2001 2002 2001
---- ---- ---- ----
(Decrease) increase in comparable
store sales (1):
Fashion Bug....................... (1)% (7)% 0% (6)%
Catherine's....................... 1 (4) 0 (2)
Lane Bryant....................... (8) -- (4) --
Sales from new stores as a percentage
of total prior-period sales:
Fashion Bug....................... 3 5 3 6
Catherine's....................... 2 2 2 3
Lane Bryant....................... 2 53 35 16
Prior-period sales from closed stores
as a percentage of total prior-
period sales:
Fashion Bug....................... (3) (3) (3) (3)
Catherine's....................... (4) (1) (4) (4)
Lane Bryant....................... (1) -- 0 --
Increase (decrease) in total sales....... (1) 51 34 15
- --------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation. Comparable store sales
for Lane Bryant are based on historical data, giving effect to our acquisition
of Lane Bryant as if it had occurred on February 4, 2001.
Comparison of Thirteen Weeks Ended November 2, 2002 and November 3, 2001
Net Sales
Net sales were $542.3 million for the quarter ended November 2, 2002
("Fiscal 2003 Third Quarter"), a decrease of 1.3% from net sales of $549.3
million for the quarter ended November 3, 2001 ("Fiscal 2002 Third Quarter").
The number of retail stores in operation at the end of the Fiscal 2003 Third
Quarter was 2,340 stores, compared to 2,495 stores at the end of the Fiscal 2002
Third Quarter. We experienced a year-over-year decrease in overall comparable
store sales of 4%. The decrease in sales was due primarily to negative results
at our Lane Bryant chain. Lane Bryant stores had comparable store sales
decreases in sweaters, denim, and intimate apparel. In particular, the Lane
Bryant chain experienced poor customer acceptance of, and fit and quality issues
with, certain of its products during the Fiscal 2003 Third Quarter, resulting in
higher levels of promotional pricing. In addition, certain basic products were
under-inventoried, resulting in missed
22
sales opportunities. Due to product lead times, these issues are expected to
negatively impact Lane Bryant results for the quarter ending February 1, 2003
("Fiscal 2003 Fourth Quarter") and could negatively impact Lane Bryant results
for the quarter ending May 3, 2003 ("Fiscal 2004 First Quarter") and the quarter
ending August 2, 2003 ("Fiscal 2004 Second Quarter"). Fashion Bug stores
experienced comparable store sales decreases in missy sportswear, dresses,
coats, and intimate apparel, which were partially offset by increases in plus
sportswear and accessories. For Catherine's Stores, comparable store sales
increases in casual sportswear and dresses, intimate apparel, and jewelry were
partially offset by declines in career sportswear.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. We recognized $5.8 million of revenues in the Fiscal 2003
Third Quarter and $4.4 million of revenues in the Fiscal 2002 Third Quarter in
connection with this program. As of December 1, 2002, no new cards will be
issued under this program.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $389.7 million in
the Fiscal 2003 Third Quarter, a decrease of 1.6% from $396.0 million in the
Fiscal 2002 Third Quarter, principally reflecting the decrease in net sales. As
a percentage of net sales, these costs decreased 0.2% in the Fiscal 2003 Third
Quarter as compared to the Fiscal 2002 Third Quarter.
Cost of goods sold as a percentage of net sales decreased 1.7% in the
Fiscal 2003 Third Quarter as compared to the Fiscal 2002 Third Quarter. The
decrease was a result of higher merchandise margins in all of our chains, due
primarily to improved inventory control as compared to the prior year and
benefits from our store restructuring program. Cost of goods sold includes
merchandise costs, net of discounts and allowances, freight, and inventory
shrinkage. Net merchandise costs and freight are capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales increased 1.5%
in the Fiscal 2003 Third Quarter as compared to the Fiscal 2002 Third Quarter.
The increase in buying and occupancy expenses as a percentage of sales was
primarily attributable to the lack of leverage on relatively fixed occupancy
costs as a result of negative overall comparable store sales. Buying expenses
include payroll, payroll-related costs, and operating expenses for our buying
departments and warehouses. Occupancy expenses include rent, real estate taxes,
insurance, common area maintenance, utilities, maintenance, and depreciation for
our stores and warehouse facilities and equipment. Buying and occupancy costs
are treated as period costs and are not capitalized as part of inventory.
Selling, General, and Administrative
Selling, general, and administrative expenses were $148.3 million in the
Fiscal 2003 Third Quarter, an increase of 1.4% from $146.2 million in the Fiscal
2002 Third Quarter. As a percentage of net sales, these costs increased by 0.6%
in the Fiscal 2003 Third Quarter as compared to the Fiscal 2002 Third Quarter.
Selling expenses as a percentage of sales for the Fiscal 2003 Third Quarter were
unchanged from the prior-year period. General and administrative expenses
increased 0.6% as a percentage of sales, primarily as a result of the lack of
leverage from negative comparable store sales. During the Fiscal 2003 Third
Quarter, we completed the integration of the Lane Bryant management information
systems, which we expect to result in future cost synergies for the Company.
23
Restructuring Credit
During the Fiscal 2003 Third Quarter, we completed the closing and
conversion of The Answer/ Added Dimensions stores, and we recognized a pre-tax
restructuring credit of $1.4 million (see "Item 1. NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited); Note 5. Accrued Restructuring
Costs" above). The restructuring credit was primarily a result of our ability to
negotiate lease terminations and amendments on terms more favorable than our
original estimates.
Amortization of Goodwill
We recognized $1.2 million of amortization of goodwill during the Fiscal
2002 Third Quarter related to the Catherine's acquisition. We adopted the
provisions of Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," as of February 3, 2002, and we are no longer amortizing the Catherine's
goodwill. However, the Catherine's goodwill and goodwill related to our
acquisition of Lane Bryant are subject to periodic impairment reviews in
accordance with the provisions of SFAS No. 142 (see "CRITICAL ACCOUNTING
POLICIES" above and "Comparison of Thirty-nine Weeks Ended November 2, 2002 and
November 3, 2001; Cumulative Effect of Accounting Change" below).
Other Income
Other income was $0.7 million in the Fiscal 2003 Third Quarter, a decrease
of 36.4% from $1.1 million in the Fiscal 2002 Third Quarter. This decrease was
primarily caused by a decrease in interest income. Interest income decreased as
a result of a decrease in the average yield on investments during the Fiscal
2003 Third Quarter as compared to the Fiscal 2002 Third Quarter.
Interest Expense
Interest expense was $4.7 million in the Fiscal 2003 Third Quarter, a
decrease of 29.7% from $6.6 million in the Fiscal 2002 Third Quarter. The
decrease was the result of both lower interest rates on borrowings and reduced
levels of borrowings in the Fiscal 2003 Third Quarter as compared to the Fiscal
2002 Third Quarter. During Fiscal 2003, we replaced $96.0 million of 7.5%
Convertible Subordinated Notes due 2006 and a $67.5 million 11.5% term loan with
$150.0 million of 4.75% Senior Convertible Notes (see "Item 1. NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited); Note 4. Debt" above and
"FINANCING" below).
Income Tax Provision
The income tax provision for the Fiscal 2003 Third Quarter was $1.2
million, resulting in a 71.6% effective tax rate, as compared to an income tax
provision for the Fiscal 2002 Third Quarter of $0.1 million, resulting in a
38.9% effective tax rate. During the Fiscal 2003 Third Quarter we increased the
estimated effective tax rate for Fiscal 2003 from 38.2% to 39.0%. This increase
in the effective tax rate is a result of the effect of unfavorable net permanent
differences between book income and taxable income on our reduced estimate of
Fiscal 2003 pre-tax income. The impact of the change in estimate on a relatively
small pre-tax income in the Fiscal 2003 Third Quarter resulted in the high
effective tax rate for the quarter.
24
Comparison of Thirty-nine Weeks Ended November 2, 2002 and November 3, 2001
Net Sales
Net sales were $1,811.3 million for the thirty-nine weeks ended November 2,
2002 ("first three quarters of Fiscal 2003"), an increase of 34.5% from net
sales of $1,346.8 million for the thirty-nine weeks ended November 3, 2001
("first three quarters of Fiscal 2002"), primarily due to our acquisition of
Lane Bryant in August 2001. Including Lane Bryant comparable store sales on a
pro forma basis, overall comparable store sales decreased 1% from the prior-year
period. Lane Bryant stores had comparable store sales decreases in sweaters,
denim, and intimate apparel. In particular, the Lane Bryant chain experienced
poor customer acceptance of, and fit and quality issues with, certain of its
products during the Fiscal 2003 Third Quarter, resulting in higher levels of
promotional pricing. In addition, certain basic products were under-inventoried,
resulting in missed sales opportunities. Due to product lead times, these issues
are expected to negatively impact Lane Bryant results for the Fiscal 2003 Fourth
Quarter and could negatively impact results for the Fiscal 2004 First Quarter
and Fiscal 2004 Second Quarter. For Fashion Bug stores, comparable store sales
increases in junior and plus sportswear, footwear, and accessories were offset
by declines in missy sportswear, dresses, coats, and intimate apparel. For
Catherine's Stores, comparable store sales increases in casual sportswear were
offset by declines in other merchandise categories. During the current year, we
discontinued the Added Dimensions chain, closed the remaining stores in the
chain, and liquidated the remaining Added Dimensions store inventory.
In Fiscal 2002, we began a customer loyalty card program for our Fashion
Bug store customers. We recognized $16.2 million of revenues in the first three
quarters of Fiscal 2003 and $8.1 million of revenues in the first three quarters
of Fiscal 2002 in connection with this program. As of December 1, 2002, no new
cards will be issued under this program.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses were $1,269.8 million in
the first three quarters of Fiscal 2003, an increase of 30.4% from $973.5
million in the first three quarters of Fiscal 2002, principally reflecting the
increase in net sales. As a percentage of net sales, these costs decreased 2.2%
in the first three quarters of Fiscal 2003 as compared to the first three
quarters of Fiscal 2002.
Cost of goods sold as a percentage of net sales decreased 3.6% in the first
three quarters of Fiscal 2003 as compared to the first three quarters of Fiscal
2002. The higher merchandise margins reflected the addition of the Lane Bryant
chain, improved gross margins and inventory controls in all chains, and benefits
from our store closing initiative. During the Fiscal 2003 Second Quarter,
markdowns taken in connection with the liquidation of the Added Dimensions
inventories were offset by $3.0 million of costs accrued during the fourth
quarter of Fiscal 2002 related to the valuation of inventory for stores to be
closed as the result of our restructuring plan. Cost of goods sold includes
merchandise costs, net of discounts and allowances, freight, and inventory
shrinkage. Net merchandise costs and freight are capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales increased 1.4%
in the first three quarters of Fiscal 2003 as compared to the first three
quarters of Fiscal 2002. The increase in buying and occupancy expenses as a
percentage of sales was primarily attributable to the lack of leverage on
relatively fixed occupancy costs as a result of negative comparable store sales.
Relatively higher occupancy expenses for the Lane Bryant stores and a $2.7
million write-down of under-performing assets related to our joint venture also
contributed to the increase in buying and occupancy expenses as a percentage of
net sales. Buying expenses for the first three quarters of Fiscal 2003, as a
percentage of net sales, were unchanged from the comparable prior-year period.
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
25
area maintenance, utilities, maintenance, and depreciation for our stores and
warehouse facilities and equipment. Buying and occupancy costs are treated as
period costs and are not capitalized as part of inventory.
Selling, General, and Administrative
Selling, general, and administrative expenses were $458.9 million in the
first three quarters of Fiscal 2003, an increase of 41.4% from $324.5 million in
the first three quarters of Fiscal 2002, principally reflecting the acquisition
of Lane Bryant. As a percentage of net sales, these costs increased by 1.3% in
the first three quarters of Fiscal 2003 as compared to the first three quarters
of Fiscal 2002. Selling expenses increased 0.6% as a percentage of sales. The
increase was attributable to a number of factors, including higher store payroll
and benefits costs, new point-of-sales systems at Fashion Bug, and an increase
in direct marketing expenses in the Catherine's and Lane Bryant chains. Credit
income (a component of selling expenses) decreased in the first three quarters
of Fiscal 2003 as a result of increased credit losses and higher operating costs
with respect to our Fashion Bug proprietary credit card program. General and
administrative expenses increased 0.7% as a percentage of sales, primarily as a
result of accruals for employee benefit costs, costs associated with
transitional service agreements related to the Lane Bryant acquisition, and the
lack of leverage on fixed costs, particularly at Lane Bryant.
Restructuring Credit
During the Fiscal 2003 Third Quarter, we completed the closing and
conversion of The Answer/ Added Dimensions stores, and we recognized a pre-tax
restructuring credit of $1.4 million (see "Item 1. NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited); Note 5. Accrued Restructuring
Costs" above). The restructuring credit was primarily a result of our ability to
negotiate lease terminations and amendments on terms more favorable than our
original estimates.
Amortization of Goodwill
We recognized $3.7 million of amortization of goodwill during the first
three quarters of Fiscal 2002 related to the Catherine's acquisition. We adopted
the provisions of SFAS No. 142 as of February 3, 2002, and we are no longer
amortizing the Catherine's goodwill. However, the Catherine's goodwill and
goodwill related to our acquisition of Lane Bryant are subject to periodic
impairment reviews in accordance with the provisions of SFAS No. 142 (see
"Cumulative Effect of Accounting Change" below).
Other Income
Other income was $1.9 million in the first three quarters of Fiscal 2003, a
decrease of 58.7% from $4.5 million in the first three quarters of Fiscal 2002.
This decrease was primarily caused by a decrease in interest income. Interest
income decreased as a result of a decrease in the average yield on investments
during the first three quarters of Fiscal 2003 as compared to the first three
quarters of Fiscal 2002.
Interest Expense
Interest expense was $17.1 million in the first three quarters of Fiscal
2003, an increase of 50.3% from $11.4 million in the first three quarters of
Fiscal 2002. This increase was primarily the result of short-term and long-term
borrowings incurred in connection with the Lane Bryant acquisition, and to a
lesser extent, the result of additional long-term mortgage borrowings and
acquisitions of point-of-sale equipment under long-term capital leases. In
addition, we wrote off $951 thousand of unamortized deferred financing costs
related to our $67.5 million term loan which was repaid during the period (see
"FINANCING" below), which resulted in additional interest expense in the
current-year period. These increases were partially offset
26
by reduced interest expense in the Fiscal 2003 Third Quarter as compared to the
Fiscal 2002 Third Quarter as a result of relatively lower interest rates on
borrowings and reduced levels of borrowings. During Fiscal 2003, we replaced
$96.0 million of 7.5% Convertible Subordinated Notes due 2006 and a $67.5
million 11.5% term loan with $150.0 million of 4.75% Senior Convertible Notes
(see "Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited);
Note 4. Debt" above and "FINANCING" below).
Income Tax Provision
The income tax provision for the first three quarters of Fiscal 2003 was
$26.8 million, resulting in a 39.0% effective tax rate, as compared to an income
tax provision for the first three quarters of Fiscal 2002 of $14.8 million,
resulting in a 38.8% effective tax rate. During the Fiscal 2003 Third Quarter,
we increased the estimated effective tax rate for Fiscal 2003 from 38.2% to
39.0%. This increase in the effective tax rate is a result of the effect of
unfavorable net permanent differences between book income and taxable income on
our reduced estimate of Fiscal 2003 pre-tax income.
Cumulative Effect of Accounting Change
We adopted the provisions of SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets" in full as of February 3,
2002. In accordance with the transition provisions of SFAS No. 142, we tested
the Catherine's goodwill for impairment during the thirteen weeks ended August
3, 2002, and recorded a write-down of $44.0 million to reduce the carrying value
of the goodwill to its estimated fair value. The write-down has been presented
as the cumulative effect of an accounting change as of February 3, 2002 in our
Consolidated Statement of Operations for the thirty-nine weeks ended November 2,
2002 (see "CRITICAL ACCOUNTING POLICIES" above).
RECENT DEVELOPMENTS
On August 28, 2002, we purchased 3,175,331 shares of our common stock from
Limited Brands for $21.3 million ($6.705 per share). On September 17, 2002, we
purchased an additional 6,350,662 shares of our common stock from Limited Brands
for $44.1 million ($6.95 per share). The transactions were financed through the
use of existing cash and proceeds from the issuance of our 4.75% Senior
Convertible Notes (see "FINANCING" below). We had previously issued 9,525,993
shares of our common stock to Limited Brands in connection with our acquisition
of Lane Bryant in August 2001. The purchased shares will be held as treasury
shares.
On September 24, 2002, we acquired a 392,500 square foot distribution
center on 29 acres of land in White Marsh, Maryland at a cost of $17.3 million.
This distribution center will replace our existing Lane Bryant distribution
center in Columbus, Ohio, which we are using under an agreement with an
affiliate of Limited Brands. In connection with our acquisition of Lane Bryant
from Limited Brands in August 2001, we entered into an agreement with an
affiliate of Limited Brands to use the Ohio distribution center and receive
related distribution services on a transition basis through August 2004, with
the right to terminate the services earlier upon notice. We expect the White
Marsh facility to have sufficient capacity to service the entire chain of Lane
Bryant stores. We expect to incur approximately $10.0 million of additional
capital expenditures over the next nine to twelve months for equipment for, and
improvements to, the facility. We have received a commitment to finance the
majority of these additional capital expenditures through a capital lease
arrangement.
27
In October 2002, we borrowed $14.0 million under a 6.53% mortgage note. The
note has a ten-year term with 120 monthly installments of principal in the
amount of $117 thousand plus interest. The mortgage note is secured by land, a
building, and certain fixtures at the White Marsh, Maryland distribution center.
The net proceeds were used to finance a substantial portion of the White Marsh
acquisition.
In connection with the securitization of credit card receivables under our
Fashion Bug proprietary credit card program, on November 22, 2002, we issued
$100.0 million of five-year asset-backed certificates in a private placement, of
which $80.0 million have been sold to investors to date. To the extent that the
remaining certificates are not sold, we will hold them as a retained interest.
The weighted average fixed interest rate on the certificates is 4.68%. These
certificates will replace an $83.5 million securitization series that is
scheduled to mature during the quarter ended February 1, 2003.
We are in discussions with the Internal Revenue Service regarding a
settlement of their audit of our corporate-owned life insurance ("COLI")
program. In anticipation of the proposed settlement, we have reclassified $24.9
million of deferred taxes from a long-term liability to a current liability. As
part of the proposed settlement, we will surrender COLI policies, which have
approximately $16.0 million in cash value. We have reclassified the cash value
of the policies from other non-current assets to other current assets. The
estimated cash required to fund the settlement as proposed, after receipt of the
proceeds from the surrender of the COLI policies, would be approximately $8.9
million, which would be funded from internally generated funds or borrowings
under our credit facility. Although the ultimate outcome of this matter cannot
be predicted with certainty, we do not believe that settlement will have a
material impact on our financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of working capital are cash flow from operations, our
proprietary credit card receivables securitization agreements, our investment
portfolio, and our credit facility.
The following table highlights certain information related to our liquidity
and capital resources:
November 2, February 2,
(Dollars in thousands) 2002 2002
---- ----
Cash and cash equivalents............. $ 46,256 $ 36,640
Available-for-sale securities......... 85,380 70,366
Working capital....................... 157,940 145,047
Current ratio......................... 1.4 1.4
Long-term debt to equity ratio........ 36.1% 37.9%
Our net cash provided by operating activities was $118.9 million for the
first three quarters of Fiscal 2003, as compared to $29.8 million for the first
three quarters of Fiscal 2002. The increase was primarily a result of an
increase in net income before a non-cash write-down of goodwill and non-cash
charges for depreciation and amortization, a decrease in prepaid expenses, and
increases in accrued expenses and income taxes payable. In addition, our
investment in inventories, net of accounts payable, decreased during the first
three quarters of Fiscal 2003 as compared to the first three quarters of Fiscal
2002 as a result of inventory management initiatives and improved vendor terms
from conforming Lane Bryant's vendor terms to our corporate terms. These changes
were partially offset by a $12.0 million decrease in accrued restructuring costs
during the first three quarters of Fiscal 2003.
28
Our capital expenditures were $64.6 million during the first three quarters
of Fiscal 2003. In addition, we acquired $2.9 million of point-of-sale equipment
under capital leases. During the remainder of Fiscal 2003, we anticipate
incurring additional capital expenditures of approximately $10.0-$15.0 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 capital expenditures
principally through internally generated funds. During the Fiscal 2003 Third
Quarter, we acquired a 392,500 square foot distribution center in White Marsh,
Maryland to replace our existing Lane Bryant distribution center in Columbus,
Ohio for $17.3 million (see "RECENT DEVELOPMENTS" above). In addition to the
$10.0-$15.0 million of capital expenditures discussed above, we expect to incur
approximately $10.0 million of capital expenditures over the next nine to twelve
months for equipment for, and improvements to, the White Marsh facility. We have
received a commitment to finance the majority of these additional capital
expenditures through a capital lease arrangement.
We plan to close 73 Fashion Bug stores during the remainder of Fiscal 2003,
including 7 stores which will be converted to Lane Bryant stores. We do not plan
to open any additional stores during the remainder of Fiscal 2003. During the
first three quarters of Fiscal 2003, we closed 97 Fashion Bug stores (including
33 stores which will be converted to Lane Bryant stores) and 68
Catherine's/Added Dimensions stores, and converted 9 Added Dimensions stores to
Catherine's stores, in connection with our restructuring plan (see "Item 1.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited); Note 5.
Accrued Restructuring Costs" above).
The following table sets forth information with respect to store activity
for the first three quarters of Fiscal 2003:
Catherine's/
Fashion Lane Added Monsoon/
Bug Bryant Dimensions Accessorize
Stores Stores Stores Stores Total
------ ------ ------ ------ -----
Stores at February 2, 2002...... 1,252 647 538 9 2,446
----- --- --- -- -----
Stores opened................... 7 27 24 1 59
Stores converted................ (33) 33 0(1) 0
Stores closed................... (67) (11) (87) 0 (165)
----- --- --- -- -----
Net change in stores............ (93) 49 (63) 1 (106)
----- --- --- -- -----
Stores at November 2, 2002...... 1,159 696 475 10 2,340
===== === === == =====
Stores relocated during period.. 17 4 11 32
Stores remodeled during period.. 4 5 8 17
- --------------------
(1) During the first three quarters of Fiscal 2003, 9 Added Dimensions stores
were converted to Catherine's stores.
As part of our Fashion Bug proprietary credit card program, we have formed
a trust called the Charming Shoppes Master Trust to which Spirit of America
National Bank (our credit card bank) has transferred, through a special purpose
entity, its interest in Fashion Bug credit card receivables. We, together with
the trust, have entered into various agreements under which the trust can sell,
on a revolving basis, interests in these receivables for a specified term. When
the revolving period terminates, an amortization period begins during which
principal payments are made to the parties with whom the trust has entered into
the securitization agreement.
29
We securitized $268.5 million of credit card receivables during the first
three quarters of Fiscal 2003 and had $293.7 million of securitized credit card
receivables outstanding as of November 2, 2002. We held retained interests in
our securitizations of $51.6 million as of November 2, 2002, which were
generally subordinated in right of payment to certificates issued by the trust
to third-party investors. Our obligation to repurchase receivables sold to the
trust is limited to those receivables that, at the time of their transfer, fail
to meet the trust's eligibility standards under normal representations and
warranties. To date, we have repurchased only a small amount of receivables
pursuant to this obligation.
On November 22, 2002, we issued $100.0 million of new five-year
asset-backed certificates in a private placement, of which $80.0 million have
been sold to investors to-date. To the extent that the remaining certificates
are not sold, we will hold them as a retained interest. The weighted average
fixed interest rate on the certificates is 4.68%. These certificates will
replace an $83.5 million securitization series that is scheduled to mature
during the quarter ended February 1, 2003.
Charming Shoppes Receivables Corp. and Charming Shoppes Seller, Inc., our
consolidated wholly-owned indirect subsidiaries, are separate special purpose
entities created for the securitization program. At November 2, 2002, Charming
Shoppes Receivables Corp. held $40.2 million of Charming Shoppes Master Trust
Certificates and Charming Shoppes Seller, Inc. held retained interests of $1.2
million (which are included in the $51.6 million of retained interests we held
at November 2, 2002). These assets are first and foremost available to satisfy
the claims of the respective creditors of these separate corporate entities,
including certain claims of investors in the Charming Shoppes Master Trust.
We could be affected by certain events that would cause the trust to
require additional enhancement from proceeds within the trust that would
otherwise be available to be paid to us with respect to our subordinated
interests. Specifically, if either the trust or we fail to meet certain
financial performance standards, a credit enhancement condition would occur and
the trust would be required to retain amounts otherwise payable to us. During
Fiscal 2002, credit card receivable credit loss percentages exceeded a specified
threshold percentage, which obligated the trust to accumulate $9.5 million into
such an enhancement account. As of November 2, 2002, the Charming Shoppes Master
Trust had all of the $9.5 million segregated for such additional enhancement
purposes. Amounts placed into enhancement accounts, if not required to be paid
to the other certificate holders, will be available to us at the termination of
the securitization series. The $9.5 million in the enhancement accounts is
classified as "available-for-sale securities" in current assets as of November
2, 2002. We do not expect the requirement to materially affect our liquidity or
results of operations. We have no obligation to directly fund the enhancement
account of the trust, other than for breaches of customary representations,
warranties, and covenants. These representations, warranties, covenants, and
related indemnities do not protect the trust or investors in the trust against
credit-related losses on the receivables. The providers of the credit
enhancements and trust investors have no other recourse to us.
These securitization agreements are intended to improve our overall
liquidity by providing short-term sources of funding. Additional information
regarding this program is included in "Part II, Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" of our Annual
Report on Form 10-K for the fiscal year ended February 2, 2002.
We also have non-recourse agreements under which third parties provide
accounts receivable proprietary credit card sales funding programs for both our
Catherine's and Lane Bryant stores. These funding programs expire in January
2005 for Catherine's and in January 2006 for Lane Bryant. Under these
agreements, the third parties reimburse us daily with respect to the proprietary
credit card sales generated by the respective store's credit card accounts.
Additional information regarding these agreements is included
30
in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" of our Annual Report on Form 10-K for the fiscal year
ended February 2, 2002.
We believe that our capital resources and liquidity position are sufficient
to support our current operations. Our requirements for working capital, capital
expenditures, and repayment of debt and other obligations are expected to be
funded from operations, supplemented as needed by short-term or long-term
borrowings available under our credit facility, our proprietary credit card
receivables securitization agreements, leases, and other available financing
sources.
FINANCING
As of November 2, 2002, we had a $300.0 million revolving credit facility,
which provides for cash borrowings and enables us to issue up to $150.0 million
of letters of credit for overseas purchases of merchandise. As of November 2,
2002, there were $26.2 million of borrowings outstanding under the revolving
credit facility. The availability of borrowings under our revolving credit
facility is subject to limitations based on eligible inventory and the value of
certain real property. The credit facility is secured by our general assets,
except for certain assets related to our credit card securitization program,
certain real properties and equipment subject to other mortgages, our interest
in our joint venture with Monsoon plc, and the assets of our non-U.S.
subsidiaries. The credit facility expires on August 16, 2004, and can be renewed
for an additional year at our option.
The interest rate on borrowings under the revolving credit facility ranges
from Prime to Prime plus .75% per annum for Prime Rate Loans, and LIBOR plus
2.0% to LIBOR plus 2.75% per annum for Eurodollar Rate Loans, and is determined
quarterly, based on our Leverage Ratio or excess availability, as defined in the
credit facility. As of November 2, 2002, the interest rate on outstanding
borrowings under the facility was 4.75%.
The credit facility includes limitations on sales and leasebacks, the
incurrence of additional liens and debt, capital lease financing, and other
limitations. The credit facility also requires, among other things, that we not
pay dividends on our common stock and, under certain circumstances, that we
maintain an Adjusted Tangible Net Worth of $228.0 million (subject to
adjustment). As of November 2, 2002, we were not in violation of any of the
covenants included in the credit facility.
On May 28, 2002, we completed a private placement of $130.0 million of
4.75% Senior Convertible Notes due 2012 (the "Senior Notes"). On June 20, 2002,
the initial purchasers of the private placement exercised their option to
purchase an additional $20.0 million principal amount of the Senior Notes,
resulting in the private placement of Senior Notes in an aggregate principal
amount of $150.0 million.
The Senior Notes will mature on June 1, 2012 and are convertible at any
time prior to maturity into shares of our common stock at a conversion price of
$9.88, subject to adjustment upon certain events. The Senior Notes are
redeemable at our option, in whole or in part, at any time on or after June 4,
2007, at declining redemption prices, starting at 102.38% of principal and
decreasing to 100.48% on or after June 1, 2011. Under certain circumstances
involving a change in control of the Company, holders of the Senior Notes may
require us to repurchase all or a portion of the Senior Notes at 100% of the
principal amount plus any accrued and unpaid interest. Also, under such
circumstances we have the option of paying the repurchase price in shares of our
common stock, valued at 95% of the average of the closing prices of the common
stock for a five-day trading period immediately before and including the third
trading day preceding the repurchase date. There is no sinking fund for the
Senior Notes.
31
Net proceeds received from the issuance of the Senior Notes were $145.5
million. We used a portion of the net proceeds to repay in full our $67.5
million term loan due August 16, 2004, $3.5 million outstanding under our
revolving credit facility, and $6.9 million of the 7.5% Convertible Subordinated
Notes due 2006 called for redemption (see below). We also used a portion of the
proceeds to purchase 2,675,000 shares of our common stock at a cost of $18.3
million. The remaining proceeds ($49.3 million) were invested in cash and cash
equivalents pending their use for the purchase of 9,525,993 shares of our common
stock from Limited Brands (see "RECENT DEVELOPMENTS" above). In addition, we
wrote off $951 thousand of unamortized deferred financing costs related to the
term loan. The write-off of the deferred financing costs has been included in
continuing operations in the Consolidated Statements of Operations for the
thirty-nine weeks ended November, 2002, in accordance with the early-application
provisions of SFAS No. 145 (see "Item 1. NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited); Note 11. Impact of Recent Accounting
Pronouncements" above). The term loan that was repaid had an 11.5% interest rate
and various financial covenants.
On May 29, 2002, we called our 7.5% Convertible Subordinated Notes due 2006
(the "Subordinated Notes") for redemption on June 28, 2002. The redemption price
was 102.5% of the principal amount of the Subordinated Notes, plus accrued and
unpaid interest up to the date of redemption. The Subordinated Notes had an
original maturity date of July 15, 2006, and could be converted into shares of
our common stock until the close of business on June 27, 2002 at a conversion
price of $7.46. During the thirty-nine weeks ended November 2, 2002, $89.1
million principal amount of the Subordinated Notes were converted into
11,944,338 shares of our common stock pursuant to the conversion terms of the
Notes. Accrued interest expense of $3.0 million on the Subordinated Notes that
were converted has been reclassified to additional paid-in capital. On June 28,
2002, the remaining Subordinated Notes, with an aggregate principal amount of
$6.9 million, were redeemed for $7.4 million, including the 2.5% redemption
premium and accrued interest of $236 thousand to the date of redemption. The
redemption premium of $174 thousand has been included in continuing operations
in the Consolidated Statements of Operations for the thirty-nine weeks ended
November 2, 2002, in accordance with the early-application provisions of SFAS
No. 145 (see "Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited); Note 11. Impact of Recent Accounting Pronouncements" above).
MARKET RISK
We manage our Fashion Bug proprietary credit card program through various
operating entities that we own. The primary activity of these entities is to
service our proprietary credit card portfolio, the balances of which we sell
under a credit card securitization program. Under the securitization program, we
can be exposed to fluctuations in interest rates to the extent that the interest
rates charged to our customers vary from the rates paid on certificates issued
by the trust. Until November 2000, the credit card program billed finance
charges based on a fixed rate. As of November 2000, finance charges on all
accounts are billed using a floating rate index (the Prime lending rate),
subject to a floor and limited by legal maximums. The floating rate index on all
of the certificates is either one-month LIBOR or the commercial paper rate,
depending on the issuance. Consequently, we have reduced our exposure to
fluctuations in interest rates. However, we have exposure in the movement of
basis risk between the floating rate index on the certificates and the Prime
rate. As of November 2, 2002, the floating-rate finance charge rate was below
the contractual floor rate, thus exposing us to a portion of interest-rate risk.
To the extent that short-term interest rates were to increase by one percentage
point by the end of Fiscal 2003, an increase of approximately $200 thousand in
selling, general, and administrative expenses would result.
32
As of November 2, 2002, there were $26.2 million of borrowings outstanding
under our revolving credit facility. These borrowings are 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 11. Impact of Recent Accounting Pronouncements" above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations; MARKET RISK," above.
Item 4. Controls and Procedures
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 established 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.
Within the 90-day period prior to the filing of this report on Form 10-Q
(the "Evaluation Date"), an evaluation was carried out by the Disclosure
Committee, under the supervision and with the participation of management,
including our CEO and CFO, 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
have been no significant changes in our internal controls or in other factors
(including any corrective actions with regard to significant deficiencies or
material weaknesses in internal controls) that could significantly affect those
controls subsequent to the date of their most recent evaluation.
33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 26, 2001, a terminated employee filed a purported class action
suit in Alameda Superior Court, California against Lane Bryant, Inc. alleging
that she and all Lane Bryant store sales managers in California were
misclassified as exempt employees, and are actually nonexempt and entitled to be
paid overtime which they had not received. The plaintiff alleges violations of
Labor Code Sections 1194 and 515 and the Industrial Welfare Commission Order
promulgated pursuant to those Sections, as well as a violation of Business &
Professions Code Sections 17,200 et seq. The plaintiff seeks back pay and
injunctive relief for the misclassification, and reimbursement and disgorgement
of profits for the violation of the Business & Professions Code.
Lane Bryant is currently investigating whether the case would be
appropriate for class treatment. Lane Bryant will vigorously and aggressively
oppose class certification and the merits of the class case should it be
certified, or the individual case should it not be certified. Although the
ultimate outcome of this matter cannot be predicted with certainty, we do not
believe that the case will have a material impact on our financial condition or
results of operations.
There are no other pending legal proceedings, other than ordinary routine
litigation incidental to our business, to which we or any of our subsidiaries is
a party or of which our property or the property of any of our subsidiaries is
the subject that are expected to have a material adverse effect on our financial
condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of Exhibits filed as part of this Quarterly Report
on Form 10-Q. Where so indicated, Exhibits that were previously filed are
incorporated by reference. For Exhibits incorporated by reference, the location
of the Exhibit in the previous filing is indicated in parenthesis.
3.1 Restated Articles of Incorporation, incorporated by reference to Form 10-K
of the Registrant for the fiscal year ended January 29, 1994. (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)
4.1 Indenture, dated as of May 28, 2002, between Charming Shoppes, Inc. and
Wachovia Bank, National Association, incorporated by reference to Form 10-Q
of the Registrant for the quarter ended May 4, 2002. (Exhibit 4.1)
4.2 Registration Rights Agreement, dated as of May 28, 2002, by and among
Charming Shoppes, Inc., as Issuer, and J. P. Morgan Securities, Inc., Bear
Stearns & Co., Inc., First Union Securities, Inc., Lazard Freres & Co.,
LLC, and McDonald Investments, Inc., as Initial Purchasers, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended May 4, 2002.
(Exhibit 4.2)
4.3 Amendment No. 4, dated September 23, 2002, to Loan and Security Agreement
dated as of August 16, 2001 by and among Charming Shoppes, Inc., Charming
Shoppes of Delaware, Inc., CSI
34
Industries, Inc., Catherine Stores Corporation, Lane Bryant, Inc. and FB
Apparel, Inc., as Borrowers, Charming Shoppes of Delaware, Inc., as
Borrowers' Agent, Congress Financial Corporation, as Administrative Agent,
Collateral Agent, Joint Lead Arranger and Joint Bookrunner, J.P. Morgan
Business Credit Corp., as Co-Agent, Joint Lead Arranger and Joint
Bookrunner and The Financial Institutions named therein, as Lenders.
10.1 Series 2002-1 Supplement, dated as of November 20, 2002, to Second Amended
and Restated Pooling and Service Agreement, dated as of November 25, 1997,
as amended on July 22, 1999 and on May 8, 2001, among Charming Shoppes
Receivables Corp., as Seller, Spirit of America, Inc., as Servicer, and
Wachovia Bank, National Association, as Trustee, for $100,000,000 Charming
Shoppes Master Trust Asset-Backed Certificates Series 2002-1.
10.2 Charming Shoppes Master Trust $63,500,000 Fixed Rate Class A Asset Backed
Certificates, Series 2002-1 and $16,500,000 Fixed Rate Class B Asset Backed
Certificates, Series 2002-2 Certificate Purchase Agreement, dated as of
November 22, 2002.
10.3 Certificate Purchase Agreement, dated as of November 22, 2002, among
Wachovia Bank, National Association, as Trustee, Charming Shoppes
Receivables Corp., as Seller, Spirit of America, Inc., as Servicer, and The
Class C Holders described therein.
10.4 Certificate Purchase Agreement, dated as of November 22, 2002, among
Wachovia Bank, National Association, as Trustee, Charming Shoppes
Receivables Corp., as Seller, Spirit of America, Inc., as Servicer, and The
Class D Holders described therein.
10.5 $14,000,000 Promissory Note, dated October 2002, between White Marsh
Distribution, LLC., as Borrower, and General Electric Capital Business
Asset Funding Corporation, as Payee and Holder.
10.6 Commercial Deed of Trust, Security Agreement, Assignment of Leases and
Rents, and Fixture Filing, made as of October 2002, among the Grantor,
White Marsh Distibution, LLC, as Borrower, in favor of James M. Smith, as
Trustee, for the benefit of the Beneficiary, General Electric Capital
Business Asset Funding Corporation, as Lender.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350), executed by the Chief Executive Officer of the Company.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350), executed by the Chief Financial Officer of the Company.
(b) Reports on Form 8-K
On August 21, 2002, we filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure" an excerpt of financial
information included in the text of a press release we issued on August 20,
2002, announcing our earnings and sales for the second quarter ended August 3,
2002 and the recording of the cumulative effect of an accounting change related
to the adoption of FAS 142, "Goodwill and Other Intangible Assets."
On October 8, 2002, we filed a Current Report on Form 8-K to report under
"Item 5. Other Events and Regulation FD Disclosure" the text of a press release
we issued on October 8, 2002, reporting our comparable store sales results for
the five weeks ended October 5, 2002 and re-projected earnings guidance for the
remainder of Fiscal 2003, in conjunction with a scheduled presentation at the
McDonald Investments 2002 Consumer Growth Conference.
35
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: December 13, 2002 /S/DORRIT J. BERN
-----------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: December 13, 2002 /S/ERIC M. SPECTER
------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer
36
Certification By Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Dorrit J. Bern, Principal Executive Officer of Charming Shoppes, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Charming Shoppes,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-4) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 13, 2002 /S/DORRIT J. BERN
-----------------
Dorrit J. Bern
Chairman of the Board
President and Principal Executive Officer
37
Certification By Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Eric M. Specter, Principal Financial Officer of Charming Shoppes, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Charming Shoppes,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-4) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize, and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 13, 2002 /S/ERIC M. SPECTER
------------------
Eric M. Specter
Executive Vice President
Principal Financial Officer
38
Exhibit Index
Exhibit No. Item
- ----------- ----
3.1 Restated Articles of Incorporation, incorporated by reference to
Form 10-K of the Registrant for the fiscal year ended January 29,
1994. (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)
4.1 Indenture, dated as of May 28, 2002, between Charming Shoppes,
Inc. and Wachovia Bank, National Association, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended
May 4, 2002. (Exhibit 4.1)
4.2 Registration Rights Agreement, dated as of May 28, 2002, by and
among Charming Shoppes, Inc., as Issuer, and J. P. Morgan
Securities, Inc., Bear Stearns & Co., Inc., First Union
Securities, Inc., Lazard Freres & Co., LLC, and McDonald
Investments, Inc., as Initial Purchasers, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended
May 4, 2002. (Exhibit 4.2)
4.3 Amendment No. 4, dated September 23, 2002, to Loan and Security
Agreement dated as of August 16, 2001 by and among Charming
Shoppes, Inc., Charming Shoppes of Delaware, Inc., CSI
Industries, Inc., Catherine Stores Corporation, Lane Bryant, Inc.
and FB Apparel, Inc., as Borrowers, Charming Shoppes of Delaware,
Inc., as Borrowers' Agent, Congress Financial Corporation, as
Administrative Agent, Collateral Agent, Joint Lead Arranger and
Joint Bookrunner, J.P. Morgan Business Credit Corp., as Co-Agent,
Joint Lead Arranger and Joint Bookrunner and The Financial
Institutions named therein, as Lenders.
10.1 Series 2002-1 Supplement, dated as of November 20, 2002, to
Second Amended and Restated Pooling and Service Agreement, dated
as of November 25, 1997, as amended on July 22, 1999 and on May
8, 2001, among Charming Shoppes Receivables Corp., as Seller,
Spirit of America, Inc., as Servicer, and Wachovia Bank, National
Association, as Trustee, for $100,000,000 Charming Shoppes Master
Trust Asset-Backed Certificates Series 2002-1.
10.2 Charming Shoppes Master Trust $63,500,000 Fixed Rate Class A
Asset Backed Certificates, Series 2002-1 and $16,500,000 Fixed
Rate Class B Asset Backed Certificates, Series 2002-2 Certificate
Purchase Agreement, dated as of November 22, 2002.
10.3 Certificate Purchase Agreement, dated as of November 22, 2002,
among Wachovia Bank, National Association, as Trustee, Charming
Shoppes Receivables Corp., as Seller, Spirit of America, Inc., as
Servicer, and The Class C Holders described therein.
10.4 Certificate Purchase Agreement, dated as of November 22, 2002,
among Wachovia Bank, National Association, as Trustee, Charming
Shoppes Receivables Corp., as Seller, Spirit of America, Inc., as
Servicer, and The Class D Holders described therein.
10.5 $14,000,000 Promissory Note, dated October 2002, between White
Marsh Distribution, LLC., as Borrower, and General Electric
Capital Business Asset Funding Corporation, as Payee and Holder.
39
10.6 Commercial Deed of Trust, Security Agreement, Assignment of
Leases and Rents, and Fixture Filing, made as of October 2002,
among the Grantor, White Marsh Distibution, LLC, as Borrower, in
favor of James M. Smith, as Trustee, for the benefit of the
Beneficiary, General Electric Capital Business Asset Funding
Corporation, as Lender.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. 1350), executed by the Chief Executive Officer
of the Company.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. 1350), executed by the Chief Financial Officer
of the Company.
40