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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 October 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File No. 000-07258
CHARMING SHOPPES, INC.
----------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1721355
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 WINKS LANE, BENSALEM, PA 19020
----------------------------------
(Address of principal executive offices) (Zip Code)
(215) 245-9100
--------------
(Registrant's telephone number, including Area Code)
NOT APPLICABLE
--------------
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of the issuer's Common Stock (par value
$.10 per share), as of November 23, 2004, was 118,909,938 shares.
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CHARMING SHOPPES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).................................. 2
Condensed Consolidated Balance Sheets
October 30, 2004 and January 31, 2004............................. 2
Condensed Consolidated Statements of Operations and Comprehensive Income
Thirteen weeks ended October 30, 2004 and November 1, 2003........ 3
Thirty-nine weeks ended October 30, 2004 and November 1, 2003..... 4
Condensed Consolidated Statements of Cash Flows
Thirty-nine weeks ended October 30, 2004 and November 1, 2003..... 5
Notes to Condensed Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 14
Forward-looking Statements.................................................. 14
Critical Accounting Policies................................................ 16
Results of Operations....................................................... 16
Liquidity and Capital Resources............................................. 22
Financing 26
Market Risk................................................................. 27
Impact of Recent Accounting Pronouncements.................................. 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 28
Item 4. Controls and Procedures........................................... 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....... 29
Item 5. Other Information................................................. 30
Item 6. Exhibits.......................................................... 30
SIGNATURES.................................................................. 32
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 30, January 31,
(Dollars in thousands, except share amounts) 2004 2004
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents .......................................... $ 202,878 $ 123,781
Available-for-sale securities ...................................... 53,468 55,688
Merchandise inventories ............................................ 378,955 309,995
Deferred taxes ..................................................... 19,693 19,902
Prepayments and other .............................................. 77,143 57,494
----------- -----------
Total current assets ............................................... 732,137 566,860
----------- -----------
Property, equipment, and leasehold improvements - at cost .......... 737,839 705,257
Less accumulated depreciation and amortization ..................... 426,666 386,633
----------- -----------
Net property, equipment, and leasehold improvements ................ 311,173 318,624
----------- -----------
Trademarks and other intangible assets ............................. 169,983 170,478
Goodwill ........................................................... 66,956 66,956
Available-for-sale securities ...................................... 2,249 14,521
Other assets ....................................................... 31,709 27,440
----------- -----------
Total assets ....................................................... $ 1,314,207 $ 1,164,879
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................... $ 167,244 $ 135,777
Accrued expenses ................................................... 150,693 138,166
Income taxes payable ............................................... 1,956 1,128
Current portion - long-term debt ................................... 22,558 17,278
Accrued expenses related to cost reduction plan .................... 2,984 2,596
----------- -----------
Total current liabilities .......................................... 345,435 294,945
----------- -----------
Deferred taxes and other non-current liabilities ................... 68,837 62,030
Long-term debt ..................................................... 203,223 202,819
Stockholders' equity
Common Stock $.10 par value:
Authorized - 300,000,000 shares
Issued - 130,417,498 shares and 125,526,573 shares, respectively ... 13,042 12,553
Additional paid-in capital ......................................... 235,785 201,798
Treasury stock at cost - 12,265,993 shares ......................... (84,136) (84,136)
Deferred employee compensation ..................................... (7,444) (2,539)
Accumulated other comprehensive loss ............................... (7) (365)
Retained earnings .................................................. 539,472 477,774
----------- -----------
Total stockholders' equity ......................................... 696,712 605,085
----------- -----------
Total liabilities and stockholders' equity ......................... $ 1,314,207 $ 1,164,879
=========== ===========
See Notes to Condensed Consolidated Financial Statements
2
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
Thirteen Weeks Ended
--------------------
October 30, November 1,
(In thousands, except per share amounts) 2004 2003
---- ----
Net sales ............................................................. $ 541,759 $ 530,291
--------- ---------
Cost of goods sold, buying, and occupancy expenses .................... 377,457 382,273
Selling, general, and administrative expenses ......................... 149,769 140,600
Expenses related to cost reduction plan ............................... 605 148
--------- ---------
Total operating expenses .............................................. 527,831 523,021
--------- ---------
Income from operations ................................................ 13,928 7,270
Other income, principally interest .................................... 783 344
Interest expense ...................................................... (3,876) (4,123)
--------- ---------
Income before income taxes and minority interest ...................... 10,835 3,491
Income tax provision .................................................. 3,803 1,341
--------- ---------
Income before minority interest ....................................... 7,032 2,150
Minority interest in net loss of consolidated subsidiary .............. 0 9
--------- ---------
Net income ............................................................ 7,032 2,159
--------- ---------
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on available-for-sale securities, net of
of income tax (provision) benefit of $(49) and $66, respectively .... 77 (102)
Reclassification of amortization of deferred loss on termination of
derivative, net of income tax benefit of $(6) and $(46), respectively 11 85
--------- ---------
Total other comprehensive income (loss), net of tax ................... 88 (17)
--------- ---------
Comprehensive income .................................................. $ 7,120 $ 2,142
========= =========
Basic net income per share ............................................ $ .06 $ .02
========= =========
Diluted net income per share .......................................... $ .06 $ .02
========= =========
Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
See Notes to Condensed Consolidated Financial Statements
3
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
Thirty-nine Weeks Ended
-----------------------
October 30, November 1,
(In thousands, except per share amounts) 2004 2003
---- ----
Net sales ............................................................... $ 1,746,234 $ 1,700,033
----------- -----------
Cost of goods sold, buying, and occupancy expenses ...................... 1,208,592 1,206,186
Selling, general, and administrative expenses ........................... 431,260 422,764
Expenses related to cost reduction plan ................................. 605 10,968
----------- -----------
Total operating expenses ................................................ 1,640,457 1,639,918
----------- -----------
Income from operations .................................................. 105,777 60,115
Other income, principally interest ...................................... 1,592 1,308
Interest expense ........................................................ (11,639) (11,777)
----------- -----------
Income before income taxes and minority interest ........................ 95,730 49,646
Income tax provision .................................................... 34,032 19,295
----------- -----------
Income before minority interest ......................................... 61,698 30,351
Minority interest in net loss of consolidated subsidiary ................ 0 142
----------- -----------
Net income .............................................................. 61,698 30,493
----------- -----------
Other comprehensive income, net of tax
Unrealized gains (losses) on available-for-sale securities, net of
income tax (provision) benefit of $(147) and $77, respectively ........ 230 (120)
Reclassification of amortization of deferred loss on termination of
derivative, net of income tax benefit of $(69) and $(138), respectively 128 256
----------- -----------
Total other comprehensive income, net of tax ............................ 358 136
----------- -----------
Comprehensive income .................................................... $ 62,056 $ 30,629
=========== ===========
Basic net income per share .............................................. $ .53 $ .27
=========== ===========
Diluted net income per share ............................................ $ .49 $ .26
=========== ===========
Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
See Notes to Condensed Consolidated Financial Statements
4
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-nine Weeks Ended
-----------------------
October 30, November 1,
(In thousands) 2004 2003
---- ----
Operating activities
Net income .............................................. $ 61,698 $ 30,493
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................... 51,426 56,714
Tax benefit related to stock plans .................... 4,187 0
Deferred income taxes ................................. 4,914 11,015
Loss from disposition of capital assets ............... 646 1,363
Other, net ............................................ 185 (142)
Changes in operating assets and liabilities:
Merchandise inventories ............................. (68,960) (121,698)
Accounts payable .................................... 31,467 47,601
Prepayments and other ............................... (19,649) 13,382
Accrued expenses and other .......................... 14,412 (8,007)
Income taxes payable ................................ 828 (6,343)
Accrued expenses related to cost reduction plan ..... 388 2,877
--------- ---------
Net cash provided by operating activities ............... 81,542 27,255
--------- ---------
Investing activities
Investment in capital assets ............................ (35,176) (39,376)
Proceeds from sales of available-for-sale securities .... 45,571 24,971
Gross purchases of available-for-sale securities ........ (30,887) (30,075)
Increase in other assets ................................ (5,610) (3,632)
--------- ---------
Net cash used by investing activities ................... (26,102) (48,112)
--------- ---------
Financing activities
Proceeds from short-term borrowings ..................... 150,298 173,213
Repayments of short-term borrowings ..................... (150,298) (173,213)
Proceeds from long-term borrowings ...................... 13,098 1,053
Repayments of long-term borrowings ...................... (12,813) (10,792)
Proceeds from issuance of common stock .................. 23,722 857
Payments of deferred financing costs .................... (350) 0
--------- ---------
Net cash provided/(used) by financing activities ........ 23,657 (8,882)
--------- ---------
Increase (decrease) in cash and cash equivalents ........ 79,097 (29,739)
Cash and cash equivalents, beginning of period .......... 123,781 102,026
--------- ---------
Cash and cash equivalents, end of period ................ $ 202,878 $ 72,287
========= =========
Non-cash financing and investing activities
Equipment acquired through capital leases ............... $ 5,399 $ 9,210
========= =========
Certain prior-year amounts have been reclassified to conform to the current-year
presentation.
See Notes to Condensed Consolidated Financial Statements
5
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Condensed Consolidated Financial Statements
We have prepared our condensed consolidated balance sheet as of October 30,
2004, and our condensed consolidated statements of operations and comprehensive
income and cash flows for the thirteen weeks and thirty-nine weeks ended October
30, 2004 and November 1, 2003, without audit. In our opinion, we have made all
adjustments (which include only normal recurring adjustments) necessary to
present fairly our financial position, results of operations, and cash flows. We
have condensed or omitted certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States. These financial statements
and related notes should be read in conjunction with our financial statements
and related notes included in our January 31, 2004 Annual Report on Form 10-K.
The results of operations for the thirteen weeks and thirty-nine weeks ended
October 30, 2004 and November 1, 2003 are not necessarily indicative of
operating results for the full fiscal year.
As used in these notes, the terms "Fiscal 2005" and "Fiscal 2004" refer to
our fiscal year ending January 29, 2005 and our fiscal year ended January 31,
2004, respectively. The terms "Fiscal 2005 Third Quarter" and "Fiscal 2004 Third
Quarter" refer to the thirteen weeks ended October 30, 2004 and November 1,
2003, respectively. The terms "Fiscal 2004 First Quarter" and "Fiscal 2004
Second Quarter" refer to the thirteen weeks ended May 3, 2003 and August 2,
2003, respectively. The terms "the Company," "we," "us," and "our" refer to
Charming Shoppes, Inc. and, where applicable, its consolidated subsidiaries.
We account for cash consideration received from vendors in accordance with
the provisions of Financial Accounting Standards Board ("FASB") Emerging Issues
Task Force ("EITF") Issue 02-16, "Accounting by a Customer (Including a
Reseller) for Cash Consideration Received from a Vendor." For interim reporting,
we generally defer markdown allowances and recognize them in the period in which
markdown expenses are recognized. Inasmuch as the markdown allowances at the
date of purchase are intended to compensate us for future markdowns taken at the
time of sale, we defer the recognition of markdown allowances during the interim
periods in order to better match the recognition of markdown allowances to the
period that the related markdown expenses are recorded.
We account for stock-based compensation using the intrinsic value method,
in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related interpretations. We
amortize deferred compensation expense attributable to stock awards and stock
options having an exercise price less than the market price on the date of grant
on a straight-line basis over the vesting period of the award or option. We do
not recognize compensation expense for options having an exercise price equal to
the market price on the date of grant or for shares purchased under our Employee
Stock Purchase Plan.
6
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 1. Condensed Consolidated Financial Statements (Continued)
The following table reconciles net income and net income per share as
reported, using the intrinsic value method under APB No. 25, to pro forma net
income and net income per share using the fair value method under FASB Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
Compensation":
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
(In thousands, except per October 30, November 1, October 30, November 1,
share amounts) 2004 2003 2004 2003
---- ---- ---- ----
Net income as reported ......................... $ 7,032 $ 2,159 $ 61,698 $ 30,493
Add stock-based employee compensation
using intrinsic value method, net
of income taxes .............................. 317 245 1,081 745
Less stock-based employee compensation
using fair value method, net of
income taxes ................................. (982) (810) (2,780) (2,494)
-------- -------- -------- --------
Pro forma net income ........................... $ 6,367 $ 1,594 $ 59,999 $ 28,744
======== ======== ======== ========
Basic net income per share:
As reported .................................. $ .06 $ .02 $ .53 $ .27
Pro forma .................................... .05 .01 .52 .26
Diluted net income per share:
As reported .................................. .06 .02 .49 .26
Pro forma .................................... .05 .01 .48 .25
Note 2. Trademarks and Other Intangible Assets
October 30, January 31,
(In thousands) 2004 2004
---- ----
Trademarks, tradenames, and internet domain names .... $ 168,800 $ 168,800
Customer lists and covenant not to compete ........... 3,300 3,300
---------- ----------
Total at cost ........................................ 172,100 172,100
Less accumulated amortization of customer lists and
covenant not to compete ............................ 2,117 1,622
---------- ----------
Net trademarks and other intangible assets ........... $ 169,983 $ 170,478
========== ==========
7
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 3. Long-term Debt
October 30, January 31,
(In thousands) 2004 2004
---- ----
4.75% Senior Convertible Notes, due June 2012 ........ $ 150,000 $ 150,000
Capital lease obligations ............................ 33,331 37,934
6.07% mortgage note, due October 2014 ................ 12,955 0
6.53% mortgage note, due November 2012 ............... 11,200 12,250
7.77% mortgage note, due December 2011 ............... 9,686 10,039
7.5% mortgage note, due March 2005 ................... 5,666 5,840
8.15% note, due December 2004 ........................ 1,483 2,494
Other long-term debt ................................. 1,460 1,540
---------- ----------
Total long-term debt ................................. 225,781 220,097
Less current portion ................................. 22,558 17,278
---------- ----------
Long-term debt ....................................... $ 203,223 $ 202,819
========== ==========
On October 6, 2004, we borrowed $13,000,000 under a 6.07% mortgage note
(the "Note"). Repayment of the Note is based on a 15-year amortization schedule,
with 119 monthly installments of principal and interest of $110,000 and a
balloon payment of $5,800,000 at the end of 10 years. The Note may be prepaid
after 2-1/2 years upon the payment of a premium, or, upon certain other events,
without the payment of a premium. The Note is secured by a mortgage on real
property at our distribution center in Greencastle, Indiana and an Assignment of
Lease and Rents and Security Agreement related to the Greencastle facility.
Note 4. Stockholders' Equity
Thirty-nine
Weeks Ended
October 30,
(Dollars in thousands) 2004
----
Total stockholders' equity, beginning of period .................... $ 605,085
Net income ......................................................... 61,698
Issuance of common stock (4,890,925 shares) ........................ 23,722
Tax benefit related to stock plans ................................. 4,187
Amortization of deferred compensation expense ...................... 1,662
Amortization of deferred loss on termination of derivative,
net of tax ....................................................... 128
Unrealized gains on available-for-sale securities, net of tax ...... 230
----------
Total stockholders' equity, end of period .......................... $ 696,712
==========
8
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 5. Customer Loyalty Card Programs
We offer our customers various loyalty card programs. Customers that join
these programs are entitled to various benefits, including discounts and rebates
on purchases during the membership period. Customers generally join these
programs by paying an annual membership fee. We recognize revenue from these
loyalty programs as sales over the life of the membership period based on when
the customer earns the benefits and when the fee is no longer refundable. We
recognize costs we incur in connection with administering these programs as cost
of goods sold when incurred.
During the Fiscal 2004 First Quarter, we introduced a new FASHION BUG(R)
customer loyalty card program that we operate under our FASHION BUG proprietary
credit card program. Like our other loyalty programs, this program entitles
customers to various rebates, discounts, and other benefits upon payment of an
annual membership fee. This program also provides customers with the option to
cancel their membership within 90 days, entitling them to a full refund of their
annual fee. Additionally, after 90 days, customers that cancel their membership
are entitled to a pro rata fee refund based on the number of months remaining on
the annual membership. Accordingly, we recognize 25% of the annual membership
fee as revenue after 90 days, with the remaining fee recognized on a pro rata
basis over nine months. During the thirteen weeks and thirty-nine weeks ended
October 30, 2004, we recognized revenues of $1,843,000 and $5,548,000,
respectively, in connection with this program. During the thirteen weeks and
thirty-nine weeks ended November 1, 2003, we recognized revenues of $2,517,000
and $5,308,000, respectively, in connection with this program. As of October 30,
2004 and January 31, 2004, we accrued $700,000 and $1,200,000, respectively, for
the estimated costs of discounts earned and coupons issued and not redeemed.
Our CATHERINES(R) brand also offers a loyalty card program. During the
thirteen weeks and thirty-nine weeks ended October 30, 2004, we recognized
revenues of $1,879,000 and $5,620,000, respectively, in connection with this
program. During the thirteen weeks and thirty-nine weeks ended November 1, 2003,
we recognized revenues of $1,876,000 and $5,682,000, respectively, in connection
with this program.
Under a previous FASHION BUG customer loyalty card program, we recognized
revenues from annual membership fees as sales over the life of the membership
based on discounts earned by the customer. For customers who did not earn
discounts during the membership period that exceeded the card fee, the
difference between the membership fee and discounts earned was recognized as
revenue upon the expiration of the annual membership period. Upon early
cancellation of the loyalty card, refunds of membership fees were reduced by the
amount of any discounts granted to the member under the program. During the
thirteen weeks and thirty-nine weeks ended November 1, 2003, we recognized
revenues of $401,000 and $6,709,000, respectively, in connection with this
program. We discontinued the issuance of new cards under this program in
December 2002, and we terminated the program during the Fiscal 2004 Second
Quarter.
9
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 6. Expenses Related to Cost Reduction Plan
On March 18, 2003, we announced a cost reduction plan, designed to take
advantage of the centralization of all corporate administrative services
throughout the Company and to realize certain efficiencies, in order to improve
profitability. We accounted for the plan in accordance with the provisions of
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The total costs recognized during Fiscal 2004 related to this plan
were $11,534,000, with $148,000 of the costs recognized during the thirteen
weeks ended November 1, 2003 and $10,968,000 of the costs recognized during the
thirty-nine weeks ended November 1, 2003.
Costs incurred during the thirteen weeks and thirty-nine weeks ended
November 1, 2003 consisted of the following:
Thirteen Thirty-nine
Weeks Ended Weeks Ended
November 1, November 1,
(In thousands) 2003 2003
---- ----
Workforce reduction costs ............................ $ 0 $ 3,059
Lease termination and related costs .................. 131 3,571
Acceleration of depreciation of property, equipment,
and leasehold improvements ......................... 0 3,703
Other facility closure costs ......................... 17 635
---------- ----------
Total costs .......................................... $ 148 $ 10,968
========== ==========
Workforce reduction costs represent involuntary termination benefits and
retention bonuses. Employees affected by the plan were notified during the
Fiscal 2004 First Quarter. During the Fiscal 2004 First Quarter, we terminated
118 employees at our corporate and divisional home offices. During the Fiscal
2004 Second Quarter, we terminated 231 employees in connection with the closing
of our Memphis, Tennessee distribution center, our Hollywood, Florida credit
operations, and our remaining Monsoon(R) stores. We accrued the severance
benefit in accordance with SFAS No. 146 and recognized retention bonuses ratably
over the employees' remaining service period. Lease termination and related
costs mainly represent the estimated fair value of the remaining lease
obligations at our Hollywood, Florida credit facility, reduced by estimated
sublease income. We recognized the present value of the remaining lease
obligations, less estimated sublease income, related to the Hollywood facility
in June 2003 when we closed the facility.
Accelerated depreciation costs mainly represent the acceleration of
depreciation of the net book value of the assets at our Memphis, Tennessee
distribution center and our Hollywood, Florida credit facility, which we closed
in June 2003, to their estimated fair values. During the Fiscal 2004 First
Quarter, we made the decision to sell our Memphis, Tennessee distribution
center, and began accelerating the depreciation of the asset to its estimated
net realizable value as of its expected cease-use date of June 2003. During the
Fiscal 2004 Third Quarter, we began to evaluate alternative uses for the
facility, and began to depreciate the then-current carrying amount of the asset
over its estimated useful life. Subsequent to October 30, 2004, we entered into
an agreement to lease the Memphis facility to a third party for a three-year
period.
10
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 6. Expenses Related to Cost Reduction Plan (Continued)
As of January 31, 2004, the accrued lease termination costs related to the
closing of the Hollywood facility were $2,596,000. In October 2004, in
accordance with SFAS No. 146, we revised our estimated sublease income on the
remaining lease obligation for the Hollywood facility and recognized an
additional expense of $605,000. As of October 30, 2004, the accrued lease
termination costs related to the closing of the Hollywood facility were
$2,984,000.
Note 7. Net Income Per Share
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
October 30, November 1, October 30, November 1,
(In thousands) 2004 2003 2004 2003
---- ---- ---- ----
Basic weighted average common shares
outstanding .................................. 117,217 112,533 115,474 112,438
Dilutive effect of assumed conversion of
convertible notes ............................ 0 0 15,182 15,182
Dilutive effect of stock options and awards .... 1,416 2,423 1,744 1,139
-------- -------- -------- --------
Diluted weighted average common shares
and equivalents outstanding .................. 118,633 114,956 132,400 128,759
======== ======== ======== ========
Net income ..................................... $ 7,032 $ 2,159 $ 61,698 $ 30,493
Decrease in interest expense from assumed
conversion of notes, net of income taxes ..... 0 0 3,404 3,248
-------- -------- -------- --------
Net income used to determine diluted net
income per share ............................ $ 7,032 $ 2,159 $ 65,102 $ 33,741
======== ======== ======== ========
Options with weighted average exercise price
greater than market price, excluded
from computation of net income per share:
Number of shares (in thousands)............... 446 7,542 432 8,351
Weighted average exercise price
per share................................... $8.23 $6.67 $8.28 $6.64
The effect of an assumed conversion of our 4.75% senior convertible notes
into 15.2 million shares of our common stock was excluded from the calculation
of diluted net income per share for the thirteen weeks ended October 30, 2004
and November 1, 2003 because the effect would have been anti-dilutive.
11
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 8. Income Taxes
The effective income tax rate was 35.6% for the thirty-nine weeks ended
October 30, 2004, as compared to 38.9% for the thirty-nine weeks ended November
1, 2003. The lower effective tax rate for the thirty-nine weeks ended October
30, 2004 is primarily the result of finalizing certain prior-year tax audits.
The tax rate for the thirty-nine weeks ended November 1, 2003 was affected by a
provision for taxes related to one of our corporate-owned life insurance
programs, which we settled with the Internal Revenue Service during the second
half of Fiscal 2004.
On October 22, 2004, the President of the United States of America signed
into law H.R. 4250, "The American Jobs Creation Act of 2004" (the "Act"), which
includes among its provisions certain tax benefits related to the repatriation
to the United States of profits from a company's international operations. The
Act provides for the repatriation of profits from international operations at a
tax rate not to exceed 5.25% for approximately a one-year period. As of October
30, 2004, the U.S. Treasury Department has not issued final guidelines for
applying the repatriation provisions of the Act. We are currently evaluating the
effects of the Act, and have not determined the effect, if any, that it will
have on our financial condition and results of operations.
Note 9. Asset Securitization
On August 5, 2004, in connection with our asset securitization program, the
Charming Shoppes Master Trust (the "Trust") issued $180,000,000 of new five-year
asset-backed certificates ("Series 2004-1") in a private placement under Rule
144A. Of the $180,000,000 of certificates issued, we sold $161,100,000 to
investors and we held $18,900,000 as a retained interest. The certificates pay
interest to investors on a floating-rate basis tied to one-month LIBOR.
Concurrently, the Trust entered into a series of fixed-rate interest rate hedge
agreements with respect to the $161,100,000 of certificates sold to investors.
The blended weighted-average interest rate on the hedged certificates is 4.90%.
On August 5, 2004, the Trust used $61,500,000 of the proceeds to pay down other
securitization series and placed the remaining proceeds of $118,500,000 into a
pre-funding cash account. We are using the proceeds from this pre-funding cash
account to pay down Series 1999-1 (which is currently in its amortization
period) as well as provide financing for additional receivables. On August 24,
2004, we sold to investors $9,450,000 of the $18,900,000 we held as a retained
interest. During the Fiscal 2005 Third Quarter, the Trust used $36,800,000 of
cash from the pre-funding cash account to fund the Series 1999-1 amortization.
12
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 10. Impact of Recent Accounting Pronouncements
In January 2003, the FASB issued Financial Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities," an interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements." A
variable interest entity ("VIE") is a legal entity used for business purposes
that either does not have equity investors with substantive voting rights or has
equity investors that do not provide sufficient financial resources for the
entity to finance its activities without additional subordinated financial
support from other parties. Consolidation of a VIE by a variable interest holder
is required if the variable interest holder is subject to a majority of the
VIE's residual returns, risk of loss, or both. Qualifying special purpose
entities ("QSPEs") subject to the requirements of SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
are excluded from the scope of FIN No. 46. Adoption of FIN No. 46 did not have a
material impact on our financial position or results of operations.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This management's discussion and analysis of financial condition and
results of operations should be read in conjunction with the financial
statements and accompanying notes included in Item 1 of this report. It should
also be read in conjunction with the management's discussion and analysis of
financial condition and results of operations, financial statements, and
accompanying notes appearing in our Annual Report on Form 10-K for the fiscal
year ended January 31, 2004. As used in this management's discussion and
analysis, the terms "Fiscal 2005" and "Fiscal 2004" refer to our fiscal year
ending January 29, 2005 and our fiscal year ended January 31, 2004,
respectively. The terms "Fiscal 2005 Third Quarter" and "Fiscal 2004 Third
Quarter" refer to the thirteen weeks ended October 30, 2004 and November 1,
2003, respectively. The terms "Fiscal 2005 First Quarter" and "Fiscal 2005
Fourth Quarter" refer to the thirteen weeks ended May 1, 2004 and the thirteen
weeks ending January 29, 2005, respectively. The terms "Fiscal 2004 First
Quarter," "Fiscal 2004 Second Quarter," and "Fiscal 2004 Fourth Quarter" refer
to the thirteen weeks ended May 3, 2003, August 2, 2003, and January 31, 2004,
respectively. The term "Fiscal 2006 First Quarter" refers to the thirteen weeks
ending April 30, 2005. The terms "the Company," "we," "us," and "our" refer to
Charming Shoppes, Inc. and, where applicable, its consolidated subsidiaries.
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters contained in the
following analysis and elsewhere in this report are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements may include, but are not limited to, projections of revenues, income
or loss, cost reductions, capital expenditures, liquidity, financing needs or
plans, and plans for future operations, as well as assumptions relating to the
foregoing. The words "expect," "should," "project," "estimate," "predict,"
"anticipate," "plan," "believes," and similar expressions are also intended to
identify forward-looking statements. Forward-looking statements are inherently
subject to risks and uncertainties, some of which we cannot predict or quantify.
Future events and actual results, performance, and achievements could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements. We assume no obligation to update any
forward-looking statement to reflect actual results or changes in, or additions
to, the factors affecting such forward-looking statements.
Factors that could cause our actual results of operations or financial
condition to differ from those described in this report include, but are not
necessarily limited to, the following:
o Our business is dependent upon our being able to accurately predict rapidly
changing fashion trends, customer preferences, and other fashion-related
factors, which we may not be able to successfully accomplish in the future.
o A slowdown in the United States economy, an uncertain economic outlook, and
escalating energy costs could lead to reduced consumer demand for our
apparel and accessories in the future.
o The women's specialty retail apparel industry is highly competitive and we
may be unable to compete successfully against existing or future
competitors.
o We cannot assure the successful implementation of our business plan for
increased profitability and growth in our plus-size women's apparel
business.
o Our business plan is largely dependent upon continued growth in the
plus-size women's apparel market, which may not occur.
o We depend on key personnel, particularly our Chief Executive Officer,
Dorrit J. Bern, and we may not be able to retain or replace these employees
or recruit additional qualified personnel.
14
o We depend on our distribution centers and could incur significantly higher
costs and longer lead times associated with distributing our products to
our stores if any of these distribution centers were to shut down for any
reason.
o We depend on the availability of credit for our working capital needs,
including credit we receive from our suppliers and their agents, and on our
credit card securitization program. If we were unable to obtain sufficient
financing at an affordable cost, our ability to merchandise our stores
would be adversely affected.
o We rely significantly on foreign sources of production and face a variety
of risks generally associated with doing business in foreign markets and
importing merchandise from abroad. Such risks include (but are not
necessarily limited to) political instability, imposition of, or changes
in, duties or quotas, increased security requirements applicable to
imports, delays in shipping, increased costs of transportation, and issues
relating to compliance with domestic or international labor standards.
o Our stores experience seasonal fluctuations in net sales and operating
income. Any decrease in sales or margins during our peak sales periods, or
in the availability of working capital during the months preceding such
periods, could have a material adverse effect on our business. In addition,
extreme or unseasonable weather conditions may have a negative impact on
our sales.
o War, acts of terrorism, or the threat of either may negatively impact
availability of merchandise and customer traffic to our stores, or
otherwise adversely affect our business.
o We may be unable to obtain adequate insurance for our operations at a
reasonable cost.
o We may be unable to protect our trademarks and other intellectual property
rights, which are important to our success and our competitive position.
o We may be unable to hire and retain a sufficient number of suitable sales
associates at our stores.
o Our manufacturers may be unable to manufacture and deliver merchandise to
us in a timely manner or to meet our quality standards.
o Our sales are dependent upon a high volume of traffic in the strip centers
and malls in which our stores are located, and our future growth is
dependent upon the availability of suitable locations for new stores.
o We may be unable to successfully implement our plan to improve merchandise
assortments in our brands.
o The carrying amount and/or useful life of intangible assets related to
acquisitions are subject to periodic valuation tests. An adverse change in
interest rates or other factors could have a significant impact on the
results of the valuation tests, resulting in a write-down of the carrying
value or acceleration of amortization of acquired intangible assets.
o Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required
to include our assessment of the effectiveness of our internal control over
financial reporting in our annual reports beginning with the fiscal year
ending January 29, 2005. Our independent accountants are also required to
attest to whether or not our assessment is fairly stated in all material
respects and to separately report on whether or not they believe that we
maintained, in all material respects, effective internal control over
financial reporting as of January 29, 2005. If we fail to timely complete
this assessment, or if our independent accountants cannot timely attest to
our assessment, we could be subject to regulatory sanctions and a possible
loss of public confidence in the reliability of our financial reporting.
Such a failure, as well as difficulties in implementing required new or
improved controls, could result in our inability to provide timely and/or
reliable financial information and could adversely affect our business.
15
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are discussed in the management's
discussion and analysis of financial condition and results of operations and
notes accompanying the consolidated financial statements that appear in our
Annual Report on Form 10-K for the fiscal year ended January 31, 2004. Except as
otherwise disclosed in the financial statements and accompanying notes included
in this report, there were no material changes in our critical accounting
policies or in the assumptions or estimates we used to prepare the financial
information appearing in this report.
RESULTS OF OPERATIONS
The following table shows our results of operations expressed as a
percentage of net sales and on a comparative basis:
Thirteen Weeks Ended Percentage Thirty-nine Weeks Ended Percentage
-------------------- Change ----------------------- Change
October 30, November 1, From Prior October 30, November 1, From Prior
2004 2003 Period 2004 2003 Period
---- ---- ------ ---- ---- ------
Net sales.................... 100.0% 100.0% 2.2% 100.0% 100.0% 2.7%
Cost of goods sold,
buying, and
occupancy expenses......... 69.7 72.1 (1.1) 69.2 71.0 0.2
Selling, general, and
administrative expenses.... 27.6 26.5 6.0 24.7 24.9 2.0
Expenses related to cost
reduction plan............. 0.1 - 308.8 - 0.7 (94.5)
Income from operations....... 2.6 1.4 91.6 6.1 3.5 76.0
Other income,
principally interest....... 0.1 0.1 127.6 0.1 0.1 21.7
Interest expense............. 0.7 0.8 (6.0) 0.7 0.7 (1.2)
Income tax provision......... 0.7 0.3 183.6 1.9 1.1 76.4
Net income................... 1.3 0.4 225.7 3.5 1.8 102.3
--------------------
Results may not add due to rounding.
The following table shows our net sales by store brand:
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
October 30, November 1, October 30, November 1,
(In millions) 2004 2003 2004 2003
---- ---- ---- ----
FASHION BUG(R) .......... $ 237.6 $ 247.9 $ 789.9 $ 797.9
LANE BRYANT(R) .......... 230.0 206.7 714.8 652.6
CATHERINES(R) ........... 74.2 75.7 241.5 247.8
Other (1) ............... 0.0 0.0 0.0 1.7
---------- ---------- ---------- ----------
Total net sales ......... $ 541.8 $ 530.3 $ 1,746.2 $ 1,700.0
========== ========== ========== ==========
--------------------
(1) Sales attributable to Monsoon/Accessorize stores, which were closed during
Fiscal 2004.
16
The following table shows additional information related to changes in our
net sales:
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
---- ---- ---- ----
Increase (decrease) in comparable
store sales(1):
Consolidated Company....................... 1% 0% 2% (3)%
FASHION BUG................................ (3) 6 2 2
LANE BRYANT................................ 7 (5) 5 (9)
CATHERINES................................. (5) (5) (5) (1)
Sales from new stores as a percentage
of total consolidated prior-period sales:
FASHION BUG................................ 1 1 1 1
LANE BRYANT................................ 3 3 3 3
CATHERINES................................. 1 1 1 1
Prior-period sales from closed stores as a
percentage of total consolidated
prior-period sales:
FASHION BUG................................ (2) (4) (2) (5)
LANE BRYANT................................ (1) (1) (1) (1)
CATHERINES................................. (1) (1) (1) (2)
Increase (decrease) in total sales........... 2 (2) 3 (6)
--------------------
(1) Sales from stores in operation during both periods. Stores are added to the
comparable store base after 13 full months of operation.
The following table sets forth information with respect to our store
activity for the first three quarters of Fiscal 2005 and planned store activity
for all of Fiscal 2005 (including the first three quarters of Fiscal 2005):
FASHION LANE
BUG BRYANT CATHERINES Total
--- ------ ---------- -----
Fiscal 2005 Year-to-Date:
Stores at January 31, 2004 ............. 1,051 710 466 2,227
----- ----- ----- -----
Stores opened .......................... 3 25 13 41
Stores closed .......................... (17) (6) (4) (27)
----- ----- ----- -----
Net change in stores ................... (14) 19 9 14
----- ----- ----- -----
Stores at October 30, 2004 ............. 1,037 729 475 2,241
===== ===== ===== =====
Stores relocated during period ......... 19 13 7 39
Stores remodeled during period ......... 3 9 0 12
Fiscal 2005:
Planned store openings ................. 5 31 15 51
Planned store closings ................. 27 18 11 56
Planned store relocations .............. 21 14 9 44
17
Comparison of Thirteen Weeks Ended October 30, 2004 and November 1, 2003
Net Sales
The increase in net sales from the Fiscal 2004 Third Quarter to the Fiscal
2005 Third Quarter resulted primarily from an increase in comparable store sales
at our LANE BRYANT brand, which was partially offset by a decrease in comparable
store sales at our FASHION BUG and CATHERINES brands. We operated 2,241 retail
stores at the end of the Fiscal 2005 Third Quarter, as compared to 2,257 stores
at the end of the Fiscal 2004 Third Quarter.
The increase in LANE BRYANT comparable store sales exceeded our sales plan
for the quarter. Improvements in the merchandise assortments offered at LANE
BRYANT during the Fiscal 2005 Third Quarter resulted in improved sales
performance as compared to the Fiscal 2004 Third Quarter. Although we
experienced relatively flat traffic levels in our LANE BRYANT stores during the
current-year quarter, we experienced an increase in the average dollar sale per
transaction. The average dollar sale per transaction increased as a result of
both an improved average retail value per unit sold and an increase in the
average number of units sold per customer ("UPC"). The improved average retail
value per unit sold reflected reduced levels of promotional pricing during the
current-year quarter. LANE BRYANT experienced comparable store sales increases
for the quarter in wear-to-work and intimate apparel, and accessories.
FASHION BUG comparable store sales did not meet our sales plan for the
quarter. Negative comparable store sales performance was a result of weaker
store traffic levels during the current-year quarter, combined with a slightly
higher average dollar sale per transaction. The average dollar sale per
transaction for the quarter reflected a decrease in the average retail value per
unit sold as a result of increased promotional activity that was offset by an
increase in the average UPC. FASHION BUG stores experienced sales decreases in
most major merchandise categories, which were partially offset by increases in
maternity and girls, two new categories added to the brand during the Fiscal
2004 Fourth Quarter.
CATHERINES comparable store sales for the Fiscal 2005 Third Quarter were
also below our sales plan for the quarter. The decrease in sales at CATHERINES
was primarily a result of continued disappointing performance in the dress and
wear-to-work categories. Negative comparable store sales performance was
primarily a result of a decrease in the average dollar sale per transaction
during the current-year period. The average dollar sale per transaction for the
quarter reflected an increase in the average UPC that was more than offset by a
decrease in the average retail value per unit sold as a result of higher levels
of promotional pricing during the current-year quarter.
We offer our customers various loyalty card programs. Customers who join
these programs are entitled to various benefits, including discounts and rebates
on purchases during the membership period. Customers generally join these
programs by paying an annual membership fee. We recognize revenue on these
loyalty programs as sales over the life of the membership period based on when
the customer earns the benefits and when the fee is no longer refundable. Costs
we incur in connection with administering these programs are recognized in cost
of goods sold as incurred. See "Item 1. Notes To Condensed Consolidated
Financial Statements (Unaudited); Note 5. Customer Loyalty Card Program" above
for further information on our loyalty card programs.
During the Fiscal 2004 First Quarter, we introduced a new FASHION BUG
customer loyalty card program that is being operated under our FASHION BUG
proprietary credit card program. During the Fiscal 2005 Third Quarter and Fiscal
2004 Third Quarter, we recognized revenues of $1.8 million and $2.5 million,
respectively, in connection with this program. During the Fiscal 2005 Third
Quarter and Fiscal 2004 Third Quarter, we also recognized revenues of $1.9
million and $1.9 million, respectively, in connection with our CATHERINES
loyalty card program.
18
Cost of Goods Sold, Buying, and Occupancy
The decrease in cost of goods sold, buying, and occupancy expenses from the
Fiscal 2004 Third Quarter to the Fiscal 2005 Third Quarter principally reflects
improved merchandise margins at our Lane Bryant and Fashion Bug brands and
reduced buying and occupancy expenses. Cost of goods sold as a percentage of net
sales was 1.5% lower in the Fiscal 2005 Third Quarter as compared to the Fiscal
2004 Third Quarter. Improved merchandise offerings at our LANE BRYANT brand
during the Fiscal 2005 Third Quarter resulted in increased merchandise margins
for the brand as compared to the Fiscal 2004 Third Quarter, which was negatively
affected by higher levels of promotional activity. Fashion Bug merchandise
margins also improved in the Fiscal 2005 Third Quarter. CATHERINES merchandise
margins decreased slightly as a result of increased promotional activity during
the current-year period. Cost of goods sold includes merchandise costs net of
discounts and allowances, freight, inventory shrinkage, and shipping and
handling costs associated with our e-commerce business. Net merchandise costs
and freight are capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales were 0.9% lower
in the Fiscal 2005 Third Quarter as compared to the Fiscal 2004 Third Quarter,
primarily as a result of leverage on relatively fixed occupancy costs and cost
savings from the consolidation of our LANE BRYANT and CATHERINES distribution
centers into our White Marsh, Maryland facility. Buying expenses include
payroll, payroll-related costs, and operating expenses for our buying
departments and warehouses. Occupancy expenses include rent, real estate taxes,
insurance, common area maintenance, utilities, maintenance, and depreciation for
our stores and warehouse facilities and equipment. Buying and occupancy costs
are treated as period costs and are not capitalized as part of inventory.
Selling, General, and Administrative
Selling, general, and administrative expenses were higher in the Fiscal
2005 Third Quarter as compared to the Fiscal 2004 Third Quarter, and were 1.1%
higher as a percentage of net sales. The increase was primarily a result of
higher expenses related to incentive-based employee compensation programs and
the purchase during the Fiscal 2005 Third Quarter of life insurance policies for
certain executives to replace split-dollar life insurance policies that were
terminated as a result of the Sarbanes-Oxley Act of 2002, which prohibits loans
to executive officers. See "Part II. Other Information; Item 5. Other
Information" below for further information with respect to the purchase of the
life insurance policies. These increases were partially offset by leverage on
the increase in net sales and improved performance of our FASHION BUG credit
card operations, which continued to experience favorable trends in delinquencies
during the Fiscal 2005 Third Quarter. Selling expenses for the Fiscal 2005 Third
Quarter were 0.4% lower as a percentage of sales, while general and
administrative expenses were 1.5% higher as a percentage of net sales.
Income Tax Provision
The effective income tax rate was 35.1% in the Fiscal 2005 Third Quarter,
as compared to 38.4% in the Fiscal 2004 Third Quarter. The tax rate for the
Fiscal 2004 Third Quarter was affected by a provision for taxes related to one
of our corporate-owned life insurance programs, which we settled with the
Internal Revenue Service during the second half of Fiscal 2004.
19
Comparison of Thirty-nine Weeks Ended October 30, 2004 and November 1, 2003
Net Sales
The increase in net sales from the first three quarters of Fiscal 2004 to
the first three quarters of Fiscal 2005 resulted primarily from positive
comparable store sales results at our LANE BRYANT and FASHION BUG brands, which
were partially offset by negative comparable store sales results at our
CATHERINES brand.
LANE BRYANT stores experienced an increase in the average dollar sale per
transaction, and to a lesser extent, an increase in the average number of
transactions per store. The average dollar sale per transaction benefited from
both an increase in the average retail value per unit sold, reflecting reduced
levels of promotional pricing for the brand as compared to the prior-year
period, and the average number of units sold per customer ("UPC"). LANE BRYANT
experienced comparable store sales increases in all major merchandise
categories, especially wear-to-work and intimate apparel. During the first three
quarters of Fiscal 2004, LANE BRYANT experienced poor customer acceptance of,
and fit and quality issues with, its product offering and had to maintain higher
levels of promotional pricing. Continued improvements in the merchandise
assortments offered at LANE BRYANT resulted in improved sales performance during
the first three quarters of Fiscal 2005.
For FASHION BUG stores, stronger traffic levels during the current-year
period were partially offset by a slightly lower average dollar sale per
transaction. For the current thirty-nine week period, an increase in the average
UPC was offset by a decrease in the average retail value per unit sold. FASHION
BUG stores experienced increases in sales of misses sportswear, intimate
apparel, and accessories, which were offset by decreases in sales of junior
sportswear, dresses, coats, and footwear. FASHION BUG store sales for the
current-year period benefited from sales of maternity and girls, two new
categories added to the brand during the Fiscal 2004 Fourth Quarter.
CATHERINES stores experienced weaker traffic levels and a lower average
dollar sale per transaction during the current-year period. An increase in the
average UPC was more than offset by a decrease in the average retail value per
unit sold, reflecting higher levels of promotional pricing during the
current-year period. The decrease in sales at CATHERINES was primarily a result
of disappointing performance in the dress and wear-to-work categories.
During the first three quarters of Fiscal 2005, we recognized revenues of
$5.5 million in connection with our FASHION BUG customer loyalty card program,
as compared to revenues of $5.3 million for the first three quarters of Fiscal
2004. During the first three quarters of Fiscal 2005 and Fiscal 2004, we also
recognized revenues of $5.6 million and $5.7 million, respectively, in
connection with our CATHERINES loyalty card program. During the first three
quarters of Fiscal 2004, we also recognized revenues of $6.7 million in
connection with a previous Fashion Bug loyalty card program that was terminated
during the Fiscal 2004 Second Quarter.
Cost of Goods Sold, Buying, and Occupancy
Cost of goods sold, buying, and occupancy expenses for the first three
quarters of Fiscal 2005 were approximately equal to the first three quarters of
Fiscal 2004, and were 1.8% lower as a percentage of sales in the current-year
period as compared to the prior-year period. Cost of goods sold as a percentage
of net sales was 0.9% lower in the first three quarters of Fiscal 2005 as
compared to the first three quarters of Fiscal 2004. Improved merchandise
margins at our LANE BRYANT brand and FASHION BUG brands were partially offset by
a decrease in merchandise margins at our CATHERINES brand. Margins at the
CATHERINES brand for the first three quarters of Fiscal 2005 were negatively
affected by increased promotional activity
20
that resulted from reduced traffic levels during the current period. As
discussed above, margins at our LANE BRYANT brand for the first three quarters
of Fiscal 2004 were negatively affected by higher levels of promotional
activity. Cost of goods sold includes merchandise costs net of discounts and
allowances, freight, inventory shrinkage, and shipping and handling costs
associated with our e-commerce business. Net merchandise costs and freight are
capitalized as inventory costs.
Buying and occupancy expenses as a percentage of net sales were 0.9% lower
in the first three quarters of Fiscal 2005 as compared to the first three
quarters of Fiscal 2004, primarily a result of leverage on relatively fixed
occupancy costs and cost savings from the consolidation of our LANE BRYANT and
CATHERINES distribution centers into our White Marsh, Maryland facility. Buying
expenses include payroll, payroll-related costs, and operating expenses for our
buying departments and warehouses. Occupancy expenses include rent, real estate
taxes, insurance, common area maintenance, utilities, maintenance, and
depreciation for our stores and warehouse facilities and equipment. Buying and
occupancy costs are treated as period costs and are not capitalized as part of
inventory.
Selling, General, and Administrative
Selling, general, and administrative expenses were higher in the first
three quarters of Fiscal 2005 as compared to the first three quarters of Fiscal
2004, but were 0.2% lower as a percentage of net sales. The increase in selling,
general, and administrative expenses was primarily a result of higher expenses
related to incentive-based employee compensation programs and the purchase
during the Fiscal 2005 Third Quarter of life insurance policies for certain
executives to replace split-dollar life insurance policies that were terminated
as a result of the Sarbanes-Oxley Act of 2002, which prohibits loans to
executive officers. See "Part II. Other Information; Item 5. Other Information"
below for further information with respect to the purchase of the life insurance
policies. These increases were partially offset by improved performance of our
FASHION BUG credit card operations, which experienced favorable trends in
delinquencies during the current-year period, and leverage from the increase in
net sales. Selling expenses for the first three quarters of Fiscal 2005 were
0.5% lower as a percentage of net sales, while general and administrative
expenses were 0.3% higher as a percentage of net sales.
Expenses Related to Cost Reduction Plan
On March 18, 2003, we announced a cost reduction plan designed to take
advantage of the centralization of all corporate administrative services
throughout the Company and to realize certain efficiencies, in order to improve
profitability. See "Item 1. Notes to Condensed Consolidated Financial Statements
(Unaudited); Note 6. Expenses Related to Cost Reduction Plan" above and "Item 8.
Financial Statements and Supplementary Data; Notes to Consolidated Financial
Statements; Note 14. Expenses Related to Cost Reduction Plan" in our Annual
Report on Form 10-K for the fiscal year ended January 31, 2004 for details of
this program. We accounted for the plan in accordance with the provisions of
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The cost reduction plan was substantially completed during Fiscal
2004. The total costs recognized during Fiscal 2004 related to this plan were
$11.5 million, with $11.0 million of the costs recognized during the thirty-nine
weeks ended November 1, 2003.
In October 2004, in accordance with SFAS No. 146, we revised our estimated
sublease income on the remaining lease obligation for our Hollywood, Florida
credit facility, which we closed in June 2003 as part of the cost reduction
plan. As a result of this revision we recognized an additional expense of
$605,000 during the thirteen weeks and thirty-nine weeks ended October 30, 2004.
21
During the Fiscal 2004 First Quarter, we made the decision to sell our
Memphis, Tennessee distribution center, and began accelerating the depreciation
of the asset to its estimated net realizable value as of its expected cease-use
date of June 2003. During the Fiscal 2004 Third Quarter, we began to evaluate
alternative uses for the facility, and began to depreciate the then-current
carrying amount of the asset over its estimated remaining useful life.
Subsequent to October 30, 2004, we entered into an agreement to lease the
Memphis facility to a third party for a three-year period.
This cost reduction plan is expected to improve annualized pre-tax earnings
by a total of approximately $45 million. During Fiscal 2004, we realized cost
reductions of more than $30 million. Except for the remaining benefits to be
realized from the consolidation of our distribution centers, which we expect to
realize by the end of Fiscal 2005, we have realized the remaining benefits of
the cost reduction plan.
Income Tax Provision
The effective income tax rate was 35.6% in the first three quarters of
Fiscal 2005, as compared to 38.9% in the first three quarters of Fiscal 2004.
The lower effective tax rate in Fiscal 2005 is primarily the result of
finalizing certain prior-year tax audits. We expect the effective income tax
rate for Fiscal 2005 to be approximately 35.9%. The tax rate for the first three
quarters of Fiscal 2004 was affected by a provision for taxes related to one of
our corporate-owned life insurance programs, which we settled with the Internal
Revenue Service during the second half of Fiscal 2004.
On October 22, 2004, the President of the United States of America signed
into law H.R. 4250, "The American Jobs Creation Act of 2004" (the "Act"), which
includes among its provisions certain tax benefits related to the repatriation
to the United States of profits from a company's international operations. The
Act provides for the repatriation of profits from international operations at a
tax rate not to exceed 5.25% for approximately a one-year period. As of October
30, 2004, the U.S. Treasury Department has not issued final guidelines for
applying the repatriation provisions of the Act. We are currently evaluating the
effects of the Act, and have not determined the effect, if any, that it will
have on our financial condition and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of working capital are cash flow from operations, our
proprietary credit card receivables securitization agreements, our investment
portfolio, and our revolving credit facility. The following table highlights
certain information related to our liquidity and capital resources:
October 30, January 31,
(Dollars in millions) 2004 2004
---- ----
Cash and cash equivalents ............................ $ 202.9 $ 123.8
Long-term available-for-sale securities .............. $ 2.2 $ 14.5
Working capital ...................................... $ 386.7 $ 271.9
Current ratio ........................................ 2.1 1.9
Long-term debt to equity ratio ....................... 29.2% 33.5%
Our net cash provided by operating activities was $81.5 million for the
first three quarters of Fiscal 2005, as compared to $27.3 million for the first
three quarters of Fiscal 2004. The increase was a result of a $19.4 million
increase in net income before non-cash charges, a $4.2 million tax benefit
related to our stock
22
plans, a decrease of $36.6 million in our investment in inventories (net of
accounts payable), and a $27.0 million increase in accrued expenses, income
taxes, and other liabilities. These increases were partially offset by a $33.0
million increase in prepaid expenses.
The decrease in the net investment in inventories was primarily a result of
tighter control over inventory levels during the first three quarters of Fiscal
2005. Prepaid expenses increased $19.6 million during the first three quarters
of Fiscal 2005, as compared to a decrease of $13.4 million during the first
three quarters of Fiscal 2004. The current year increase in prepaid expenses was
primarily a result of the timing of payments for rent and increases in other
current assets. The decrease in prepaid expenses in Fiscal 2004 was primarily a
result of our surrender of existing life insurance policies and receipt of cash
surrender value in connection with our settlement of an Internal Revenue Service
audit of our corporate-owned life insurance program. Accrued expenses and other
liabilities increased $14.8 million during the first three quarters of Fiscal
2005, as compared to a decrease of $5.1 million during the first three quarters
of Fiscal 2004, primarily as a result of the timing of certain payments. Income
taxes payable increased $0.8 million during the first three quarters of Fiscal
2005, as compared to a decrease of $6.3 million during the first three quarters
of Fiscal 2004. The increase in income taxes payable was primarily a result of
an increase in taxable income for the first three quarters of Fiscal 2005, as
compared to the first three quarters of Fiscal 2004.
Capital Expenditures
Our capital expenditures were $35.2 million during the first three quarters
of Fiscal 2005. In addition, we acquired $3.9 million of point-of-sale equipment
for our CATHERINES stores and $1.5 million of equipment for our White Marsh,
Maryland distribution center under capital leases. The total investment in
property, equipment, and leasehold improvements, including cash expenditures and
capital lease financing, was $40.6 million. During the remainder of Fiscal 2005,
we anticipate incurring additional capital expenditures of approximately $20 -
$25 million, primarily for the construction and fixturing of new stores,
remodeling and fixturing of existing stores, and improvements to our corporate
offices and distribution centers. We expect to finance these additional capital
expenditures primarily through internally generated funds.
Common Stock and Dividends
During the first three quarters of Fiscal 2005, we received $23.7 million
of cash in connection with the issuance of approximately 4.6 million shares of
our common stock as a result of exercises of employee stock options and
purchases of shares under our employee stock purchase plan.
We have not paid any dividends since 1995. The payment of future dividends
is within the discretion of our Board of Directors and will depend upon our
future earnings, if any, our capital requirements, our financial condition, and
other relevant factors. Additionally, our existing credit facility prohibits the
payment of dividends on our common stock.
Off-Balance-Sheet Financing
We have formed a trust called the Charming Shoppes Master Trust (the
"Trust"). Spirit of America National Bank (our credit card bank) transfers its
interest in credit card receivables created under our FASHION BUG proprietary
credit card program to the Trust through a special-purpose entity. Together with
the Trust, we have entered into various agreements under which the Trust can
sell interests in these receivables on a revolving basis for a specified term.
At the end of the revolving period, an amortization period begins during which
the Trust makes principal payments to the parties that have entered into the
securitization agreement with the Trust.
23
As of October 30, 2004, the Trust had the following securitization
facilities outstanding:
(Dollars in millions) Series 1999-1 Series 1999-2 Series 2002-1 Series 2004 Series 2004-1
------------- ------------- ------------- ----------- -------------
Date of facility................. July 1999 May 1999 November 2002 January 2004 August 2004
Type of facility................. Term Conduit Term Conduit Term
Maximum funding.................. $150.0 $50.0 $100.0 $100.0 $180.0
Funding as of October 30, 2004... $ 51.8 $ 0.0 $100.0 $ 0.0 $180.0
First scheduled principal payment March 2004 Not applicable August 2007 Not applicable April 2009
Expected final principal payment. February 2005 Not applicable May 2008 Not applicable March 2010
Renewal.......................... Not applicable Annual Not applicable Annual(1) Not applicable
--------------------
(1) This facility has an initial term of two years, subject to an annual
renewal.
The Series 1999-1 securitization began its scheduled amortization period in
March 2004, and $98.2 million of principal was amortized in the three quarters
of Fiscal 2005. The remainder of the principal is scheduled to amortize as
follows: $36.0 million in the Fiscal 2005 Fourth Quarter and $15.8 million in
the Fiscal 2006 First Quarter. We will fund this remaining amortization with the
proceeds available from Series 2004-1, which was issued on August 5, 2004 (see
below).
On August 5, 2004, in connection with our asset securitization program, the
Trust issued $180.0 million of new five-year asset-backed certificates ("Series
2004-1") in a private placement under Rule 144A. Of the $180.0 million of
certificates issued, $161.1 million were sold to investors, and we held $18.9
million as a retained interest. The certificates pay interest to investors on a
floating-rate basis tied to one-month LIBOR. Concurrently, the Trust entered
into a series of fixed-rate interest rate hedge agreements with respect to the
$161.1 million of certificates sold to investors. The blended weighted-average
interest rate on the hedged certificates is 4.90%. The Trust used $61.5 million
of the proceeds to pay down other securitization series and placed the remaining
proceeds of $118.5 million into a pre-funding cash account. We are using the
proceeds from this pre-funding cash account to pay down Series 1999-1 (which is
currently in its amortization period) as well as provide financing for
additional receivables. On August 24, 2004, we sold to investors $9.5 million of
the $18.9 million we held as a retained interest. During the Fiscal 2005 Third
Quarter, the Trust used $36.8 million of cash from the pre-funding cash account
to fund the Series 1999-1 amortization.
During the Fiscal 2005 First Quarter, we sold to investors $9.5 million of
2002-1 Series certificates that we were previously holding as a retained
interest. Subsequent to October 30, 2004, we sold an additional $10.5 million of
2002-1 Series certificates that we were holding as a retained interest. These
certificates are included in the $53.5 million of short-term available-for-sale
securities we held at October 30, 2004.
As these credit card receivables securitizations reach maturity, we plan to
obtain funding for the FASHION BUG proprietary credit card program through
additional securitizations. However, we can give no assurance that we will be
successful in securing financing through either replacement securitizations or
other sources of replacement financing.
We securitized $240.0 million of private label credit card receivables in
the first three quarters of Fiscal 2005 and had $246.9 million of securitized
credit card receivables outstanding as of October 30, 2004. We held certificates
and retained interests in our securitizations of $52.2 million as of October 30,
2004, which were generally subordinated in right of payment to certificates
issued by the Trust to third-party investors. Our obligation to repurchase
receivables sold to the Trust is limited to those receivables that, at the time
of their transfer, fail to meet the Trust's eligibility standards under normal
representations and warranties. To date, our repurchases of receivables pursuant
to this obligation have been insignificant.
24
Charming Shoppes Receivables Corp. ("CSRC") and Charming Shoppes Seller,
Inc., our consolidated wholly-owned indirect subsidiaries, are separate
special-purpose entities created for the securitization program. As of October
30, 2004, CSRC held $27.8 million of Charming Shoppes Master Trust certificates
and retained interests and Charming Shoppes Seller, Inc. held retained interests
of $7.5 million (which are included in the $53.5 million of short-term
available-for-sale securities we held at October 30, 2004). These assets are
first and foremost available to satisfy the claims of the respective creditors
of these separate corporate entities, including certain claims of investors in
the Charming Shoppes Master Trust. Additionally, if either the Trust or Charming
Shoppes, Inc. fails to meet certain financial performance standards, the Trust
would be obligated to reallocate to third-party investors holding certain
certificates issued by the Trust, collections in an amount up to $17.3 million
that otherwise would be available to CSRC. The result of this reallocation would
be to increase CSRC's retained interest in the Trust by the same amount.
Subsequent to such a transfer occurring, and upon certain conditions being met,
these same investors would be required to repurchase these interests. As of
October 30, 2004, there were no reallocated collections as the result of a
failure to meet these financial performance standards.
In addition to the above, we could be affected by certain other events that
would cause the Trust to hold proceeds of receivables, which would otherwise be
available to be paid to us with respect to our subordinated interests, within
the Trust as additional enhancement. For example, if we fail or the Trust fails
to meet certain financial performance standards, a credit enhancement condition
would occur and the Trust would be required to retain amounts otherwise payable
to us. In addition, the failure to satisfy certain financial performance
standards could further cause the Trust to stop using collections on Trust
assets to purchase new receivables, and would require such collections to be
used to repay investors on a prescribed basis, as provided in the Trust
agreements. If this were to occur, it could result in our having insufficient
liquidity; however, we believe we would have sufficient notice to seek
alternative forms of financing through other third-party providers. As of
October 30, 2004, the Trust was in compliance with all applicable financial
performance standards. Amounts placed into enhancement accounts, if any, that
are not required for payment to other certificate holders will be available to
us at the termination of the securitization series. We have no obligation to
directly fund the enhancement account of the Trust, other than for breaches of
customary representations, warranties, and covenants and for customary
indemnities. These representations, warranties, covenants, and indemnities do
not protect the Trust or investors in the Trust against credit-related losses on
the receivables. The providers of the credit enhancements and Trust investors
have no other recourse to us.
These securitization agreements are intended to improve our overall
liquidity by providing short-term sources of funding. The agreements provide
that we will continue to service the credit card receivables and control credit
policies. This control allows us, absent certain adverse events, to fund
continued credit card receivable growth and to provide the appropriate customer
service and collection activities. Accordingly, our relationship with our credit
card customers is not affected by these agreements. Additional information
regarding this program is included in "Part II, Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Part II,
Item 8. Financial Statements and Supplementary Data; Notes to Consolidated
Financial Statements; Note 16. Asset Securitization" of our Annual Report on
Form 10-K for the fiscal year ended January 31, 2004.
We also have non-recourse agreements under which third parties provide
accounts receivable proprietary credit card sales accounts receivable funding
programs for both our CATHERINES and LANE BRYANT brands. These funding programs
expire in January 2005 for CATHERINES and in January 2006 for LANE BRYANT. Under
these agreements, the third parties reimburse us daily for sales generated by
the respective store's credit card accounts. Additional information regarding
these agreements is included in "Part II, Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Part II, Item 8.
Financial Statements and Supplementary Data; Notes to Consolidated Financial
Statements; Note 16. Asset Securitization" of our Annual Report on Form 10-K for
the fiscal year ended January 31, 2004.
25
On January 28, 2004, in accordance with the terms of the Merchant Services
Agreement pursuant to which the CATHERINES proprietary credit cards are issued,
we gave notification of termination and election to purchase the CATHERINES
credit card portfolio to the third-party provider. In accordance with the terms
of the Merchant Services Agreement, the purchase option required us to provide
one year's notice in order to terminate the agreement and to purchase the
portfolio, subject to the negotiation of the final purchase agreement. We expect
to purchase the CATHERINES credit card portfolio during the Fiscal 2006 First
Quarter, and expect to fund the purchase using our securitization program,
including a portion of the proceeds from the Series 2004-1 securitization.
We lease substantially all of our operating stores under non-cancelable
operating lease agreements. Additional details on these leases, including
minimum lease commitments, are included in "Item 8. Financial Statements and
Supplementary Data; Notes to Consolidated Financial Statements; Note 17. Leases"
of our Annual Report on Form 10-K for the fiscal year ended January 31, 2004.
FINANCING
Revolving Credit Facility
We have a $300.0 million revolving credit facility (the "Facility") that
provides for cash borrowings and enables us to issue up to $150.0 million of
letters of credit for purchases of merchandise and for standby letters of
credit. As of October 30, 2004, there were no borrowings outstanding under the
Facility. The availability of borrowings under the Facility is subject to
limitations based on eligible inventory and, under certain circumstances, credit
card receivables and in-transit cash. The Facility is secured by our general
assets, except for (i) all assets related to our credit card securitization
program, (ii) all real property, (iii) certain equipment subject to other
mortgages or capital leases, (iv) the assets of our non-U.S. subsidiaries, and
(v) certain other assets. The Facility expires on August 15, 2008.
The interest rate on borrowings under the Facility ranges from Prime to
Prime plus .50% per annum for Prime Rate Loans, and LIBOR plus 1.5% to LIBOR
plus 2.00% per annum for Eurodollar Rate Loans. The applicable rate is
determined quarterly, based on our average excess and suppressed availability,
as defined in the Facility. As of October 30, 2004, the interest rate on
borrowings under the Facility was 4.75% for Prime Rate Loans and 3.46% for
Eurodollar Rate Loans.
The Facility includes limitations on sales and leasebacks, the incurrence
of additional liens and debt, capital lease financing, and other limitations.
The Facility also requires, among other things, that we not pay dividends on our
common stock and, if our excess and suppressed availability (as defined in the
Facility) is less than $50.0 million at any time within a fiscal quarter, that
we maintain a minimum level of consolidated 12-month earnings before interest,
taxes, depreciation, and amortization ("EBITDA") (excluding non-recurring,
non-cash charges as defined in the Facility). During the Fiscal 2005 Third
Quarter, our excess and suppressed availability was above $50.0 million at all
times. As of October 30, 2004, we were not in violation of any of the covenants
included in the Facility.
26
On October 6, 2004, we borrowed $13,000,000 under a 6.07% mortgage note
(the "Note"). Repayment of the Note is based on a 15-year amortization schedule,
with 119 monthly installments of principal and interest of $110,000 and a
balloon payment of $5,800,000 at the end of 10 years. The Note may be prepaid
after 2-1/2 years upon the payment of a premium, or, upon certain other events,
without the payment of a premium. The Note is secured by a mortgage on real
property at our distribution center in Greencastle, Indiana and an Assignment of
Lease and Rents and Security Agreement related to the Greencastle facility. We
expect to use the net proceeds from the borrowing to repay the scheduled
maturities of other debt and for other general corporate purposes.
Additional information regarding our long-term borrowings is included in
"Part II, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Part II, Item 8. Financial Statements and
Supplementary Data; Notes to Consolidated Financial Statements; Note 7. Debt" of
our Annual Report on Form 10-K for the fiscal year ended January 31, 2004.
We believe that our capital resources and liquidity position are sufficient
to support our current operations. Our requirements for working capital, capital
expenditures, and repayment of debt and other obligations are expected to be
funded from operations, supplemented as needed by short-term or long-term
borrowings available under our credit facility, our proprietary credit card
receivables securitization agreements, leases, and other available financing
sources.
MARKET RISK
We manage our FASHION BUG proprietary credit card program through various
operating entities that we own. The primary activity of these entities is to
service our proprietary credit card receivables portfolio, the balances of which
we sell under a credit card securitization program. Under the securitization
program, we can be exposed to fluctuations in interest rates to the extent that
the interest rates charged to our customers vary from the rates paid on
certificates issued by the Trust. The finance charges on most of our proprietary
credit card accounts are billed using a floating-rate index (the Prime lending
rate), subject to a floor and limited by legal maximums. The certificates issued
under the securitization include both floating- and fixed-interest-rate
certificates. The floating-rate certificates are based on an index of either
one-month LIBOR or the commercial paper rate, depending on the issuance.
Consequently, we have basis risk exposure to the extent that the movement of the
floating-rate index on the certificates varies from the movement of the Prime
rate. Additionally, as of October 30, 2004, the floating finance charge rate on
the credit cards was below the contractual floor rate, thus exposing us to
interest-rate risk on the portion of certificates that are funded at floating
rates. In addition, as a result of the Trust entering into a series of
fixed-rate interest rate hedge agreements with respect to the $161.1 million of
Series 2004-1certificates (see "Off-Balance-Sheet Financing" above), we have
significantly reduced the exposure of floating-rate certificates outstanding to
interest-rate risk. To the extent that short-term interest rates were to
increase by one percentage point by the end of Fiscal 2005, an increase of
approximately $89 thousand in selling, general, and administrative expenses
would result.
As of October 30, 2004, there were no borrowings outstanding under our
revolving credit facility. To the extent that there are borrowings outstanding
under our revolving credit facility, such borrowings would be exposed to
variable interest rates. An increase in market interest rates would increase our
interest expense and decrease our cash flows. Conversely, a decrease in market
interest rates would decrease our interest expense and increase our cash flows.
We are not subject to material foreign exchange risk, as our foreign
transactions are primarily U.S. Dollar-denominated and our foreign operations do
not constitute a material part of our business.
27
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
See "Item 1. Notes To Condensed Consolidated Financial Statements
(Unaudited); Note 10. Impact of Recent Accounting Pronouncements" above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations; MARKET RISK," above.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in reports we file under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized,
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), as appropriate and in such a manner as to
allow timely decisions regarding required disclosure. We have a Disclosure
Committee, which is made up of several key management employees and reports
directly to the CEO and CFO, to centralize and enhance these controls and
procedures and assist our management, including our CEO and CFO, in fulfilling
their responsibilities for establishing and maintaining such controls and
procedures and providing accurate, timely, and complete disclosure.
As of the end of the period covered by this report on Form 10-Q (the
"Evaluation Date"), our Disclosure Committee, under the supervision and with the
participation of management, including our CEO and CFO, carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our management, including our
CEO and CFO, has concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective. Furthermore, there has been no change in
our internal control over financial reporting that occurred during the period
covered by this report on Form 10-Q that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
In accordance with Section 404 of the Sarbanes-Oxley Act of 2002, we are in
the process of performing our annual assessment of the effectiveness of our
internal control over financial reporting. In the course of performing our
assessment, we have identified certain deficiencies. We are taking the
appropriate steps to make the improvements necessary to remediate these
deficiencies. We will consider the results of our remediation efforts and
related testing as part of our year-end assessment of the effectiveness of our
internal control over financial reporting.
28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in legal proceedings involving the
Company or its subsidiaries since those reported in our Annual Report on Form
10-K for the fiscal year ended January 31, 2004.
Other than ordinary routine litigation incidental to our business, there
are no other pending material legal proceedings that we or any of our
subsidiaries are a party to, and there are no other proceedings that are
expected to have a material adverse effect on our financial condition or results
of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Total Maximum
Number Number of
of Shares Shares that
Total Purchased as May Yet be
Number Average Part of Publicly Purchased
of Shares Price Paid Announced Plans Under the Plans
Period Purchased per Share or Programs(1) or Programs(1)
------ --------- --------- ------------- -------------
August 1, 2004 through
August 28, 2004........ - - - -
August 29, 2004 through
October 2, 2004........ - - - -
October 3, 2004 through
October 30, 2004....... - - - -
Total...................... - - - -
--------------------
(1) In November 1997, we publicly announced that our Board of Directors granted
authority to repurchase up to 10,000,000 shares of our common stock. In
March 1999, we publicly announced that our Board of Directors granted
authority to repurchase up to an additional 10,000,000 shares of our common
stock. As of October 30, 2004, approximately 5,000,000 shares of our common
stock remain available for repurchase under these programs. Our ability to
exercise this authority is subject to certain restrictions under the terms
of our revolving credit facility. As conditions may allow, and if any
required consent is granted, we may from time to time acquire additional
shares of our common stock under these programs. Such shares, if purchased,
would be held as treasury shares. No shares were acquired under this
program during the three months ended October 30, 2004. The repurchase
program has no expiration date.
(2) Our existing revolving credit facility prohibits the payment of dividends
on our common stock.
29
Item 5. Other Information
The Company has decided that it will terminate its split-dollar life
insurance program that had been implemented for the benefit of certain of its
executive officers. The Company had not been making premium payments for
executive officers under the program since July 2002 following enactment of the
Sarbanes-Oxley Act of 2002. Each of Dorrit J. Bern, Colin D. Stern, Anthony A.
DeSabato, and Eric M. Specter will agree to terminate her/his participation in
the split-dollar program. As a result of the termination of the split-dollar
program, the Company will receive the cash surrender value for their policies,
which was approximately $380,000, $195,071, $168,383, and $74,923 for Dorrit J.
Bern, Colin D. Stern, Anthony A. DeSabato, and Eric M. Specter, respectively. In
addition, the Company will agree to provide each of these executives with an
unconditional five-year bonus to enable the executive to purchase a replacement
life insurance policy. This bonus will be payable in five equal annual
installments in an amount equal to the annual insurance premiums paid by the
executive for the new policy, plus a tax gross-up amount. The form of bonus
agreement is filed as an exhibit to this report.
Item 6. 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 (File No.
000-07258, Exhibit 3.2).
10.1 2003 Incentive Compensation Plan, incorporated by reference to Appendix
C of the Registrant's Proxy Statement Pursuant to Section 14 of the
Securities Exchange Act of 1934, filed on May 22, 2003.
10.2 2004 Stock Award and Incentive Plan, incorporated by reference to
Appendix B of the Registrant's Proxy Statement Pursuant to Section 14
of the Securities Exchange Act of 1934, filed on May 19, 2004.
10.3 Amended and Restated Variable Deferred Compensation Plan for
Executives, Effective December 23, 2003, incorporated by reference to
Form 10-Q of the Registrant for the quarter ended July 31, 2004 (File
No. 000-07258, Exhibit 10.3).
10.4 Fourth Amendment, dated as of August 5, 2004, to Second Amended and
Restated Pooling and Servicing Agreement, dated as of November 25,
1997, as amended on July 22, 1999 and on May 8, 2001, among Charming
Shoppes Receivables Corp., as Seller, Spirit of America, Inc., as
Servicer, and Wachovia Bank, National Association (formerly known as
First Union National Bank) as Trustee, incorporated by reference to
Form 10-Q of the Registrant for the quarter ended July 31, 2004 (File
No. 000-07258, Exhibit 10.4).
10.5 Series 2004-1 Supplement, dated as of August 5, 2004, to Second Amended
and Restated Pooling and Service Agreement, dated as of November 25,
1997 (as amended on July 22, 1999, on May 8, 2001 and on August 5,
2004), among Charming Shoppes Receivables Corp., as Seller, Spirit of
America, Inc., as Servicer, and Wachovia Bank, National Association, as
Trustee, on behalf of the Series 2004-1 Certificateholders, for
$180,000,000 Charming Shoppes Master Trust Series 2004-1, incorporated
by reference to Form 10-Q of the Registrant for the quarter ended July
31, 2004 (File No. 000-07258, Exhibit 10.5).
30
10.6 Certificate Purchase Agreement, dated as of July 21, 2004, among
Charming Shoppes Receivables Corp., Fashion Service Corp., Spirit of
America, Inc., and Barclay's Capital Inc. (as representative of the
Initial Purchasers), incorporated by reference to Form 10-Q of the
Registrant for the quarter ended July 31, 2004 (File No. 000-07258,
Exhibit 10.6).
10.7 Certificate Purchase Agreement, dated as of August 5, 2004, among
Wachovia Bank, National Association as Trustee, Charming Shoppes
Receivables Corp. as Seller, Spirit of America, Inc. as Servicer, and
Clipper Receivables Company LLC as Initial Class C Holder, incorporated
by reference to Form 10-Q of the Registrant for the quarter ended July
31, 2004 (File No. 000-07258, Exhibit 10.7).
10.8 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive Plan
Restricted Stock Agreement, dated as of May 13, 2004, between Charming
Shoppes, Inc. and Dorrit J. Bern, incorporated by reference to Form
10-Q of the Registrant for the quarter ended July 31, 2004 (File No.
000-07258, Exhibit 10.8).
10.9 Mortgage, Assignment of Leases and Rents and Security Agreement, dated
as of October 6, 2004, between FB Distro Distribution Center, LLC, as
Mortgagor, and BankAtlantic Commercial Mortgage Capital, LLC, as
Mortgagee.
10.10 $13,000,000 Mortgage Note, dated October 6, 2004, between FB Distro
Distribution Center, LLC, as Maker, and BankAtlantic Commercial
Mortgage Capital, LLC, as Payee.
10.11 Guaranty, executed as of October 6, 2004, by Charming Shoppes, Inc., as
Guarantor, for the benefit of BankAtlantic Commercial Mortgage Capital,
LLC, as Lender.
10.12 Hazardous Substances Indemnity Agreement, dated October 6, 2004, by FB
Distro Distribution Center, LLC and by Charming Shoppes, Inc., jointly
and severally as Indemnitors, in favor of BankAtlantic Commercial
Mortgage Capital, LLC, as Holder.
10.13 Amended and Restated Certificate Purchase Agreement, dated as of
November 22, 2004 and Amended and Restated as of November 18, 2004,
among Wachovia Bank, National Association as Trustee, Charming Shoppes
Receivables Corp. as Seller, Spirit of America, Inc. as Servicer, and
the Class D-2 Certificateholders Described Herein.
10.14 Form of Bonus Agreement by and between Charming Shoppes, Inc. and the
Executive Officer named in the Agreement.
10.15 Charming Shoppes, Inc. 2004 Stock Award and Incentive Plan Stock Option
Agreement.
10.16 Charming Shoppes, Inc. 2004 Stock Award and Incentive Plan Restricted
Stock Agreement - Section 16 Officers.
10.17 Charming Shoppes, Inc. 2004 Stock Award and Incentive Plan Restricted
Stock Agreement - Associates Other Than Section 16 Officers.
31.1 Certification by Principal Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification by Principal Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
31
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: November 29, 2004 /S/ Dorrit J. Bern
------------------
Dorrit J. Bern
Chairman of the Board
President and Chief Executive Officer
Date: November 29, 2004 /S/ Eric M. Specter
-------------------
Eric M. Specter
Executive Vice President
Chief Financial Officer
32
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 (File No. 000-07258, Exhibit 3.2)
10.1 2003 Incentive Compensation Plan, incorporated by reference to
Appendix C of the Registrant's Proxy Statement Pursuant to
Section 14 of the Securities Exchange Act of 1934, filed on
May 22, 2003.
10.2 2004 Stock Award and Incentive Plan, incorporated by reference
to Appendix B of the Registrant's Proxy Statement Pursuant to
Section 14 of the Securities Exchange Act of 1934, filed on
May 19, 2004.
10.3 Amended and Restated Variable Deferred Compensation Plan for
Executives, Effective December 23, 2003, incorporated by
reference to Form 10-Q of the Registrant for the quarter ended
July 31, 2004 (File No. 000-07258, Exhibit 10.3).
10.4 Fourth Amendment, dated as of August 5, 2004, to Second
Amended and Restated Pooling and Servicing Agreement, dated as
of November 25, 1997, as amended on July 22, 1999 and on May
8, 2001, among Charming Shoppes Receivables Corp., as Seller,
Spirit of America, Inc., as Servicer, and Wachovia Bank,
National Association (formerly known as First Union National
Bank) as Trustee, incorporated by reference to Form 10-Q of
the Registrant for the quarter ended July 31, 2004 (File No.
000-07258, Exhibit 10.3).
10.5 Series 2004-1 Supplement, dated as of August 5, 2004, to
Second Amended and Restated Pooling and Service Agreement,
dated as of November 25, 1997 (as amended on July 22, 1999, on
May 8, 2001 and on August 5, 2004), among Charming Shoppes
Receivables Corp., as Seller, Spirit of America, Inc., as
Servicer, and Wachovia Bank, National Association, as Trustee,
on behalf of the Series 2004-1 Certificateholders, for
$180,000,000 Charming Shoppes Master Trust Series 2004-1,
incorporated by reference to Form 10-Q of the Registrant for
the quarter ended July 31, 2004 (File No. 000-07258, Exhibit
10.3).
10.6 Certificate Purchase Agreement, dated as of July 21, 2004,
among Charming Shoppes Receivables Corp., Fashion Service
Corp., Spirit of America, Inc., and Barclay's Capital Inc.
(as representative of the Initial Purchasers), incorporated
by reference to Form 10-Q of the Registrant for the quarter
ended July 31, 2004 (File No. 000-07258, Exhibit 10.3).
10.7 Certificate Purchase Agreement, dated as of August 5, 2004,
among Wachovia Bank, National Association as Trustee,
Charming Shoppes Receivables Corp. as Seller, Spirit of
America, Inc. as Servicer, and Clipper Receivables Company
LLC as Initial Class C Holder, incorporated by reference to
Form 10-Q of the Registrant for the quarter ended July 31,
2004 (File No. 000-07258, Exhibit 10.3).
10.8 The Charming Shoppes, Inc. 1993 Employees' Stock Incentive
Plan Restricted Stock Agreement, dated as of May 13, 2004,
between Charming Shoppes, Inc. and Dorrit J. Bern,
incorporated by reference to Form 10-Q of the Registrant for
the quarter ended July 31, 2004 (File No. 000-07258, Exhibit
10.3).
10.9 Mortgage, Assignment of Leases and Rents and Security
Agreement, dated as of October 6, 2004, between FB Distro
Distribution Center, LLC, as Mortgagor, and BankAtlantic
Commercial Mortgage Capital, LLC, as Mortgagee.
33
10.10 $13,000,000 Mortgage Note, dated October 6, 2004, between FB
Distro Distribution Center, LLC, as Maker, and BankAtlantic
Commercial Mortgage Capital, LLC, as Payee.
10.11 Guaranty, executed as of October 6, 2004, by Charming Shoppes,
Inc., as Guarantor, for the benefit of BankAtlantic Commercial
Mortgage Capital, LLC, as Lender.
10.12 Hazardous Substances Indemnity Agreement, dated October 6,
2004, by FB Distro Distribution Center, LLC and by Charming
Shoppes, Inc., jointly and severally as Indemnitors, in favor
of BankAtlantic Commercial Mortgage Capital, LLC, as Holder.
10.13 Amended and Restated Certificate Purchase Agreement, dated as
of November 22, 2004 and Amended and Restated as of November
18, 2004, among Wachovia Bank, National Association as
Trustee, Charming Shoppes Receivables Corp. as Seller, Spirit
of America, Inc. as Servicer, and the Class D-2
Certificateholders Described Herein.
10.14 Form of Bonus Agreement by and between Charming Shoppes, Inc.
and the Executive Officer named in the Agreement.
10.15 Charming Shoppes, Inc. 2004 Stock Award and Incentive Plan
Stock Option Agreement.
10.16 Charming Shoppes, Inc. 2004 Stock Award and Incentive Plan
Restricted Stock Agreement - Section 16 Officers.
10.17 Charming Shoppes, Inc. 2004 Stock Award and Incentive Plan
Restricted Stock Agreement - Associates Other Than Section
16 Officers.
31.1 Certification By Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification By Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
34