-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Og1IUDUbhjzpB0g9xRFiqmocL66iAX3JmGGP2soU40TUsT3mOhKj+tbtp3pfR/no HBkcniUqQM+gomeLw/FPVg== 0000019353-03-000094.txt : 20030606 0000019353-03-000094.hdr.sgml : 20030606 20030606155314 ACCESSION NUMBER: 0000019353-03-000094 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030503 FILED AS OF DATE: 20030606 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHARMING SHOPPES INC CENTRAL INDEX KEY: 0000019353 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 231721355 STATE OF INCORPORATION: PA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-07258 FILM NUMBER: 03735963 BUSINESS ADDRESS: STREET 1: 450 WINKS LANE CITY: BENSALEM STATE: PA ZIP: 19020 BUSINESS PHONE: 2152459100 MAIL ADDRESS: STREET 1: 450 WINKS LANE CITY: BENSALEM STATE: PA ZIP: 19020 10-Q 1 form10q1.txt FIRST QUARTER FISCAL 2004 FORM 10-Q ================================================================================ 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 May 3, 2003 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, as of May 23, 2003, was 112,981,870 shares. ================================================================================ CHARMING SHOPPES, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets May 3, 2003 and February 1, 2003................................ 2 Condensed Consolidated Statements of Operations Thirteen weeks ended May 3, 2003 and May 4, 2002................ 3 Condensed Consolidated Statements of Comprehensive Income (Loss) Thirteen weeks ended May 3, 2003 and May 4, 2002................ 4 Condensed Consolidated Statements of Cash Flows Thirteen weeks ended May 3, 2003 and May 4, 2002................ 5 Notes to Condensed Consolidated Financial Statements.................. 6 - 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking Statements............................................ 13 - 14 Critical Accounting Policies.......................................... 14 - 15 Results of Operations................................................. 15 - 20 Liquidity and Capital Resources....................................... 20 - 22 Financing............................................................. 23 Market Risk........................................................... 23 - 24 Impact of Recent Accounting Pronouncements............................ 24 Item 3. Quantitative and Qualitative Disclosures About Market Risk... 24 Item 4. Controls and Procedures...................................... 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................ 25 Item 6. Exhibits and Reports on Form 8-K............................. 25 SIGNATURES AND CERTIFICATIONS......................................... 26 - 28 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CHARMING SHOPPES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
May 3, February 1, (Dollars in thousands, except per-share amounts) 2003 2003 ---- ---- (Unaudited) ASSETS Current assets Cash and cash equivalents .......................................... $ 97,629 $ 102,026 Available-for-sale securities ...................................... 54,613 50,286 Merchandise inventories ............................................ 342,448 286,472 Deferred taxes ..................................................... 17,986 11,726 Prepayments and other .............................................. 81,379 77,504 ----------- ----------- Total current assets ........................................... 594,055 528,014 ----------- ----------- Property, equipment, and leasehold improvements - at cost .......... 681,106 668,168 Less: accumulated depreciation and amortization .................... 360,033 348,295 ----------- ----------- Net property, equipment, and leasehold improvements ............ 321,073 319,873 ----------- ----------- Trademarks and other intangible assets ............................. 170,973 171,138 Goodwill ........................................................... 68,594 68,594 Available-for-sale securities ...................................... 24,864 23,472 Other assets ....................................................... 28,253 28,065 ----------- ----------- Total assets ....................................................... $ 1,207,812 $ 1,139,156 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable ................................................... $ 206,401 $ 147,952 Accrued expenses ................................................... 147,324 163,598 Income taxes payable ............................................... 14,047 7,144 Current portion - long-term debt ................................... 13,644 12,595 Accrued expenses related to cost reduction plan .................... 1,581 0 ----------- ----------- Total current liabilities ...................................... 382,997 331,289 ----------- ----------- Deferred taxes and other non-current liabilities ................... 49,492 43,188 Long-term debt ..................................................... 203,450 203,045 Stockholders' equity Common Stock $.10 par value: Authorized - 300,000,000 shares Issued - 125,247,463 shares and 125,149,242 shares, respectively 12,525 12,515 Additional paid-in capital ......................................... 200,683 200,040 Treasury stock at cost - 12,265,993 shares ......................... (84,136) (84,136) Deferred employee compensation ..................................... (3,521) (3,370) Accumulated other comprehensive loss ............................... (502) (550) Retained earnings .................................................. 446,824 437,135 ----------- ----------- Total stockholders' equity ..................................... 571,873 561,634 ----------- ----------- Total liabilities and stockholders' equity ......................... $ 1,207,812 $ 1,139,156 =========== =========== See Notes to Condensed Consolidated Financial Statements
2 CHARMING SHOPPES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Thirteen Weeks Ended -------------------- May 3, May 4, (In thousands, except per-share amounts) 2003 2002(1) ---- ---- Net sales .............................................. $ 564,286 $ 630,616 --------- --------- Cost of goods sold, buying, and occupancy expenses ..... 395,488 437,235 Selling, general, and administrative expenses .......... 145,265 159,156 Expenses related to cost reduction plan ................ 4,431 0 --------- --------- Total operating expenses ............................... 545,184 596,391 --------- --------- Income from operations ................................. 19,102 34,225 Other income, principally interest ..................... 424 444 Interest expense ....................................... (3,805) (6,802) --------- --------- Income before income taxes, minority interest, and cumulative effect of accounting changes ............ 15,721 27,867 Income tax provision ................................... 6,116 10,656 --------- --------- Income before minority interest and cumulative effect of accounting changes .............................. 9,605 17,211 Minority interest in net loss of consolidated subsidiary 84 61 --------- --------- Income before cumulative effect of accounting changes .. 9,689 17,272 Cumulative effect of accounting changes, net of income tax benefit of $2,758 ....................... 0 (49,098) --------- --------- Net income (loss) ...................................... $ 9,689 $ (31,826) ========= ========= Basic net income (loss) per share: Before cumulative effect of accounting changes ..... $.09 $ .15 Cumulative effect of accounting changes ............ .00 (.44) ---- ----- Net income (loss) .................................. $.09 $(.28)(2) ==== ===== Diluted net income (loss) per share: Before cumulative effect of accounting changes ..... $.08 $ .14 Cumulative effect of accounting changes ............ .00 (.39) ---- ----- Net income (loss) .................................. $.08 $(.24)(2) ==== ===== - -------------------- (1) Restated for adoption of EITF 02-16 (See Note 1 of Notes to Condensed Consolidated Financial Statements). (2) Results do not add due to rounding. See Notes to Condensed Consolidated Financial Statements
3 CHARMING SHOPPES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
Thirteen Weeks Ended -------------------- May 3, May 4, (In thousands) 2003 2002(1) ---- ---- Net income (loss) ....................................................... $ 9,689 $(31,826) -------- -------- Unrealized gains (losses) on available-for-sale securities, net of income taxes of $24 and $(20), respectively ................................ (38) 15 Reclassification of amortization of deferred loss on termination of derivative, net of income taxes of $(46) and $(46), respectively .... 86 86 -------- -------- Total other comprehensive income (loss), net of taxes ............... 48 101 -------- -------- Comprehensive income (loss) ............................................. $ 9,737 $(31,725) ======== ======== - -------------------- (1) Restated for adoption of EITF 02-16 (See Note 1 of Notes to Condensed Consolidated Financial Statements). See Notes to Condensed Consolidated Financial Statements
4 CHARMING SHOPPES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Thirteen Weeks Ended -------------------- May 3, May 4, (In thousands) 2003 2002(1) ---- ---- Operating activities Net income (loss) ................................................... $ 9,689 $ (31,826) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ................................... 19,270 18,335 Write-down of Catherine's goodwill .............................. 0 43,975 Cumulative effect of capitalization of cash received from vendors 0 7,881 Deferred income taxes ........................................... (1,025) (2,211) Other, net ...................................................... 694 33 Changes in operating assets and liabilities: Merchandise inventories ...................................... (55,976) (38,069) Accounts payable ............................................. 58,449 41,664 Prepayments and other ........................................ (4,048) (14,148) Accrued expenses and other ................................... (15,143) 28,093 Income taxes payable ......................................... 6,903 0 Accrued restructuring costs .................................. 0 (1,274) Accrued expenses related to cost reduction plan .............. 1,581 0 --------- --------- Net cash provided by operating activities ........................... 20,394 52,453 --------- --------- Investing activities Investment in capital assets ........................................ (13,325) (10,606) Proceeds from sales of available-for-sale securities ................ 8,888 3 Gross purchases of available-for-sale securities .................... (14,669) (8,996) Increase in other assets ............................................ (2,562) (1,239) --------- --------- Net cash used in investing activities ............................... (21,668) (20,838) --------- --------- Financing activities Proceeds from short-term borrowings ................................. 81,172 222,613 Repayments of short-term borrowings ................................. (81,172) (255,167) Repayments of long-term borrowings .................................. (3,382) (2,355) Proceeds from exercise of stock options ............................. 259 4,053 --------- --------- Net cash used in financing activities ............................... (3,123) (30,856) --------- --------- Increase (decrease) in cash and cash equivalents .................... (4,397) 759 Cash and cash equivalents, beginning of period ...................... 102,026 36,640 --------- --------- Cash and cash equivalents, end of period ............................ $ 97,629 $ 37,399 ========= ========= Non-cash financing and investing activities Common stock issued on conversion of convertible notes .............. $ 0 $ 13 ========= ========= Equipment acquired through capital leases ........................... $ 4,836 $ 640 ========= ========= - -------------------- (1) Restated for adoption of EITF 02-16 (See Note 1 of Notes to Condensed Consolidated Financial Statements). See Notes to Condensed Consolidated Financial Statements
5 CHARMING SHOPPES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Condensed Consolidated Financial Statements We have prepared the condensed consolidated balance sheet as of May 3, 2003, and the condensed consolidated statements of operations, comprehensive income (loss) and cash flows for the thirteen weeks ended May 3, 2003 and May 4, 2002, without audit. In the opinion of our management, all adjustments (which include only normal recurring adjustments, except for the cumulative effect of accounting changes) necessary to present fairly the financial position at May 3, 2003, and the results of operations and cash flows for the thirteen weeks ended May 3, 2003 and May 4, 2002, have been made. 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 condensed consolidated financial statements should be read in conjunction with the financial statements and related notes included in our February 1, 2003 Annual Report on Form 10-K. The results of operations for the thirteen weeks ended May 3, 2003 and May 4, 2002 are not necessarily indicative of operating results for the full fiscal year. As used in these notes, the terms "Fiscal 2004" and "Fiscal 2003" refer to our fiscal year ending January 31, 2004 and our fiscal year ended February 1, 2003, respectively. The terms "Fiscal 2004 First Quarter" and "Fiscal 2003 First Quarter" refer to the thirteen weeks ended May 3, 2003 and May 4, 2002, respectively. The term "Fiscal 2004 Second Quarter" refers to the thirteen weeks ending August 2, 2003. The terms "the Company," "we," "us," and "our" refer to Charming Shoppes, Inc. and, where applicable, its consolidated subsidiaries. In the fourth quarter of Fiscal 2003, we adopted 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," as of the beginning of Fiscal 2003 and restated our results of operations for the first three quarters of Fiscal 2003. EITF Issue 02-16 addresses the accounting for cash consideration given to a customer, including both a reseller of the vendor's products and an entity that purchases the vendor's products, from a reseller. The Issue provides accounting guidance on how a customer should characterize cash consideration received from a vendor, and when to recognize and how to measure that consideration in its income statement. The cumulative effect of the adoption of EITF Issue 02-16 as of the beginning of Fiscal 2003 was a charge of $5,123,000, net of income taxes of $2,758,000. For interim reporting, markdown allowances are deferred, and are recognized in the period in which markdown expenses are recognized. In accordance with the transition provisions of FASB Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," we performed a review of our goodwill and other indefinite-lived intangible assets for impairment during the second quarter of Fiscal 2003. We determined that the carrying value of goodwill related to our acquisition of Catherines Stores Corporation exceeded its estimated fair value under SFAS No. 142. We recognized a charge of $43,975,000 as the cumulative effect of an accounting change as of the beginning of Fiscal 2003 to reduce the carrying value of the Catherine's goodwill to its estimated fair value. This charge has no tax effect, as it is not deductible for tax purposes. 6 CHARMING SHOPPES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 1. Condensed Consolidated Financial Statements (continued) The results of operations for the Fiscal 2003 First Quarter as previously reported, prior to the restatement for the adoption of EITF Issue 02-16 and the cumulative effect of accounting changes for the adoption of EITF Issue 02-16 and SFAS No. 142, were as follows:
Thirteen Weeks Ended (In thousands, except per-share amounts) May 4, 2002 ----------- Net sales............................................ $630,616 Cost of goods sold, buying, and occupancy expenses... 438,808 Net income........................................... 16,311 Net income per share: Basic............................................ $.15 Diluted.......................................... .14
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 over the vesting period of the award or option. We do not recognize compensation expense for options having an exercise price equal to the market price on the date of grant or for shares purchased under our Employee Stock Purchase Plan. We have adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." The following table reconciles net income (loss) and net income (loss) per share as reported, using the intrinsic value method under APB No. 25, to pro forma net income (loss) and pro forma net income (loss) per share using the fair value method under SFAS No. 123:
Thirteen Weeks Ended -------------------- (In thousands, except per-share amounts) May 3, 2003 May 4, 2002 ----------- ----------- (Restated) Net income (loss), as reported ................................... $ 9,689 $ (31,826) Add stock-based employee compensation as reported, using intrinsic value method, net of income taxes ........................... 270 208 Less stock-based employee compensation, using fair value method, net of income taxes ......................................... (989) (1,365) --------- ---------- Pro forma net income (loss) ...................................... $ 8,970 $ (32,983) ========= ========== Basic net income (loss) per share: As reported ................................................. .09 (.28) Pro forma ................................................... .08 (.30) Diluted net income (loss) per share: As reported ................................................. .08 (.24) Pro forma ................................................... .08 (.25)
7 CHARMING SHOPPES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 2. Trademarks and Other Intangible Assets
May 3, February 1, (In thousands) 2003 2003 ---- ---- Trademarks, tradenames, and internet domain names . $168,800 $168,800 Customer lists and covenant not to compete ........ 3,300 3,300 -------- -------- Total at cost ..................................... 172,100 172,100 Less accumulated amortization of customer lists and covenant not to compete ....................... 1,127 962 -------- -------- Net trademarks and other intangible assets ........ $170,973 $171,138 ======== ========
3. Long-term Debt
May 3, February 1, (In thousands) 2003 2003 ---- ---- 4.75% Senior Convertible Notes due 2012 $150,000 $150,000 Capital lease obligations ............. 33,971 31,703 6.53% mortgage note ................... 13,300 13,650 7.77% mortgage note ................... 10,372 10,478 7.5% mortgage note .................... 6,006 6,059 8.15% note ............................ 3,445 3,750 -------- -------- Total long-term debt .................. 217,094 215,640 Less current portion .................. 13,644 12,595 -------- -------- Long-term debt ........................ $203,450 $203,045 ======== ========
4. Stockholders' Equity
Thirteen Weeks Ended (In thousands) May 3, 2003 ----------- Total stockholders' equity, beginning of period ...................... $ 561,634 Net income ........................................................... 9,689 Exercises of stock options ........................................... 86 Amortization of deferred compensation expense ........................ 416 Amortization of deferred loss on termination of derivative, net of tax 86 Unrealized losses on available-for-sale securities, net of tax ....... (38) --------- Total stockholders' equity, end of period ............................ $ 571,873 =========
8 CHARMING SHOPPES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 5. Customer Loyalty Card Program In Fiscal 2002, we began a customer loyalty card program for our Fashion Bug store customers. The program grants discounts on customer purchases over a twelve-month period upon payment of a $25 annual fee. Revenues from card fees under the program are recognized as sales over the life of the membership dependent on discounts being earned by the customer. If a customer does not earn discounts in an amount that exceeds the card fee, such difference is recognized as revenue upon the expiration of the annual period. Upon early cancellation of a loyalty card, refunds of membership fees are reduced by the amount of any discounts granted to the member under the program. Costs we incur in connection with administering the program are recognized in cost of goods sold as incurred. During the Fiscal 2004 First Quarter and Fiscal 2003 First Quarter, we recognized revenues of $4,173,000 and $4,311,000, respectively, in connection with this program. As of December 1, 2002, we discontinued the issuance of new cards under this program. We plan to terminate this program by the end of the Fiscal 2004 Second Quarter. During the Fiscal 2004 First Quarter, we introduced a new customer loyalty card program that is being operated under our proprietary credit card program. For an annual fee of $25, the program grants, among other benefits, a $20 discount each time a customer accumulates over $200 of purchases (up to $2,000 of purchases) to be applied at the next purchase. We have accrued $2,100,000 for the estimated costs of discounts earned during the Fiscal 2004 First Quarter, based on year-to-date purchases. Customers are entitled to a full refund of the $25 annual fee if membership is canceled within 90 days. After 90 days the refund will be reduced by a pro rata amount over nine months. Accordingly, revenues from card fees under the program will be recognized as sales on a pro rata basis after 90 days. Costs we incur in connection with administering the program are recognized in cost of goods sold as incurred. During the Fiscal 2004 First Quarter, no revenues were recognized in connection with the new loyalty card program. 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 efficiencies available to us, in order to improve profitability. The components of the cost reduction plan are as follows: o Reduction in corporate operating expenses by streamlining processes and gaining optimal pricing through the consolidation of vendors and the continued centralization of finance, human resources, and other administrative functions in order to leverage the efficiency of our shared services organization. o Workforce reduction at our corporate and divisional home offices. o Consolidation of our Memphis, Tennessee distribution center into our distribution center in White Marsh, Maryland. o Consolidation of our Hollywood, Florida credit operations into our Milford, Ohio facility. o Closing of the 9 Monsoon/Accessorize stores that we operate under a joint venture with Monsoon plc. 9 CHARMING SHOPPES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 6. Expenses Related to Cost Reduction Plan (continued) We are accounting for the plan in accordance with the provisions of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The total estimated costs related to the plan are $10,425,000, of which $4,431,000 of costs were incurred during the Fiscal 2004 First Quarter. We expect to incur the majority of the remaining costs in connection with the plan by the end of the Fiscal 2004 Second Quarter. The total estimated costs related to the plan consist of the following:
(In thousands) Workforce reduction costs ................................ $ 3,160 Lease termination and related costs ...................... 3,264 Acceleration of depreciation of property, equipment, and leasehold improvements........................... 3,224 Other facility closure costs ............................. 777 ------- Total estimated costs .................................... $10,425 =======
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 and accrued the severance benefit in accordance with SFAS No. 146. We expect to terminate approximately 250 additional employees during the Fiscal 2004 Second Quarter in connection with the closing of our Memphis, Tennessee distribution center and our Hollywood, Florida credit operations. In accordance with SFAS No. 146, we are recognizing retention bonuses ratably over the future service period. Lease termination and related costs mainly represent the estimated fair value of the remaining lease obligations at the Hollywood, Florida facility, reduced by estimated sublease income. In accordance with SFAS No. 146, we will recognize the value of the remaining lease obligation related to the Hollywood, Florida facility in June 2003 when we close 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, which we expect to close in June 2003, to their estimated salvage value. During the Fiscal 2004 First Quarter, we made the decision to sell the Memphis, Tennessee distribution center. Costs accrued in connection with the plan, and payments/settlements against the accrual for the Fiscal 2004 First Quarter, were as follows:
Costs for Quarter Ended Payments/ Accrued at (In thousands) May 3, 2003 Settlements May 3, 2003 ----------- ----------- ----------- Workforce reduction costs ...................... $ 2,409 $ (828) $ 1,581 Lease termination and related costs ............ 301 (301) 0 Accelerated depreciation costs (non-cash charge) 1,363 (1,363) 0 Other facility closure costs ................... 358 (358) 0 ------- ------- ------- Total .......................................... $ 4,431 $(2,850) $ 1,581 ======= ======= =======
10 CHARMING SHOPPES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 6. Expenses Related to Cost Reduction Plan (continued) Expenses related to the plan incurred during the Fiscal 2004 First Quarter are included in "Expenses related to cost reduction plan" in the accompanying Condensed Consolidated Statements of Operations. 7. Net Income (Loss) Per Share
Thirteen Weeks Ended -------------------- (In thousands, except per-share amounts) May 3, 2003 May 4, 2002 ----------- ----------- (Restated) Basic weighted average common shares outstanding ............................... 112,361 111,741 Dilutive effect of assumed conversion of convertible notes ..................... 15,182 12,875 Dilutive effect of stock options ............................................... 185 2,387 ------- ------- Diluted weighted average common shares and equivalents outstanding ............. 127,728 127,003 ======= ======= Income before cumulative effect of accounting changes .......................... $ 9,689 $ 17,272 Decrease in interest expense from assumed conversion of notes, net of income taxes ........................................................ 1,099 1,120 ------- -------- Income before cumulative effect of accounting changes used to determine diluted net income per share ..................................... 10,788 18,392 Cumulative effect of accounting changes ........................................ 0 (49,098) ------- -------- Net income (loss) used to determine diluted net income (loss) per share ........ $10,788 $(30,706) ======= ======== Options with weighted average exercise price greater than market price, excluded from computation of diluted net income (loss) per share: Number of shares ........................................................... 11,626 828 Weighted average exercise price per share .................................. $6.07 $12.01
8. Impact of Recent Accounting Pronouncements In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, and addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Our adoption of SFAS No. 143 as of the beginning of Fiscal 2004 did not have a material impact on our financial position or results of operations. 11 CHARMING SHOPPES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 8. Impact of Recent Accounting Pronouncements (continued) In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," an amendment of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 amends SFAS No. 123 to provide alternative transition methods for a voluntary change from the intrinsic value method of accounting for stock-based compensation under APB Opinion No. 25 to the fair value method of accounting under SFAS No. 123. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method used in accounting for stock-based compensation and the effects of the method used on reported results. We have adopted the interim financial statement disclosure requirements of SFAS No. 148 in the Fiscal 2004 First Quarter. At the present time, we do not intend to change from the intrinsic value method of accounting for stock-based compensation to the fair value method. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after that date. We do not currently hold derivative instruments subject to the provisions of SFAS No. 133, as amended. We do not expect that adoption of SFAS No. 149 will have a material impact on our financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that financial instruments within the scope of the statement be classified as a liability (or an asset in some circumstances). Under previous guidance, such instruments could be classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. We have not issued financial instruments subject to the provisions of SFAS No. 150. We do not expect that adoption of SFAS No. 150 will have a material impact on our financial position or results of operations. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This management's discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes appearing elsewhere in this report. It should also be read in conjunction with the management's discussion and analysis of financial condition and results of operations, financial statements, and accompanying notes appearing in our annual report on Form 10-K for the fiscal year ended February 1, 2003. As used in this management's discussion and analysis, the terms "Fiscal 2004" and "Fiscal 2003" refer to our fiscal year ending January 31, 2004 and our fiscal year ended February 1, 2003, respectively. The terms "Fiscal 2004 First Quarter" and "Fiscal 2003 First Quarter" refer to the thirteen weeks ended May 3, 2003 and May 4, 2002, respectively. The terms Fiscal 2004 Second Quarter" and "Fiscal 2003 Second Quarter" refer to the thirteen weeks ending August 2, 2003 and the thirteen weeks ended August 3, 2002, respectively. The term "Fiscal 2005" refers to our fiscal year ending January 29, 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, capital expenditures and cost reductions, plans for future operations, and financing needs or plans, 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 The general slowdown in the United States economy and the uncertain economic outlook has led to reduced consumer demand for our apparel and accessories and may continue to do so in the future. o The women's specialty retail apparel industry is highly competitive and we may be unable to compete successfully against existing or future competitors. o We cannot assure the successful implementation of our business plan for increased profitability and growth in our plus-sized women's apparel business. o Our business plan is largely dependent upon the continued growth in the plus-sized women's apparel market, which may not continue. o We depend on key personnel, particularly our Chief Executive Officer, Dorrit J. Bern, and we may not be able to retain or replace these employees or recruit additional qualified personnel. 13 o We depend on our distribution centers and could incur significantly higher costs and longer lead times associated with distributing our products to our stores if any of these distribution centers were to shut down for any reason. o We may experience disruptions in the flow of our merchandise during the relocation of our Memphis, Tennessee and Columbus, Ohio distribution centers to our White Marsh, Maryland distribution center. o We depend for our working capital needs on the availability of credit, including credit we receive from our suppliers and their agents, and on our credit card securitization program. If we were unable to obtain sufficient financing at affordable cost, our ability to merchandise our stores would be adversely affected. o We rely significantly on foreign sources of production and face a variety of risks (including political instability, imposition of duties or quotas, increased security requirements applicable to imports, delays in shipping, increased costs of transportation, and issues relating to compliance with domestic or international labor standards) generally associated with doing business in foreign markets and importing merchandise from abroad. o Our stores experience seasonal fluctuations in net sales and operating income. Any decrease in sales or margins during our peak sales periods, or in the availability of working capital needed in the months preceding such periods, could have a material adverse effect on our business. In addition, extreme or unseasonable weather conditions may have an impact on our sales. o War, acts of terrorism, or the threat of either may negatively impact availability of merchandise and customer traffic to our stores, or otherwise adversely affect our business. o We may be unable to obtain adequate insurance for our operations at a reasonable cost. o We may be unable to protect our trademarks and other intellectual property rights, which we believe are important to our success and our competitive position. o We may be unable to hire and retain suitable sales associates at our stores. o We may be unable to successfully implement our cost reduction plan described elsewhere in this report. o Our manufacturers may be unable to manufacture and deliver merchandise to us in a timely manner or to meet our quality standards. o Our sales are dependent upon a high volume of traffic in the strip centers and malls in which our stores are located, and our future growth is dependent upon the availability of suitable locations for new stores. o We may be unable to successfully integrate Lane Bryant into our current operating structure, or implement our plan to improve merchandise assortments and sales performance in our Lane Bryant stores. We also currently rely on logistics services from Limited Brands, Inc. ("Limited Brands") with respect to our Lane Bryant stores. CRITICAL ACCOUNTING POLICIES Our critical accounting policies are discussed in the management's discussion and analysis of financial condition and results of operations and notes accompanying the consolidated financial statements that appear in our annual report on Form 10-K for the fiscal year ended February 1, 2003. Except as otherwise disclosed in the financial statements and accompanying notes included in this report, there were 14 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. During the Fiscal 2004 First Quarter, we introduced a new customer loyalty card program that is being operated under our proprietary credit card program. See "Net Sales" below for further details of this program. RESULTS OF OPERATIONS The following table presents certain financial data expressed as a percentage of net sales and on a comparative basis:
Percentage Increase/ Thirteen Weeks Ended (Decrease) -------------------- From Prior May 3, 2003 May 4, 2002 Period ----------- ----------- ------ (Restated) Net sales........................................... 100.0% 100.0% (10.5)% Cost of goods sold, buying, and occupancy expenses.. 70.1 69.3 (9.5) Selling, general, and administrative expenses....... 25.7 25.2 (8.7) Expenses related to cost reduction plan............. 0.8 -- -- Income from operations.............................. 3.4 5.4 (44.2) Other income, principally interest.................. 0.1 0.1 (4.5) Interest expense.................................... 0.7 1.1 (44.1) Income tax provision................................ 1.1 1.7 (42.6) Minority interest in net loss of subsidiary......... -- -- 37.7 Cumulative effect of accounting changes............. -- (7.8) (100.0) Net income (loss)................................... 1.7 (5.0) -- - -------------------- Results may not add due to rounding.
The following table presents our net sales by store brand:
Thirteen Weeks Ended -------------------- (In millions) May 3, 2003 May 4, 2002 ----------- ----------- Fashion Bug.................................. $252.9 $289.9 Lane Bryant.................................. 224.9 238.8 Catherine's.................................. 85.7 101.0(1) Monsoon/Accessorize.......................... 0.8 0.9 ------ ------ Total net sales.............................. $564.3 $630.6 ====== ====== - -------------------- (1) Includes sales from 41 Added Dimensions stores that were closed during Fiscal 2003.
15 The following table presents certain additional information related to changes in our net sales:
Thirteen Weeks Ended -------------------- May 3, 2003 May 4, 2002 ----------- ----------- Decrease in comparable store sales (1): Fashion Bug............................................. (3)% (3)% Catherine's............................................. (2) (2) Lane Bryant............................................. (11) -- Sales from new stores as a percentage of total consolidated prior-period sales: Fashion Bug............................................. 1 4 Catherine's............................................. 1 3 Lane Bryant............................................. 3 61 Prior-period sales from closed stores as a percentage of total consolidated prior-period sales: Fashion Bug............................................. (5) (3) Catherine's/Added Dimensions............................ (3) (3) Lane Bryant............................................. (1) -- Increase (decrease) in total consolidated sales................ (11) 60 - -------------------- (1) Sales from stores in operation during both periods. Stores are added to the comparable store base after 13 full months of operation.
Comparison of Thirteen Weeks Ended May 3, 2003 and May 4, 2002 Net Sales Net sales were $564.3 million for the quarter ended May 3, 2003 ("Fiscal 2004 First Quarter"), a decrease of 10.5% from net sales of $630.6 million for the quarter ended May 4, 2002 ("Fiscal 2003 First Quarter"). The number of retail stores in operation at the end of the Fiscal 2004 First Quarter was 2,245 stores, compared to 2,415 stores at the end of the Fiscal 2003 First Quarter. We experienced a year-over-year decrease in overall comparable store sales of 6%. The decrease in sales was due primarily to negative results at our Lane Bryant chain and the decrease in the number of operating stores. As a result of continuing soft demand for apparel caused by a weak economic environment, we continued to experience lower customer traffic levels at each of our chains. Lane Bryant stores experienced comparable store sales decreases in sweaters, wear-to-work and denim separates, and casual woven tops, which were partially offset by increases in casual woven separates, wear-to-work tops, and intimate apparel. The Lane Bryant chain continued to experience poor customer acceptance of certain of its spring apparel merchandise assortments during the Fiscal 2004 First Quarter, resulting in higher levels of promotional pricing. This trend could continue to negatively impact our results for the Fiscal 2004 Second Quarter. Our plans at Lane Bryant include improved merchandise assortments for the 2003 fall season, which should result in improved sales performance for the chain. Fashion Bug stores experienced comparable store sales decreases in junior and missy sportswear and dresses, which were partially offset by increases in intimate apparel and plus sportswear. For Catherine's Stores, comparable store sales decreases in career and casual sportswear were partially offset by increases in dresses and intimate apparel. 16 In Fiscal 2002, we began a customer loyalty card program for our Fashion Bug store customers. The program grants discounts on customer purchases over a twelve-month period upon payment of a $25 annual fee. Revenues from card fees under the program are recognized as sales over the life of the membership dependent on discounts being earned by the customer. If a customer does not earn discounts in an amount that exceeds the card fee, such difference is recognized as revenue upon the expiration of the annual period. Upon early cancellation of a loyalty card, refunds of membership fees are reduced by the amount of any discounts granted to the member under the program. Costs we incur in connection with administering the program are recognized in cost of goods sold as incurred. During the Fiscal 2004 First Quarter and Fiscal 2003 First Quarter, we recognized revenues of $4.2 million and $4.3 million, respectively, in connection with this program. As of December 1, 2002, we discontinued the issuance of new cards under this program. We plan to terminate this program by the end of the Fiscal 2004 Second Quarter. During the Fiscal 2004 First Quarter, we introduced a new customer loyalty card program that is being operated under our proprietary credit card program. For an annual fee of $25, the program grants, among other benefits, a $20 discount each time a customer accumulates over $200 of purchases (up to $2,000 of purchases) to be applied at the next purchase. We have accrued $2.1 million for the estimated costs of discounts earned during the Fiscal 2004 First Quarter, based on year-to-date purchases. Customers are entitled to a full refund of the $25 annual fee if membership is canceled within 90 days. After 90 days the refund will be reduced by a pro rata amount over nine months. Accordingly, revenues from card fees under the program will be recognized as sales on a pro rata basis after 90 days. Costs we incur in connection with administering the program are recognized in cost of goods sold as incurred. During the Fiscal 2004 First Quarter, no revenues were recognized in connection with the new loyalty card program. Cost of Goods Sold, Buying, and Occupancy Cost of goods sold, buying, and occupancy expenses were $395.5 million in the Fiscal 2004 First Quarter, a decrease of 9.5% from $437.2 million in the Fiscal 2003 First Quarter, principally reflecting the decrease in net sales. As a percentage of net sales, these costs increased 0.8% in the Fiscal 2004 First Quarter as compared to the Fiscal 2003 First Quarter. Cost of goods sold as a percentage of net sales decreased 0.8% in the Fiscal 2004 First Quarter as compared to the Fiscal 2003 First Quarter. The decrease was a result of higher merchandise margins in our Fashion Bug and Catherine's chains, partially offset by lower margins in our Lane Bryant chain. Cost of goods sold includes merchandise costs, net of discounts and allowances, freight, and inventory shrinkage. Net merchandise costs and freight are capitalized as inventory costs. Buying and occupancy expenses as a percentage of net sales increased 1.6% in the Fiscal 2004 First Quarter as compared to the Fiscal 2003 First Quarter. The increase in buying and occupancy expenses as a percentage of sales was primarily attributable to the lack of leverage on relatively fixed occupancy costs as a result of negative overall comparable store sales, particularly in our Lane Bryant chain. 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 $145.3 million in the Fiscal 2004 First Quarter, a decrease of 8.7% from $159.2 million in the Fiscal 2003 First Quarter. As a percentage of net sales, these costs increased by 0.5% in the Fiscal 2004 First Quarter as compared to the Fiscal 2003 First Quarter. Selling expenses as a percentage of sales for the Fiscal 2004 First Quarter increased 0.7% from the prior-year period, 17 primarily as a result of the lack of leverage from the decrease in comparable store sales. General and administrative expenses decreased 0.2% as a percentage of sales, primarily as a result of the realization of cost reduction initiatives, partially offset by the lack of leverage from negative comparable store 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 efficiencies available to us, in order to improve profitability. We expect this cost reduction plan to improve annualized pre-tax earnings by approximately $45 million, with an improvement of approximately $18 million in pre-tax earnings during Fiscal 2004. We expect that the full annual pre-tax benefit of $45 million will first be realized during Fiscal 2005. We expect the execution of the plan to have no material after-tax cash impact. The components of the cost reduction plan are as follows: o Reduction in corporate operating expenses by streamlining processes and gaining optimal pricing through the consolidation of vendors and the continued centralization of finance, human resources, and other administrative functions in order to leverage the efficiency of our shared services organization. o Workforce reduction at our corporate and divisional home offices. o Consolidation of our Memphis, Tennessee distribution center into our distribution center in White Marsh, Maryland. o Consolidation of our Hollywood, Florida credit operations into our Milford, Ohio facility. o Closing of the 9 Monsoon/Accessorize stores that we operate under a joint venture with Monsoon plc. We are accounting for the plan in accordance with the provisions of Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The total estimated costs related to the plan are $10.4 million, of which $4.4 million of costs were incurred during the Fiscal 2004 First Quarter. We expect to incur the majority of the remaining costs in connection with the plan by the end of the Fiscal 2004 Second Quarter. The total estimated costs related to the plan consist of the following:
(In millions) Workforce reduction costs................................ $ 3.1 Lease termination and related costs...................... 3.3 Acceleration of depreciation of property, equipment, and leasehold improvements.......................... 3.2 Other facility closure costs ............................ 0.8 ----- Total estimated costs.................................... $10.4 =====
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 and accrued the severance benefit in accordance with SFAS No. 146. We expect to terminate approximately 250 additional employees during the Fiscal 2004 Second Quarter in connection with the closing of our Memphis, Tennessee distribution center and our Hollywood, Florida credit operations. In accordance with SFAS No. 146, we are recognizing retention bonuses ratably over the future service period. Lease termination and related costs mainly represent the estimated fair value of the remaining lease obligations at the Hollywood, Florida facility, reduced by estimated sublease income. In 18 accordance with SFAS No. 146, we will recognize the value of the remaining lease obligation related to the Hollywood, Florida facility in June 2003 when we close 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, which we expect to close in June 2003, to their estimated salvage value. During the Fiscal 2004 First Quarter, we made the decision to sell the Memphis, Tennessee distribution center. Costs accrued in connection with the plan, and payments/settlements against the accrual for the Fiscal 2004 First Quarter, were as follows:
Costs for Quarter Ended Payments/ Accrued at (In millions) May 3, 2003 Settlements May 3, 2003 ----------- ----------- ----------- Workforce reduction costs....................... $2.4 $(0.8) $1.6 Lease termination and related costs............. 0.3 (0.3) 0.0 Accelerated depreciation costs (non-cash charge) 1.4 (1.4) 0.0 Other facility closure costs.................... 0.3 (0.3) 0.0 ---- ------ ---- Total........................................... $4.4 $(2.8) $1.6 ==== ====== ====
Expenses incurred during the Fiscal 2004 First Quarter are included in "Expenses related to cost reduction plan" in the accompanying Condensed Consolidated Statements of Operations. Other Income/Interest Expense Other income (principally interest income) was $0.4 million in the Fiscal 2004 First Quarter, unchanged from $0.4 million in the Fiscal 2003 First Quarter. Interest expense was $3.8 million in the Fiscal 2004 First Quarter, a decrease of 44.1% from $6.8 million in the Fiscal 2003 First Quarter. The decrease was the result of both lower interest rates on borrowings and reduced levels of borrowings in the Fiscal 2004 First Quarter as compared to the Fiscal 2003 First Quarter. During the Fiscal 2003 Second Quarter, we replaced $96.0 million of 7.5% Convertible Subordinated Notes due 2006 and a $67.5 million 11.5% term loan with $150.0 million of 4.75% Senior Convertible Notes. Income Tax Provision The income tax provision for the Fiscal 2004 First Quarter was $6.1 million, resulting in a 38.9% effective tax rate, as compared to an income tax provision for the Fiscal 2003 First Quarter of $10.7 million, resulting in a 38.2% effective tax rate. Cumulative Effect of Accounting Changes In Fiscal 2003, we changed our method of accounting for cash consideration received from a vendor in accordance with the provisions of FASB Emerging Issues Task Force ("EITF") Issue 02-16, "Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor." EITF Issue 02-16 addresses the accounting for cash consideration given to a customer, including both a reseller of the vendor's products and an entity that purchases the vendor's products, from a reseller. The Issue provides accounting guidance on how a customer should characterize cash consideration received from a vendor and when to recognize and how to measure that consideration in its income statement. 19 We adopted the provisions of EITF Issue 02-16 as of the beginning of Fiscal 2003 and restated our results of operations for the first three quarters of Fiscal 2003. The cumulative effect of the adoption of EITF Issue 02-16 as of the beginning of Fiscal 2003 was a charge of $5.1 million, net of income taxes of $2.8 million. In accordance with the transition provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," we performed a review of our goodwill and other indefinite-lived intangible assets for impairment during the Fiscal 2003 Second Quarter. We determined that the carrying value of goodwill related to our Catherine's stores acquisition exceeded the estimated fair value of the goodwill under SFAS No. 142. We recognized a charge of $44.0 million as the cumulative effect of an accounting change as of the beginning of Fiscal 2003 to reduce the carrying value of the Catherine's goodwill to its estimated fair value. This charge has no tax effect, as it is not deductible for tax purposes. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of working capital are cash flow from operations, our proprietary credit card receivables securitization agreements, our investment portfolio, and our credit facility. The following table highlights certain information related to our liquidity and capital resources:
May 3, February 1, (Dollars in millions) 2003 2003 ---- ---- Cash and cash equivalents................ $ 97.6 $102.0 Long-term available-for-sale securities.. 24.9 23.5 Working capital.......................... 211.1 196.7 Current ratio............................ 1.6 1.6 Long-term debt to equity ratio........... 35.6% 36.2%
Our net cash provided by operating activities was $20.4 million for the Fiscal 2004 First Quarter, as compared to $52.5 million for the Fiscal 2003 First Quarter. The decrease was primarily a result of a $7.6 million decrease in net income before non-cash charges and the cumulative effect of accounting changes, and a $23.4 million decrease in net prepaid and accrued expenses. Our capital expenditures were $13.3 million during the Fiscal 2004 First Quarter. In addition, we acquired $4.8 million of equipment under capital leases. During the remainder of Fiscal 2004, we anticipate incurring additional capital expenditures of approximately $35.0 - $40.0 million, primarily for the construction and fixturing of new stores, remodeling and fixturing of existing stores, and improvements to our corporate offices and distribution centers. We expect to finance these capital expenditures principally through internally generated funds. In addition to the $35.0 - $40.0 million of capital expenditures discussed above, we expect to incur approximately $4.0 million of additional capital lease financing over the next three to six months for equipment for, and improvements to, the White Marsh facility. 20 The following table sets forth information with respect to our store activity for the Fiscal 2004 First Quarter and planned store activity for all of Fiscal 2004 (including the Fiscal 2004 First Quarter):
Fashion Lane Monsoon/ Bug Bryant Catherine's Accessorize Total --- ------ ----------- ----------- ----- Fiscal 2004 First Quarter: Stores at February 1, 2003.... 1,083 689 467 9 2,248 ----- --- --- -- ----- Stores opened................. 1 9 2 12 Stores converted.............. 4(1) 4 Stores closed................. (11) (3) (4) (1) ( 19) ----- --- --- -- ----- Net change in stores.......... (10) 10 (2) (1) (3) ----- --- --- -- ----- Stores at May 3, 2003......... 1,073 699 465 8 2,245 ===== === === == ===== Stores relocated during period 7 2 5 14 Stores remodeled during period 3 2 5 Fiscal 2004: Planned store openings........ 2 33-36 10-15 45-53 Planned store closings........ 25-30 15 15 8 63-68 Planned store relocations..... 20-25 20-25 15-20 55-70 - -------------------- (1) Fashion Bug stores closed prior to February 1, 2003 which were converted to Lane Bryant stores during the Fiscal 2004 First Quarter.
We have formed a trust called the Charming Shoppes Master Trust to which Spirit of America National Bank, our credit card bank, has transferred, through a special-purpose entity, its interest in credit card receivables created under our Fashion Bug proprietary credit card program. We, together with the trust, have entered into various agreements under which the trust can sell, on a revolving basis, interests in these receivables for a specified term. When the revolving period terminates, an amortization period begins during which principal payments are made to the parties with whom the trust has entered into the securitization agreement. We securitized $74.6 million of credit card receivables in the Fiscal 2004 First Quarter and had $277.1 million of securitized credit card receivables outstanding as of May 3, 2003. We held certificates and retained interests in our securitizations of $54.4 million as of May 3, 2003, which were generally subordinated in right of payment to certificates issued by the trust to third-party investors. Our obligation to repurchase receivables sold to the trust is limited to those receivables that, at the time of their transfer, fail to meet the trust's eligibility standards under normal representations and warranties. To date, our repurchases of receivables pursuant to this obligation have been insignificant. Charming Shoppes Receivables Corp. and Charming Shoppes Seller, Inc., our consolidated wholly-owned indirect subsidiaries, are separate special-purpose entities created for the securitization program. At May 3, 2003, Charming Shoppes Receivables Corp. held $44.1 million of Charming Shoppes Master Trust certificates and retained interests and Charming Shoppes Seller, Inc. held retained interests of $0.7 million (which are included in the $54.4 million of retained interests we held at May 3, 2003). 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. 21 We could be affected by certain events that would cause the trust to hold proceeds of receivables within the trust as additional enhancement, which proceeds would otherwise be available to be paid to us with respect to our subordinated interests. For example, if either we or the trust fail to meet certain financial performance standards, a credit enhancement condition would occur and the trust would be required to retain amounts otherwise payable to us. 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 should have sufficient notice to seek alternative forms of financing through other third-party providers. As of May 3, 2003, the trust was in compliance with all applicable financial performance standards. Amounts placed into enhancement accounts, if not required to be paid to the other certificate holders, will be available to us at the termination of the securitization series. 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 14. Asset Securitization" of our Annual Report on Form 10-K for the fiscal year ended February 1, 2003. We also have non-recourse agreements under which third parties provide accounts receivable proprietary credit card sales funding programs for both our Catherine's and Lane Bryant stores. These funding programs expire in January 2005 for Catherine's and in January 2006 for Lane Bryant. Under these agreements, the third parties reimburse us daily with respect to the proprietary credit card sales generated by the respective store's credit card accounts. Additional information regarding these agreements is included in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II, Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 14. Asset Securitization" of our Annual Report on Form 10-K for the fiscal year ended February 1, 2003. We have not paid any dividends since 1995, and we do not expect to declare or pay any dividends on our common stock in the foreseeable future. The payment of future dividends is within the discretion of our Board of Directors and will depend upon our future earnings, if any, our capital requirements, financial condition and other relevant factors. Additionally, our existing credit facility and one of our agreements with Limited Brands restrict the payment of dividends on our common stock. 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. 22 FINANCING As of May 3, 2003, we had a $300.0 million revolving credit facility, which provides for cash borrowings and enables us to issue up to $150.0 million of letters of credit for overseas purchases of merchandise and for other guarantees. As of May 3, 2003, there were no borrowings outstanding under the revolving credit facility. The availability of borrowings under our revolving credit facility is subject to limitations based on eligible inventory and the value of certain real property. The credit facility is secured by our general assets, except for certain assets related to our credit card securitization program, certain real properties and equipment subject to other mortgages, our interest in our joint venture with Monsoon plc, and the assets of our non-U.S. subsidiaries. The credit facility expires on August 16, 2004, and can be renewed for an additional year at our option. The interest rate on borrowings under the revolving credit facility ranges from Prime to Prime plus .75% per annum for Prime Rate Loans, and LIBOR plus 2.0% to LIBOR plus 2.75% per annum for Eurodollar Rate Loans, and is determined quarterly, based on our Leverage Ratio or excess availability, as defined in the credit facility. As of May 3, 2003, the interest rate on borrowings under the revolving credit line was 4.25%. The revolving credit facility includes limitations on sales and leasebacks, the incurrence of additional liens and debt, capital lease financing, and other limitations. The revolving credit facility also requires, among other things, that we not pay dividends on our common stock and, under certain circumstances, that we maintain an Adjusted Tangible Net Worth of $228.0 million (subject to adjustment). As of May 3, 2003, we were not in violation of any of the covenants included in the revolving credit facility. As of May 3, 2003, the excess availability under the revolving credit facility was $193.4 million. 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 February 1, 2003. As of May 3, 2003, under authority granted by our Board of Directors during prior fiscal years, we are authorized to repurchase approximately 5 million additional shares of our common stock. Our ability to exercise this authority currently is restricted by the terms of our revolving credit facility and an agreement with Limited Brands that we entered into in conjunction with our acquisition of Lane Bryant. Subject to obtaining consents, and as conditions may allow, we may acquire additional shares of our common stock. Such shares, if purchased, would be held as treasury shares. MARKET RISK We manage our Fashion Bug proprietary credit card program through various operating entities that we own. The primary activity of these entities is to service our proprietary credit card portfolio, the balances of which we sell under a credit card securitization program. Under the securitization program, we can be exposed to fluctuations in interest rates to the extent that the interest rates charged to our customers vary from the rates paid on certificates issued by the trust. Until November 2000, the credit card program billed finance charges based on a fixed rate. As of November 2000, finance charges on all accounts are billed using a floating rate index (the Prime lending rate), subject to a floor and limited by legal maximums. As of May 3, 2003, a portion of the certificates have fixed rates. To the extent that interest rates decline, we may be exposed to interest-rate risk on our fixed-rate certificates. The floating rate index on our floating-rate certificates is either one-month LIBOR or the commercial paper rate, depending on the issuance. Consequently, we have reduced our exposure to fluctuations in interest rates. However, we have exposure in the movement 23 of basis risk between the floating rate index on the certificates and the Prime rate. As of May 3, 2003, the floating-rate finance charge rate was below the contractual floor rate, thus exposing us to a portion of interest-rate risk. To the extent that short-term interest rates were to increase by one percentage point by the end of Fiscal 2004, an increase of approximately $700 thousand in selling, general, and administrative expenses would result. As of May 3, 2003, there were no borrowings outstanding under our revolving credit facility. To the extent that there are borrowings outstanding under our revolving credit facility, such borrowings would be exposed to variable interest rates. An increase in market interest rates would increase our interest expense and decrease our cash flows. A decrease in market interest rates would decrease our interest expense and increase our cash flows. We are not subject to material foreign exchange risk, as our foreign transactions are primarily U.S. Dollar-denominated and our foreign operations do not constitute a material part of our business. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS See "Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited); Note 8. Impact of Recent Accounting Pronouncements" above. Item 3. Quantitative and Qualitative Disclosures About Market Risk See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations; MARKET RISK," above. Item 4. Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate and in such a manner as to allow timely decisions regarding required disclosure. We have established a Disclosure Committee, which is made up of several key management employees and reports directly to the CEO and CFO, to centralize and enhance these controls and procedures and assist our management, including our CEO and CFO, in fulfilling their responsibilities for establishing and maintaining such controls and procedures and providing accurate, timely, and complete disclosure. Within the 90-day period prior to the filing of this report on Form 10-Q (the "Evaluation Date"), 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 have been no significant changes in our internal controls or in other factors (including any corrective actions with regard to significant deficiencies or material weaknesses in internal controls) that could significantly affect those controls subsequent to the date of their most recent evaluation. 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings On April 17, 2003, Donald Brown, Thomas Lamore, and Sau Yeung filed suit against 109 entities, including Lane Bryant, Inc., in the Los Angeles County Superior Court, California. The named plaintiffs purport to represent a class of applicants for employment against 109 defendants, alleging, among other things, violations of California state laws regarding the questioning of job applicants about certain illegal drug-related criminal convictions. We are conducting a preliminary investigation of the allegations, but we have not made any final judgments about the likelihood of class certification or liability of Lane Bryant. Other than this matter, 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 February 1, 2003. Other than ordinary routine litigation incidental to our business, there are no other pending legal proceedings to which we or any of our subsidiaries are a party, and there are no other proceedings that are expected to have a material adverse effect on our financial condition or results of operations. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following is a list of Exhibits filed as part of this Quarterly Report on Form 10-Q. Where so indicated, Exhibits that were previously filed are incorporated by reference. For Exhibits incorporated by reference, the location of the Exhibit in the previous filing is indicated in parenthesis. 3.1 Restated Articles of Incorporation, incorporated by reference to Form 10-K of the Registrant for the fiscal year ended January 29, 1994. (File No. 000-07258, Exhibit 3.1) 3.2 Bylaws, as Amended and Restated, incorporated by reference to Form 10-Q of the Registrant for the quarter ended July 31, 1999. (Exhibit 3.2) 10.1 Charming Shoppes, Inc. Supplemental Retirement Plan, effective February 1, 2003. 99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), executed by the Chief Executive Officer of the Company. 99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), executed by the Chief Financial Officer of the Company. (b) Reports on Form 8-K On March 18, 2003, we filed a Current Report on Form 8-K to report, under "Item 9. Regulation FD Disclosure," our early adoption of the provisions of Financial Accounting Standards Board Emerging Issues Task Force ("EITF") Issue 02-16, "Accounting by a Customer (Including A Reseller) for Cash Consideration Received from a Vendor," effective as of the beginning of our fiscal year ended February 1, 2003 ("Fiscal 2003"). The information provided under Item 9 included a discussion of the impact of adoption of EITF Issue 02-16 on our reported results for Fiscal 2003 and our condensed consolidated statements of operations for the first three quarters of Fiscal 2003 as originally reported and as restated for the adoption of EITF Issue 02-16. 25 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: June 6, 2003 /S/DORRIT J. BERN ----------------- Dorrit J. Bern Chairman of the Board President and Chief Executive Officer Date: June 6, 2003 /S/ERIC M. SPECTER ------------------ Eric M. Specter Executive Vice President Chief Financial Officer 26 Certification By Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Dorrit J. Bern, Principal Executive Officer of Charming Shoppes, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Charming Shoppes, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 6, 2003 /S/DORRIT J. BERN ----------------- Dorrit J. Bern Chairman of the Board President and Principal Executive Officer 27 Certification By Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Eric M. Specter, Principal Financial Officer of Charming Shoppes, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Charming Shoppes, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: June 6, 2003 /S/ERIC M. SPECTER ------------------ Eric M. Specter Executive Vice President Principal Financial Officer 28 Exhibit Index Exhibit No. Item - ---------- ---- 3.1 Restated Articles of Incorporation, incorporated by reference to Form 10-K of the Registrant for the fiscal year ended January 29, 1994. (File No. 000-07258, Exhibit 3.1) 3.2 Bylaws, as Amended and Restated, incorporated by reference to Form 10-Q of the Registrant for the quarter ended July 31, 1999. (Exhibit 3.2) 10.1 Charming Shoppes, Inc. Supplemental Retirement Plan, effective February 1, 2003. 99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), executed by the Chief Executive Officer of the Company. 99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), executed by the Chief Financial Officer of the Company. 29 EX-10 4 exh101.txt SUPPLEMENTAL RETIREMENT PLAN EXHIBIT 10.1 Supplemental Retirement Plan Charming Shoppes, Inc. Effective February 1, 2003 Contents Article 1. Establishment, Purpose, and Duration 1 Article 2. Definitions 1 Article 3. Participation 4 Article 4. Vesting 4 Article 5. Retirement Benefit Account 5 Article 6. Payment of the Retirement Benefit 6 Article 7. Administration 8 Article 8. Miscellaneous 10 Supplemental Retirement Plan Charming Shoppes, Inc. Article 1. Establishment, Purpose, and Duration 1.1. Establishment of the Plan. Charming Shoppes, Inc. (the "Company"), a corporation incorporated under the laws of the Commonwealth of Pennsylvania, hereby establishes the Charming Shoppes Supplemental Retirement Plan (the "Plan") effective February 3, 2003 ("the "Effective Date"). 1.2. Purpose of the Plan. The primary purpose of the Plan is to provide supplemental retirement benefits for a select group of management and highly compensated employees, within the meaning of Section 201 of ERISA, as a means to attract and retain key talent now and in the future. 1.3. Duration of the Plan. The Plan shall commence upon approval by the Board and shall remain in effect, subject to the right of the Board of Directors of the Company to terminate the Plan at any time pursuant to Section 7.5. Article 2. Definitions Whenever used in the Plan, the following terms shall have the meanings set forth below. Unless the context clearly indicates to the contrary, when the defined meaning is intended, the initial letter of the word is capitalized: (a) "Actuarial Equivalent" or "Actuarially Equivalent" means the equivalence in present value between two (2) forms and/or times of payment based upon a determination by an actuary chosen by the Committee, using sound actuarial assumptions at the time of such determination. (b) "Affiliate" means any firm, partnership, or corporation that directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the Company. "Affiliate" also includes any other organization similarly related to the Company that is designated as such by the Board. (c) "Annual Bonus" means an amount awarded under the Company's annual bonus plan and any special recognition bonus the Committee, in its sole discretion, declares to be an Annual Bonus. (d) "Beneficiary" means the person or persons selected by the Participant, on a form provided by the Committee, to receive benefits provided under the Plan that are payable after the Participant's death, or in the absence of such selection, the Participant's estate. (e) "Benefit Percentage" means the percentage, determined under Section 5.2, of Salary and Annual Bonus added each month to a Participant's Retirement Benefit Account. (f) "Board of Directors" or "Board" means the Board of Directors of the Company, and shall also mean any committee of the Board of Directors which has been delegated 1 authority to exercise the powers and authority of the Board of Directors with respect to the Plan. (g) "Cause" means the occurrence of any one or more of the following: (i) The willful and continued failure by the Eligible Executive to substantially perform his duties of employment (other than any such failure resulting from the Eligible Executive's Disability), after a written demand for substantial performance is delivered to the Eligible Executive that specifically identifies the manner in which the Committee believes that the Eligible Executive has not substantially performed his duties, and the Eligible Executive has failed to remedy the situation within a reasonable period of time; or (ii) The Eligible Executive's plea of nolo contendre to or conviction for committing an act of fraud, embezzlement, theft, or other act constituting a felony involving moral turpitude (with all rights of appeal having been exhausted); or (iii) The willful engaging by the Eligible Executive in gross misconduct materially and demonstrably injurious to the Company, monetarily or otherwise. However, no act or failure to act on the Eligible Executive's part shall be considered "willful" unless done, or omitted to be done, by the Eligible Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. (h) "Change in Control" means the occurrence of an event described under Section 2.10 ("Change of Control") of the Amended and restated Charming Shoppes Variable Deferred Compensation Plan for Executives. (i) "Committee" means the Compensation Committee of the Board of Directors, or other persons delegated pursuant to Section 7.1 to assist the Committee, that will administer the Plan in accordance with Section 7.1. (j) "Company" means Charming Shoppes, Inc., a corporation organized and existing under the laws of the Commonwealth of Pennsylvania or its successor or successors. (k) "Disability" means a mental or physical condition which qualifies a Participant for benefits under the Charming Shoppes Long-Term Disability Plan. (l) "Effective Date" means February 3, 2003. (m) "Eligible Executive" means an individual member of a group of select management or highly compensated employees of the Company or an Affiliate. (n) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor act thereto. (o) "Interest Rate" means the sum of (a) three percent (3%) and (b) the "10-Year Treasury Note Yield", published in the Wall Street Journal (or such other business publication 2 selected by the Committee), as of the close of the first business day of each calendar quarter for which earnings are determined under Section 5.4. (p) "Participant" means an Eligible Executive designated and selected by the Committee for participation in the Plan in accordance with the provisions of Article 3. (q) "Plan" means the Charming Shoppes Supplemental Retirement Plan, the plan set forth herein, as amended from time to time. (r) "Plan Service" means the product of one-twelfth (1/12) times the number of complete calendar months of Service a Participant has performed since the Effective Date. (For purposes of this calculation only, the period beginning February 3, 2003 and ending February 28, 2003 will be considered a complete calendar month of service.) (s) "Plan Year" means the consecutive twelve (12) month period commencing on January 1 and ending on December 31 except that the first Plan Year shall commence on the Effective Date. (t) "Retirement Benefit" means the amount determined under Article 6 payable to a Participant or Beneficiary following the Participant's termination of employment. (u) "Retirement Benefit Account" means the bookkeeping account established for the Participant as described under Article 5. (v) "Retirement Credits" means the amounts determined under Section 5.2 that are added to a Participant's Retirement Benefit Account. (w) "Salary" means all regular, basic wages before reduction for amounts deferred pursuant to any plan of the Company, payable in cash to a Participant for services to be rendered, exclusive of any Annual Bonus, other special fees, awards or incentive compensation, imputed income, allowances, or amounts designated by the Company as payment toward or reimbursement of expenses. (x) "Service" means the period of time during which an employment relationship exists between an employee and the Company, including any period during which the employee is on an approved leave of absence, whether paid or unpaid. "Service" also includes employment with an Affiliate if an employee transfers directly between the Company and the Affiliate. (y) "Vesting Percentage" means the percentage, determined under Article 4, of a Participant's Retirement Benefit Account that the Participant is entitled to receive following termination of employment with the Company or an Affiliate. (z) "Year of Service" or "Years of Service" means the "years of service" credited to a Participant under the Charming Shoppes, Inc. Employees' Retirement Savings Plan. 3 Article 3. Participation 3.1. Participation. The Committee, in its sole discretion, reserves the right to select Eligible Executives to participate in the Plan. 3.2. Notification. Eligible Executives who have been selected and approved for participation in the Plan shall be notified in writing of their selection at least thirty (30) calendar days prior to the first Plan Year of participation, or as soon as possible thereafter. The Participant shall not have any contractual rights under the Plan until notified. In the event that a Participant is deemed by the Committee to be ineligible to continue participation in the Plan for any reason, such Participant shall be notified in writing of such decision and such Participant shall become an inactive Participant, retaining all the rights relating to the Retirement Benefit previously accrued, which shall continue to vest as otherwise provided herein, as described under the Plan. In such event, the Committee or the Board, at its sole and absolute discretion, may cause the Company to immediately cash out a Participant's Retirement Benefit Account in a single lump-sum payment. Such payment shall be in full satisfaction of the Participant's rights under this Plan. Article 4. Vesting 4.1. Vesting Percentage. A Participant's Vesting Percentage shall be measured as follows:
- ------------------------------------------------------------ Actual Age + Years of Service Vesting Percentage - ------------------------------------------------------------ Under 55 0% 55 + 10 Years of Service 50% 56 + 10 Years of Service 60% 57 + 10 Years of Service 70% 58 + 10 Years of Service 80% 59 + 10 Years of Service 90% 60 and Over + 5 Years of Service 100% - ------------------------------------------------------------
4.2. Vesting Upon Special Events. Notwithstanding the Vesting Percentage shown in the table above, a Participant's Retirement Benefit Account will become fully vested, and the Participant's Vesting Percentage shall equal one hundred percent (100%), upon death, Disability, involuntary termination without Cause within 24 months following a Change in Control, or termination of the Plan. 4.3. Termination for Cause. Notwithstanding anything to the contrary hereunder, if a Participant is terminated for Cause, whether determined before or after the Participant's actual termination date, the Participant's Vesting Percentage shall be zero percent (0%), and the Participant shall not be entitled to any Retirement Benefit under this Plan. 4 Article 5. Retirement Benefit Account 5.1. Retirement Benefit Account. The Company shall establish and maintain an individual bookkeeping account (the "Retirement Benefit Account") in the name of each Participant. Each month a Participant's Retirement Benefit Account shall be increased by Retirement Credits and earnings calculated for such month as determined under Section 5.2 and Section 5.4, respectively, and shall be decreased by any Retirement Benefit payment(s) occurring in such month as required under Section 5.3. 5.2. Retirement Credits. At the end of each month during a Plan Year, if the Participant is actively employed by the Company, a Retirement Credit will be calculated. The Retirement Credit for any given month is equal to the Benefit Percentage determined as of the beginning of the Plan Year times the sum of: (a) any Salary and (b) any Annual Bonus paid during such month. The Benefit Percentage as of the beginning of the Plan Year is equal to the percentage reflected in the table below and modified, as appropriate, under Section 5.2(a) and Section 5.2(b).
- ---------------------------------------------------------- Sum of Age and Plan Service Benefit Percentage At At Beginning of Plan Year Beginning of Plan Year - ---------------------------------------------------------- Under 60 8% 60-69 12% Over 69 15% - ----------------------------------------------------------
For purposes of calculating the Benefit Percentage as of the beginning of a Plan Year, the Participant's age and Plan Service are measured in years and complete months. For example, a Participant who is fifty-seven (57) years and five (5) months old as of the beginning of a particular Plan Year and whose Plan Service is two (2) years and seven (7) months as of the beginning of that Plan Year would have a score of sixty (60) for purposes of calculating the Benefit Percentage for that Plan Year. (a) For those Participants hired before the Effective Date who have attained age fifty (50) before the Effective Date, the Benefit Percentages determined above will be increased by one percent (1%) for each full Year of Service performed prior to the Effective Date (up to a maximum increase of ten percent (10%)). (b) Furthermore, for those Participants hired before the Effective Date, the Benefit Percentage (as modified above, if applicable) will be increased by an additional ten percent (10%) for all Plan Years beginning after the Plan Year during which the Participant attains age 55. Therefore, the maximum Benefit Percentage used to calculate a Retirement Credit is thirty-five percent (35%). 5.3. Charges Against Account. At the end of each month, each Participant's Retirement Benefit Account shall be charged for all Retirement Benefit payments made during such month to the Participant or to the Participant's Beneficiary. 5 5.4. Earnings Calculation. At the end of each calendar month, the balance of the Participant's Retirement Benefit Account, determined after deducting any charges against the account but before adding any Retirement Credits for the month (the "end of month" balance), shall be increased with earnings. Such earnings shall equal one-twelfth (1/12) the product of the end of month balance times the Interest Rate. 5.5 Statements. The Committee shall furnish each Participant with a statement of the balance credited to the Participant's Retirement Benefit Account on at least an annual basis. Article 6. Payment of the Retirement Benefit 6.1. Retirement Benefit. On the first business day of April of the calendar year following the year the Participant terminates Service with the Company, the Participant (or the Participant's Beneficiary, if applicable) shall be paid the Retirement Benefit. The Retirement Benefit is a lump-sum amount equal to the product of: (a) the balance in the Participant's Retirement Benefit Account (immediately preceding such payment) times (b) the Participant's Vesting Percentage determined as of the date such termination of Service occurs. 6.2. Optional Form of Payment. In the case of a Participant whose Retirement Benefit Account balance is at least $50,000 at the time payment would be required under Section 6.1, the Participant may elect to have the Retirement Benefit Account distributed in one of the following methods, as elected by the Participant in writing made prior to the date of the Participant's termination of Service: (i) a lump sum; (ii) annual installments (to a maximum of 10); or (iii) by any other formula that is Actuarially Equivalent to the amount of the Retirement Benefit and is acceptable to the Committee, including a deferral in commencement of any such form of Retirement Benefit of up to five years. Annual installment payments shall be equal to (i) the value of such Retirement Benefit Account as of the last business day of the Plan Year preceding the date of payment, divided by (ii) the number of annual installment payments elected by the Participant in the election. The remaining annual installments shall be paid not later than January 31 of each succeeding Plan Year in an amount equal to (i) the value of such Retirement Benefit Account as of the last business day of the immediately preceding Plan Year divided by (ii) the number of installments remaining. In the case of any deferred payment, earnings shall continue to be added to the Participant's Retirement Benefit Account as required under Section 5.4 until the Retirement Benefit Account is fully distributed. A Participant may change the election regarding the manner of payment as described in this Section at any time prior to the Participant's termination of Service but no election shall be effective until the first day of the 13th month following delivery of the election to the Committee. 6.3. Payment to Beneficiary. In the event of a Participant's death prior to the payment of all benefits due the Participant under Sections 6.1 or 6.2, remaining Retirement Benefit payments otherwise due the Participant shall be paid to the Participant's Beneficiary. Each Participant may designate a Beneficiary or Beneficiaries (which Beneficiary may be an entity other than a natural person) to receive any payments which may be made following the Participant's death. Such designation may be changed or canceled at any time without the consent of any such Beneficiary. Any such designation, change, or cancellation must be made in a form approved by the Committee and shall not be effective until received by the Committee, or its designee. If no Beneficiary has been named, or the designated Beneficiary or Beneficiaries shall have predeceased the Participant, the 6 Beneficiary shall be the Participant's estate. If a Participant designates more than one Beneficiary, the interests of such Beneficiaries shall be paid in equal shares, unless the Participant has specifically designated otherwise. 6.4. Facility of Payment. If, in the Committee's judgment, any person to whom benefits are payable hereunder is under a legal disability or unable to care for his affairs because of illness, accident, or other incapacity, any payment due may be paid to his spouse, parent, brother, sister, or any other person as the Committee may determine (unless prior claim therefore shall have been made by a duly qualified guardian, committee, or other legal representative). Any such payment shall be a payment for the account of such person and shall, to the extent thereof, be a complete discharge of any liability under the Plan to such person. 7 Article 7. Administration 7.1. Committee. The Committee shall administer the Plan and it shall have the full power, discretion, and authority to interpret and administer the Plan in a manner that is consistent with the Plan's provisions. The Committee shall have the authority to delegate administrative duties to officers, employees, or directors of the Company. Each Participant by participating in the Plan, agrees to accept the terms of the Plan and the authority and discretion of the Committee as set forth in the Plan. 7.2. Powers and Duties of the Committee. The Committee shall carry out the duties assigned to it under the Plan and shall administer the Plan in accordance with its terms. The Committee shall have all powers as may be necessary to carry out its duties under the Plan, including, but not by way of limitation, the following: (a) to construe and interpret the provisions of the Plan; (b) to decide any disputes which may arise under the Plan; (c) to decide all questions that shall arise under the Plan, including questions as to the eligibility to become Participants, and the amount, manner, and time of payment of any benefits under the Plan; (d) to employ or appoint legal counsel, accountants, actuaries, consultants, or any person to assist in the administration of the Plan and any other agents it deems advisable. The Committee shall also have the power to allocate and delegate responsibilities. The Committee shall have the power and authority to direct the investment of a trust fund created pursuant to Section 8.3, and in connection with such power, may delegate in writing authority to manage assets of the trust fund to one or more investment managers. The Committee may adopt from time to time written investment policies and guidelines which shall govern the manner in which the assets of such trust fund are to be invested, which policies and guidelines shall be followed by the investment managers. 7.3. Amendment and Termination. The Plan may be amended, suspended, discontinued or terminated at any time by the Board; provided, however, that no such amendment, suspension, discontinuance, or termination shall reduce or in any manner adversely affect the rights of any Participant or Beneficiary with respect to benefits that are payable or would become payable under the terms of the Plan assuming there had not been such amendment, suspension, discontinuance or termination, and assuming a Retirement Credit of zero for all months following such amendment, suspension, discontinuance or termination. 7.4. Merger or Consolidation of Plan. In the event of any merger or consolidation of the Plan with another retirement or pension plan, provision shall be made so that each Participant in the Plan as of the date of such merger or consolidation will receive a benefit after the merger or consolidation which is Actuarially Equivalent to or greater than the benefit he would have been entitled to receive immediately prior to the merger or consolidation if the Plan had then terminated. 7.5. Payment Upon Plan Termination. In the event of termination of the Plan pursuant to Section 7.3, the vested amount credited to the Retirement Benefit Account of each Participant shall be paid to the Participant within 60 days thereafter. 7.6. Indemnification. The Company shall indemnify each member of the Committee, and the directors, officers, and employees of the Company involved in the operation and administration of the Plan against any and all claims, losses, damages, expenses, and liabilities arising from any action or failure to act, except when the same is determined by the Board of Directors to be due to gross negligence or willful misconduct of such member. 8 7.7. Claims Procedure. A Participant or Beneficiary shall have the right to file a claim, inquire if he has any right to benefits and the amounts thereof, or appeal the denial of a claim. (a) Initial Claim. A claim will be considered as having been filed when a written communication is made by the Participant, Beneficiary, or his or her authorized representative to the attention of the Committee (the "claimant"). The Committee shall notify the claimant in writing within ninety (90) days after receipt of the claim if the claim is wholly or partially denied. If an extension of time beyond the initial ninety (90) day period for processing the claim is required, written notice of the extension shall be provided to the claimant prior to the expiration of the initial ninety (90) day period. In no event shall the period, as extended, exceed one hundred eighty (180) days. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render a final decision. (b) Content of Denial. Notice of a wholly or partially denied claim for benefits will be in writing, in a manner calculated to be understood by the claimant, and shall include: (i) The reason or reasons for denial; (ii) Specific reference to the Plan provisions on which the denial is based; (iii) A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (iv) An explanation of the Plan's claim appeal procedure, including a statement of the claimant's right to bring a civil action under Section 502(a) of ERISA following an adverse benefit determination. (c) Right to Appeal. If a claim is wholly or partially denied, the claimant may file a written appeal requesting the Committee to conduct a full and fair review of his or her claim. For purposes of this review, the Committee may appoint an individual or committee (other than the individual or committee that heard the initial claim) to act on its behalf. An appeal must be made in writing no more than sixty (60) days after the claimant receives written notice of the denial. The claimant may submit written comments, documents, records, and other information relating to the claim for benefits, and may access and copy (free of charge) all documents, records, and other information relevant to the claimant's claim. The Committee shall take into account all comments, documents, records, and other information submitted by the claimant in reviewing the claim, without regard to whether such information was submitted in the initial determination. 9 (d) Notice of Appeal Determination. The decision of the Committee regarding the appeal shall be given to the claimant in writing no later than sixty (60) days following receipt of the appeal. However, if the Committee, in its sole discretion, grants a hearing, or there are special circumstances involved, the decision will be given no later than one hundred twenty (120) days after receiving the appeal. If such an extension of time for review is required, written notice of the extension shall be furnished to the claimant prior to the commencement of the extension. In the case of an adverse benefit determination, the Committee's decision shall include: (i) The reason or reasons for denial; (ii) Specific reference to the Plan provisions on which the denial is based; (iii) A statement that the claimant is entitled to access and copy (free of charge) all documents, records, and other information relevant to the claimant's claim for benefits; and (iv) A statement of the claimant's right to bring a civil action under Section 502(a) of ERISA following an adverse benefit determination. (e) Exhaustion of Administrative Remedy. Notwithstanding any provision in the Plan to the contrary, no employee or Participant may bring any legal or administrative claim or cause of action against the Plan, the Committee, or the Company in court or any other venue until the employee or Participant has exhausted its administrative remedies under this Section 7.7. (f) Suspension of Payment. If the Committee is in doubt concerning the entitlement of any person to any payment claimed under the Plan, the Company may suspend payment until satisfied as to the person's entitlement to the payment. Notwithstanding the foregoing, no Participant or Beneficiary may bring a claim for Plan benefits to arbitration, court, or through any other legal action or process until the administrative claims process of this Section 7.7 has been exhausted. Article 8. Miscellaneous 8.1. Unfunded Plan. This Plan is intended to be an unfunded plan maintained primarily to provide supplemental pension benefits for "a select group of management or highly compensated employees" within the meaning of Sections 201, 301, and 401 of ERISA, and therefore is further intended to be exempt from the provisions of Parts 2, 3, and 4 of Title I of ERISA. Accordingly, the Committee may terminate the Plan, subject to Article 7 herein, for any or all Participants, in order to achieve and maintain this intended result. 8.2. Unsecured General Creditor. Participants and their Beneficiaries, heirs, successors, and assigns shall have no secured legal or equitable rights, interest, or claims in any property or assets of the Company or its Affiliates, nor shall they be Beneficiaries of, or have any rights, claims, or interests in any life insurance policies, annuity contracts, or the proceeds therefrom owned or which may be acquired by the Company or its Affiliates. Except as provided under Section 8.3, such policies, annuity contracts, or other assets of the Company or its Affiliates shall not be held under 10 any trust for the benefit of Participants, their beneficiaries, heirs, successors, or assigns, or held in any way as collateral security for the fulfilling of the obligations of the Company under this Plan. Any and all of the Company's assets and policies, and those of its Affiliates, shall be, and remain, the general, unpledged, unrestricted assets of the Company or of its Affiliates as the case may be. The Company's obligation under this Plan shall be that of an unfunded and unsecured promise to pay money in the future. 8.3. Authorization for Trust. The Company may, but shall not be required to, establish one (1) or more trusts, with such trustee as the Committee may approve, for the purpose of providing for the payment of benefits under the Plan. Such trust or trusts may be irrevocable, but the assets thereof shall be subject to the claims of the Company's creditors. To the extent any amounts payable under the Plan are actually paid from any such trust, the Company shall have no further obligation with respect thereto, but to the extent not so paid, such amounts shall remain the obligation of, and shall be paid by, the Company. 8.4. Costs of the Plan. All costs of implementing and administering the Plan, and all costs incurred in providing the benefits described herein, shall be borne by the Company. 8.5. Tax Withholding. The Company shall have the right to require Participants to remit to the Company an amount sufficient to satisfy federal, state, and local tax withholding requirements, or to deduct from all payments made pursuant to the Plan amounts sufficient to satisfy such withholding requirements. 8.6. Nontransferability. Except as provided under a court-approved divorce agreement, the interest of an individual or an entity to a benefit under the Plan shall not be anticipated, alienated, sold, transferred, assigned, pledged, encumbered, or subjected to any charge or legal process. No interest or right to receive a benefit may be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such individual or entity, including claims for alimony, support, separate maintenance, and claims in bankruptcy proceedings. 8.7. Successors. All obligations of the Company under the Plan shall be binding upon any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. 8.8. Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 8.9. Applicable Law. To the extent not preempted by federal law, the Plan shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to principles of conflicts of laws. 11 8.10. No Enlargement of Rights. The Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute an employment contract between the Company and any Participant, or to be consideration for, or an inducement to, or condition of, the employment of any Participant. Nothing contained in the Plan shall be deemed to give any Participant employment rights with the Company or to interfere with the right of the Company to discharge any Participant at any time regardless of the effect such discharge shall have upon him as a Participant of the Plan. No Participant shall have any right to a Retirement Benefit, except to the extent provided in the Plan. 8.11. Gender and Number. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates to the contrary. The words "hereof," "herein," "hereunder," and other similar compounds of the word "here" shall mean and refer to the entire Plan, not to any particular provision or Section. Section headings are included for convenience of reference and are not intended to add to, or subtract from, the terms of the Plan. 8.12. Notice of Address. Each person entitled to benefits under the Plan must file with the Committee, in writing, his post office address and each change of post office address. Any communication, statement, or notice addressed to such a person at his latest post office address as filed with the Committee will be binding upon such person for all purposes of the Plan, and neither the trustee nor the Company shall be obliged to search for or ascertain the whereabouts of any such person. In addition, any notice or filing required or permitted to be given to the Committee under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the Company's human resources department, or to such other entity as the Committee may designate from time to time. Such notice shall be deemed given as to the date of delivery, or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 8.13. Headings and Captions. Headings and captions are inserted in this Plan for convenience of reference only and are to be ignored in the construction of the provisions of the Plan. 12 EX-99 5 exh991.txt CEO SECTION 906 CERTIFICATION EXHIBIT 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 I, Dorrit J. Bern, the Chief Executive Officer of Charming Shoppes, Inc. (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) the Form 10-Q of the Company for the quarterly period ended May 3, 2003 (the "Form 10-Q"), fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: June 6, 2003 /S/ DORRIT J. BERN ---------------------- Dorrit J. Bern Chairman of the Board President and Chief Executive Officer [A signed original of this written statement required by Section 906 has been provided to Charming Shoppes, Inc. and will be retained by Charming Shoppes, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.] EX-99 6 exh992.txt CFO SECTION 906 CERTIFICATION EXHIBIT 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 I, Eric M. Specter, the Chief Financial Officer of Charming Shoppes, Inc. (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) the Form 10-Q of the Company for the quarterly period ended May 3, 2003 (the "Form 10-Q"), fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: June 6, 2003 /S/ ERIC M. SPECTER ------------------------ Eric M. Specter Executive Vice President Chief Financial Officer [A signed original of this written statement required by Section 906 has been provided to Charming Shoppes, Inc. and will be retained by Charming Shoppes, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.] -----END PRIVACY-ENHANCED MESSAGE-----