-----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, ELLsEl0finA2f1rJxcQYfNCMkpljLz+xhwZcCASpUWvmrrolrKlwY0uI798Nb1aK ztWXK9EHuLGJfyjwJv19kw== 0000019353-05-000132.txt : 20050818 0000019353-05-000132.hdr.sgml : 20050818 20050818145208 ACCESSION NUMBER: 0000019353-05-000132 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050602 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20050818 DATE AS OF CHANGE: 20050818 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: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-07258 FILM NUMBER: 051035739 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 8-K/A 1 form8ka.txt AMENDED FORM 8-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): June 2, 2005 Charming Shoppes, Inc. ---------------------- (Exact Name of Registrant as Specified in its Charter) Pennsylvania ------------ (State or Other Jurisdiction of Incorporation) 000-07258 23-1721355 --------- ---------- (Commission File Number) (I.R.S. Employer Identification No.) 450 Winks Lane, Bensalem, Pennsylvania 19020 -------------------------------------- ----- (Address of Principal Executive Offices) Zip Code) (215) 245-9100 -------------- (Registrant's Telephone Number, Including Area Code) Not Applicable -------------- (Former Name or Former Address, if Changed Since Last Report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) ================================================================================ This Report on Form 8-K/A amends and supplements the report on Form 8-K dated June 2, 2005 and filed by Charming Shoppes, Inc. (the "Company" or the "Registrant") on June 8, 2005 (the "Report on Form 8-K"). The Report on Form 8-K was filed to report the acquisition by Chestnut Acquisition Sub, Inc., a subsidiary of the Registrant, of all of the outstanding capital stock of Crosstown Traders, Inc. ("Crosstown Traders") held by affiliates of JPMorgan Partners, the private equity arm of J.P. Morgan Chase & Co., and the other stockholders and optionholders of Crosstown Traders. The disclosures required by Items 1.01, 2.01, and 2.03 were included in the Report on Form 8-K. In accordance with the requirements of Items 9.01(a)(4) and 9.01(b)(2) of the Report on Form 8-K, this Report on Form 8-K/A is being filed within 71 days after June 8, 2005 (the date that the initial Report on Form 8-K was required to be filed), to amend and supplement the Report on Form 8-K to include the financial statements and pro forma financial information required by Item 9.01. Item 9.01. Financial Statements and Exhibits. Item 9.01(a) is hereby amended and supplemented as follows: a) Financial Statements of Businesses Acquired. The Consolidated Financial Statements of Crosstown Traders, Inc. and Subsidiaries for the fiscal years ended January 29, 2005 and January 31, 2004, together with the Notes thereto, are incorporated herein by reference to Exhibit 99.1 of this Report on Form 8-K/A. The Consolidated Financial Statements of Crosstown Traders, Inc. and Subsidiaries (Unaudited) for the thirteen-week periods ended April 30, 2005 and May 1, 2004, together with the Notes thereto, are incorporated herein by reference to Exhibit 99.2 of this Report on Form 8-K/A. Item 9.01(b) is hereby amended and supplemented as follows: (b) Pro Forma Financial Information. The unaudited pro forma financial information included herein gives effect to the Company's acquisition of Crosstown Traders, Inc. The Unaudited Pro Forma Condensed Consolidated Statements of Operations are based on historical data as reported by the separate companies, and reflect adjustments prepared as if the acquisition had occurred on February 1, 2004. The Unaudited Pro Forma Condensed Consolidated Balance Sheet is based on historical data as reported by the separate companies, and reflects adjustments prepared as if the acquisition had occurred on April 30, 2005. As used herein, the terms "the Company," "we," and "our" refer to Charming Shoppes, Inc., and, where applicable, its consolidated subsidiaries. The Unaudited Pro Forma Condensed Consolidated Financial Statements contained herein (the "Statements") include adjustments having a continuing impact on the consolidated company as a result of using the purchase method of accounting for the acquisition. The pro forma adjustments are described in the notes accompanying the Statements (the "Notes"). 1 The Statements have been prepared based on available information, using assumptions that our management believes are reasonable. The Statements do not purport to represent the actual financial position or results of operations that would have occurred if the acquisition had taken place on the dates specified. The Statements are not necessarily indicative of the results of operations that may be achieved in the future. The Statements do not reflect any adjustments for the effect of non-recurring items or operating synergies that we may realize as a result of the acquisition. The Statements include certain reclassifications to conform the historical financial information of Crosstown Traders to our presentation. The assumptions used and adjustments made in preparing the Statements are described in the Notes, which should be read in conjunction with the Statements. The Statements and related Notes contained herein should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended January 29, 2005, the unaudited condensed consolidated financial statements and related notes included in our Quarterly Report on Form 10-Q for the quarter ended April 30, 2005, and the consolidated financial statements and related notes of Crosstown Traders filed as exhibits to this Report on Form 8-K/A and incorporated by reference in Item 9.01(a). The unaudited pro forma adjustments made in preparing the Statements are based on preliminary purchase price allocations and on certain management judgments. These preliminary allocations are based on an analysis of the estimated fair values of assets acquired and liabilities assumed, including identifiable tangible and intangible assets, deferred tax assets and liabilities, and estimates of the useful lives of tangible and amortizable intangible assets. The final purchase price allocations will be completed after we obtain third-party appraisals, review all available data, and complete our own internal assessments. Any additional adjustments resulting from finalization of the purchase price allocations for Crosstown will affect the amount assigned to goodwill. 2 CHARMING SHOPPES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET April 30, 2005
As Reported --------------------- Pro Forma Charming Crosstown Pro Forma Combined (In thousands) Shoppes Traders* Adjustments Notes Company ------- -------- ----------- ----- ------- ASSETS Current assets Cash and cash equivalents ... $ 254,801 $ 5,099 $ (264,451) 1 110,000 1 (1,150) 2 $ 104,299 Available-for-sale securities 84,639 0 84,639 Accounts receivable, net .... 0 59,371 2,200 1 61,571 Merchandise inventories ..... 347,794 73,679 421,473 Deferred advertising ........ 0 14,062 14,062 Deferred taxes .............. 15,500 (932) 9,781 1 24,349 Prepayments and other ....... 91,671 2,554 94,225 ---------- ---------- ---------- ---------- Total current assets ........ 794,405 153,833 (143,620) 804,618 ---------- ---------- ---------- ---------- Net property, equipment, and leasehold improvements . 318,508 4,952 15,000 1 338,460 ---------- ---------- ---------- ---------- Tradenames and other intangible assets ...... 169,653 0 70,000 1 20,000 1 259,653 Goodwill .................... 66,666 4,149 80,469 1 (4,149) 1 147,135 Available-for-sale securities 240 0 240 Other assets ................ 35,987 3,768 1,150 2 (996) 1 39,909 ---------- ---------- ---------- ---------- Total assets ................ $1,385,459 $ 166,702 $ 37,854 $1,590,015 ========== ========== ========== ========== See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet * Amounts include certain reclassifications to conform the historical financial information of Crosstown Traders to the Company's presentation.
3 CHARMING SHOPPES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (Continued) April 30, 2005
As Reported --------------------- Pro Forma Charming Crosstown Pro Forma Combined (In thousands) Shoppes Traders* Adjustments Notes Company ------- -------- ----------- ----- ------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings........ $ 110,000 1 $ 110,000 Accounts payable............. $ 171,781 $ 9,735 181,516 Accrued expenses............. 156,571 40,268 5,962 1 (680) 1 202,121 Income taxes payable......... 3,942 0 3,942 Current portion -- long-term debt.................... 20,822 0 20,822 ---------- ---------- ---------- ---------- Total current liabilities.... 353,116 50,003 115,282 518,401 ---------- ---------- ---------- ---------- Deferred taxes and other non-current liabilities. 106,040 421 38,850 1 145,311 Long-term debt............... 199,862 42,897 (42,897) 1 199,862 Stockholders' equity Common stock................. 13,208 1 (1) 1 13,208 Additional paid-in capital... 258,367 33,436 (33,436) 1 258,367 Treasury stock at cost....... (84,136) 0 (84,136) Deferred employee compensation............ (15,639) 0 (15,639) Retained earnings............ 554,641 39,944 (39,944) 1 554,641 ---------- ---------- ---------- ---------- Total stockholders' equity... 726,441 73,381 (73,381) 726,441 ---------- ---------- ---------- ---------- Total liabilities and stockholders' equity.... $1,385,459 $ 166,702 $ 37,854 $1,590,015 ========== ========== ========== ========== See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet * Amounts include certain reclassifications to conform the historical financial information of Crosstown Traders to the Company's presentation.
4 CHARMING SHOPPES, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 2005 1. The Pro Forma Adjustments to the Unaudited Pro Forma Condensed Consolidated Balance Sheet reflect the allocation of the purchase price to the assets acquired and liabilities assumed, based on a preliminary estimate of their respective fair values at the date of acquisition. The preliminary pro forma allocation of the purchase price of Crosstown Traders is as follows (in thousands): Cash paid .............................................. $ 218,015 Payment of assumed debt ................................ 42,897 Fees and other direct costs of the acquisition ......... 3,539 --------- Total purchase price ................................... $ 264,451 ========= Net assets of Crosstown Traders at April 30, 2005 ...... $ 73,381 Estimated fair market value of identifiable intangible assets acquired: Trademarks, tradenames, and internet domain names .. 70,000 Customer relationships ............................. 20,000 Payment of assumed debt ................................ 42,897 Estimated fair value adjustment for accounts receivable 2,200 Estimated fair value adjustment for other assets ....... (996) Estimated fair value adjustment for accrued expenses ... 680 Estimated fair value adjustment for property, equipment, and leasehold improvements ......................... 15,000 Write-off of pre-acquisition goodwill .................. (4,149) Adjustment to deferred taxes ........................... (29,069) Estimated expenses for lease and contract cancellations, severance, and certain other exit activities ....... (5,962) --------- Estimated fair value of identifiable net assets acquired $ 183,982 --------- Excess of cost of acquisition over estimated fair value of net assets acquired ............................. $ 80,469 =========
The cash paid for the acquisition was funded with approximately $108,015,000 of our existing cash and cash equivalents and $110,000,000 of borrowings obtained under our then existing $300,000,000 revolving credit facility. Subsequent to the acquisition, we securitized Crosstown Traders' apparel-related accounts receivable of approximately $54 million under a new conduit funding facility established specifically for funding the Crosstown receivables. The majority of the proceeds from the securitization were used to retire Crosstown's debt. 5 CHARMING SHOPPES, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 2005 (Continued) 2. Subsequent to the acquisition of Crosstown Traders, on July 28, 2005, we amended our existing $300,000,000 revolving credit facility, which was due to expire on August 15, 2008. The amended facility provides for a revolving credit facility with a maximum availability of $375,000,000, subject to certain limitations as defined in the facility agreement, and provides that up to $300,000,000 of the facility may be used for letters of credit. The amended facility expires on July 28, 2010. In connection with the amendment, we incurred approximately $1,150,000 of expenses that were capitalized and are being amortized on a straight-line basis over the life of the amended facility. 6 CHARMING SHOPPES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Thirteen Weeks Ended April 30, 2005
As Reported --------------------- Pro Forma Charming Crosstown Pro Forma Combined (In thousands) Shoppes Traders* Adjustments Notes Company ------- -------- ----------- ----- ------- Net sales.................... $603,255 $106,487 $709,742 -------- -------- -------- Cost of goods sold, buying, and occupancy expenses.. 403,824 80,616 $ 750 (A) 485,190 Selling, general, and administrative expenses. 150,938 23,190 1,250 (A) 175,378 -------- -------- ------- -------- Total operating expenses..... 554,762 103,806 2,000 660,568 -------- -------- ------- -------- Income from operations....... 48,493 2,681 (2,000) 49,174 Other income (expense)....... 2,815 (99) (621) (B) 2,095 Interest expense............. 3,925 1,474 1,243 (C) (1,040) (C) 5,602 --------- -------- ------- -------- Income before income taxes............ 47,383 1,108 (2,824) 45,667 Income tax provision......... 17,366 430 (1,072) (D) 16,724 -------- -------- ------- -------- Net income................... $ 30,017 $ 678 $(1,752) $ 28,943 ======== ======== ======= ======== Basic income per share....... $0.25 $0.24 ===== ===== Weighted average shares outstanding............. 118,984 118,984 Diluted income per share..... $0.23 $0.22 ===== ===== Weighted average shares and equivalents outstanding. 135,743 135,743 See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations * Amounts include certain reclassifications to conform the historical financial information of Crosstown Traders to the Company's presentation.
7 CHARMING SHOPPES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Year Ended January 29, 2005
As Reported --------------------- Pro Forma Charming Crosstown Pro Forma Combined (In thousands) Shoppes Traders* Adjustments Notes Company ------- -------- ----------- ----- ------- Net sales..................... $2,332,334 $444,805 $2,777,139 ---------- -------- ---------- Cost of goods sold, buying, and occupancy expenses.. 1,640,248 323,355 $ 3,000 (A) 1,966,603 Selling, general, and administrative expenses. 577,301 95,691 5,000 (A) 677,992 Expenses related to cost reduction plan.......... 605 605 ---------- -------- --------- ---------- Total operating expenses..... 2,218,154 419,046 8,000 2,645,200 ---------- -------- --------- ---------- Income from operations....... 114,180 25,759 (8,000) 131,939 Other income................. 3,098 182 (1,532) (B) 1,748 Interest expense............. 15,610 5,687 3,684 (C) (3,192) (C) 21,789 ---------- -------- --------- ---------- Income before income taxes............ 101,668 20,254 (10,024) 111,898 Income tax provision......... 37,142 8,749 (4,643) (D) 41,248 ---------- -------- --------- ---------- Net income................... $ 64,526 $ 11,505 $ (5,381) $ 70,650 ========== ======== ========= ========== Basic income per share....... $0.56 $0.61 ===== ===== Weighted average shares outstanding............. 116,196 116,196 Diluted income per share .... $0.52 $0.56 ===== ===== Weighted average shares and equivalents outstanding. 133,174 133,174 See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations * Amounts include certain reclassifications to conform the historical financial information of Crosstown Traders to the Company's presentation.
8 CHARMING SHOPPES, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JANUARY 29, 2005 AND THE THIRTEEN WEEKS ENDED APRIL 30, 2005 A. The fair value adjustment for property, equipment, and leasehold improvements results in additional depreciation expense, which is included in cost of goods sold, buying, and occupancy expenses. The recognition of the fair value of Crosstown's customer relationships results in additional amortization expense, which is included in selling, general, and administrative expenses. The pro forma effects on depreciation and amortization expense are as follows:
Thirteen Year Ended Weeks Ended Fair Value Useful January 29, April 30, (Dollars in thousands) Adjustment Life 2005 2005 ---------- ---- ---- ---- Property, equipment, and leasehold improvements.. $15,000 5 yrs. $3,000 $ 750 Customer relationships...... 20,000 4 yrs. 5,000 1,250
B. The use of our existing cash and cash equivalents to fund the acquisition results in a reduction of funds available for investment in cash equivalents and/or available-for-sale securities. As a result, we will earn less interest income. The pro forma effect of the reduction in interest income is as follows:
Thirteen Year Ended Weeks Ended Interest January 29, April 30, (Dollars in thousands) Principal Rate 2005 2005 --------- ---- ---- ---- Cash and cash equivalents used to fund the acquisition $108,015 1.4% $1,532 $ -- 2.3% -- 621
The interest rate used is an estimated average rate of return on securities that would have been available for investment during the respective periods. 9 CHARMING SHOPPES, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JANUARY 29, 2005 AND THE THIRTEEN WEEKS ENDED APRIL 30, 2005 (Continued) C. As a result of the revolving loan used to finance a portion of the acquisition and the expenses incurred in connection with the amendment of the revolving credit facility, we will incur additional interest expense and amortization of deferred debt acquisition costs. In addition, as a result of the repayment of Crosstown's debt as of the date of acquisition, Crosstown will not incur interest expense on its outstanding term loans and will incur interest expense on revolving working capital borrowings at a reduced rate subsequent to the date of acquisition. The pro forma effect of the additional interest expense on the revolving loan, amortization of deferred debt acquisition costs, and the reduction of Crosstown's interest expense is as follows:
Interest Thirteen Rate or Year Ended Weeks Ended Amortization January 29, April 30, (Dollars in thousands) Principal Period 2005 2005 --------- ------ ---- ---- Revolving loan................ $110,000 3.1% $ 3,454 $ -- 4.3% -- 1,243 Amortization of deferred debt acquisition costs......... 1,150 5 yrs. 230 58 Reduction of Crosstown's interest expense.......... (3,192) (1,040)
The interest rate for the revolving loan used in the above table represents the interest rate that was in effect for the loan during the respective periods. Amortization of deferred debt acquisition costs is included in interest expense on the Company's statement of operations. D. The income tax provision has been adjusted for the estimated tax effect of the pro forma adjustments to income before income taxes for the respective periods. Weighted average shares and equivalents outstanding used to calculate diluted income per share include the effect of assumed conversion of our convertible debt, using the "if-converted" method. After-tax interest expense related to the convertible debt of $4,539,000 for the year ended January 29, 2005 and $1,128,000 for the thirteen weeks ended April 30, 2005 has been added back to net income for the respective periods for the purpose of calculating diluted income per share. 10 Item 901(c) is hereby amended and supplemented as follows: (c) Exhibits. 23 Consent of Deloitte & Touche LLP. 99.1 Consolidated Financial Statements of Crosstown Traders, Inc. and Subsidiaries for the fiscal years ended January 29, 2005 and January 31, 2004. 99.2 Consolidated Financial Statements of Crosstown Traders, Inc. and Subsidiaries (Unaudited) for the thirteen-week periods ended April 30, 2005 and May 1, 2004. 11 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 hereunto duly authorized. CHARMING SHOPPES, INC. (Registrant) Dated: August 17, 2005 /S/ ERIC M. SPECTER ------------------- Eric M. Specter Executive Vice President Chief Financial Officer 12 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 23 Consent of Deloitte & Touche LLP. 99.1 Consolidated Financial Statements of Crosstown Traders, Inc. and Subsidiaries for the fiscal years ended January 29, 2005 and January 31, 2004. 99.2 Consolidated Financial Statements of Crosstown Traders, Inc. and Subsidiaries (Unaudited) for the thirteen-week periods ended April 30, 2005 and May 1, 2004. 13 EX-23 2 exh23a.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement Nos. 333-119638, 333-111004, 333-109220, 333-70862, 333-45750, 333-88899, 333-43117, 333-22323, 033-56145, and 033-56147 on Form S-8 and Registration Statement Nos. 333-91966 and 333-98741 on Form S-3 of Charming Shoppes, Inc. of our report dated April 29, 2005, relating to the consolidated financial statements of Crosstown Traders, Inc. for the years ended January 29, 2005 and January 31, 2004, appearing in this Current Report on Form 8-K/A of Charming Shoppes, Inc. dated June 2, 2005. /S/DELOITTE & TOUCHE LLP Phoenix, Arizona August 15, 2005 EX-99 3 jan05stmts.txt EXHIBIT 99.1 EXHIBIT 99.1 Crosstown Traders, Inc. and Subsidiaries Consolidated Financial Statements for the Years Ended January 29, 2005 and January 31, 2004 and Independent Auditors' Report Deloitte & Touche LLP Suite 1200 2901 N. Central Avenue Phoenix, AZ 85012-2799 USA Tel: +1 602 234 5100 Fax: +1 602 234 5186 www.deloitte.com INDEPENDENT AUDITORS' REPORT Board of Directors Crosstown Traders, Inc. Tucson, Arizona We have audited the accompanying consolidated balance sheets of Crosstown Traders, Inc. and subsidiaries (the "Company") as of January 29, 2005 and January 31, 2004, and the related consolidated statements of income, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Crosstown Traders, Inc. and subsidiaries as of January 29, 2005 and January 31, 2004, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /S/DELOITTE & TOUCHE LLP April 29, 2005 CROSSTOWN TRADERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JANUARY 29, 2005 AND JANUARY 31, 2004 (In thousands)
ASSETS 2005 2004 CURRENT ASSETS: Cash and cash equivalents .............................. $ 2,191 $ 2,327 Accounts receivable-net ................................ 91,975 95,416 Inventories-net ........................................ 80,195 78,169 Deferred advertising ................................... 12,886 14,927 Supplies and prepaid expenses .......................... 2,835 2,828 Deferred income taxes .................................. 98 -------- -------- Total current assets .......................... 190,082 193,765 PROPERTY AND EQUIPMENT-Net ............................... 4,600 3,427 DEFERRED INCOME TAXES .................................... 1,520 2,919 DEFERRED FINANCING COSTS--Net of accumulated amortization of $1,225 (2005) and $681 (2004) ....................... 641 1,185 OTHER ASSETS ............................................. 3,116 2,955 GOODWILL ................................................. 4,149 -------- -------- TOTAL .................................................... $204,108 $204,251 ======== ======== (Continued)
-2- CROSSTOWN TRADERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JANUARY 29, 2005 AND JANUARY 31, 2004 (In thousands except share data)
LIABILITIES AND SHAREHOLDERS' EQUITY 2005 2004 CURRENT LIABILITIES: Accounts payable and accrued liabilities ............... $ 39,979 $ 32,571 Reserve for sales returns .............................. 6,047 4,772 Income taxes payable ................................... 4,271 1,918 Deferred income taxes .................................. 932 -------- -------- Total current liabilities ..................... 51,229 39,261 LONG-TERM DEBT ........................................... 78,025 102,422 OTHER LIABILITIES ........................................ 2,151 1,830 -------- -------- Total liabilities ............................. 131,405 143,513 -------- -------- COMMITMENTS AND CONTINGENCIES (Note 14) SHAREHOLDERS' EQUITY: Common stock, Class A, $.001 par value- 1,027,500 shares authorized; 885,179 (2005) and 874,602 (2004) shares issued and outstanding; liquidation value $43,015,000 (2005) and $40,469,000 (2004) ............................... 1 1 Common stock, Class B, $.001 par value-1,050,000 shares authorized; 22,500 shares issued and outstanding Additional paid-in capital ............................. 33,436 32,976 Retained earnings ...................................... 39,266 27,761 -------- -------- Total shareholders' equity .................... 72,703 60,738 -------- -------- TOTAL .................................................... $204,108 $204,251 ======== ======== See notes to consolidated financial statements. (Concluded)
-3- CROSSTOWN TRADERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JANUARY 29, 2005 AND JANUARY 31, 2004 (In thousands)
2005 2004 REVENUES: Net sales .............................................. $442,226 $421,962 Other revenue .......................................... 16,701 12,691 -------- -------- Total revenues ................................ 458,927 434,653 COST OF GOODS SOLD ....................................... 196,766 189,128 -------- -------- GROSS PROFIT ............................................. 262,161 245,525 -------- -------- OPERATING EXPENSES: Advertising and promotional expenses ................... 123,072 118,280 Selling, general and administrative expenses............ 113,023 107,756 -------- -------- Total operating expenses ...................... 236,095 226,036 -------- -------- OPERATING INCOME ......................................... 26,066 19,489 INTEREST EXPENSE ......................................... 5,812 6,204 -------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES ................. 20,254 13,285 PROVISION FOR INCOME TAXES ............................... 8,749 4,765 -------- -------- NET INCOME ............................................... $ 11,505 $ 8,520 ======== ======== See notes to consolidated financial statements.
-4- CROSSTOWN TRADERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED JANUARY 29, 2005 AND JANUARY 31, 2004 (In thousands)
Class A Class B Additional Total Common Stock Common Stock Paid-In Retained Shareholders' Shares Amount Shares Amount Capital Earninqs Equity BALANCE-February 1, 2003.......... 860 $ 1 22 $ - $ 32,341 $ 19,241 $ 51,583 Issuance of stock for cash...... 15 635 635 Net income...................... 8,520 8,520 --- --- -- --- -------- -------- -------- BALANCE-January 31, 2004.......... 875 1 22 - 32,976 27,761 60,738 Issuance of stock for services.. 5 235 235 Issuance of stock for cash...... 6 250 250 Repurchase of stock upon employee termination......... (1) (25) (25) Net income...................... 11,505 11,505 --- --- -- --- -------- -------- -------- BALANCE-January 29, 2005.......... 885 $ 1 22 $ - $ 33,436 $ 39,266 $ 72,703 === === == === ======== ======== ======== See notes to consolidated financial statements.
-5- CROSSTOWN TRADERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JANUARY 29, 2005 AND JANUARY 31, 2004 (In thousands)
2005 2004 CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................ $ 11,505 $ 8,520 Adjustments to reconcile net income to net cash provided by operating activities: Provision for deferred income taxes ................. 2,429 87 Depreciation and amortization expense ............... 1,821 1,109 Provision for sales returns ......................... 480 (484) Provision for bad debts ............................. 15,304 18,188 Stock issued for services ........................... 235 Changes in assets and liabilities: Accounts receivable ............................... (11,689) (16,055) Other receivable .................................. 2,834 Inventories ....................................... 432 769 Deferred advertising .............................. 3,443 (938) Supplies and prepaid expenses and other assets .... 511 (286) Accounts payable and accrued liabilities .......... 2.018 (2,749) Income taxes payable .............................. 2,352 1,012 Other liabilities ................................. 321 (427) -------- -------- Net cash provided by operating activities .... 29,162 11,580 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Repayment of assumed Monterey Bay debt-net of cash acquired .................................... (2,685) Purchases of property and equipment ................... (2,358) (2,350) -------- -------- Net cash used in investing activities ........ (5,043) (2,350) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under credit agreement ..................... 68,199 78,709 Repayments under credit agreement ..................... (92,679) (88,641) Borrowings under term loan ............................ 203 186 Repayments under term loan ............................ (203) (238) Proceeds from issuance of common stock ................ 250 635 Repurchase of common stock ............................ (25) -------- -------- Net cash used in financing activities ........ (24,255) (9,349) -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS ................... (136) (119) CASH AND CASH EQUIVALENTS--Beginning of year ............. 2,327 2,446 -------- -------- CASH AND CASH EQUIVALENTS--End of year ................... $ 2,191 $ 2,327 ======== ======== See notes to consolidated financial statements.
-6- cROSSTOWN TRADERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 29, 2005 AND JANUARY 31, 2004 1. BASIS OF PRESENTATION AND ACQUISITION Basis of Presentation--Crosstown Traders, Inc. ("Crosstown") and its wholly owned subsidiaries, Arizona Mail Order Company, Inc. ("AMO") and Figi's Inc. ("Figi's") (collectively, the "Company"), are direct to consumer merchandisers. Figi's sells a variety of cheeses, meats, bakery, confectionery, candy, nuts, fruits, and other non-food gift items. AMO markets a broad line of women's apparel. Both AMO and Figi's market through various channels, primarily catalogs and the Internet. JP Morgan Partners formed Crosstown on October 16, 2002 as a Delaware corporation. Crosstown acquired AMO and Figi's on October 31, 2002. Acquisition-Effective February 6, 2004, the Company acquired certain assets of Monterey Bay Clothing Company, LLC ("Monterey Bay") in exchange for assumption of certain liabilities. The transaction expands the Company's product lines and was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. These financial statements include the results of operations of Monterey Bay from February 6, 2004, the date of acquisition. A summary of the fair values assigned to assets acquired and liabilities assumed at February 6, 2004 is as follows (in thousands): Current assets acquired ......................... $4,804 Intangible assets ............................... 88 Goodwill ........................................ 4,149 ------ Total assets .................................... $9,041 ====== Liabilities assumed ............................. $8,240 Accrual for severance, relocation and other costs 801 ------ Total liabilities ............................... $9,041 ======
Liabilities assumed included Monterey Bay bank debt of $2,772,000, which the Company retired using its existing credit facilities. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year-The Company's fiscal year is the 52- or 53-week period ending on the Saturday closest to January 31st. The fiscal years ended January 29, 2005 and January 31, 2004 each consisted of 52 weeks. Principles of Consolidation-The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. -7- Use of Estimates-The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of management estimates. These estimates are subjective in nature and involve judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at fiscal year-end and the reported amounts of revenues and expenses during the fiscal year. Actual results could differ from those estimates. Revenue Recognition-Revenue related to sales of merchandise is recognized when both title and risk of loss transfer to the customer. The Company provides for an estimate of merchandise returns at the time of sale for projected returns based upon historical experience. Amounts billed to customers for shipping and handling are reported in net sales. Finance charge and fee revenue from credit card receivables owned are recorded as finance revenue when earned and are included in other revenues. Vendor Allowances-The Company accounts for discounts received from its merchandise vendors as a reduction of the cost of the vendors' products. Shipping Costs-Shipping costs incurred related to the shipment of products to customers are included in cost of goods sold. Cash and Cash Equivalents-Cash equivalents represent short-term, highly liquid investments with original maturities of three months or less. Accounts Receivable-Accounts receivable at AMO consist primarily of credit card receivables and related finance charges generated in connection with the sale of the Company's merchandise. AMO offers unsecured credit to its customers under revolving accounts, which are accepted on customary credit terms. Receivables at Figi's consist of credit offered to its customers using interest-free credit terms over three months, with the first payment due generally 30 to 60 days after a stated holiday. The Company continually evaluates the collectibility of its accounts receivable based upon a combination of factors, including analysis of historical trends, aging of accounts receivable, write-off experience, past history of recoveries, and expectations of future performance. Inventories-Merchandise inventories are valued at lower of cost or market using the average cost retail inventory method at AMO, and at the lower of cost or market using the first-in, first-out method at Figi's. Deferred Advertising-Deferred advertising consists of promotional materials and costs related to the production and distribution of the Company's catalogs. These costs are deferred and expensed as the related catalog sales occur, generally within one to six months. The cost of nondirect-response advertising is expensed as incurred. Property and Equipment-Property, equipment and capitalized software acquired after the acquisition date are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided on a straight-line basis over estimated asset lives of 3 to 15 years. Impairment of Long-lived Assets-The Company periodically reviews the carrying values of long-lived assets, including goodwill, whenever events or circumstances indicate that a potential impairment has occurred. When a potential impairment has occurred, an impairment write-down is recorded if the carrying value of the long-lived asset exceeds its fair value. At January 29, 2005, there was no impairment of recorded long-lived assets. -8- Goodwill and Other Intangible Assets-The Company has recognized goodwill and other intangible assets in connection with the acquisition of Monterey Bay. The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are not amortized but are subject to impairment testing at least annually. Intangible assets with finite lives are stated at cost, net of accumulated amortization and are tested for impairment in accordance with SFAS No. 144. These assets are amortized on the straight-line method over the estimated useful lives or periods of expected benefit, but not in excess of 20 years. Income Taxes-The Company files a consolidated federal income tax return. Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Derivative Financial Instruments-The Company recognizes all derivative financial instruments as either assets or liabilities and measures such instruments at fair value. Fair Value of Financial Instruments-The carrying values of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to the short-term maturities of these assets and liabilities. Additionally, the carrying amount of accounts receivable reflects a reasonable estimate of losses from doubtful accounts. The carrying amount of long-term debt approximates fair value as a result of the variable interest rate paid on a majority of the Company's borrowings and the Company's belief that it could obtain similar rates on alternative financing arrangements. Reclassifications-Certain amounts have been reclassified in the prior year financial statements to conform to the current year presentation. Recent Accounting Pronouncements-Financial Accounting Standards Board ("FASB") Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities ("FIN 46R"), prescribes how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. FIN 46R requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. FIN 46R is effective for the Company for the fiscal year beginning January 30, 2005. The adoption of FIN 46R is not expected to have a material effect on the Company's consolidated financial statements. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an Amendment of ARB No. 43, Chapter 4. SFAS No. 151 clarifies the accounting for amounts of idle facility expenses, freight, handling costs, and wasted material (spoilage). This statement is effective for the Company for the fiscal year beginning January 29, 2006. The adoption of SFAS No. 151 is not expected to have a material effect on the Company's consolidated financial statements. -9- In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123R"), effective for the Company for the fiscal year beginning January 29, 2006. SFAS No. 123R requires that all stock-based compensation be treated as a cost that is reflected in the financial statements. The Company is currently reviewing the effect of this statement on the Company's consolidated financial statements. See Note 12 for information regarding the Company's stock-based compensation plan. 3. ACCOUNTS RECEIVABLE Accounts receivable consist of the following at January 29, 2005 and January 31, 2004 (in thousands):
2005 2004 Due from customers ................. $ 96,369 $ 106,147 Less allowance for doubtful accounts (10,664) (14,739) --------- --------- Total customer receivables ......... 85,705 91,408 Other receivables .................. 6,270 4,008 --------- --------- Total .............................. $ 91,975 $ 95,416 ========= =========
4. INVENTORIES Inventories consist of the following at January 29, 2005 and January 31, 2004 (in thousands):
2005 2004 Raw materials and supplies ................... $ 8,584 $ 10,186 Merchandise .................................. 79,093 74,474 -------- -------- Inventories-at cost .......................... 87,677 84,660 Less reserve for excess and obsolete inventory (7,482) (6,491) -------- -------- Inventories-net .............................. $ 80,195 $ 78,169 ======== ========
5. PROPERTY AND EQUIPMENT Property and equipment consist of the following at January 29, 2005 and January 31, 2004 (in thousands):
2005 2004 Computer software and hardware ............... $ 5,318 $ 3,330 Furniture and equipment ...................... 849 507 Leasehold improvements ....................... 236 205 ------- ------- Total property and equipment at cost ......... 6,403 4,042 Less accumulated depreciation and amortization (1,803) (615) ------- ------- Property and equipment-net ................... $ 4,600 $ 3,427 ======= =======
The carrying value of property and equipment does not include any value for assets owned by AMO and Figi's at October 31, 2002, as the carrying value of these assets was reduced to zero in connection with the acquisition of AMO and Figi's by Crosstown. -10- Depreciation expense for the years ended January 29, 2005 and January 31, 2004 totaled $1,274,000 and $564,000, respectively. 6. GOODWILL At January 29, 2005, the Company had approximately $4,149,000 of recorded goodwill resulting from the acquisition of Monterey Bay. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company's goodwill is not subject to amortization. 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consists of the following at January 29, 2005 and January 31, 2004 (in thousands):
2005 2004 Merchandise and expense accounts payable $27,157 $20,268 Taxes other than income taxes .......... 1,046 881 Accrued wages and vacation ............. 5,850 5,794 Other .................................. 5,926 5,628 ------- ------- Total .................................. $39,979 $32,571 ======= =======
8. DEBT Long-term debt is as follows at January 29, 2005 and January 31, 2004 (in thousands):
2005 2004 Asset-backed revolving credit agreement $ 57,138 $ 81,617 Term loan agreement ................... 20,000 20,000 Other notes payable ................... 887 805 -------- -------- Total ................................. $ 78,025 $102,422 ======== ========
AMO and Figi's (the "Borrowers") have jointly entered into a $125,000,000 senior credit facility agreement (the "Credit Agreement") with a group of banks. The Credit Agreement provides a revolving borrowing facility and letter of credit support. Borrowings under the Credit Agreement bear interest at either the London InterBank Offering Rate ("LIBOR") plus an applicable margin or at Bank of America's prime rate plus an applicable margin or a combination thereof at the election of the Borrowers. Beginning October 31, 2003, the Credit Agreement provides for quarterly adjustment of the rates based upon Crosstown's consolidated fixed charge coverage ratio. During the year ended January 29, 2005, rates were adjusted each quarter. On January 11, 2005, the Credit Agreement was amended to extend the termination date to October 30, 2006 and to reduce the applicable margins that are applied to LIBOR and prime rates as well as the monthly rate that is applied to the unused portion of the revolving credit facility. At January 29, 2005, the Borrowers had $57,100,000 of availability under the Credit Agreement. Borrowings under this amendment bear interest at either the LIBOR plus 1.75% (4.14% at January 29, 2005) or at Bank of America's prime rate plus a margin of .25% (5.50% at January 29, 2005.) The unused line fee, as of January 29, 2005, was calculated at .25% of the amounts unused on the revolving borrowing facility. The weighted average borrowing rate for existing debt under the Credit Agreement was 5.09% for the year ended January 29, 2005 and 5.77% for the year ended January 31, 2004. -11- Additionally, the Borrowers have jointly entered into a $20,000,000 second lien term loan agreement (the "Term Loan"), which matures in October 2007. The Term Loan bears interest at prime plus 6.75% (12% at January 29, 2005), which is payable monthly. In addition to the interest accruing on the principal balance, an additional amount of 1% of the outstanding balance of the Term Loan will accrue to the principal balance. The additional principal is paid each month. The loan requires an exit fee upon termination or voluntary prepayment of $200,000, and if such action occurs on or after the first anniversary of the closing date, which was October 30, 2002, an additional $16,666.67 per month will be due commencing with the month after the anniversary of the closing date. The weighted average borrowing rate for existing debt under the Term Loan, including the exit fee accrual, was 14.45% for the year ended January 29, 2005 and 12.42% for the year ended January 31, 2004. Substantially all of the assets and stock of AMO, Figi's, and certain of their subsidiaries are pledged as collateral for the Credit Agreement and Term Loan. Additionally, the Borrowers are contingently liable for all amounts borrowed by Crosstown or its affiliates under these facilities. At January 29, 2005 and January 31, 2004, total borrowings under these two credit agreements were approximately $77,138,000 and $101,617,000, respectively. Crosstown has guaranteed the borrowings under the Credit Agreement and Term Loan. The above agreements have restrictive covenants, including requirements for the Borrowers to maintain minimum fixed charge coverage ratios and borrowing availability levels. At January 29, 2005, the Borrowers were in compliance with such covenants. For the years ended January 29, 2005 and January 31, 2004, the Company paid cash for interest totaling approximately $5,203,000 and $5,636,000, respectively. Other notes payable totaling $887,000 as of January 29, 2005 and $805,000 as of January 31, 2004, consist of notes payable to JP Morgan Partners. These notes bear interest at 4.52% per annum with interest-only payments due at the end of each calendar quarter, with principal repayment subordinated to the Credit Agreement and the Term Loan. Interest payments are currently being deferred and are accruing. Total accrued and unpaid interest at January 29, 2005 and January 31, 2004 was $82,000 and $46,000, respectively. Aggregate maturities of the long-term debt, including other notes payable, are as follows (in thousands):
Year Ending January 2006 ...... $ -- January 2007 ...... 57,852 January 2008 ...... 20,173 ------- $78,025 =======
The Company is exposed to underlying risks relating to fluctuation of interest rates on the Credit Agreement. The Company has mitigated this risk by entering into two interest rate collar agreements. The interest rate collars are measured at fair value and recorded as assets or liabilities, with the change in fair value recorded in interest expense. These collar agreements became effective as of December 2, 2002. The first agreement had a notional amount of $20,000,000, terminated on December 2, 2004, had a floor rate of 2.20%, and a cap rate of 3.25%. The second agreement is also for a notional amount of $20,000,000, terminates on November 1, 2005, has a floor rate of 2.50%, and a cap rate of 3.90%. The fair value of the collar agreements was a liability of approximately $1,000 and $434,000 at January 29, 2005 and January 31, 2004, respectively. -12- 9. RELATED PARTY TRANSACTIONS During the year ended January 29, 2005, Crosstown issued stock to certain directors of the Company for payment of their directors' fees. The Company recorded compensation expense totaling $235,000 relating to these stock issuances. In accordance with a management agreement, JP Morgan Partners is entitled to management fees of $1,000,000 per year; however, for the years ended January 29, 2005 and January 31, 2004, the management fee was waived. At January 29, 2005, the Company had notes payable to JP Morgan Partners totaling approximately $887,000 (see Note 8). 10. TAXES Income tax expense is as follows for the years ended January 29, 2005 and January 31, 2004 (in thousands):
2005 2004 ------------------------- ------------------------- Current Deferred Total Current Deferred Total Federal ....... $5,195 $2,002 $7,197 $3,848 $ 72 $3,920 State and local 1,125 427 1,552 830 15 845 ------ ------ ------ ------ ------ ------ Total ......... $6,320 $2,429 $8,749 $4,678 $ 87 $4,765 ====== ====== ====== ====== ====== ======
During the years ended January 29, 2005 and January 31, 2004, cash paid for income taxes totaled approximately $3,929,000 and $3,645,000, respectively. A reconciliation of the effective tax rate with the Federal statutory income tax rate is as follows:
2005 2004 Statutory Federal income tax rate .................. 35.0% 35.0% State and local income taxes, net of Federal income tax benefit ...................... 5.0% 3.9% Other, net ......................................... 3.2% (3.0%) ---- ---- Effective tax rate ................................. 43.2% 35.9% ==== ====
-13- The Company's deferred tax assets and liabilities relate to the following at January 29, 2005 and January 31, 2004 (in thousands):
2005 2004 Deferred tax assets: Allowance for doubtful accounts $ 2,143 $ 3,415 Property and equipment ........ 1,520 2,919 Accrued liabilities ........... 1,097 1,926 Inventory reserves ............ 1,757 1,414 Other ......................... 135 ------- ------- Total deferred tax assets ....... 6,517 9,809 ------- ------- Deferred tax liabilities: Deferred advertising .......... (5,155) (5,932) Supplies and prepaid expenses . (761) (793) Other ......................... (13) (67) ------- ------- Total deferred tax liabilities .. (5,929) (6,792) ------- ------- Deferred tax assets-net ......... $ 588 $ 3,017 ======= =======
Management believes that realization of the deferred tax assets through future taxable earnings or alternative tax strategies is more likely than not, and therefore, no valuation allowance is necessary. 11. DEFINED CONTRIBUTION PLAN The Company has a defined contribution retirement plan (the "Plan"), which covers substantially all Crosstown, AMO, and Figi's employees who are 21 years of age and have at least one year of service. The Plan includes voluntary savings features for eligible employees. The Company's matching contributions are discretionary and are determined by the Company's board of directors. The Plan also provides for a supplemental contribution based on the participants' age and length of service. Expenses for all Company contributions to the Plan amounted to approximately $1,366,000 and $2,361,000 for the years ended January 29, 2005 and January 31, 2004, respectively. 12. MANAGEMENT INCENTIVE PLANS The Company offers incentives to management under several plans: Deferred Compensation Plan-Certain management employees may elect to defer current salary amounts through purchases of units in a deferred compensation plan, with underlying investments in mutual funds selected and directed by the employee. Changes in the value of the investments and corresponding liability are recognized through the consolidated statement of income as investment gains and losses and compensation expense, respectively. At January 29, 2005 and January 31, 2004, the Company held assets for the plan in the amount of approximately $2,151,000 and $1,830,000, respectively, included in other assets, with a related liability in the amount of $2,151,000 and $1,830,000, respectively, which is included in other liabilities. Bonus Plan-The Company offers certain incentive bonus amounts to management upon meeting financial and operational targets. During the years ended January 29, 2005 and January 31, 2004, no bonuses were earned or accrued. In addition, the Company offers profit sharing to certain employees -14- based on Company performance. During the year ended January 29, 2005, $663,000 of discretionary profit sharing amounts were accrued for AMO and Figi's employees. Stock Option Plan-In 2002, the board of directors approved the Crosstown Traders, Inc. 2002 Stock Option Plan (the "2002 Plan") and reserved 117,500 shares of Class A common stock. The 2002 Plan provides for the granting of stock-based incentive awards to the Company's directors, officers, employees, and consultants. Options are granted under one of three vesting methods, either pro rata over four years, pro rata at the end of each of the four full fiscal years following date of grant and dependent upon reaching predefined earnings targets, or upon the sale of the Company dependent upon the defined cumulative rate of return that has been achieved by JP Morgan Partners at the time of such sale. Changes in options for the years ended January 29, 2005 and January 31, 2004 are as follows:
Weighted Average Exercise Shares Price Balance-February 2, 2003 .............. 42,500 $ 43.49 Grants ............................. 63,600 43.49 Canceled ........................... (14,500) 43.49 ------- Balance-January 31, 2004 .............. 91,600 43.49 ------- Grants ............................. 34,300 43.49 Canceled ........................... (15,400) 43.49 ------- Balance-January 29, 2005 .............. 110,500 $ 43.49 ======= Vested and exercisable-January 29, 2005 3,438 $ 43.49 ======= Vested and exercisable-January 31, 2004 1,563 $ 43.49 =======
Weighted average remaining contractual lives for stock options with an exercise price of $43.49 were 8.27 and 8.97 years at January 29, 2005 and January 31, 2004, respectively. SFAS No. 123, Accounting for Stock-Based Compensation encourages, but does not require, companies to record compensation cost based on the fair value of employee stock option grants. The Company has chosen to continue to account for employee option grants using intrinsic value under Accounting Principles Board ("APB') Opinion No. 25. Accordingly, no compensation expense has been recognized for employee stock option grants. Entities electing to continue accounting for stock-based compensation under APB No. 25 make proforma disclosures of net income, as if the fair value based method of accounting defined in SFAS No. 123 had been applied. The Company has computed the value of shares granted under the plan for the purposes of disclosure using the Black-Scholes method and the following weighted average assumptions for the years ended January 29, 2005 and January 31, 2004, respectively: risk-free interest rates of 3.7% and 2.9%, an expected option term of five years and volatility rates of 35% and 50%. The weighted average per share fair value of option grants in the years ended January 29, 2005 and January 31, 2004 was $16.07 and $19.86 per share, respectively. For the years ended January 29, 2005 and January 31, 2004, there is no significant difference between net income as reported and pro forma net income. -15- 13. COMMON STOCK Class A Common Stock-The Company has authorized 1,027,500 shares of $.001 par value Class A common stock ("Class A Stock"). Class A Stock is convertible into Class B common stock ("Class B Stock") at the option of the holder at any time, based upon the conversion ratio, as defined. At February 1, 2003, one share of Class A Stock would be convertible into 1.013 shares of Class B Stock. Each share of Class A Stock has one vote for each share of Class B Stock into which it would be convertible. Class A Stock ranks senior to Class B Stock with regard to liquidation and dividend rights. Class A Stock accrues dividends at 5% per annum of the original issue price of $43.49 per share, which is payable when and if declared by the board of directors. Class A Stock has a liquidation preference equal to $43.49 per share plus an amount in cash equal to all accrued but unpaid dividends. The Class A Stock also has special consent rights to certain of the Company's activities, including, but not limited to, amendment of the Company's articles or bylaws and merger or consolidation of the Company. Class B Common Stock-The Company has authorized 1,050,000 shares of $.001 par value Class B Stock. Each share of Class B Stock has one vote. Class B Stock may be repurchased by the Company in the event the holders leave the Company. 14. COMMITMENTS AND CONTINGENCIES Executive Compensation-Certain executive officers of the Company have employment agreements that provide for compensation and severance benefits. Operating Leases-The Company leases office space and equipment under certain noncancelable operating leases. Minimum rental commitments under these leases were as follows at January 29, 2005 (in thousands):
Year Ending January 2006 ................... $ 4,920 January 2007 ................... 4,664 January 2008 ................... 3,766 January 2009 ................... 3,194 January 2010 ................... 3,154 Thereafter ..................... 9,316 ------- Total minimum rental commitments $29,014 =======
Rental expense consisted of the following for the years ended January 29, 2005 and January 31, 2004 (in thousands):
2005 2004 Real estate ........ $4,884 $4,099 Personal property .. 547 690 ------ ------ Total rental expense $5,431 $4,789 ====== ======
Litigation-The Company is involved in litigation incidental to its business. Management does not believe the ultimate disposition of this litigation will have a material adverse effect on the Company's consolidated financial statements. -16- 15. SUBSEQUENT EVENT Subsequent to January 29, 2005, the Company and JP Morgan Partners have entered into negotiations to sell the outstanding stock of the Company to a third party in exchange for cash consideration and assumption of certain liabilities. The Company will continue to operate as a wholly owned subsidiary of the third party, and these consolidated financial statements do not include any effect for this potential transaction. ****** -17- EX-99 4 apr05stmts.txt EXHIBIT 99.2 EXHIBIT 99.2 Crosstown Traders, Inc. and Subsidiaries Consolidated Financial Statements for the Thirteen-Weeks Ended April 30, 2005 and May 1, 2004 (Unaudited) CROSSTOWN TRADERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS APRIL 30, 2005 AND JANUARY 29, 2005 (In thousands) - --------------------------------------------------------------------------------
April 30, January 29, 2005 2005 (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents .............................. $ 5,099 $ 2,191 Accounts receivable--net ............................... 59,371 91,975 Inventories--net ....................................... 73,679 80,195 Deferred advertising ................................... 14,062 12,886 Supplies and prepaid expenses .......................... 2,207 2,835 Income taxes receivable ................................ 347 -------- -------- Total current assets .......................... 154,765 190,082 PROPERTY AND EQUIPMENT--Net .............................. 4,952 4,600 DEFERRED INCOME TAXES .................................... 1,520 1,520 DEFERRED FINANCING COSTS, Net of accumulated amortization of $1,361 (April 30, 2005) and $1,225 (January 29, 2005) 505 641 OTHER ASSETS ............................................. 3,263 3,116 GOODWILL ................................................. 4,149 4,149 -------- -------- TOTAL .................................................... $169,154 $204,108 ======== ========
(Continued) -2- CROSSTOWN TRADERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS APRIL 30, 2005 AND JANUARY 29, 2005 (In thousands except share data) - --------------------------------------------------------------------------------
April 30, January 29, 2005 2005 (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities ............... $ 41,031 $ 39,979 Reserve for sales returns .............................. 8,972 6,047 Income taxes payable ................................... 4,271 Deferred income taxes .................................. 932 932 -------- -------- Total current liabilities ..................... 50,935 51,229 LONG-TERM DEBT ........................................... 42,897 78,025 OTHER LIABILITIES ........................................ 1,941 2,151 -------- -------- Total liabilities ............................. 95,773 131,405 -------- -------- COMMITMENTS AND CONTINGENCIES (Notes 6 and 9) SHAREHOLDERS' EQUITY: Common stock, Class A, $.001 par value--authorized, 1,027,500 shares; issued and outstanding, 885,179 shares; liquidation value $43,554,000 (April 30, 2005) and $43,015,000 (January 29, 2005) ............. 1 1 Common stock, Class B, $.001 par value--authorized, 1,050,000 shares; issued and outstanding, 22,500 shares Additional paid-in capital ............................. 33,436 33,436 Retained earnings ...................................... 39,944 39,266 -------- -------- Total shareholders' equity .................... 73,381 72,703 -------- -------- TOTAL .................................................... $169,154 $204,108 ======== ======== See notes to consolidated financial statements. (Concluded)
-3- CROSSTOWN TRADERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THE THIRTEEN-WEEKS ENDED APRIL 30, 2005 AND MAY 1, 2004 (Unaudited, in thousands) - --------------------------------------------------------------------------------
2005 2004 REVENUES: Net sales ........................................... $ 105,840 $ 106,373 Other revenue ....................................... 4,199 4,351 --------- --------- Total revenues ............................. 110,039 110,724 COST OF GOODS SOLD .................................... 49,519 49,549 --------- --------- GROSS PROFIT .......................................... 60,520 61,175 --------- --------- OPERATING EXPENSES: Advertising and promotional expenses ................ 30,152 31,254 Selling, general, and administrative expenses ....... 27,741 28,778 --------- --------- Total operating expenses ................... 57,893 60,032 --------- --------- OPERATING INCOME ...................................... 2,627 1,143 INTEREST EXPENSE ...................................... 1,519 1,402 --------- --------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES ....... 1,108 (259) PROVISION FOR INCOME TAXES (BENEFIT) .................. 430 (112) --------- --------- NET INCOME (LOSS) ..................................... $ 678 $ (147) ========= ========= See notes to consolidated financial statements.
-4- CROSSTOWN TRADERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE THIRTEEN-WEEKS ENDED APRIL 30, 2005 (Unaudited, in thousands) - --------------------------------------------------------------------------------
Class A Class B Common Stock Common Stock Additional Total ---------------- ---------------- Paid-In Retained Shareholders' Shares Amount Shares Amount Capital Earnings Equity BALANCE--January 29, 2005 885 $ 1 22 $ $33,436 $39,266 $72,703 Net income ............ 678 678 ------- ------- ------- ------- ------- ------- ------- BALANCE--April 30, 2005 . 885 $ 1 22 $ $33,436 $39,944 $73,381 ======= ======= ======= ======= ======= ======= ======= See notes to consolidated financial statements.
-5- CROSSTOWN TRADERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THIRTEEN-WEEKS ENDED APRIL 30, 2005 AND MAY 1, 2004 (Unaudited, in thousands) - --------------------------------------------------------------------------------
2005 2004 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ..................................... $ 678 $ (147) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization expense ............... 515 365 Provision for sales returns ......................... 2,925 2,878 Provision for bad debts ............................. 2,369 3,078 Stock issued for services ........................... 235 Changes in assets and liabilities: Accounts receivable ............................... 30,235 29,559 Inventories ....................................... 6,516 3,189 Deferred advertising .............................. (1,176) (1,039) Supplies and prepaid expenses and other assets .... 481 (2,675) Accounts payable and accrued liabilities .......... 1,052 3,061 Income taxes receivable and payable ............... (4,618) (3,348) Other liabilities ................................. (210) (72) -------- -------- Net cash provided by operating activities .... 38,767 35,084 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Repayment of assumed Monterey Bay debt--net of cash acquired ....................................... (2,685) Purchases of property and equipment ................... (731) (556) -------- -------- Net cash used in investing activities ........ (731) (3,241) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under credit agreement ..................... 8,622 10,293 Repayments under credit agreement ..................... (43,750) (41,910) Borrowings under term loan ............................ 50 67 Repayments under term loan ............................ (50) (51) Repurchase of common stock ............................ (25) -------- -------- Net cash used in financing activities ........ (35,128) (31,626) -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS ................... 2,908 217 CASH AND CASH EQUIVALENTS--Beginning of period .......... 2,191 2,327 -------- -------- CASH AND CASH EQUIVALENTS--End of period ................ $ 5,099 $ 2,544 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION-- Cash paid for interest .................................. $ 1,182 $ 1,390 ======== ======== See notes to consolidated financial statements.
-6- CROSSTOWN TRADERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRTEEN-WEEKS ENDED APRIL 30, 2005 AND MAY 1, 2004 (UNAUDITED) - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION AND ACQUISITION Basis of Presentation--Crosstown Traders, Inc. ("Crosstown") and its wholly owned subsidiaries, Arizona Mail Order Company, Inc. ("AMO") and Figi's Inc. ("Figi's") (collectively, the "Company"), are direct to consumer merchandisers. Figi's sells a variety of cheeses, meats, bakery, confectionery, candy, nuts, fruits, and other nonfood gift items. AMO markets a broad line of women's apparel. Both AMO and Figi's market through various channels, primarily catalogs and the Internet. JP Morgan Partners formed Crosstown on October 16, 2002 as a Delaware corporation. Crosstown acquired AMO and Figi's on October 31, 2002. The condensed consolidated balance sheet as of April 30, 2005, and consolidated statements of income (loss) and cash flows for the thirteen weeks ended April 30, 2005 and May 1, 2004, have not been audited. The Company believes, all adjustments necessary to present fairly the financial position, results of operations, and cash flows have been made. In accordance with APB 28, the Company has condensed or omitted certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States. These interim financial statements and related notes should be read in conjunction with the financial statements and related notes for the years ended January 29, 2005 and January 31, 2004. Statement of Financial Accounting Standards Statement No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123") encourages, but does not require, companies to record compensation cost based on the fair value of employee stock option grants. The Company has chosen to continue to account for employee option grants using intrinsic value under Accounting Principles Board ("APB") Opinion No. 25. Accordingly, no compensation expense has been recognized for employee stock option grants. Entities electing to continue accounting for stock-based compensation under APB No. 25 make proforma disclosures of net income, as if the fair value based method of accounting defined in SFAS No. 123 had been applied. There were no grants in the thirteen-week period ended April 30, 2005. The Company has computed the value of shares granted under the plan for the purposes of disclosure using the Black-Scholes method and the following weighted average assumptions for the year ended January 29, 2005: risk-free interest rate of 3.7%, an expected option term of five years and volatility rate of 35%. The weighted average per share fair value of option grants in the year ended January 29, 2005 was $16.07 per share. For the thirteen-weeks ended April 30, 2005, and May 1, 2004, there is no significant difference between net income as reported and pro forma net income. The results of operations for the thirteen weeks ended April 30, 2005 and May 1, 2004 are not necessarily indicative of operating results for the full fiscal year. Recent Accounting Pronouncements--In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement No. 123 (revised 2004), Share Based Payment a revision of Statement No. 123 ("SFAS No. 123R"). Statement No. 123R supersedes APB Opinion No. 25. SFAS No. 123R is similar to the fair value method in SFAS No. 123, except that it requires the Company to recognize the fair value of share-based payments as compensation expense in our financial statements, and pro forma disclosure will no longer be allowed. Adoption of SFAS No. 123R will result in the recognition of additional compensation expense for stock based compensation in periods subsequent to January 28, 2006. -7- Acquisition by Charming Shoppes-- Effective June 2, 2005, the Company was acquired by Charming Shoppes, Inc. ("Charming Shoppes") for $218,000,000 cash (the "Transaction") and assumption of the Company's liabilities. The Company will continue to operate as a wholly owned subsidiary of Charming Shoppes, and these consolidated financial statements do not include any effect for this transaction. 2. ACCOUNTS RECEIVABLE Accounts receivable consist of the following at April 30, 2005 and January 29, 2005 (in thousands):
April 30, 2005 January 29, 2005 Due from customers .................. $ 59,558 $ 96,369 Less allowance for doubtful accounts (2,497) (10,664) -------- -------- Total customer receivables 57,061 85,705 Other receivables ................... 2,310 6,270 -------- -------- Total ............................... $ 59,371 $ 91,975 ======== ========
3. INVENTORIES Inventories consist of the following at April 30, 2005 and January 29, 2005 (in thousands):
April 30, 2005 January 29, 2005 Raw materials and supplies ............. $ 2,608 $ 8,584 Merchandise ............................ 79,567 79,093 -------- -------- Inventories--at cost ........ 82,175 87,677 Less reserve for excess and obsolete inventory............................ (8,496) (7,482) -------- -------- Inventories--net ....................... $ 73,679 $ 80,195 ======== ========
4. GOODWILL The Company had approximately $4,149,000 of recorded goodwill at April 30, 2005 and January 29, 2005, resulting from the acquisition of Monterey Bay Clothing Company. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company's goodwill is not subject to amortization, but is assessed for impairment at least annually. -8- 5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following at April 30, 2005 and January 29, 2005 (in thousands):
April 30, 2005 January 29, 2005 Merchandise and expense accounts payable $28,389 $27,157 Taxes other than income taxes .......... 290 1,046 Accrued wages and vacation ............. 9,263 5,850 Other .................................. 3,089 6,147 ------- ------- Total .................................. $41,031 $40,200 ======= =======
6. DEBT Long-term debt is as follows at April 30, 2005 and January 29, 2005 (in thousands):
April 30, 2005 January 29, 2005 Asset-backed revolving credit agreement $22,000 $57,138 Term loan agreement ................... 20,000 20,000 Other notes payable ................... 897 887 ------- ------- Total ................................. $42,897 $78,025 ======= =======
AMO and Figi's (the "Borrowers") have jointly entered into a $125,000,000 senior credit facility agreement (the "Credit Agreement") with a group of banks. The Credit Agreement provides a revolving borrowing facility and letter of credit support. Borrowings under the Credit Agreement bear interest at either the London InterBank Offering Rate ("LIBOR") plus an applicable margin or at Bank of America's prime rate plus an applicable margin or a combination thereof at the election of the Borrowers. The Credit Agreement provides for quarterly adjustment of the rates based upon Crosstown's consolidated fixed charge coverage ratio. On January 11, 2005, the Credit Agreement was amended to extend the termination date to October 30, 2006 and to reduce the applicable margins that are applied to LIBOR and prime rates as well as the monthly rate that is applied to the unused portion of the revolving credit facility. Availability under the Credit Agreement is based on a certain percentage of inventory and accounts receivable, as defined in the Credit Agreement. At April 30, 2005, the Borrowers had $59,400,000 of availability under the Credit Agreement. Borrowings under this amendment bear interest at either the LIBOR plus 1.75% (4.62% at April 30, 2005) or at Bank of America's prime rate plus a margin of 0.25% (6.00% at April 30, 2005). The unused line fee, as of April 30, 2005, was calculated at 0.25% of the amounts unused on the revolving borrowing facility. The weighted average borrowing rate for existing debt under the Credit Agreement was 6.46% for the thirteen-week period ended April 30, 2005 and 5.09% for the year ended January 29, 2005. The revolving credit facility was paid in full in connection with the Transaction. Additionally, the Borrowers have jointly entered into a $20,000,000 second lien term loan agreement (the "Term Loan"), which matures in October 2007. The Term Loan bears interest at prime plus 6.75% (12.50% at April 30, 2005), which is payable monthly. In addition to the interest accruing on the principal balance, an additional amount of 1% of the outstanding balance of the Term Loan will accrue to the principal balance. The additional principal is paid each month. The loan requires an exit fee upon termination or voluntary prepayment of $200,000, and if such action occurs on or after the first -9- anniversary of the closing date, which was October 30, 2002, an additional $16,666.67 per month will be due commencing with the month after the anniversary of the closing date. The weighted average borrowing rate for existing debt under the Term Loan, including the exit fee accrual, was 17.09% for the thirteen-week period ended April 30, 2005 and 14.45% for the year ended January 29, 2005. The Term Loan was paid in full in connection with the Transaction. Substantially all of the assets and stock of AMO, Figi's, and certain of their subsidiaries are pledged as collateral for the Credit Agreement and Term Loan. Additionally, the Borrowers are contingently liable for all amounts borrowed by Crosstown or its affiliates under these facilities. At April 30, 2005 and January 29, 2005, total borrowings under these two credit agreements were approximately $42,000,000 and $77,138,000, respectively. Crosstown has guaranteed the borrowings under the Credit Agreement and Term Loan. The above agreements have restrictive covenants, including requirements for the Borrowers to maintain minimum fixed charge coverage ratios and borrowing availability levels. At April 30, 2005 and January 29, 2005, the Borrowers were in compliance with such covenants. Other notes payable totaling $897,000 as of April 30, 2005 and $887,000 as of January 29, 2005, consist of notes payable to JP Morgan Partners, a shareholder. These notes bear interest at 4.52% per annum with interest-only payments due at the end of each calendar quarter, with principal repayment subordinated to the Credit Agreement and the Term Loan. Interest payments were being deferred and accruing. Total accrued and unpaid interest at April 30, 2005 and January 29, 2005 was $92,000 and $82,000, respectively. The notes payable to JP Morgan Partners were paid in full in connection with the Transaction. Aggregate maturities of the long-term debt, including other notes payable, are as follows (in thousands):
Year Ending January 2006 $ - January 2007 22,000 January 2008 20,897 -------- $ 42,897 ========
7. RELATED PARTY TRANSACTIONS In accordance with a management agreement, JP Morgan Partners is entitled to management fees of $1,000,000 per year; however, for the thirteen-weeks ended April 30, 2005 and May 1, 2004, the management fee was waived. At April 30, 2005 and January 29, 2005, the Company had notes payable to JP Morgan Partners totaling approximately $897,000 and $887,000, respectively (see Note 6). 8. MANAGEMENT INCENTIVE PLANS The Company offers incentives to management under several plans: Deferred Compensation Plan--Certain management employees may elect to defer current salary amounts through purchases of units in a deferred compensation plan, with underlying investments in mutual funds selected and directed by the employee. Changes in the value of the investments and corresponding liability are recognized through the consolidated statement of income as investment gains and losses and compensation expense, respectively. At April 30, 2005 and January 29, 2005, the Company held assets for the plan in the amount of approximately $1,941,000 and $2,151,000, -10- respectively, included in other assets, with a related liability in the amount of $1,941,000 and $2,151,000, respectively, which is included in other liabilities. Bonus Plan--The Company offers certain incentive bonus amounts to management upon meeting financial and operational targets. During the thirteen-weeks ended April 30, 2005 and May 1, 2004 the Company had accrued bonuses totaling $823,000 and $1,215,000, respectively. In addition, the Company offers profit sharing to certain employees based on Company performance. During the thirteen weeks ended April 30, 2005 and May 1, 2004, $531,000 and $380,000, respectively of discretionary profit sharing amounts were accrued. Stock Option Plan--In 2002, the board of directors approved the Crosstown Traders, Inc. 2002 Stock Option Plan (the "2002 Plan") and reserved 117,500 shares of Class A common stock. The 2002 Plan provides for the granting of stock-based incentive awards to the Company's directors, officers, employees, and consultants. Options are granted under one of three vesting methods, either pro rata over four years, pro rata at the end of each of the four full fiscal years following date of grant and dependent upon reaching predefined earnings targets, or upon the sale of the Company dependent upon the defined cumulative rate of return that has been achieved by JP Morgan Partners at the time of such sale. At April 30, 2005 and January 29, 2005, 110,500 options were outstanding, respectively. 9. COMMON STOCK Class A Common Stock--The Company has authorized 1,027,500 shares of $.001 par value Class A common stock ("Class A Stock"). Class A Stock is convertible into Class B common stock ("Class B Stock") at the option of the holder at any time, based upon the conversion ratio, as defined. Each share of Class A Stock has one vote for each share of Class B Stock into which it would be convertible. Class A Stock ranks senior to Class B Stock with regard to liquidation and dividend rights. Class A Stock accrues dividends at 5% per annum of the original issue price of $43.49 per share, which is payable when and if declared by the board of directors. Class A Stock has a liquidation preference equal to $43.49 per share plus an amount in cash equal to all accumulated but unpaid dividends. At April 30, 2005 and January 29, 2005, total accumulated but unpaid dividends were approximately $5,060,000 and $4,521,000, respectively. The Class A Stock also has special consent rights to certain of the Company's activities, including, but not limited to, amendment of the Company's articles or bylaws and merger or consolidation of the Company. Class B Common Stock--The Company has authorized 1,050,000 shares of $.001 par value Class B Stock. Each share of Class B Stock has one vote. Class B Stock may be repurchased by the Company in the event the holders leave the Company. ****** -11- -----END PRIVACY-ENHANCED MESSAGE-----