-----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, QYXy+9qR/fwwv0Or7gNOiS12xlMx+2vSBKPB3j3yjId2+kq2ipa2BXOCZIG/vn06 SEiSDtli2qwvu1sLNB17rw== 0000019353-99-000058.txt : 19991214 0000019353-99-000058.hdr.sgml : 19991214 ACCESSION NUMBER: 0000019353-99-000058 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991030 FILED AS OF DATE: 19991213 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: SEC FILE NUMBER: 000-07258 FILM NUMBER: 99773546 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 30, 1999 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. 0-7258 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 ( ) The number of shares outstanding of the issuer's Common Stock, as of Octo- ber 30, 1999, was 98,637,033 shares.
CHARMING SHOPPES, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets October 30, 1999 and January 30, 1999............................. 2 - 3 Condensed Consolidated Statements of Operations Thirteen weeks ended October 30, 1999 and October 31, 1998........ 4 Condensed Consolidated Statements of Operations Thirty-nine weeks ended October 30, 1999 and October 31, 1998..... 5 Condensed Consolidated Statements of Comprehensive Income (Loss) Thirty-nine weeks ended October 30, 1999 and October 31, 1998..... 6 Condensed Consolidated Statements of Cash Flows Thirty-nine weeks ended October 30, 1999 and October 31, 1998..... 7 Notes to Condensed Consolidated Financial Statements.............. 8 - 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking Statements........................................ 14 Current Developments.............................................. 14 Results of Operations............................................. 15 - 19 Liquidity and Capital Resources................................... 19 - 22 Impact of Year 2000............................................... 22 - 27 Market Risk....................................................... 27 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................................. 27 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K......................... 28
1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements
CHARMING SHOPPES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) October 30, January 30, (In thousands) 1999 1999 ASSETS Current assets Cash and cash equivalents......................... $ 12,842 $ 43,789 Available-for-sale securities (including fair value adjustments of $0 and $19, respectively)... 42,572 100,743 Merchandise inventories........................... 262,488 171,327 Deferred taxes.................................... 15,194 15,194 Prepayments and other............................. 38,334 30,487 -------- -------- Total current assets............................. 371,430 361,540 -------- -------- Property, equipment, and leasehold improvements... 410,786 391,152 Less: accumulated depreciation and amortization... 257,165 236,569 -------- -------- Net property, equipment and leasehold improvements..................................... 153,621 154,583 -------- -------- Available-for-sale securities (including fair value adjustments of $(3,404) and $389, respectively).................................... 199,865 145,882 Other assets...................................... 28,559 22,644 -------- -------- Total assets...................................... $753,475 $684,649 ======== ========
[FN] See Notes to Condensed Consolidated Financial Statements 2
CHARMING SHOPPES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) October 30, January 30, (In thousands) 1999 1999 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable.................................. $ 98,054 $ 61,806 Accrued expenses.................................. 112,559 84,444 Income taxes payable.............................. 12,053 4,552 Accrued restructuring expenses.................... 8,928 18,448 Current portion -- long-term debt................. 17 16 -------- -------- Total current liabilities........................ 231,611 169,266 -------- -------- Deferred taxes.................................... 6,942 12,336 Long-term debt.................................... 96,136 119,475 Stockholders' equity Common Stock $.10 par value Authorized -- 300,000,000 shares Issued -- 107,592,033 shares and 106,830,596 shares, respectively............... 10,759 10,683 Additional paid-in capital........................ 68,396 64,924 Treasury stock at cost -- 8,955,000 shares and 8,710,000 shares, respectively................... (40,824) (39,405) Deferred employee compensation.................... (2,011) (1,051) Accumulated other comprehensive income (loss)..... (2,191) 267 Retained earnings................................. 384,657 348,154 -------- -------- Total stockholders' equity....................... 418,786 383,572 -------- -------- Total liabilities and stockholders' equity........ $753,475 $684,649 ======== ========
[FN] See Notes to Condensed Consolidated Financial Statements 3
CHARMING SHOPPES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Thirteen Weeks Ended October 30, October 31, (In thousands except per-share amounts) 1999 1998 Net sales.......................................... $277,441 $239,742 Other income....................................... 3,702 3,921 -------- -------- Total revenue..................................... 281,143 243,663 -------- -------- Cost of goods sold, buying, and occupancy expenses. 199,177 180,148 Selling, general, and administrative expenses...... 71,128 61,772 Non-recurring gain from demutualization of insurance company................................. (6,700) 0 Interest expense................................... 1,729 2,395 -------- -------- Total expenses.................................... 265,334 244,315 -------- -------- Income (loss) before income taxes.................. 15,809 (652) Income tax provision (benefit)..................... 7,533 (228) -------- -------- Net income (loss).................................. $ 8,276 $ (424) ======== ======== Basic net income (loss) per share.................. $ .08 $ .00 ===== ===== Diluted net income (loss) per share................ $ .08 $ .00 ===== =====
[FN] See Notes to Condensed Consolidated Financial Statements 4
CHARMING SHOPPES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Thirty-nine Weeks Ended October 30, October 31, (In thousands except per-share amounts) 1999 1998 Net sales.......................................... $848,159 $762,931 Other income....................................... 9,299 12,242 -------- -------- Total revenue..................................... 857,458 775,173 -------- -------- Cost of goods sold, buying, and occupancy expenses. 604,011 568,045 Selling, general, and administrative expenses...... 200,115 182,413 Non-recurring gain from demutualization of insurance company................................. (6,700) 0 Restructuring (credit) charge...................... (2,834) 34,000 Interest expense................................... 5,526 7,635 -------- -------- Total expenses.................................... 800,118 792,093 -------- -------- Income (loss) before income taxes and extraordinary item................................ 57,340 (16,920) Income tax provision (benefit)..................... 22,069 (5,922) -------- -------- Income (loss) before extraordinary item............ 35,271 (10,998) Extraordinary item -- gain on early retirement of debt, net of income taxes of $664.............. 1,232 0 -------- -------- Net income (loss).................................. $ 36,503 $(10,998) ======== ======== Basic net income (loss) per share: Before extraordinary item......................... $ .36 $(.11) Extraordinary item................................ .01 .00 ----- ----- Net income (loss)............................... $ .37 $(.11) ===== ===== Diluted net income (loss) per share: Before extraordinary item......................... $ .34 $(.11) Extraordinary item................................ .01 .00 ----- ----- Net income (loss)............................... $ .35 $(.11) ===== =====
[FN] See Notes to Condensed Consolidated Financial Statements 5
CHARMING SHOPPES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Thirty-nine Weeks Ended October 30, October 31, (In thousands) 1999 1998 Net income (loss)................................. $36,503 $(10,998) ------- -------- Other comprehensive (loss) income: Unrealized gains on available-for-sale securities, net of income tax expense of $523 and $210, respectively................... 971 390 Reclassification of realized gains on available-for-sale securities, net of income tax expense of $1,846 and $85, respectively..................................... (3,429) (157) ------- -------- Total other comprehensive (loss) income, net of taxes..................................... (2,458) 233 ------- -------- Comprehensive income (loss)....................... $34,045 $(10,765) ======= ========
[FN] See Notes to Condensed Consolidated Financial Statements 6
CHARMING SHOPPES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Thirty-nine Weeks Ended October 30, October 31, (In thousands) 1999 1998 Operating activities Net income (loss)................................. $ 36,503 $(10,998) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.................... 23,661 26,055 Deferred income taxes............................ 1,323 (5,849) Restructuring write-down of capital assets....... 0 10,000 Gain from disposition of capital assets.......... (3,147) (35) Gain on early retirement of debt................. (1,896) 0 Gain on sale of available-for-sale securities.... (5,276) (242) Changes in operating assets and liabilities: Merchandise inventories........................ (80,206) (41,215) Accounts payable............................... 34,718 29,575 Prepayments and other.......................... (5,726) 2,790 Accrued expenses............................... 20,144 (5,534) Income taxes payable........................... 7,501 (6,123) Accrued restructuring expenses................. (9,520) 19,031 -------- -------- Net cash provided by operating activities......... 18,079 17,455 -------- -------- Investing activities Investment in capital assets...................... (26,053) (20,418) Proceeds from sales of capital assets............. 10,329 60 Proceeds from sales of available-for-sale securities....................................... 361,285 326,762 Gross purchases of available-for-sale securities.. (355,704) (258,993) Acquisition of Modern Woman, net of cash acquired. (6,435) 0 Increase in other assets.......................... (7,047) (15,229) -------- -------- Net cash (used in) provided by investing activities....................................... (23,625) 32,182 -------- -------- Financing activities Reduction of long-term borrowings................. (21,055) (15,837) Reduction of short-term borrowings................ (3,793) 0 Purchases of treasury stock....................... (1,419) (14,023) Proceeds from exercise of stock options........... 866 507 -------- -------- Net cash used in financing activities............. (25,401) (29,353) -------- -------- (Decrease) Increase in cash and cash equivalents.. (30,947) 20,284 Cash and cash equivalents, beginning of period.... 43,789 12,349 -------- -------- Cash and cash equivalents, end of period.......... $ 12,842 $ 32,633 ======== ========
[FN] See Notes to Condensed Consolidated Financial Statements 7 CHARMING SHOPPES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Condensed Consolidated Financial Statements The condensed consolidated balance sheet as of October 30, 1999, the condensed consolidated statements of operations for the thirteen and thirty- nine weeks ended October 30, 1999 and October 31, 1998, and the condensed consolidated statements of comprehensive income (loss) and cash flows for the thirty-nine weeks ended October 30, 1999 and October 31, 1998 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at October 30, 1999 and the results of operations and cash flows for the thirteen and thirty-nine weeks ended October 30, 1999 and October 31, 1998 have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's January 30, 1999 Annual Report on Form 10-K. The results of operations for the thirteen and thirty-nine weeks ended October 30, 1999 and October 31, 1998 are not necessarily indicative of operating results for the full fiscal year. 2. Stockholders' Equity During the thirty-nine weeks ended October 30, 1999, stockholders' equity increased $35,214,000. Stockholders' equity increased as the result of net income of $36,503,000, payments of exercise price for stock options in the amount of $2,054,000, and amortization of deferred compensation expense of $534,000. These increases were partially offset by net unrealized losses on available-for-sale securities of $2,458,000 (net of an income tax benefit of $1,323,000) and purchases of treasury stock of $1,419,000. 3. Restructuring Charge (Credit) In December 1998, the Company consolidated its distribution center operations in its Greencastle, Indiana facility and closed its Bensalem, Pennsylvania distribution center. As a result, the Company recognized a pre-tax restructuring charge of $20,246,000 during the fourth quarter of the fiscal year ended January 30, 1999. The restructuring charge included a $17,969,000 write-down of the cost of the Bensalem facilities to a net realizable value of $5,662,000, based on an independent appraisal. The restructuring charge also included estimated severance costs of $1,556,000 and other estimated non-recurring costs of $721,000 relating to the closure. 8 CHARMING SHOPPES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. Restructuring Charge (Credit) (Continued) During July 1999, the Company completed the sale of the Bensalem facility and revised its estimate of costs relating to the distribution center restructuring. As a result, the Company recognized a pre-tax re- structuring credit of $2,834,000 during the thirty-nine weeks ended October 30, 1999. The credit primarily represents sales proceeds in excess of the estimated net realizable value of the Bensalem facility. During the thirty- nine weeks ended October 30, 1999, the Company charged $1,254,000 of costs against the distribution center restructuring accrual. At October 30, 1999, the Company had remaining accrued restructuring charges of $487,000 relating to the closing of the Bensalem facility. On March 5, 1998, the Company's Board of Directors approved a restruc- turing plan ("the Plan") in conjunction with its decision to eliminate men's merchandise from the Company's stores. The Plan resulted in a pre- tax restructuring charge of $34,000,000 during the thirty-nine weeks ended October 31, 1998. During the thirteen weeks ended October 30, 1999, the Company closed 1 store and completed the downsizing of 23 stores in connec- tion with the Plan. To-date, 60 stores have been closed, and 7 stores are scheduled for closing during the fiscal year ending January 29, 2000 ("Fis- cal 2000") in connection with the Plan. In addition, 71 stores have been downsized to-date, 1 store is scheduled for downsizing in Fiscal 2000, and approximately 10 stores are scheduled for downsizing thereafter. The following table summarizes accrued restructuring charges related to the Plan as of January 30, 1999 and payments charged against the accrual during the thirty-nine weeks ended October 30, 1999:
Accrued at Accrued At January October 30, 30, (in thousands) 1999 Payments 1999 Termination/amendment of store leases... $ 8,095 $(1,745) $6,350 Renovation of vacated store space....... 5,534 (4,495) 1,039 Severance............................... 120 (20) 100 Other costs............................. 3,429 (2,477) 952 ------- ------- ------ $17,178 $(8,737) $8,441 ======= ======= ======
9 CHARMING SHOPPES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. Non-recurring Gain from Demutualization of Insurance Company During the thirteen weeks ended October 30, 1999, the Company received a stock distribution from one of its mutual insurance carriers in connec- tion with the carrier's conversion to a publicly-held corporation (demutu- alization). In accordance with the consensus reached in Emerging Issues Task Force Issue No. 99-4, "Accounting for Stock Received from the Demutualization of A Mutual Insurance Company," the Company recorded the distribution at its fair value and recognized the resulting non-recurring gain in income from continuing operations. 5. Repurchases of Convertible Notes and Common Stock During the thirty-nine weeks ended October 30, 1999, the Company repurchased $23,316,000 aggregate principal amount of its 7.5% Convertible Subordinated Notes due 2006 (the "Notes") at a total cost of $21,031,000. The Notes had an aggregate carrying value of $22,927,000 as of the repurchase dates. The repurchases resulted in an extraordinary gain of $1,232,000, net of income taxes of $664,000. During the thirty-nine weeks ended October 31, 1998, the Company repurchased $15,833,000 aggregate principal amount of the Notes at a total cost of $15,306,000. The net gain on these repurchases was not material. The Company's Board of Directors has approved the repurchase of up to 20,000,000 shares of the Company's Common Stock. During the thirty-nine weeks ended October 30, 1999, the Company repurchased a total of 245,000 shares of its Common Stock at an aggregate cost of $1,419,000. As of Octo- ber 30, 1999, the Company has repurchased an aggregate total of 8,955,000 shares of its Common Stock at an aggregate cost of $40,824,000. 6. Net Income (Loss) Per Share
Thirteen Weeks Ended Thirty-nine Weeks Ended October 30, October 31, October 30, October 31, (In thousands) 1999 1998 1999 1998 Basic weighted average common shares outstanding................ 98,386 98,860 98,286 99,952 Dilutive effect of stock options.............. 1,430 0 1,100 0 Dilutive effect of convertible notes.......... 0 0 16,000 0 ------ ------ ------- ------ Diluted weighted average common shares and equivalents outstanding.... 99,816 98,860 115,386 99,952 ====== ====== ======= ======
10 CHARMING SHOPPES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6. Net Income (Loss) Per Share (Continued)
Thirteen Weeks Ended Thirty-nine Weeks Ended October 30, October 31, October 30, October 31, (In thousands) 1999 1998 1999 1998 Net income (loss)........... $8,276 $(424) $36,503 $(10,998) Decrease in interest expense from assumed conversion of notes, net of income taxes........ 0 0 3,524 0 ------ ----- ------- -------- Net income (loss) used to determine diluted earnings per share......... $8,276 $(424) $40,027 $(10,998) ====== ===== ======= ========
Options to purchase 3.0 million and 7.8 million shares of Common Stock at October 30, 1999 and October 31, 1998, respectively, with exercise prices in excess of the average market price of the Company's Common Stock, were excluded from the computation of diluted net income per share because the effect would have been antidilutive. Options with exercise prices below the average market price, having a dilutive effect of 0.6 million shares and 0.8 million shares for the thirteen weeks and thirty-nine weeks ended October 31, 1998, respectively, were excluded from the computation of net loss per share because the effect would have been antidilutive. The assumed conversion of the Company's 7.5% Convertible Subordinated Notes due 2006 was excluded from the computation of diluted net income per share for the thirteen weeks ended October 30, 1999 and diluted net loss per share for the thirteen weeks and thirty-nine weeks ended October 31, 1998 because the effect would have been antidilutive. 7. Shareholder Rights Plan In February 1999, the Company's Board of Directors adopted a Sharehol- der Rights Plan to replace the existing Shareholder Rights Plan with effect from April 26, 1999, when the existing Shareholder Rights Plan expired. The Board of Directors also increased the authorized shares of Partici- pating Series A Junior Preferred Stock, $1.00 par value, from 300,000 shares to 500,000 shares, and declared a dividend of one Right for each outstanding share of Common Stock, payable as of the close of business on April 26, 1999 to shareholders of record as of the close of business on April 12, 1999. Such Rights only become exercisable or transferable apart 11 CHARMING SHOPPES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. Shareholder Rights Plan (Continued) from the Common Stock ten days after a person or group (Acquiring Person) acquires, or obtains the right to acquire, beneficial ownership of twenty percent (20%) or more of the Company's outstanding common shares. Each Right then may be exercised to acquire one three-hundredth of a share of newly created Series A Junior Participating Preferred Stock or a combina- tion of securities and assets of equivalent value at a purchase price of $20, subject to adjustment. Upon the occurrence of certain events (for example, if the Company is a surviving corporation in a merger with an Acquiring Person), the Rights entitle holders other than the Acquiring Person to acquire Common Stock having a value of twice the exercise price of the Rights. Upon the occur- rence of certain other events (for example, if the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving corporation), the rights entitle holders other than the Acquiring Person to acquire Common Stock of the Acquiring Person having a value twice the exercise price of the Rights. The Rights may be redeemed by the Company at $.01 per Right at any time until the tenth day following public announcement that a twenty percent (20%) position has been acquired. The Rights will expire on April 25, 2009. 8. Acquisition On August 2, 1999, the Company completed the acquisition of 100% of the outstanding stock of Modern Woman Holdings, Inc. ("Modern Woman") for $10 million. Modern Woman operates a chain of 135 retail apparel stores in 24 states, specializing in large-size women's apparel. The acquisition has been accounted for as a purchase, and Modern Woman's results of operations are included in the Company's financial statements as of the acquisition date. Prior-period results have not been restated. Pro forma consolidated results of operations for periods prior to the acquisition have not been presented, as the effect of the acquisition was not material. The fair value of the net assets acquired exceeded the purchase price, and the excess has been applied to reduce the fair value of non-current assets. The acquisition was financed through the use of internally-generated funds. 12 CHARMING SHOPPES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. Impact of Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company is required to adopt this statement as of the beginning of the fiscal year ending February 2, 2002. SFAS No. 133 requires the recognition of all derivative instruments as either assets or liabilities in the statement of financial position, and the measurement of those instruments at fair value. The statement also specifies the conditions under which derivative instruments qualify as hedging activities, and the accounting for changes in the fair value of derivatives designated as hedges. The Company currently manages a portion of its interest rate risk through the use of derivative instruments that cap a portion of the Company's interest rate risk. Management has not completed its determination of the effect that SFAS 133 will have on the Company's financial statements or financial statement disclosures. 10. Subsequent Event On November 15, 1999, the Company announced that it has entered into a definitive merger agreement to acquire for cash all outstanding shares of Catherines Stores Corporation ("Catherines Stores") for $21.00 per share. The total cost of the acquisition of the shares is expected to be approx- imately $150 million, and will be funded from the Company's existing cash and available-for-sale securities. The boards of directors of both compa- nies have approved the transaction, and closing of the transaction is expected to occur during January 2000. The offer is conditioned upon, among other things, at least a majority of the Catherines Stores shares being properly tendered and not withdrawn prior to the expiration of the offer. The tender offer is scheduled to expire at 5:00 p.m., New York time, on January 6, 2000, unless otherwise extended. The acquisition of Catherines Stores will be accounted for as a pur- chase, and the Company's prior-period results will not be restated. The Company anticipates that the purchase price will exceed the fair value of the net assets acquired. Any such excess will be accounted for as goodwill and amortized over an appropriate period. Catherines Stores currently operates 436 retail apparel stores in 40 states and the District of Columbia, specializing in large-size women's apparel. For the twenty-six weeks ended July 31, 1999, Catherines Stores reported net sales of $158.6 million and net income of $8.3 million. The Company plans to operate Catherines Stores as a separate division, and plans to consolidate its Modern Woman stores into the Catherines Stores division. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements concern- ing the Company's operations, performance and financial condition. In particular, it includes forward-looking statements regarding sales perfor- mance, store openings and closings, cost savings, capital requirements, management's expectations for Year 2000 compliance, the Company's exposure to fluctuations in interest rates, and other matters. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those indicated in the forward- looking statements. Such risks and uncertainties may include, but are not limited to, (i) rapid changes in or miscalculation of fashion trends, (ii) extreme or unseasonable weather conditions, (iii) economic downturns, a weakness in overall consumer demand, inflation and cyclical variations in the retail market for women's fashion apparel, (iv) the risks attendant to the sourcing of the Company's merchandise needs abroad, including exchange rate fluctuations, political instability, trade sanctions or restrictions, changes in quota and duty regulations, delays in shipping or increased costs of transportation, (v) competitive pressures, (vi) disruptions to operations as a result of Year 2000 compliance issues, (vii) failure to realize merger-related synergies, and (viii) fluctuations in interest rates. These, and other risks and uncertainties, are detailed further in this Item 2, in "Part I, Item 1 -- Business: Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995" of the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1999, and in the Company's reports filed with the Securities and Exchange Commission from time to time. CURRENT DEVELOPMENTS On August 2, 1999, the Company completed the acquisition of 100% of the outstanding stock of Modern Woman Holdings, Inc. ("Modern Woman") for $10.0 million. Modern Woman operates a chain of 135 retail apparel stores in 24 states, specializing in large-size women's apparel. The acquisition has been accounted for as a purchase, and Modern Woman's results of operations are included in the Company's financial statements as of the acquisition date. Prior-period results have not been restated. The fair value of the net assets acquired exceeded the purchase price, and the excess has been applied to reduce the fair value of non-current assets. The acquisition was financed through the use of internally-generated funds. 14 On November 15, 1999, the Company announced that it has entered into a definitive merger agreement to acquire for cash all outstanding shares of Catherines Stores Corporation ("Catherines Stores") for $21.00 per share. The total cost of the acquisition of the shares is expected to be approxi- mately $150 million, and will be funded from the Company's existing cash and available-for-sale securities. The boards of directors of both compa- nies have approved the transaction, and closing of the transaction is expected to occur during January 2000. The offer is conditioned upon, among other things, at least a majority of the Catherines Stores shares being properly tendered and not withdrawn prior to the expiration of the offer. The tender offer is scheduled to expire at 5:00 p.m., New York time, on January 6, 2000, unless otherwise extended. The acquisition of Catherines Stores will be accounted for as a pur- chase, and the Company's prior-period results will not be restated. The Company anticipates that the purchase price will exceed the fair value of the net assets acquired. Any such excess will be accounted for as goodwill and amortized over an appropriate period. Catherines Stores currently operates 436 retail apparel stores in 40 states and the District of Columbia, specializing in large-size women's apparel. For the twenty-six weeks ended July 31, 1999, Catherines Stores reported net sales of $158.6 million and net income of $8.3 million. The Company plans to operate Catherines Stores as a separate division, and plans to consolidate its Modern Woman stores into the Catherines Stores division. RESULTS OF OPERATIONS The following table sets forth, as a percentage of net sales, certain items appearing in the Condensed Consolidated Statements of Operations:
Thirteen Weeks Ended Thirty-nine Weeks Ended October October October October 30, 31, 30, 31, 1999 1998 1999 1998 Net sales....................... 100.0% 100.0% 100.0% 100.0% Cost of goods sold, buying and occupancy expenses............. 71.8 75.1 71.2 74.5 Selling, general, and administrative expenses........ 25.6 25.8 23.6 23.9 Non-recurring gain from demutualization of insurance company........................ (2.4) -- (0.8) -- Restructuring charge (credit)... -- -- (0.3) 4.5 Interest expense................ 0.6 1.0 0.6 1.0 Income (loss) before income taxes and extraordinary item... 5.7 (0.3) 6.8 (2.2) Income tax provision (benefit).. 2.7 (0.1) 2.6 (0.8) Gain on early retirement of debt, net of taxes............. -- -- 0.1 -- Net income (loss)............... 3.0 (0.2) 4.3 (1.4)
15 Thirteen Weeks Ended October 30, 1999 and October 31, 1998 Net sales for the quarter ended October 30, 1999 ("Fiscal 2000 Third Quarter") were $277.4 million, a 15.7% increase from net sales of $239.7 million for the quarter ended October 31, 1998 ("Fiscal 1999 Third Quarter"). Comparable store sales (sales generated by stores in operation during the same weeks of each period) increased 6.0% in the Fiscal 2000 Third Quarter as compared to the Fiscal 1999 Third Quarter. In addition, sales from new stores (sales generated by stores in operation during the Fiscal 2000 Third Quarter that were not in operation during the corres- ponding weeks of the Fiscal 1999 Third Quarter) in the Fiscal 2000 Third Quarter equaled 13.3% of Fiscal 1999 Third Quarter sales. Sales for the Fiscal 1999 Third Quarter which were not comparable with sales for the Fiscal 2000 Third Quarter as a result of the closing of stores in Fiscal 1999 and Fiscal 2000 equaled 3.3% of Fiscal 1999 Third Quarter sales. The number of retail stores increased from 1,156 at October 31, 1998 to 1,303 at October 30, 1999. Increases in comparable store sales were achieved in sportswear, intimate apparel, accessories, and girls, reflecting favorable customer response to the Company's fall merchandise offerings. New store sales and the increase in the number of retail stores include the results of the Modern Woman chain (see CURRENT DEVELOPMENTS" above). Cost of goods sold, buying, and occupancy expenses expressed as a percentage of sales decreased 3.3% in the Fiscal 2000 Third Quarter as compared to the Fiscal 1999 Third Quarter. Cost of goods sold as a percentage of sales decreased 2.1% in the Fiscal 2000 Third Quarter as compared to the Fiscal 1999 Third Quarter. The improvement in merchandise margins was primarily a result of reduced levels of markdowns and store- wide promotions. Buying and occupancy expenses expressed as a percentage of sales decreased 1.2% in the Fiscal 2000 Third Quarter as compared to the Fiscal 1999 Third Quarter. The decrease in buying and occupancy expenses as a percentage of sales was due primarily to cost savings from the consol- idation of the Company's distribution centers and a reduction in store occupancy expenses. These decreases were partially offset by inclusion of the results of the Modern Woman chain in the Fiscal 2000 Third Quarter. Buying and occupancy expenses as a percentage of sales also benefited from the leveraging effect of the increase in sales volume on the fixed portion of these expenses. Selling, general, and administrative expenses expressed as a percent- age of sales decreased 0.2% in the Fiscal 2000 Third Quarter as compared to the Fiscal 1999 Third Quarter, primarily as a result of the leveraging effect of the increase in sales volume. Selling expenses increased in amount primarily as a result of increases in payroll costs, store incentive programs, advertising, and certain volume-related expenses, but decreased 0.2% as a percentage of sales. General and administrative expenses increased slightly in amount as compared to the prior-year period, but decreased as a percentage of sales. Selling, general, and administrative expenses also increased as the result of inclusion of the results of the Modern Woman chain in the Fiscal 2000 Third Quarter. 16 During the Fiscal 2000 Third Quarter, the Company received a stock distribution from one of its mutual insurance carriers in connection with the carrier's conversion to a publicly-held corporation (demutualization). In accordance with the consensus reached in Emerging Issues Task Force Issue No. 99-4, "Accounting for Stock Received from the Demutualization of A Mutual Insurance Company," the Company recorded the distribution at its fair value and recognized the resulting non-recurring gain in income from continuing operations. Interest expense expressed as a percentage of sales decreased 0.4% in the Fiscal 2000 Third Quarter as compared to the Fiscal 1999 Third Quarter. The decrease in interest expense is a result of the Company's repurchase of $42.0 million aggregate principal amount of its 7.5% Convertible Subordi- nated Notes due 2006 during Fiscal 1999 and the quarter ended May 1, 1999 ("Fiscal 2000 First Quarter"). The income tax provision for the Fiscal 2000 Third Quarter was 47.7% of the Company's pre-tax income, as compared to an income tax benefit of 35.0% of the pre-tax loss for the Fiscal 1999 Third Quarter. The tax provision for the Fiscal 2000 Third Quarter includes an additional non- recurring provision of $2.0 million related to one of the Company's employee insurance programs. Thirty-nine Weeks Ended October 30, 1999 and October 31, 1998 Net sales for the first three quarters of the fiscal year ended Janu- ary 29, 2000 ("Fiscal 2000") were $848.2 million, an 11.2% increase from net sales of $762.9 million for the first three quarters of the fiscal year ended January 30, 1999 ("Fiscal 1999"). Comparable store sales increased 7.9% in the first three quarters of Fiscal 2000 as compared to the first three quarters of Fiscal 1999. In addition, sales from new stores for the first three quarters of Fiscal 2000 equaled 7.1% of sales for the first three quarters of Fiscal 1999. Sales for the first three quarters of Fiscal 1999 for stores that were closed during Fiscal 1999 and Fiscal 2000 equaled 3.6% of total sales for the first three quarters of Fiscal 1999. Increases in comparable store sales were achieved in sportswear, intimate apparel, accessories, and girls, as favorable customer response to the Company's spring and summer merchandise offerings carried over to the Company's fall merchandise. New store sales include the results of the Modern Woman chain (see "CURRENT DEVELOPMENTS" above). During Fiscal 1999, the Company eliminated sales of men's merchandise and remerchandised the selling space used for men's merchandise. Cost of goods sold, buying, and occupancy expenses expressed as a per- centage of sales decreased 3.3% in the first three quarters of Fiscal 2000 as compared to the first three quarters of Fiscal 1999. Cost of goods sold as a percentage of sales decreased 1.7% in the first three quarters of Fiscal 2000 as compared to the first three quarters of Fiscal 1999. The improvement in merchandise margins was primarily a result of reduced levels 17 of markdowns and store-wide promotions in the second and third quarters of the current year. Merchandise margins also benefited from improvements in shrinkage rates and sourcing operations. Buying and occupancy expenses expressed as a percentage of sales decreased 1.6% in the first three quar- ters of Fiscal 2000 as compared to the first three quarters of Fiscal 1999. The decrease in buying and occupancy expenses as a percentage of sales was due primarily to cost savings from the consolidation of the Company's distribution centers and a reduction in store occupancy expenses. These decreases were partially offset by inclusion of the results of the Modern Woman chain in the Fiscal 2000 Third Quarter. Buying and occupancy expenses as a percentage of sales also benefited from the leveraging effect of the increase in sales volume on the fixed portion of these expenses. Selling, general, and administrative expenses expressed as a percent- age of sales decreased 0.3% in the first three quarters of Fiscal 2000 as compared to the first three quarters of Fiscal 1999, primarily as a result of the leveraging effect of the increase in sales volume. Selling expenses increased in amount primarily as a result of increases in payroll costs, store incentive programs, advertising, and certain volume-related expenses, but were constant as a percentage of sales. General and administrative expenses increased in amount as compared to the prior-year period, but decreased as a percentage of sales. Selling, general, and administrative expenses also increased as the result of inclusion of the results of the Modern Woman chain in the Fiscal 2000 Third Quarter. During the Fiscal 2000 Third Quarter, the Company received a stock distribution from one of its mutual insurance carriers in connection with the carrier's conversion to a publicly-held corporation (demutualization). In accordance with the consensus reached in Emerging Issues Task Force Issue No. 99-4, "Accounting for Stock Received from the Demutualization of A Mutual Insurance Company," the Company recorded the distribution at its fair value and recognized the resulting non-recurring gain in income from continuing operations. In December 1998, the Company consolidated its distribution center operations in its Greencastle, Indiana facility and closed its Bensalem, Pennsylvania distribution center. As a result, the Company recognized a pre-tax restructuring charge of $20.2 million during the fourth quarter of Fiscal 1999. During July 1999, the Company completed the sale of the Bensalem facility and revised its estimate of costs relating to the distribution center restructuring. As a result, the Company recognized a pre-tax restructuring credit of $2.8 million. The credit primarily repre- sents sales proceeds in excess of the estimated net realizable value of the Bensalem facility. On March 5, 1998, the Company's Board of Directors approved a restruc- turing plan that resulted in a pre-tax charge of $34.0 million during the first quarter of Fiscal 1999. The plan was approved in conjunction with the decision to eliminate men's merchandise from the Company's stores. During the first three quarters of Fiscal 2000, the Company closed 8 stores 18 and completed the downsizing of 41 stores in connection with the plan. To- date, 60 stores have been closed, and 7 additional stores are scheduled for closing in connection with the plan during the remainder of Fiscal 2000. In addition, 71 stores have been downsized to-date, 1 store is scheduled for downsizing during the remainder of Fiscal 2000, and approximately 10 stores are scheduled for downsizing thereafter. Interest expense expressed as a percentage of sales decreased 0.4% in the first three quarters of Fiscal 2000 as compared to the first three quarters of Fiscal 1999. The decrease in interest expense is a result of the Company's repurchase of $42.0 million aggregate principal amount of its 7.5% Convertible Subordinated Notes due 2006 during Fiscal 1999 and the Fiscal 2000 First Quarter. Other income expressed as a percentage of sales decreased 0.5 in the first three quarters of Fiscal 2000 as compared to the first three quarters of Fiscal 1999. The decrease was primarily a result of a decrease in interest income from the Company's available-for-sale securities during the first quarter of Fiscal 2000 and realized losses from the Company's available-for-sale securities during the second and third quarters of Fiscal 2000. The Company utilized proceeds from the sale of a portion of its available-for-sale securities during Fiscal 1999 and the first quarter of Fiscal 2000 to repurchase portions of the Company's convertible notes and common stock. In addition, average interest rates on the securities declined during the period. The decrease in other income was partially offset by the decrease in interest expense that resulted from the repur- chases of the convertible notes. The income tax provision for the first three quarters of Fiscal 2000 was 38.5% of the Company's pre-tax income before extraordinary items, as compared to an income tax benefit of 35% of the pre-tax loss for the first three quarters of Fiscal 1999. The tax provision for the first three quarters of Fiscal 2000 includes an additional non-recurring provision of $2.0 million related to one of the Company's employee insurance programs. During the first quarter of Fiscal 2000, the Company repurchased $23.3 million aggregate principal amount of its 7.5% Convertible Subordinated Notes due 2006 at a total cost of $21.0 million. The notes had an aggregate carrying value of $22.9 million as of the repurchase dates. The repurchases resulted in an extraordinary gain of $1.2 million, net of income taxes of $0.7 million. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of working capital are (i) cash flow from operations, (ii) proprietary credit card receivables securitization agreements, (iii) its long-term investment portfolio and (iv) its $150 million revolving credit facility. As of October 30, 1999, the Company had 19 working capital of $139.8 million as compared to $192.3 million at January 30, 1999. Working capital at October 30, 1999 included $12.8 million of cash and cash equivalents, compared to cash and cash equivalents of $43.8 million at January 30, 1999. The ratio of current assets to current liabilities was 1.6 to 1 at October 30, 1999 and 2.1 to 1 at January 30, 1999. The primary reason for the decrease in working capital and the current ratio is a change in the mix of investments in available-for-sale securities from short-term maturities to long-term maturities. Short-term investments decreased by $58.2 million from January 30, 1999 to October 30, 1999, while long-term investments increased by $54.0 million during the same period. Net cash provided by operating activities was $18.1 million for the first three quarters of Fiscal 2000, as compared to net cash provided by operating activities of $17.5 million for the first three quarters of Fiscal 1999. The increase in cash provided by operations was primarily the result of the year-over-year improvement in the Company's operating income, offset by an increase in the net investment in merchandise inventories. The increase in the net investment in merchandise inventories is partially a result of the Company's decision to accelerate merchandise receipts as part of its Year 2000 contingency plan (see "IMPACT OF YEAR 2000 -- Year 2000 Risk Assessment and Year 2000 Contingency Planning" below.) The Company has an agreement with a commercial finance company to provide a revolving credit facility with a maximum availability of $150 million, subject to limitations based upon eligible inventory. The facil- ity, which expires June 1, 2000, enables the Company to issue letters of credit for overseas purchases of merchandise and provides for seasonal cash borrowings, if necessary. The facility is secured by merchandise inven- tory, furniture and fixtures at the retail stores, and certain other Company assets. As of October 30, 1999, the availability under this facility was approximately $136.5 million, against which the Company had outstanding letters of credit of $45.0 million. There were no cash borrow- ings outstanding under this agreement as of October 30, 1999. The agree- ment requires, among other things, that the Company maintain a minimum net worth of $300 million and not pay dividends on its Common Stock. Capital expenditures of $26.1 million during the first three quarters of Fiscal 2000 were primarily for the construction, remodeling, and fixtur- ing of new and existing retail stores, loss-prevention equipment, systems technology, and expansion of the Company's Greencastle, Indiana distribu- tion center. During Fiscal 2000, the Company anticipates incurring capital expenditures of approximately $37 million. The Company expects to finance these capital expenditures principally through internally generated funds. The Company plans to open approximately 75 new stores and relocate 17 stores during Fiscal 2000. The majority of the new store openings are expected to be in the West, Southwest, and Southeast regions of the United States. During the first three quarters of Fiscal 2000, the Company opened 41 new stores, relocated 13 stores, and closed 9 stores. In addition, the Company acquired 136 stores in the Modern Woman chain during the current quarter. 20 In connection with the Company's store restructuring plan, which was adopted in conjunction with the decision to eliminate men's merchandise from the Company's stores, and the consolidation of the Company's distri- bution centers, the Company had approximately $8.9 million of accrued, unpaid restructuring costs as of October 30, 1999. The Company expects to pay the majority of these costs within twelve months, and has included them in current liabilities. The Company anticipates that these restructuring costs will be financed principally through internally generated funds. At the present time, management does not expect any further change in the estimated costs for the restructuring plans. During the first three quarters of Fiscal 2000, the Company repur- chased $23.3 million aggregate principal amount of its 7.5% Convertible Subordinated Notes due 2006 ("Notes") at a total cost of $21.0 million. As of October 30, 1999, the Company has repurchased a total of $42.0 million aggregate principal amount of Notes at a total cost of $38.8 million. The Company will continue to evaluate market conditions to determine if addi- tional Notes will be repurchased. The Company's Board of Directors has approved the repurchase of up to 20 million shares of the Company's Common Stock. During the first three quarters of Fiscal 2000, the Company repurchased 245,000 shares of its Common Stock at a cost of $1.4 million. As of October 30, 1999, the Company has repurchased a total of 8,955,000 shares at a total cost of $40.8 million. The Company will continue to evaluate market conditions to determine if additional shares of Common Stock will be repurchased. The Company maintains a trust to which it transfers, at face value, its interest in receivables created under the Company's proprietary credit card program. The Company, together with the trust, has entered into vari- ous securitization agreements whereby it 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 party with whom the trust has entered into the securitization agreement. During the second quarter of Fiscal 2000, the Company, through the trust, completed an offering of $150 million of asset-backed certificates with a five-year term to replace its five-year facility that matured in April 1999. Charming Shoppes Receivables Corp., a wholly-owned indirect subsidiary of the Company, is a special purpose corporation. Its assets, comprising $33.9 million of the Charming Shoppes Master Trust Certificates, will be available first and foremost to satisfy the claims of its cred- itors, including certain claims of investors in the Charming Shoppes Master Trust. The providers of the credit enhancements and trust investors have no other recourse to the Company. The Company does not receive collateral from any party to the securitization, and the Company does not have any risk of counterparty non-performance. 21 These securitization agreements improve the overall liquidity of the Company and lessen the effect of interest rate volatility by providing short-term sources of funding. Additional information regarding the Company's asset securitization program is included in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1999. The Company believes that cash flow from operations, its proprietary credit card receivables securitization agreements, its long-term investment portfolio, and its $150 million revolving credit facility are sufficient to support current operations. IMPACT OF YEAR 2000 For many years, dates have been stored in computer systems with two digit rather than four digit years. The Year 2000 computer problem occurs when a computer system cannot properly recognize dates stored with two digit years beyond 1999. Calculations may inaccurately interpret a date stored in a format of "00" as the year 1900 rather than 2000, resulting in improper computations, execution of faulty logic, or outright computer system failure. Systems must be remediated and tested in order to minimize the potential for failure caused by the Year 2000 computer calculation. The Company uses computer equipment and software in its retailing operations to supply stores with products for sale, process customer trans- actions, including credit transactions, and to record and report its financial condition and results of operations. Since 1997, the Company has been implementing a comprehensive program to correct its computer systems, equipment, and facilities so that they will be Year 2000 compliant. The Company has also communicated with its important suppliers of merchandise and services to ensure that they are addressing their Year 2000 issues. An Executive Oversight Committee, made up of the Company's General Counsel, Corporate Director of Human Resources, and Chief Financial Offi- cer, oversees the Company's overall Year 2000 initiatives. The committee has implemented a comprehensive Year 2000 readiness program that has been adopted by all business units of the Company. Individual department heads have assigned resources to this program to coordinate and manage Year 2000 readiness within and among the Company's departments and to evaluate the state of Year 2000 readiness of outside vendors and suppliers. The Com- pany's Corporate Audit Department facilitated the implementation of the Year 2000 readiness program by identifying and reporting outstanding issues to the committee for resolution, administering vendor compliance programs, and monitoring the progress of each business unit. The Company's Year 2000 readiness program is currently on schedule. Internal resources and outside consultants have been used to implement the Year 2000 readiness program. 22 The Year 2000 readiness program consists of five phases, as follows: (a) Standardization: The development of a set of policies, guidelines, and standards to be used during the Year 2000 readiness program. Examples of these include standard date routines to be used in computer programs, standard test plans to be used for testing all systems, and guidelines for migrating a tested system into the production environment. These policies, guidelines, and standards are designed to ensure that all personnel follow a consistent approach in implementing the Year 2000 readiness program. (b) Evaluation: The identification and evaluation of the Company's busi- ness systems so as to determine the method by which the systems will be made Year 2000 compliant. All of these systems are prioritized for attention based on usage of dates, the extent to which they are critical to the Company's business, and the likelihood of failure. (c) Remediation: The development of a remediation strategy for each sys- tem. Strategies include system replacement, remediation of existing systems, and coordination with the supplying vendor to provide a version that is Year 2000 compliant. (d) End-to-End Testing: The development and implementation of a testing strategy and test plan for each system. Testing is designed to cover all significant transition dates, and includes testing within and among systems, as well as data communications with critical vendors. (e) Contingency Planning: The development of contingency plans if the Com- pany does not successfully complete significant portions of its Year 2000 readiness program or if the critical vendors are not Year 2000 compliant. Corporate Business Systems The Company has been implementing its Year 2000 readiness program for corporate business systems since 1997. These systems include all mainframe and non-mainframe systems and software, the corporate computing infrastruc- ture and network of hardware and software, desktop equipment and software, and external and internal communication software and equipment. Third- party software, along with in-house developed systems, is included within the scope of the Company's Year 2000 readiness program. These corporate business systems are located at the Company's headquarters and offices in Bensalem and Lancaster, Pennsylvania, its distribution center in Green- castle, Indiana, and its private label credit card operations in Milford, Ohio. They are also located in the Company's 1,303 stores located in 47 states, its factory operations in the Dominican Republic, and its inter- national operations in Hong Kong, Singapore, and Shanghai. 23 The standardization and evaluation phases covering these corporate business systems have been completed. The remediation, segment testing, and end-to-end testing phases for the Company's mainframe, non-mainframe, and in-store systems have been completed. An independent third-party review of programming code was conducted in the third quarter of Fiscal 2000. Year 2000 defects are deemed to be minor and will be remediated and tested prior to December 31, 1999. The Company's private label credit card organization is monitored and regulated by the office of the Comptroller of the Currency. The Comp- troller has performed quarterly Year 2000 reviews of this organization since the first quarter of Fiscal 1999 and is scheduled to do so through Fiscal 2000. This organization has two separate system components, namely, internal credit systems and a third-party credit card processing system used for all primary functions of the private label credit card program. The standardization, evaluation, and remediation phases have been completed for the internal credit systems. The end-to-end testing phase of internal credit systems commenced during the first quarter of Fiscal 2000 and was completed during the second quarter of Fiscal 2000. The Company is regularly monitoring the progress of its third-party credit processor in achieving Year 2000 compliance. Based on information provided to the Company by that third-party processor, the standardization, evaluation, remediation, and testing phases for the third-party credit card processing system have been completed. Embedded Technologies "Embedded technologies" refers to any equipment or machinery that relies on a computer chip or microprocessor in order to operate. Examples include office systems, such as fax machines and photocopiers; building systems, such as elevators, lighting, security systems, and environmental control units; and business communication systems, such as data switching equipment and telephone exchange equipment. Certain microprocessors within such equipment may fail if they cannot properly recognize dates into the Year 2000. The Company uses various technologies and computer-controlled equipment in the operation of its corporate and store facilities. This equipment includes security monitoring systems; primary and back-up power supply systems; energy management systems; elevators; and office equipment. Some of this equipment may contain embedded chip technology that may be affected by the Year 2000 issue. The Company has taken an inventory of all 24 such equipment and has held discussions with vendors who supply and/or support such technology and equipment to assess the sensitivity of these systems and equipment to the Year 2000 issue. In conjunction with the Corporate Audit Department's program of auditing vendor preparedness for Year 2000, the Company has obtained assurances from these vendors and, to the extent possible, tested these systems to ensure Year 2000 compliance. Private branch exchanges at the Company's Bensalem, Pennsylvania corporate facilities are Year 2000 compliant. Upgrading of telecommunication soft- ware at the Company's corporate headquarters was completed during the third quarter of Fiscal 2000. Distribution Center Computer Systems The Company's distribution center, located in Greencastle, Indiana, uses a variety of computer systems and embedded technology equipment for its day-to-day operations. Shop floor machinery, interacting with complex computer systems, monitors, processes, and controls plant processes and material movement. Automated equipment includes conveyor systems, palleti- zers, sorters, scales, and radio frequency devices. Vendors have supplied software and equipment that have been heavily customized for the Company's distribution center configuration. The Company has worked with appropriate distribution center system vendors to perform all necessary Year 2000 reme- diation and testing services. The standardization and evaluation phases covering the distribution center systems have been completed. The remediation and testing phases were completed in the third quarter of Fiscal 2000. Vendors and Suppliers The Company has conducted a formal communication program with signifi- cant vendors to evaluate their Year 2000 compliance, and has assessed their responses to the Company's Year 2000 readiness questionnaire. Compre- hensive mailings were made during the fourth quarter of Fiscal 1999. Questionnaires were followed up with telephone interviews, and where necessary, audits were performed by the Company's Corporate Audit Depart- ment. The Company cannot assure timely compliance of vendors and may be adversely affected by the failure of a significant vendor to supply merchandise or services due to Year 2000 compliance failures. Although the Company values its relationship with significant vendors, it may use an alternative vendor if it determines that a particular vendor is unlikely to be Year 2000 compliant. Costs The total cost of the Company's Year 2000 readiness program is estimated at $6.6 million, of which approximately $1.3 million is for replacement systems and the remainder is for remediation and upgrade costs. To-date, $5.6 million of Year 2000 costs have been incurred, of which $2.4 million were incurred through the end of Fiscal 1999. The Company expects 25 to fund the estimated balance of $1.0 million for its Year 2000 readiness program from operating cash flows. The Company does not anticipate delaying any significant information technology projects as a result of the Company's Year 2000 compliance effort. Estimated future expenditures are not expected to have a material adverse effect on the Company's financial position, results of operations, or cash flows. Year 2000 Risk Assessment and Year 2000 Contingency Planning The Company is a retailer of women's apparel, and does not rely on a single customer for any significant amount of sales. The Company does not sell products which use computer systems, embedded chip technology, or other devices that may be sensitive to dates. The Company's financial condition could be materially adversely impacted by a failure to complete a significant portion of its Year 2000 readiness program in a timely fashion. However, management does not consider the possibility of such an occurrence to be likely at the present time. The Company anticipates that the most reasonably likely worst case scenarios include, but are not limited to, loss of communications to the stores, loss of utilities, and the inability to process customer transac- tions or engage in normal business activity. The Company has developed a Year 2000 contingency plan to mitigate the risks associated with potential Year 2000 disruptions. Despite such a contingency plan, the Company may be adversely affected by the failure of significant third-party vendors to become Year 2000 compliant. The Company's Year 2000 contingency plan includes, among other things, stockpiling and advance ordering of materials, accelerating merchandise production schedules and delivery dates to the Company's warehouse and stores, and identifying alternate vendors, suppliers, and carriers. The plan also includes procedures to address utility and telecommunication dis- ruptions, and manual procedures for recording sales and credit transaction authorizations and processing. Also, the Company has purchased an emer- gency generator to supplement power to the data center and for certain office space, and has established a communications process and crisis command center to address Year-2000-related disruptions. Projected completion dates and the estimated costs of the Company's Year 2000 readiness program are based on management's best estimates for future events and are forward-looking statements that may be updated as additional information becomes available. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those indicated. Such risks and un- certainties may include, but are not limited to, the ability of the Company, its critical vendors, and service providers to complete Year 2000 26 compliance remediation in a timely fashion; the ability to identify and correct all relevant computer codes and embedded chips; delay in the rendition of remediation services provided by third parties; and disrup- tions to operations as a result of Year 2000 compliance issues. Readers are cautioned that forward-looking statements contained herein should be read in conjunction with the disclosures in "Part I, Item 1 -- Business: Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995" of the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1999. MARKET RISK The Company may be exposed to fluctuations in interest rates to the extent that a portion of the investor certificates sold under its credit card securitization program are floating-rate instruments. The Company regularly monitors interest rate fluctuations and business implications surrounding interest rate changes, and manages interest rate risk through the use of derivative instruments. As of October 30, 1999, the Company had rate exposure to floating-rate instruments representing approximately $188 million, or 72% of all securi- tized assets under the program. The Company has entered into certain interest rate cap agreements that protect the Company's securitization master trust if interest rates were to exceed 9% and 11%. The effect on the Company's results of operations of a one percentage point change in short-term interest rates by the end of Fiscal 2000 would not be material. 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. 27 PART II. OTHER INFORMATION 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. (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 Employment Agreement, dated as of October 12, 1999, by and between Charming Shoppes, Inc. and Dorrit J. Bern. 10.2 1993 Employees' Stock Incentive Plan Restricted Stock Agreement, dated as of October 12, 1999, by and between Charming Shoppes, Inc. and Dorrit J. Bern. 27 Financial Data Schedule. (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended October 30, 1999. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHARMING SHOPPES, INC. (Registrant) Date: December 13, 1999 /S/ DORRIT J. BERN -------------------- Dorrit J. Bern Chairman of the Board President and Chief Executive Officer Date: December 13, 1999 /S/ ERIC M. SPECTER --------------------- Eric M. Specter Executive Vice President Chief Financial Officer 29 EX-27 2
5 1,000 9-MOS JAN-29-2000 OCT-30-1999 12,842 42,572 0 0 262,488 371,430 410,786 257,165 753,475 231,611 96,136 0 0 10,759 408,027 753,475 848,159 848,159 604,011 604,011 0 0 5,526 57,340 22,069 35,271 0 1,232 0 36,503 0.37 0.35
EX-10 3 EXHIBIT 10.1 Charming Shoppes, Inc. Employment Agreement This EMPLOYMENT AGREEMENT is made, entered into, and is effective as of this 12th day of October 1999 (herein referred to as the "Effective Date"), by and between Charming Shoppes, Inc. (hereinafter referred to as the "Company"), a Pennsylvania corporation having its principal offices in Bensalem, Pennsylvania and Dorrit J. Bern (hereinafter referred to as the "Executive"). WHEREAS, the Executive is presently employed by the Company in the capacity of President and Chief Executive Officer, and as a member of the Board of Directors of the Company; WHEREAS, the Executive possesses considerable experience and an intimate knowledge of the business and affairs of the Company, its policies, methods, personnel, and operations; and WHEREAS, the Company recognized that the Executive's contribution has been substantial and meritorious and, as such, the Executive has demonstrated unique qualifications to act in an executive capacity for the Company; and WHEREAS, the Company is desirous of assuring the continued employment of the Executive in the above stated capacity, and the Executive is desirous of such assurance. NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements of the parties set forth in this Agreement, and of other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: Section 1. Term of Employment (a) The Company hereby agrees to employ the Executive and the Executive hereby agrees to continue to serve the Company in accordance with the terms and conditions set forth herein, for an initial term, commencing as of the Effective Date of this Agreement and ending on December 31, 2004; subject however, to earlier termination as expressly provided herein. (b) The initial term of employment automatically shall be extended for one (1) additional year at the end of the initial term, and then again after each successive year thereafter (the initial term, as extended hereunder, the "Term"). However, either party may terminate this Agreement at the end of the Term, by giving the other party written notice of intent not to renew, delivered at least three (3) months prior to the end of such initial term or successive term. (c) In the event such notice of intent not to renew is properly delivered, this Agreement, along with all corresponding rights, duties, and covenants, automatically shall expire at the end of the Term then in progress, with the exception of the provisions contained in Section 12 herein, which shall survive such expiration. (d) However, regardless of the above, if at any time during the Term, a Change in Control of the Company occurs, then this Agreement shall become immediately irrevocable for the longer of: (i) two (2) years beyond the month in which the effective date of such Change in Control occurs; or (ii) until all obligations of the Company hereunder have been fulfilled, and until all benefits provided hereunder have been paid. Section 2. Definitions 2.1 "Agreement" means this Employment Agreement for Dorrit J. Bern. 2.2 "Annual Bonus" means the annual bonus paid to the Executive pursuant to Section 5.2 herein. 2.3 "Award Agreement" means an agreement entered into by the Company and the Executive, which specifies the terms and conditions of an equity grant (i.e., an Option grant or restricted stock grant). 2.4 "Base Salary" means the salary of record paid to the Executive as annual salary, pursuant to Section 5.1 herein, excluding amounts received under incentive or other bonus plans, whether or not deferred. 2.5 "Beneficial Ownership" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act. 2.6 "Beneficiary" means the persons or entities designated or deemed designated by the Executive pursuant to Section 13.6 herein. 2.7 "Board" or "Board of Directors" means the Board of Directors of the Company. 2.8 "Cause" means the Executive's: (a) Willful and continued neglect, refusal or failure to substantially perform her duties with the Company (other than any such failure resulting from Disability or occurring after issuance by the Executive of a Notice of Termination for Good Reason), after a written demand for substantial performance is delivered to the Executive that specifically identifies the manner in which the Company believes that the Executive has willfully failed to substantially perform her duties, and after the Executive has failed to resume substantial performance of her duties on a continuous basis within ten (10) calendar days of receiving such demand; (b) Conviction of a felony involving a crime of moral turpitude; or (c) Willfully engaging in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of determining Cause, no act or omission by the Executive shall be considered "willful" unless it is done or omitted in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act or failure to act based upon: (a) authority given pursuant to a resolution duly adopted by the Board, or (b) advice of counsel for the Company, shall be conclusively presumed to be done or omitted to be done by the Executive in good faith and in the best interests of the Company. 2.9 "Change in Control" or "CIC" of the Company shall be deemed to have occurred as of the first day any one or more of the following conditions shall have been satisfied: (a) Any Person, other than the Company or a Related Party, acquires directly or indirectly the Beneficial Ownership of any Voting Security and immediately after such acquisition such Person has directly or indirectly, the Beneficial Ownership of Voting Securities representing twenty (20%) percent or more of the total voting power of all the then-outstanding Voting Securities; or (b) During any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors and any new Director (other than a Director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a) or (c) of this Section) whose election by the Board of Directors or nomination of election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who either were Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute two- thirds (2/3) of the Board; or (c) The shareholders of the Company approve a merger, consolidation, recapitalization or reorganization of the Company, a reverse stock split of outstanding Voting Securities, or an acquisition of securities or assets by the Company (a "Transaction"), or consummation of such a Transaction if shareholder approval is not obtained, other than a Transaction which would result in the holders of Voting Securities having at least eighty (80%) percent of the total voting power represented by the Voting Securities outstanding immediately prior thereto continuing to hold Voting Securities or voting securities of the surviving entity having at least sixty (60%) percent of the total voting power represented by the Voting Securities or the voting securities of such surviving entity outstanding immediately after such transaction and in or as a result of which the voting rights of each Voting Security relative to the voting rights of all other Voting Securities are not altered; or (d) The shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets other than any such transaction which would result in Related Parties owning or acquiring more than fifty (50%) percent of the assets owned by the Company immediately prior to the transaction. However, in no event shall a Change in Control be deemed to have occurred, with respect to the Executive, if the Executive is part of a purchasing group which consummates the Change in Control transaction. The Executive shall be deemed "part of a purchasing group" for purposes of the preceding sentence if the Executive is an equity participant in the purchasing company or group (except for: (i) passive ownership, either alone or with any Person, of less than five (5%) percent of any class of equity securities of the purchasing company that are registered under Section 12 of the Securities Exchange Act or (ii) ownership of equity participation in the purchasing company or group which is otherwise not significant, as determined prior to the Change in Control by a majority of the nonemployee continuing Directors). 2.10 "CIC-Severance Benefits" means the payment of severance compensation associated with a Qualifying Termination occurring subsequent to a Change in Control, as described in Section 8.3 herein, fifty percent (50%) of which is acknowledged to be consideration for Executive's performance of her obligations under Section 12.3 herein. 2.11 "Code" means the United States Internal Revenue Code of 1986, as amended. 2.12 "Compensation Committee" means the Compensation Committee of the Board, or any other committee appointed by the Board to perform the functions of the Compensation Committee. 2.13 "Company" means Charming Shoppes, Inc. a Pennsylvania corporation (including any and all subsidiaries), or any successor thereto as provided in Article 9 herein. 2.14 "Director" means any individual who is a member of the Board of Directors of the Company. 2.15 "Disability" or "Disabled" means for all purposes of this Agreement, the incapacity of the Executive, due to injury, illness, disease, or bodily or mental infirmity, to engage in the performance of substantially all of the usual duties of employment with the Company. 2.16 "Effective Date" means October 12, 1999. 2.17 "Effective Date of Termination" means the date on which a termination occurs, including non-renewal, following the Company's notice, at the end of the initial term or the Term, which triggers the payment of Severance Benefits or CIC-Severance Benefits hereunder. 2.18 "Executive" means Dorrit J. Bern. 2.19 "Fair Market Value" means the value of a Share determined by the Compensation Committee or its designee. 2.20 "Good Reason" shall mean, without the Executive's express written consent, the occurrence of any one or more of the following: (a) Assigning to the Executive duties materially inconsistent or, during the twenty-four (24) month period following a Change in Control, inconsistent, in either case with the Executive's position (including status, titles, and reporting relationships), authority or responsibilities in effect on the Effective Date of this Agreement, or any other action by the Company which results in a diminution of the Executive's position, authority, duties, or responsibilities as constituted as of the Effective Date of this Agreement (excluding an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof); provided, however, that the appointment of a Chief Operating Officer ("COO"), which may require a shift in some the Executive's current responsibilities to the newly elected COO, would not constitute Good Reason as it relates to a reduction or alteration in authorities, duties or responsibilities from those currently in place if the Executive participates in and consents to such hiring, which consent shall not be unreasonably withheld; (b) Requiring the Executive to be based in Pennsylvania or at a location which is at least fifty (50) miles farther from the Executive's current primary residence; (c) Reducing the Executive's Base Salary; (d) Reducing the Executive's targeted Annual Bonus award opportunities and/or the reasonable degree of probability of attainment of such annualized award opportunities under the Company's short and long-term incentive programs, based on past practice, as such opportunities exist as of the Effective Date of this Agreement; (e) Failing to maintain the Executive's amount of benefits under or relative level of participation in the Company's employee benefit or retirement plans, policies, practices, or arrangements in which the Executive participates as of the Effective Date of this Agreement; provided, however, that any such change that applies consistently to all executive officers of the Company or is required by applicable law shall not be deemed to constitute Good Reason; (f) Purportedly terminating the Executive's employment otherwise than as expressly permitted by this Agreement; or (g) Failing to require any successor to the Company to assume and agree to perform the Company's obligations hereunder. 2.21 "Notice of Termination" means a written notice which shall indicate the specific termination provision in this Agreement relied upon, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provisions so indicated. 2.22 "Option" means a stock option granted pursuant to the Company's stock option plan. 2.23 "Option Price" means the price at which a Share may be purchased by the Executive pursuant to an Option, as determined by the Compensation Committee. 2.24 "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Securities Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) thereof. 2.25 "Qualifying Termination" means any of the events described in Section 8.2 herein, the occurrence of which triggers the payment of CIC- Severance Benefits hereunder. 2.26 "Related Party" means (a) a majority-owned subsidiary of the Company; or (b) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any majority-owned subsidiary; or (c) a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportion as their ownership of Voting Securities. 2.27 "Retirement" means the Executive's voluntary termination of employment in a manner which qualifies the Executive to receive immediately payable retirement benefits under the Company's tax-qualified retirement plan or under the successor or replacement of such retirement plan if it is then no longer in effect. The term "Retirement" shall not mean a termination of the Executive's employment under circumstances which constitute Good Reason or that constitute an involuntary termination of the Executive's employment by the Company, whether or not the Executive would then be eligible to retire. 2.28 "Securities Exchange Act" means the United States Securities Exchange Act of 1934, as amended. 2.29 "Severance Benefits" means the payment of severance compensation as provided in Sections 7.4 and 7.6 herein, and not payable due to a Change in Control of the Company, fifty percent (50%) of which is acknowledged to be consideration for Executive's performance of her duties under Section 12.3 herein. 2.30 "Shares" mean the shares of common stock of Charming Shoppes, Inc. 2.31 "Voting Securities" or "Voting Security" means any securities of the Company which carry the right to vote generally in the election of Directors. Section 3. Position and Responsibilities During the Term, the Executive agrees to serve as President and Chief Executive Officer of the Company. In her capacity as President and Chief Executive Officer of the Company, the Executive shall report directly to the Company's Board of Directors, and shall maintain the level of duties and responsibilities as in effect as of the Effective Date, or such higher level of duties and responsibilities as she may be assigned during the Term. The Executive shall have the same status, privileges, and responsibilities normally inherent in such capacities in corporate institutions of similar size and character. Section 4. Standard of Care During the Term, the Executive agrees to devote substantially her full time, attention, and energies to the Company's business and shall not be engaged in any other business activity, whether or not such business activity is pursued for gain, profit, or other pecuniary advantage. However, subject to Section 12 herein, the Executive may serve in charitable and civic positions and as a director of those companies of which she is a director on the Effective Date and of other companies with the prior consent of the Board, which consent shall not be unreasonably withheld. The Executive covenants, warrants, and represents that she shall: (a) Devote her full and best efforts to the fulfillment of her employment obligations; and (b) Exercise the highest degree of loyalty and the highest standards of conduct in the performance of her duties. Section 5. Compensation As remuneration for all services to be rendered by the Executive during the term of this Agreement, and as consideration for complying with the covenants herein, the Company shall pay and provide to the Executive the following: 5.1 Base Salary. The Company shall pay the Executive a Base Salary in an amount which shall be established from time to time by the Board of Directors of the Company or the Board's designee; provided, however, that such Base Salary shall not be less than one million dollars ($1,000,000) per year. This Base Salary shall be paid to the Executive in equal installments throughout the year, consistent with the normal payroll practices of the Company. The Base Salary shall be reviewed at least annually following the Effective Date of this Agreement, while this Agreement is in force, to ascertain whether, in the judgment of the Board or the Board's designee, such Base Salary should be increased based primarily on the performance of the Executive during the year and on the then current rate of inflation. If so increased, the Base Salary as stated above shall, likewise, be increased for all purposes of this Agreement and shall not, in any event, be decreased in any year. 5.2 Annual Bonus. In addition to her Base Salary, the Executive shall be entitled to participate in the Company's short-term incentive program, as such program may exist from time to time, at a level commensurate with the position of President and Chief Executive Officer, as determined at the sole discretion of the Company's Compensation Committee; provided, however, that the minimum targeted short-term incentive opportunity in any one fiscal year shall be sixty (60%) percent of the Executive's Base Salary as of the beginning of each such fiscal year. The maximum pay-out shall not be less than two hundred (200%) percent of the Executive's targeted short-term incentive opportunity as of the beginning of each such fiscal year; provided, however, that the maximum pay-out will be reviewed and may be adjusted by the Compensation Committee on an annual basis. 5.3 Long-Term Incentives. The Executive shall be eligible to participate in the Company's long-term incentive plan, as such shall be amended or superseded from time to time, at a level commensurate with the position of President and Chief Executive Officer, as determined in the sole discretion of the Company's Compensation Committee; provided, however, at the time of the Company's normal granting of option awards in 2000 to its executives generally, in accordance with past practice, and annually thereafter during the Term hereof, the Company shall grant to the Executive an Option to purchase a minimum of two-hundred thousand (200,000) Shares, at the stated Option Price, which is one hundred (100%) percent of the Fair Market Value of a Share on the date of grant, in the manner and subject to the terms and conditions of the Company's 1993 Employees' Stock Incentive Plan (the "Plan"), or any successor plan, and the Executive's Award Agreement, which Award Agreement shall have terms and conditions substantially similar to those set forth on Exhibit A hereto. 5.4 Special One-Time Renewal Award. On the Effective Date of this Agreement, the Company shall grant to the Executive two hundred thousand (200,000) restricted Shares, subject to the terms and conditions of the Plans and substantially similar to those set forth in the Award Agreement attached hereto as Exhibit B. Forty thousand (40,000) Shares shall become vested on the first anniversary of the date of grant and an additional forty thousand (40,000) Shares shall vest on each succeeding anniversary of the date of grant until the fifth anniversary of the date of grant at which time all Shares shall be fully vested, in all cases subject to Executive's continued employment with the Company through the relevant anniversary; provided, however, that all restrictions shall lapse and the Shares shall become fully vested upon a Change in Control, or if the Executive resigns for Good Reason, or the Executive is terminated without Cause, and the resignation or termination is not related to a Change in Control. 5.5 Retirement Benefits. (a) The Company shall provide to the Executive participation in all Company qualified defined benefit and defined contribution retirement plans, subject to the eligibility and participation requirements of such plans as applicable to executives of the Company generally. In addition, the Company shall provide to the Executive participation in all other nonqualified retirement programs typically offered to executives of the Company generally. (b) Nothing in this paragraph shall be construed as obligating the Company to refrain from changing, and/or amending the nonqualified retirement programs, so long as such changes are similarly applicable to all executives generally. 5.6 Employee Benefits. (a) During the Term, and as otherwise provided within the provisions of each of the respective plans, the Company shall provide to the Executive all benefits to which other executives and employees of the Company are entitled to receive, as commensurate with the position of President and Chief Executive Officer, subject to the eligibility requirements and other provisions of such arrangements as applicable to executives of the Company generally. Such benefits shall include, but shall not be limited to, group term life insurance, comprehensive health and major medical insurance, dental and life insurance, and short-term and long-term disability. (b) Company shall maintain for the Term the four million ($4,000,000) dollar split dollar life insurance policy currently in place for the Executive (the "Policy"). The Company shall pay the premium on the Policy. The Executive's rights and obligations in respect of such Policy shall be governed by the terms thereof, provided, however, that Executive shall be entitled to convert the Policy to a "last to die" policy provided, further, that such conversion does not increase the Company's costs, or diminish its rights, under the Policy. (c) The Executive shall be entitled to paid vacation in accordance with the standard written policy of the Company with regard to vacations of employees. (d) The Executive shall likewise participate in any additional benefit as may be established during the term of this Agreement, by standard written policy of the Company. 5.7 Perquisites. The Company shall provide to the Executive, at the Company's cost, all perquisites which are suitable to the position of President and Chief Executive Officer and at least those which are made available to Executive immediately prior to the date hereof. 5.8 Relocation. The Company will pay all expenses if relocation occurs; prior to relocation, the Company will provide Executive an apartment and a weekly round-trip airplane ticket between Chicago and Philadelphia. 5.9 Right to Change Plans. Section 5.6 herein shall not obligate the Company to institute, maintain, or refrain from changing, amending, or discontinuing any benefit plan, program, or perquisite, so long as such changes are similarly applicable to executive employees generally. Section 6. Expenses Upon presentation of appropriate documentation, the Company shall pay, or reimburse the Executive for all ordinary and necessary expenses, in a reasonable amount, which the Executive incurs in performing her duties under this Agreement including, but not limited to, travel, entertainment, professional dues and subscriptions, and all dues, fees, and expenses associated with membership in various professional, business, and civic associations and societies in which the Executive's participation is in the best interest of the Company. Section 7. Employment Terminations 7.1 Termination Due to Retirement or Death. (a) In the event the Executive's employment is terminated while this Agreement is in force by reason of Retirement, or death, the Executive's benefits shall be determined in accordance with the Company's retirement, survivor's benefits, insurance, and other applicable programs of the Company then in effect. (b) Upon the effective date of such termination, the Company's obligation under this Agreement to pay and provide to the Executive the elements of pay described in Sections 5.1, 5.2, and 5.3 herein, shall immediately expire. However, the Executive shall receive all other rights and benefits that she is vested in, pursuant to other plans and programs of the Company. 7.2 Termination Due to Disability. (a) In the event that the Executive becomes Disabled during the term of this Agreement and is, therefore, unable to perform her duties herein for more than one hundred eighty (180) total calendar days during any period of twelve (12) consecutive months, or in the event of the Board's reasonable expectation that the Executive's Disability will exist for more than a period of one hundred eighty (180) calendar days, the Company shall have the right to terminate the Executive's active employment as provided in this Agreement. However, the Board shall deliver written notice to the Executive of the Company's intent to terminate for Disability at least thirty (30) calendar days prior to the effective date of such termination. (b) A termination for Disability shall become effective upon the end of the thirty (30) day notice period. Upon such effective date, the Company's obligation to pay and provide to the Executive the elements of pay described in the Sections 5.1, 5.2, and 5.3 herein, shall immediately expire. However, the Executive shall receive all rights and benefits that she is vested in, pursuant to other plans and programs of the Company. (c) Such Disability to be determined by the Board of Directors of the Company upon receipt of and in reliance on competent medical advice from one (1) or more individuals, selected by the Board, who are qualified to give such professional medical advice. (d) If the Executive and the Company shall not be in agreement as to whether the Executive has suffered a Disability for the purpose of this Agreement, the matter shall be referred to a panel of three (3) medical doctors, one of which shall be selected by the Executive, one of which shall be selected by the Company, and one of which shall be selected by the two (2) doctors as so selected, and the decision of a majority of the panel with respect to the question of whether the Executive has suffered a Disability shall be binding upon the Executive and the Company. The expenses of any such referral shall be borne by the Company. The Executive may be required by the Company to submit to medical examination at any time during the period of her employment hereunder, but not more often than quarterly, to determine whether a Disability exists for the purpose of this Agreement. (e) It is expressly understood that the Disability of the Executive for a period of one hundred eighty (180) calendar days or less in the aggregate during any period of twelve (12) consecutive months, in the absence of any reasonable expectation that her Disability will exist for more than such a period of time, shall not constitute a failure by her to perform her duties hereunder and shall not be deemed a breach or default and the Executive shall receive full compensation for any such period of Disability or for any other temporary illness or incapacity during the Term of this Agreement. 7.3 Voluntary Termination by the Executive. (a) The Executive may terminate this Agreement at any time by giving the Board of Directors of the Company written notice of her intent to terminate, delivered at least ninety (90) calendar days prior to the effective date of such termination. The termination automatically shall become effective upon the expiration of the ninety (90) day notice period. (b) Upon the effective date of such termination, following the expiration of the ninety (90) day notice period, the Company shall pay the Executive her full Base Salary, at the rate then in effect, through the effective date of termination, plus all other benefits to which the Executive has a vested right to at that time (for this purpose, the Executive shall not be paid any Annual Bonus with respect to the fiscal year in which voluntary termination under this section occurs). With the exception of the covenants contained in Section 12 herein (which shall survive such termination), the Company and the Executive thereafter shall have no further obligations under this Agreement. 7.4 Involuntary Termination by the Company without Cause. (a)(i) At all times during the Term, the Board may terminate the Executive's employment for reasons other than death, Disability, Retirement, or for Cause, or the Company may elect not to renew this Agreement upon the expiration of the initial term or the Term, by providing to the Executive a Notice of Termination or a notice of non-renewal, as the case may be, at least ninety (90) calendar days prior to the Effective Date of Termination. (ii) In the event that a Change in Control occurs or, in the case of a transaction described in Sections 2.9(c) or 2.9(d) a binding agreement is entered into that results in such a transaction, in either case within three (3) months after the Board terminates the Executive's employment without Cause, the Executive shall be entitled to the CIC- Severance Benefits in lieu of the Severance Benefits. (b) Upon the Effective Date of Termination other than a Qualifying Termination, following the expiration of the ninety (90) day notice period, the Company shall pay to the Executive in twenty-four (24) equal monthly installments an amount equal to two times (2') the sum of (i) Executive's annual Base Salary plus (ii) the Executive's targeted Annual Bonus established for the fiscal year in which the Executive's Effective Date of Termination occurs. (c) In addition, the Company shall continue, at the same cost to the Executive as existed as of the Effective Date of this Agreement, all health, welfare, and benefit plan participation for two (2) full years following the Effective Date of Termination; provided, however, that in the event the Executive obtains employment from a successor employer that offers substantially similar benefits, such continuation of coverage by the Company shall immediately cease. (d) Further, the Company shall pay the Executive all other benefits to which the Executive has a vested right at the time, according to the provisions of the governing plan or program. With the exception of the covenants contained in Section 12 herein, the Company and the Executive thereafter shall have no further obligations under this Agreement. 7.5 Termination for Cause. (a) Nothing in this Agreement shall be construed to prevent the Board from terminating the Executive's employment under this Agreement for "Cause." (b) Executive shall not be deemed to be terminated for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three quarters (3/4) of the entire membership of the Board at a meeting called and held for such purpose (after reasonable notice is provided to Executive and Executive is given an opportunity, together with counsel, to be heard before the Board) finding that in the good faith opinion of the Board, Executive is guilty of the conduct described in subsection (a) or (c) of the definition set forth in Section 2.8 above and specifying the particulars thereof in detail. (c) In the event this Agreement is terminated by the Board for Cause, the Company shall pay the Executive her Base Salary through the effective date of the employment termination and the Executive shall immediately thereafter forfeit all rights and benefits (other than vested benefits) she would otherwise have been entitled to receive under this Agreement. The Company and the Executive thereafter shall have no further obligations under this Agreement, except for the provisions set forth in Section 12, which shall survive such termination. 7.6 Termination for Good Reason. (a) At any time during the Term, the Executive may terminate this Agreement for Good Reason by providing to the Board of Directors of the Company a Notice of Termination at least ninety (90) calendar days prior to the Effective Date of Termination, which notice sets forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination. (b) Upon the Effective Date of Termination, following the expiration of the ninety (90) day notice period, the Good Reason termination shall become effective, and the Company shall pay and provide to the Executive the benefits set forth in this Section 7.6 or, in the event of termination for Good Reason within twenty-four (24) calendar months following the effective date of a Change in Control, the benefits set forth in Section 8.3 herein. (c) Upon a termination of the Executive's employment for Good Reason at any time during the Term, other than during the twenty-four (24) month period following the effective date of a Change in Control, following the expiration of the ninety (90) day notice period the Company shall pay to the Executive in twenty-four (24) equal monthly installments an amount equal to two times (2x) the sum of (i) the Executive's annual Base Salary plus (ii) the Executive's targeted Annual Bonus established for the fiscal year in which the Executive's Effective Date of Termination occurs. (d) In addition, the Company shall continue, at the same cost to the Executive as existed as of the Effective Date of this Agreement, all health, welfare, and benefit plan participation for two (2) full years following the Effective Date of Termination; provided, however, that in the event the Executive obtains employment from a successor employer that offers substantially similar benefits, such continuation of coverage by the Company shall immediately cease. (e) Further, the Company shall pay the Executive all other benefits to which the Executive has a vested right at the time, according to the provisions of the governing plan or program. With the exception of the covenants contained in Section 12 herein, the Company and the Executive thereafter shall have no further obligations under this Agreement. (f) Upon a termination for Good Reason within the twenty-four (24) months following the effective date of a Change in Control, the Executive shall be entitled to receive the payments and benefits set forth in Section 8.3 herein in lieu of those set forth in this Section 7.6. (g) The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness unless such incapacity is determined to constitute a Disability as provided herein. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. Section 8. Change in Control 8.1 Employment Termination within twenty-four (24) calendar months following a Change in Control. The Executive shall be entitled to receive from the Company CIC-Severance Benefits if there has been a Change in Control of the Company and if, within twenty-four (24) calendar months following the Change in Control, a Notice of Termination for a Qualifying Termination of the Executive has been delivered. The Executive shall not be entitled to receive CIC-Severance Benefits if she is terminated for Cause (as provided in Section 7.5 herein), or if her employment with the Company ends due to death, Disability, or Retirement or due to voluntary termination of employment by the Executive without Good Reason. CIC- Severance Benefits shall be paid in lieu of all other benefits provided to the Executive under the terms of this Agreement. 8.2 Qualifying Termination. "Qualifying Termination" means the occurrence of any one or more of the following events: (a) An involuntary termination of the Executive's employment by the Company for reasons other than Cause, death, Disability or Retirement (i) within twenty-four (24) calendar months following, the end of the month in which a Change in Control of the Company occurred as evidenced by a Notice of Termination delivered by the Company to the Executive, or (ii) as described in Section 7.4(a)(ii) herein; (b) A voluntary termination by the Executive for Good Reason within twenty-four (24) calendar months following the end of the month in which a Change in Control of the Company occurred as evidenced by a Notice of Termination delivered to the Company by the Executive; or (c) The Company or any successor company materially breaches any of the provisions of Sections 5 or 6 herein or fails to comply with the provisions of the second paragraph of Section 9.1 herein. 8.3 Severance Benefits Paid upon a Qualifying Termination. In the event the Executive becomes entitled to receive CIC-Severance Benefits, the Company shall pay to the Executive and provide her with the following, subject to Section 8.4 herein: (a) A lump sum amount equal to three (3x) times the highest rate of the Executive's annualized Base Salary in effect at any time from her initial date of employment with the Company up to and including the Effective Date of Termination. (b) A lump sum amount equal to three (3x) times the greater of the Executive's targeted Annual Bonus award established for the (i) plan year in which the Executive's Effective Date of Termination occurs or (ii) the plan year ending immediately prior to such Effective Date of Termination. (c) A lump sum amount equal to the Executive's unpaid targeted Annual Bonus award, established for the year in which the Executive's Effective Date of Termination occurs, multiplied by a fraction, the numerator of which is the number of completed days in the then-existing fiscal year through the Effective Date of Termination, and the denominator of which is three hundred sixtyfive (365). (d) A lump sum amount equal to the Executive's unpaid Base Salary, accrued vacation pay, and earned but not taken vacation pay through the Effective Date of Termination. (e) A continuation of the welfare benefits of health care, life and accidental death and dismemberment, and disability insurance coverage for three (3) full years after the Effective Date of Termination. These benefits shall be provided to the Executive at the same coverage level, as in effect as of the Executive's Effective Date of Termination or, if greater, as in effect 90 days prior to the date of the Change in Control, and at the same premium cost to the Executive which was paid by the Executive at the time such benefits were provided. However, in the event the premium cost and/or level of coverage shall change for all employees of the Company, or for management employees with respect to supplemental benefits, the cost and/or coverage level, likewise, shall change for the Executive in a corresponding manner. The continuation of these welfare benefits shall be discontinued prior to the end of the three (3) year period in the event the Executive has available substantially similar benefits at a comparable cost to the Executive from a subsequent employer, as determined by the Compensation Committee. (f) With regard to the Company's split-dollar life insurance arrangement with the Executive, the following provisions shall apply: (i) The Company shall continue to pay the annual premiums on the policy that is subject to the split-dollar life insurance agreement, in accordance with the most recent schedule provided prior to the Change in Control by the insurance broker who administers the split-dollar life insurance arrangement. (ii) For purposes of making any determination under the split- dollar life insurance agreement, the Executive's number of years of employment with the Company, as of the Effective Date of Termination, shall be deemed to be five (5). (g) Incentive awards granted under the incentive arrangements adopted by the Company shall be treated pursuant to the terms of the applicable plan or agreement thereunder. (h) The aggregate benefits accrued by the Executive as of the Effective Date of Termination under any savings and retirement plan sponsored by the Company, shall be distributed pursuant to the terms of the applicable plan. Compensation which has been deferred under the Charming Shoppes Variable Deferred Compensation Plan or other plans sponsored by the Company, as applicable, together with all interest that has been credited with respect to any such deferred compensation balances, shall be distributed pursuant to the terms of the applicable plan. 8.4 Excise Tax. In the event that a Change in Control of the Company occurs and a determination is made by the Company, pursuant to Section 280G and 4999 of the Code, that a golden parachute excise tax is due, the benefits provided to the Executive under this Agreement that are classified as "parachute payments" (as such term is defined in Section 280G of the Code), shall be limited to the amount just necessary to avoid the excise tax. However, this limitation shall be applied if, and only if, such a limitation results in a greater net (of excise tax) cash benefit to the Executive than she would receive had the benefits not been capped and an excise tax been levied. In the event the Internal Revenue Service subsequently adjusts the excise tax computation herein described, the Company shall reimburse the Executive for the full amount necessary to make the Executive whole (less any amounts received by the Executive that she would not have received had the computation initially been computed as subsequently adjusted), including the value of benefits that were erroneously limited, and any related interest and/or penalties due to the Internal Revenue Service. Section 9. Assignment 9.1 Assignment by Company. This Agreement may and shall be assigned or transferred to, and shall be binding upon and shall inure to the benefit of, any successor of the Company, and any such successor shall be deemed substituted for all purposes of the "Company" under the terms of this Agreement. As used in this Agreement, the term "successor" shall mean any person, firm, corporation, or business entity which at any time, whether by merger, purchase, or otherwise, acquires all or substantially all of the assets or the business of the Company. Notwithstanding such assignment, the Company shall remain, with such successor, jointly and severally liable for all its obligations hereunder. Failure of the Company to obtain the agreement of any successor to be bound by the terms of this Agreement prior to the effectiveness of any such succession shall be a breach of this Agreement, and shall immediately entitle the Executive to benefit from the Company in the same amount and on the same terms as the Executive would be entitled to receive in the event of a termination of employment for Good Reason as provided in Section 7.6 or 8.3, if the failure of assignment follows or is in connection with a Change in Control. Except as herein provided, this Agreement may not otherwise be assigned by the Company. 9.2 Assignment by Executive. The services to be provided by the Executive to the Company hereunder are personal to the Executive, and the Executive's duties may not be assigned by the Executive; provided, however that this Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, and administrators, successors, heirs, distributes, devices, and legatees. If the Executive dies while any amounts payable to the Executive hereunder remain outstanding, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, in the absence of such designee, to the Executive's estate. Section 10. Dispute Resolution and Notice 10.1 Dispute Resolution. Any dispute or controversy arising under or in connection with this Agreement shall be settled by arbitration, conducted before a panel of three (3) arbitrators sitting in a location selected by the Executive within fifty (50) miles from the location of her employment with the Company, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association then in effect. Judgment may be entered on the award of the arbitrator in any court having proper jurisdiction. Subject to the limitation set forth in Section 10.2 related to legal fees incurred by the Executive, all expenses of such arbitration shall be borne by the Company. 10.2 Payment of Legal Fees. To the extent permitted by law, the Company shall pay (or advance, upon the written request of the Executive) legal fees, costs of arbitration, prejudgment interest, and other expenses incurred (or to be incurred) in good faith by the Executive as a result of the Company's refusal to provide the Severance Benefits or CIC-Severance Benefits to which the Executive becomes entitled under this Agreement, or as a result of the Company's contesting the validity, enforceability, or interpretation of this Agreement, or as a result of any conflict (including conflicts related to the calculation of parachute payments) between the parties pertaining to this Agreement, subject to an overall limit on the payment of legal fees incurred by the Executive of fifty thousand dollars ($50,000). 10.3 Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address she has filed in writing with the Company or, in the case of the Company, at its principal offices. Section 11. Outplacement Assistance The Executive shall be reimbursed by the Company for the costs of all outplacement services obtained by the Executive within the two (2) year period after the Executive's Qualifying Termination subsequent to a Change in Control or within the two (2) year period following a termination for Good Reason or a termination without Cause unrelated to a Change in Control; provided, however, that the total reimbursement shall be limited to an amount equal to fifty thousand ($50,000) dollars. Section 12. Confidentiality and Noncompetition 12.1 Disclosure of Information. The Executive recognizes that she has access to and knowledge of certain confidential and proprietary information of the Company which is essential to the performance of her duties under this Agreement. The Executive will not, during or after the Term hereof, in whole or in part, disclose such information to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever, nor shall she make use of any such information for her own purposes, so long as such information has not otherwise been disclosed to the public or is not otherwise in the public domain except as required by law or pursuant to administrative or legal process. 12.2 Covenants Regarding Other Employees. During the term of this Agreement, and for a period of twenty-four (24) months following the Executive's termination of employment for any reason, the Executive agrees not to attempt to induce any merchant, buyer, or manager or higher level employee of the Company to terminate his or her employment with the Company. 12.3 Noncompete Following a Termination of Employment. From the Effective Date of this Agreement until twenty-four (24) months following the Executive's termination of employment for any reason, the Executive will not: (a) directly or indirectly own any equity or proprietary interest in (except for ownership of shares in a publicly traded company not exceeding five (5%) percent of any class of outstanding securities), or be an employee, agent, director, advisor, or consultant to or for any Competitor (as defined below) of the Company in the United States, whether on her own behalf or on behalf of any person, in the procuring, sale, marketing, promotion, or distribution of any product or product lines competitive with any product or product lines of the Company at the end of the Term or on the Effective Date of Termination, if earlier, and the Executive will not assist in, manage, or supervise any of the foregone activities, or (b) undertake any action to induce or cause any supplier to discontinue any part of its business with the Company. For purposes of this section of this Agreement, Competitor shall mean at any time only a chain of retail stores with 50 or more store locations; provided, however, that the average square footage of the chain's stores is less than 15,000 square feet. Section 13. Miscellaneous 13.1 Entire Agreement. This Agreement supersedes any prior agreements or understandings, oral or written, between the parties hereto or between the Executive and the Company, with respect to the subject matter hereof, and constitutes the entire agreement of the parties with respect thereto. 13.2 Modification. This Agreement shall not be varied, altered, modified, canceled, changed, or in any way amended except by mutual agreement of the parties in a written instrument executed by the parties hereto or their legal representatives. 13.3 Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. 13.4 Counterparts. This Agreement may be executed in one (1) or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement. 13.5 Tax Withholding. The Company may withhold from any benefits payable under this Agreement all federal, state, city, or other taxes as may be required pursuant to any law or governmental regulation or ruling. 13.6 Beneficiaries. Any payment or benefits hereunder due the Executive at the time of her death shall nonetheless be paid or provided and the Executive may designate one or more persons or entities as the primary and/or contingent beneficiaries of any amounts to be received under this Agreement. Such designation must be in the form of a signed writing acceptable to the Board or the Board's designee. The Executive may make or change such designation at any time. 13.7 Payment Obligation Absolute. The Company's obligation to make the payments and the arrangement provided for herein shall be absolute and unconditional, and shall not be affected by any circumstances, including, without limitation, any offset, counterclaim, recoupment, defense, or other right which the Company may have against the Executive or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Subject to the provisions set forth in Section 8.4, each and every payment made hereunder by the Company shall be final, and the Company shall not seek to recover all or any part of such payment from the Executive or from whomsoever may be entitled thereto, for any reasons whatsoever other than Executive's breach of Section 12 herein. The Executive shall not be obligated to seek other employment in mitigation of the amounts payable or arrangements made under any provision of this Agreement, and the obtaining of any such other employment shall in no event effect any reduction of the Company's obligations to make the payments and arrangements required to be made under this Agreement; provided, however, that continued health, welfare, and benefit plan participation pursuant to Sections 7.4(b) or 8.3(e) shall be discontinued in the event the Executive becomes eligible to receive substantially similar benefits from a successor employer. 13.8 Contractual Rights to Benefits. This Agreement establishes and vests in the Executive a contractual right to the benefits to which she is entitled hereunder. However, nothing herein contained shall require or be deemed to require, or prohibit or be deemed to prohibit, the Company to segregate, earmark, or otherwise set aside any funds or other assets, in trust or otherwise, to provide for any payments to be made or required hereunder. 13.9 Specific Performance. The Executive acknowledges that the obligations undertaken by her pursuant to Section 12 of this Agreement are unique and that the Company will likely have no adequate remedy at law if the Executive shall fail to perform any of her obligations hereunder. The Executive therefore confirms that the Company's right to specific performance of the terms of this Agreement is essential to protect the rights and interests of the Company. Accordingly, in addition to any other remedies that the Company may have at law or in equity, the Company shall have the right to have all obligations, covenants, agreements, and other provisions of this Agreement specifically performed by the Executive and the Company shall have the right to obtain preliminary injunctive relief to secure specific performance and to prevent a breach or contemplated breach of this Agreement by the Executive. Section 14. Governing Law To the extent not preempted by federal law, the provisions of this Agreement shall be construed and enforced in accordance with the substantive laws (and not the choice of law rules) of the Commonwealth of Pennsylvania. Section 15. Indemnification The Company hereby covenants and agrees to indemnify and hold harmless the Executive fully, completely, and absolutely against and in respect to any and all actions, suits, proceedings, claims, demands, judgements, costs, expenses (including attorney's fees), losses, and damages resulting from the Executive's good faith performance of her duties and obligations under the terms of this Agreement and her service as a member of the Board of Directors. Executive: _______________________ ATTEST Charming Shoppes, Inc. By: ___________________ By: _______________________ Corporate Secretary Name: Title: EX-10 4 EXHIBIT 10.2 CHARMING SHOPPES, INC. 1993 EMPLOYEES' STOCK INCENTIVE PLAN RESTRICTED STOCK AGREEMENT Agreement dated as of October 12, 1999 between CHARMING SHOPPES, INC. (the "Company") and DORRIT J. BERN ("Employee"). It is agreed as follows: 1. GRANT OF RESTRICTED STOCK; CONSIDERATION The Company hereby confirms the grant, under and pursuant to the Company's 1993 Employees' Stock Incentive Plan (the "Plan"), to Employee on October 12, 1999 (the "Date of Grant") of 200,000 shares of the Company's common stock, par value $0.10 per share ("Shares"), granted pursuant to Section 6(d) of the Plan and subject to restrictions as set forth herein and therein ("Restricted Stock" or "Award"). Employee shall be required to pay no cash consideration for the grant of the Restricted Stock, but Employee's prior services to the Company, performance of services to the Company prior to the expiration of applicable restrictions relating to the Restricted Stock and otherwise during the term of her employment agreement, and her agreement to abide by the terms set forth in the Plan and this Restricted Stock Agreement (the "Agreement") shall be deemed to be consideration for the Award. 2. INCORPORATION OF PLAN BY REFERENCE The Award has been granted to Employee under the Plan, a copy of which is attached hereto. All of the terms, conditions and other provisions of the Plan are hereby incorporated by reference into this Agreement. Capitalized terms used in this Agreement but not defined herein shall have the same meanings as in the Plan. If there is any conflict between the provisions of this Agreement and the provisions of the Plan, the provisions of the Plan shall govern. 3. RESTRICTIONS ON RESTRICTED STOCK AND RELATED TERMS (a) Restrictions Generally. Until they expire in accordance with Section 3(b), 3(c), or 5(a), the following restrictions (the "Restrictions") shall apply to the Restricted Stock: Employee shall have no right to sell, transfer, assign, pledge, or otherwise encumber or dispose of the Restricted Stock (except for transfers and forfeitures to the Company); and the Restricted Stock shall be subject to the risk of forfeiture as set forth in Section 3(b). Employee shall be entitled to receive dividends on the Restricted Stock when, as, and if dividends are declared and paid on Shares, shall be entitled to vote Restricted Stock on any matter submitted to a vote of holders of Common Stock, and shall have all other rights of a shareholder of the Company except as otherwise expressly provided under this Section 3. (b) Forfeiture. Unless otherwise determined by the Committee, if Employee's employment terminates and she thereafter is not an employee by the Company or any of its subsidiaries (a "Termination") prior to the expiration of the Restrictions for any reason other than due to death, permanent disability, involuntary termination by the Company for reasons other than "Cause," or voluntary termination by Employee for "Good Reason," the Restricted Stock as to which Restrictions have not previously expired shall be forfeited at the time of such Termination. In the event of a Termination due to death, permanent disability, involuntary termination by the Company for reasons other than "Cause," or a voluntary termination by Employee for "Good Reason," the Restrictions on the Restricted Stock shall expire at the time of such Termination. For purposes of this Agreement, "Cause" and "Good Reason" shall have the meanings ascribed to such terms in the Employment Agreement between Employee and the Company, as in effect at the Date of Grant. The foregoing notwithstanding, the Committee shall independently make any determination that "Cause" exists, but only if the Board of Directors previously has made such determination pursuant to the Employment Agreement. For purposes of this Agreement, the existence of a "permanent disability" shall be determined by, or in accordance with criteria and standards adopted by, the Committee. (c) Expiration of Restrictions. Unless the Restrictions on Restricted Stock expire earlier under Section 3 (b) or 5 (a), the Restrictions shall expire as to 40,000 shares of Restricted Stock on each of the first, second, third, fourth and fifth anniversaries of the Date of Grant. Upon expiration of the Restrictions on any Restricted Stock, the Company shall promptly deliver to Employee one or more certificates representing such Shares (which shall no longer be deemed to be Restricted Stock), with any legend referring to the Restrictions removed from such certificate(s) , or shall cause such Shares to be delivered to a broker or bank which maintains an account for Employee or Employee's designee, for deposit to such account. (d) Certificates Representing Restricted Stock. Restricted Stock shall be evidenced by issuance of one or more certificates in the name of Employee, bearing an appropriate legend referring to the terms, conditions, and Restrictions applicable hereunder, and shall remain in the physical custody of the General Counsel of the Company or his designee until such time as the Restrictions on such shares have expired. In addition, Restricted Stock shall be subject to such stop- transfer orders and other restrictive measures as the General Counsel of the Company shall deem advisable under federal or state securities laws, rules and regulations thereunder, and the rules of the Nasdaq National Market System or any national securities exchange on which Common Stock is then quoted or listed, or to implement the Restrictions, and the General Counsel may cause a legend or legends to be placed on any such certificates to make appropriate reference to the Restrictions. (e) Stock Powers. Employee agrees to execute and deliver to the Company one or more stock powers, in such form as may be specified by the General Counsel, authorizing the transfer of the Restricted Stock to the Company, at the Date of Grant of the Restricted Stock or upon request at any time thereafter. 4. TAX WITHHOLDING Employee agrees to remit to the Company and any subsidiary, and authorizes the Company and any subsidiary to deduct from any payment to be made to Employee hereunder if such remittance has not been made, any amount that federal, state, local, or foreign tax law requires to be withheld with respect to the grant of Restricted Stock or delivery of Shares hereunder. At the election of the Committee, the Company may withhold from the number of Shares to be delivered upon expiration of Restrictions on Restricted Stock a number of whole shares up to but not exceeding that number which has a Fair Market Value nearest to but not exceeding the amount of taxes required to be withheld with respect to such expiration of Restrictions; provided, however, no such withholding shall be permitted if Employee elects to be taxed on the grant of Restricted Stock, under Section 83(b) of the Code, prior to expiration of Restrictions. 5. CHANGE OF CONTROL PROVISIONS (a) Acceleration of Expiration of Restrictions. In the event of a Change of Control at any time after the date of grant of the Restricted Stock, the Restrictions on the Restricted Stock shall immediately expire. (b) Definitions of Certain Terms. For purposes of this Agreement, the following definitions shall apply: (1) "Beneficial Owner," "Beneficially Owns," and "Beneficial Ownership" shall have the meanings ascribed to such terms for purposes of Section 13(d) of the Exchange Act and the rules thereunder, except that, for purposes of this Section 5, "Beneficial Ownership" (and the related terms) shall include Voting Securities that a Person has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants, options, or otherwise, regardless of whether any such right is exercisable within 60 days of the date as of which Beneficial Ownership is to be determined. (2) "Change of Control" means and shall be deemed to have occurred if (i) any Person, other than the Company or a Related Party, acquires directly or indirectly the Beneficial Ownership of any Voting Security of the Company and immediately after such acquisition such Person has, directly or indirectly, the Beneficial Ownership of Voting Securities representing 20 percent or more of the total voting power of all the then-outstanding Voting Securities; or (ii) those individuals who as of the Date of Grant constitute the Board or who thereafter are elected to the Board and whose election, or nomination for election, to the Board was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors as of the Date of Grant or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the members of the Board; or (iii) the shareholders of the Company approve a merger, consolidation, recapitalization, or reorganization of the Company, a reverse stock split of outstanding Voting Securities, or an acquisition of securities or assets by the Company (a "Transaction"), or consummation of such a Transaction if shareholder approval is not obtained, other than a Transaction which would result in the holders of Voting Securities having at least 80 percent of the total voting power represented by the Voting Securities outstanding immediately prior thereto continuing to hold Voting Securities or voting securities of the surviving entity having at least 60 percent of the total voting power represented by the Voting Securities or the voting securities of such surviving entity outstanding immediately after such Transaction and in or as a result of which the voting rights of each Voting Security relative to the voting rights of all other voting securities are not altered; provided, however, a Change of Control shall not be deemed to have occurred if the Committee shall have determined, by action taken prior to the approval of the Transaction by shareholders or consummation of the Transaction if shareholder approval is not obtained, that such Transaction shall not constitute a Change of Control for purposes of this Agreement (provided that the Committee shall make no such determination unless the Board shall have determined that such Transaction shall not constitute a Change of Control for purposes of Employee's Employment Agreement with the Company made as of October 12, 1999 and all other Awards then outstanding under the Plan, which determination, if made with respect to a Transaction, shall not be deemed to constitute a determination with respect to any subsequent Transaction; or (iv) he shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets other than any such transaction which would result in Related Parties owning or acquiring more than 50 percent of the assets owned by the Company immediately prior to the transaction. (3) "Person" shall have the meaning ascribed for purposes of Section 13(d) of the Exchange Act and the rules thereunder. (4) "Related Party" means (i) a majority-owned subsidiary of the Company; or (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any majority-owned subsidiary of the Company; or (iii) a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportion as their ownership of Voting Securities; or (iv) if, prior to any acquisition of a Voting Security which would result in any Person Beneficially Owning more than ten percent of any outstanding class of Voting Security and which would be required to be reported on a Schedule 13D or an amendment thereto, the Board approved the initial transaction giving rise to an increase in Beneficial Ownership in excess of ten percent and any subsequent transaction giving rise to any further increase in Beneficial Ownership; provided, however, that such Person has not, prior to obtaining Board approval of any such transaction, publicly announced an intention to take actions which, if consummated or successful (at a time such Person has not been deemed a "Related Party"), would constitute a Change of Control. (5) "Voting Securities" means any securities of the Company which carry the right to vote generally in the election of directors. 6. EMPLOYEE BOUND BY PLAN Employee hereby acknowledges receipt of the attached copy of the Plan and agrees to be bound by all the terms and provisions thereof (as presently in effect or hereafter amended), and by all decisions and determinations of the Committee thereunder. 7. MISCELLANEOUS This Agreement shall be binding upon the heirs, executors, administrators, and successors of the parties. This Agreement constitutes the entire agreement between the parties with respect to the Award, and supersedes any prior agreements or documents with respect to the Award. No amendment, alteration, suspension, discontinuation, or termination of this Agreement which may impose any additional obligation upon the Company or materially impair the rights of Employee with respect to the Award shall be valid unless in each instance such amendment, alteration, suspension, discontinuation, or termination is expressed in a written instrument duly executed in the name and on behalf of the Company and by Employee. CHARMING SHOPPES, INC. By:__________________________ Executive Vice President and Chief Financial Officer EMPLOYEE: By: __________________________ Dorrit J. Bern STOCK POWER FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto Charming Shoppes, Inc. _____________ shares of Common Stock, $0.10 par value per share, of Charming Shoppes, Inc., a Pennsylvania corporation (the "Corporation"), registered in the name of the undersigned on the books and records of the Corporation, and does hereby irrevocably constitute and appoint Colin D. Stern and Anthony A. DeSabato, and each of them, attorneys, to transfer the Common Stock on the books of the Corporation, with full power of substitution in the premises. _______________________________________ Signed (Signature should be in exact form as on Stock certificate) _______________________________________ Date -----END PRIVACY-ENHANCED MESSAGE-----