<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1996
REGISTRATION NO. 333-4137
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CHARMING SHOPPES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
PENNSYLVANIA 23-1721355
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
450 WINKS LANE
BENSALEM, PENNSYLVANIA 19020
(215) 245-9100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
COLIN STERN, ESQ.
CHARMING SHOPPES, INC.
450 WINKS LANE
BENSALEM, PENNSYLVANIA 19020
(215) 245-9100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
FRANCIS J. MORISON, ESQ. DONALD B. BRANT, JR., ESQ.
DAVIS POLK & WARDWELL MILBANK, TWEED, HADLEY & MCCLOY
450 LEXINGTON AVENUE ONE CHASE MANHATTAN PLAZA
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10005
(212) 450-4000 (212) 530-5618
</TABLE>
Approximate date of commencement of proposed sale to the public: as soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box: / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: / /
- ------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. / /
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the same
offering. / /
- ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED JULY 1, 1996
PROSPECTUS
$100,000,000
CHARMING SHOPPES, INC.
% CONVERTIBLE SUBORDINATED NOTES DUE 2006
------------------------
The % Convertible Subordinated Notes Due 2006 (the "Notes") are
convertible at any time prior to maturity, unless previously redeemed or
otherwise repurchased, into shares of common stock, par value $.10 per share
(the "Common Stock"), of Charming Shoppes, Inc. (the "Company") at a conversion
rate of shares per $1,000 principal amount of Notes (equivalent to a
conversion price of approximately $ per share), subject to adjustment in
certain circumstances. The Common Stock is quoted on the Nasdaq National Market
("Nasdaq") under the symbol "CHRS". On June 28, 1996, the last reported sales
price of the Common Stock on Nasdaq was $7 1/16 per share. The Company does not
intend to list the Notes on any securities exchange or on any over-the-counter
quotation system.
Interest on the Notes is payable on and of each year,
commencing , 1997. The Notes will be redeemable at the Company's
option, in whole or in part, at any time on or after , 1999, at the
redemption prices set forth herein, plus accrued interest to the date of
redemption. In the event of a Change of Control (as hereinafter defined), each
holder of the Notes may require the Company to repurchase all or a portion of
such holder's Notes at 100% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of repurchase. There is no sinking fund for
the Notes. See "Description of the Notes".
The Notes are unsecured and subordinated in right of payment to all existing
and future Senior Debt (as defined under "Description of the
Notes -- Subordination of Notes") of the Company and will be effectively
subordinated in right of payment to all indebtedness and other liabilities of
the Company's subsidiaries. As of May 31, 1996, as adjusted for this offering,
including application of the proceeds thereof, and the repayment of certain
indebtedness of the Company in May 1996 as described herein, the Senior Debt of
the Company and the aggregate indebtedness of its subsidiaries, on a
consolidated basis, totalled approximately $70,714,000 (excluding accrued
interest). The Notes do not contain any restrictions on the creation of Senior
Debt or any other indebtedness of the Company or any subsidiary of the Company.
See "Description of the Notes -- Subordination of Notes".
The Notes will be represented by a Global Security registered in the name of
the nominee of The Depository Trust Company ("DTC"), which will act as
Depository. Beneficial interests in the Global Security will be shown on, and
transfers thereof will be effected only through, records maintained by DTC and
its direct and indirect participants. Except as described herein, Notes in
definitive form will not be issued. See "Description of the Notes -- Book-Entry;
Delivery and Form".
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DESCRIPTION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
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UNDERWRITING
PRICE TO DISCOUNT AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
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Per Note............................ % % %
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Total(4)............................ $ $ $
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</TABLE>
(1) Plus accrued interest, if any, from , 1996.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(3) Before deducting estimated expenses of $525,000 payable by the Company.
(4) The Company has granted the Underwriters an option to purchase up to an
additional $15,000,000 aggregate principal amount of Notes at the Price to
Public, less the Underwriting Discount and Commissions, solely to cover
over-allotments. If such option is exercised in full, the total Price to
Public, Underwriting Discount and Commissions and Proceeds to Company will
be $ , $ and $ , respectively. See "Underwriting".
------------------------
The Notes offered hereby are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the
Underwriters, subject to approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve their right
to withdraw, cancel or modify such offer and to reject orders in whole or in
part. It is expected that delivery of the Notes will be made through the
facilities of DTC on or about , 1996.
------------------------
LAZARD FRERES & CO. LLC BEAR, STEARNS & CO. INC.
------------------------
The date of this Prospectus is , 1996.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THE
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
<PAGE> 3
AVAILABLE INFORMATION
Charming Shoppes, Inc. is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at its Regional Offices located at: Seven
World Trade Center, 13th Floor, New York, New York 10048; and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material may also be obtained by mail from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Such material may also be accessed electronically by means of
the Commission's home page on the Internet at http://www.sec.gov. The Common
Shares are quoted on Nasdaq, and reports, proxy statements and other information
concerning the Company are on file for inspection at the offices of Nasdaq, 1735
K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Notes offered hereby (the "Registration Statement"). This
Prospectus does not contain all of the information included in the Registration
Statement and the exhibits thereto. Statements contained in this Prospectus as
to the contents of any contract or other document referred to herein and filed
as an exhibit to the Registration Statement are not necessarily complete and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information with
respect to the Company and its subsidiaries and the Notes, reference is hereby
made to the Registration Statement and the exhibits thereto which may be
obtained from the Commission in the manner set forth above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company has filed with the Commission (i) pursuant to Section 13 or
15(d) of the Exchange Act, an Annual Report on Form 10-K for the fiscal year
ended February 3, 1996 and a Quarterly Report on Form 10-Q for the fiscal
quarter ended May 4, 1996 and (ii) pursuant to Section 12 of the Exchange Act, a
Registration Statement on Form 8-A relating to the Common Stock, each of which
is hereby incorporated by reference in and made a part of this Prospectus.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the Notes offering shall be deemed to
be incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will furnish, without charge, to each person to whom this
Prospectus is delivered, upon written or oral request of such person, including
any beneficial owner, a copy of any and all of the information that has been
incorporated by reference into the Registration Statement of which this
Prospectus is a part but which has not been delivered with this Prospectus (not
including exhibits to the information that is incorporated by reference unless
such exhibits are specifically incorporated by reference into the information
that the Registration Statement incorporates by reference); such requests should
be directed to Charming Shoppes, Inc., 450 Winks Lane, Bensalem, Pennsylvania
19020, Attention: Bernard Brodsky, Vice President, Secretary and Treasurer.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE NOTES OR THE
COMMON SHARES OR BOTH OF THEM AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON NASDAQ OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Fashion Bug(R) and Fashion Bug Plus(R) are registered trademarks used by
the Company.
2
<PAGE> 4
PROSPECTUS SUMMARY
THE COMPANY
The following summary is qualified in its entirety by the more detailed
information (including the financial statements and the notes thereto) included
elsewhere or incorporated by reference in this Prospectus. Each prospective
investor is urged to read this Prospectus in its entirety. Unless otherwise
indicated, all references herein to "Charming Shoppes, Inc." or the "Company"
include its subsidiaries, and references to a "Fiscal" year specify the calendar
year in which the fiscal year ended; for example, Fiscal 1996 refers to the
fiscal year ended February 3, 1996. In addition, unless otherwise indicated,
information contained herein assumes no exercise of the Underwriters'
over-allotment option.
Charming Shoppes, Inc. operates a chain of Fashion Bug(R) and Fashion Bug
Plus(R) stores selling moderately and popularly priced women's specialty
apparel. Fashion Bug(R) stores specialize in selling a wide variety of
fashionable merchandise, including junior, misses, large-size and girls-size
sportswear, dresses, coats, lingerie, accessories and casual footwear. Fashion
Bug Plus(R) stores specialize in similar merchandise for the large-size
customer. An assortment of men's casual apparel and accessories is also
available in most Fashion Bug(R) stores and certain stores carry a selection of
petite women's apparel. The Company's stores sell both brand-name and private
label merchandise. As of May 4, 1996, the Company operated a total of 1,225
stores in 46 states, the substantial majority of which are located in strip
shopping centers in the Northeast quadrant of the United States. 1,159 of such
stores were operated as Fashion Bug(R) stores, with the remainder operated as
Fashion Bug Plus(R) stores.
From Fiscal 1990 to Fiscal 1994, the Company significantly expanded its
market presence in the value oriented women's specialty apparel industry as the
number of Fashion Bug(R) and Fashion Bug Plus(R) stores grew from 1,013 in
Fiscal 1990 to 1,333 in Fiscal 1994. Net income increased from $36,410,000 to
$75,765,000 during the same period. The Company pursued a strategy of (i)
offering its customer one-stop shopping for her apparel needs, gradually
expanding the variety and depth of its merchandise assortment, (ii)
strategically locating its stores in strip shopping centers which have lower
store occupancy costs as compared to malls and (iii) increasing the internal
development of fashion merchandise and its manufacture in lower cost foreign
markets, which by Fiscal 1994 accounted for approximately 59% of the Company's
purchases.
In Fiscal 1995, then-current management made the strategic decision to
increase significantly the Company's reliance on overseas sourcing, narrow the
assortment of merchandise offered and raise the initial markup on its
merchandise to allow for increased promotional pricing. By Fiscal 1996, over 70%
of the Company's merchandise was developed in-house by product developers, and
then purchased primarily through the Company's overseas sources which generally
required lead times of six to twelve months in advance of the selling season. A
higher initial markup was achieved on the products purchased overseas, but
because the Company's foreign sourcing operations required such lengthy lead
times, the Company was unable to react quickly to changes in fashion trends. In
addition, the customer did not respond favorably to the Company's narrow
merchandise selections. As a result, sales productivity and profitability
declined sharply from Fiscal 1994 levels resulting in a significant loss in
Fiscal 1996.
NEW MANAGEMENT TEAM
In response to this declining sales productivity and profit performance,
the Company made significant changes in its management, with Dorrit J. Bern
joining the Company as President and Chief Executive Officer in September 1995.
Ms. Bern had been employed by Sears, Roebuck & Co. ("Sears") since 1987 and had
most recently held the position of Group Vice President for Women's Apparel and
Home Fashions at Sears. Ms. Bern was instrumental in the creation and execution
of the women's apparel strategy at Sears. In addition to Ms. Bern, the Company
is led by new senior merchandising executives, a newly appointed Chief Financial
Officer and a new Executive Vice President of Sourcing.
3
<PAGE> 5
NEW BUSINESS STRATEGY
Under the direction of Ms. Bern and her new management team, during the
fourth quarter of Fiscal 1996 management re-examined many aspects of the
Company's business strategy and made significant changes in merchandising,
marketing, purchasing, distribution and finance. The new business strategy is
aimed at enhancing sales productivity and improving financial performance, while
capitalizing on the Company's competitive strengths. The Company believes that
such strengths include (i) the Company's strategically located stores (the
substantial majority of which are located in strip shopping centers), (ii) its
customer base, including approximately 3,300,000 active proprietary credit card
customers, (iii) its existing management information systems and (iv) its
recently upgraded distribution centers. During the fourth quarter of Fiscal
1996, the Board of Directors approved a restructuring plan to support the
Company's new business strategy and management implemented an expense reduction
initiative to further reduce operating costs. The Company's new business
strategy focuses on meeting the demands of its primary customers, which
management believes are generally 20 to 45 year old women with lower-middle to
middle incomes who look for value, fashion and convenience. The Company believes
that these customers tend to follow fashion trends and visit strip shopping
centers more frequently than malls for their shopping needs because of the mix
of the tenants in, and the convenience of, strip shopping centers.
- Improved Merchandise Selection. The Company has responded to the needs
of its customers by expanding the variety of choices in its merchandise
assortment. Furthermore, the Company is expanding its merchandise assortment in
previously underdeveloped products such as career wear and dresses, and petite
sizes are being offered for the first time. Product assortments are also being
tailored to area demographics, and merchandise will be available for six
distinct seasons -- spring, summer, transitional, fall, holiday and
transitional -- rather than two seasons as in the past. Quality standards have
also been raised with respect to merchandise fabrication, construction and fit.
- Switch to a More Realistic Value Pricing Strategy. The Company has
implemented a more realistic value pricing strategy which reduces the initial
price markup of fashion merchandise in order to increase the percentage of sales
at the ticketed price. Management believes this new strategy should result in a
greater degree of credibility with the customer, reducing the need for
aggressive price promotions. The Company expects to continue to achieve a higher
initial markup in basic low-risk commodity merchandise that is purchased through
its overseas sourcing operation.
- Shift to Responsive Sourcing Strategy. The Company, which had previously
placed heavy reliance on internally developed product sourced overseas, has
shifted a significant portion of its purchases to the domestic market. This
allows management to respond more quickly to current fashion trends. While
overseas sourcing resulted in lower product costs and increased initial markups,
long lead times were generally required to procure merchandise. Use of the
domestic market allows the Company to make purchase decisions generally with two
to four month lead times and quickly replenish merchandise inventory as
necessary (generally with one to two month lead times). The Company continues to
use its overseas sourcing operation, which has been reorganized to support this
strategic change, to procure basic low-risk commodity merchandise. Management
expects that such merchandise will account for approximately 35% of the
Company's purchases in Fiscal 1997.
- Shift Toward Direct Mail and Mass-Media Advertising. The Company has
shifted a greater proportion of its advertising expenditures from in-store
promotions to radio and newspaper advertising, and management is actively
utilizing targeted direct mail advertising to its list of 3,300,000 active
proprietary credit card customers.
- Improvement in Inventory Flow. The Company's new merchandise and
purchasing strategy, and enhancements to the Company's inventory management,
facilitate the timely and orderly purchase and flow of merchandise, thereby
enabling the stores to offer fresh product assortments on a regular basis.
Management expects that such changes and enhancements should improve inventory
turnover, reduce the expense of outside storage facilities and decrease
borrowing costs incurred in connection with merchandise procurement.
- Increased Liquidity. In November 1995, the Company (i) entered into an
agreement with a commercial finance company to provide a revolving credit
facility with a maximum availability of
4
<PAGE> 6
$157,000,000, subject to limitations based upon eligible inventory, (ii)
negotiated the conversion of $82,862,000 of existing trade obligations into a
term loan, and (iii) renegotiated an outstanding term loan in the amount of
$9,488,000. As described below under "-- Recent Developments", the maximum
availability under the Company's revolving credit facility was reduced to
$150,000,000 following release of a $7,000,000 cash deposit in May 1996. This
resulted from the receipt of the Company's $56,726,000 tax refund which was used
to repay a portion of the Company's $82,862,000 term loan. In accordance with
the provisions of the Company's term loan agreements, a portion of the proceeds
of the Notes offering will be used to repay all amounts remaining outstanding
thereunder. Management believes that its revolving credit facility together with
cash flow from operations and certain proprietary credit card securitization
agreements are sufficient to support current operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition -- Liquidity and Capital Resources".
Management expects that this new business strategy will (i) enhance sales
productivity by expanding the number of choices available to its customer at
competitive, value oriented prices, (ii) increase the number of store visits by
customers by changing product selections more frequently and by direct mail and
mass-media advertising, (iii) improve gross margins by reducing the need for
aggressive price promotions, (iv) allow the Company to respond more quickly to
current fashion trends while enhancing inventory management flexibility and (v)
increase financial flexibility through increased liquidity.
RECENT RESTRUCTURING AND EXPENSE REDUCTION INITIATIVE
The Restructuring Plan approved by the Board of Directors during the fourth
quarter of Fiscal 1996 resulted in a fourth quarter pre-tax charge of
$103,000,000. The primary components of the Restructuring Plan are (i) the
planned closing through Fiscal 1997 of 290 under-performing Fashion Bug(R) and
Fashion Bug Plus(R) stores, (ii) the reorganization and reduction of foreign
merchandise sourcing operations discussed above and (iii) reductions in
corporate support operations which were not necessary to support the Company's
new business strategy. The pre-tax operating loss for Fiscal 1996 for these 290
stores, exclusive of the restructuring charge and before allocation of fixed
overhead, was approximately $34,000,000. Given the Company's disappointing
performance in Fiscal 1996 and the implementation of its new business strategy,
however, such operating loss is not indicative of future savings resulting from
the closing of such stores, which are likely to be lower. As of May 4, 1996, the
Company had closed 200 stores.
The Company has also implemented an expense reduction initiative to further
reduce operating costs. The primary components of this initiative are (i) the
further reduction of distribution, merchandising, and administrative personnel,
(ii) the renegotiation of store lease obligations and (iii) the reduction of
various other overhead costs. The Restructuring Plan and the further expense
reduction initiative are expected to result in a workforce reduction of
approximately 2,300 store employees and 800 non-store employees.
RECENT DEVELOPMENTS
During May 1996, the Company received a $56,726,000 income tax refund as a
result of net operating loss carrybacks for taxes paid in prior years. In
accordance with the terms of the Company's $82,862,000 term loan entered into in
November 1995, the tax refund has been used to reduce the amount of such term
loan to $26,136,000 as of May 15, 1996. In addition, as a result of such
payment, a letter of credit in the amount of $22,000,000 issued under the
Company's revolving credit facility as security for the payment of such tax
refund has been cancelled and a $7,000,000 cash deposit in support of such
letter of credit has been released. As a result of the release of such cash
deposit, the maximum availability under the revolving credit facility has been
reduced from $157,000,000 to $150,000,000, subject to limitations based upon
eligible inventory.
The Company, a Pennsylvania corporation, was formed in 1969. The Company's
principal executive offices are located at 450 Winks Lane, Bensalem,
Pennsylvania 19020, telephone (215) 245-9100.
5
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Securities Offered............ $100,000,000 aggregate principal amount of %
Convertible Subordinated Notes Due 2006.
Maturity Date................. , 2006.
Interest Payment Dates........ and commencing , 1997.
Conversion Rights............. Each Note will be convertible, at the option of the Holder,
at any time on or prior to maturity, unless previously
redeemed or otherwise purchased by the Company, for Common
Shares of the Company at the conversion rate of shares
per Note, subject to adjustment in certain circumstances. See
"Description of the Notes -- Conversion".
Subordination................. The Notes will be subordinated in right of payment, as set
forth in the Indenture, to the prior payment in full of all
existing and future Senior Debt (as defined herein) of the
Company. The Company is a holding company and its assets
consist almost entirely of investments in its subsidiaries.
Accordingly, the Company's right and the rights of its
creditors (including holders of Notes) to participate in the
distribution of assets of any subsidiary upon such
subsidiary's liquidation or reorganization will be
effectively subordinated to all existing and future
liabilities of the Company's subsidiaries. As of May 31,
1996, as adjusted for this offering, including the
application of the proceeds thereof, and the repayment of
certain indebtedness of the Company as described under
"-- Recent Developments", Senior Debt of the Company and the
aggregate indebtedness of its subsidiaries, on a consolidated
basis, totaled approximately $70,714,000, excluding accrued
interest. See "Capitalization" and "Description of the
Notes -- Subordination of Notes".
Sinking Fund.................. None.
Redemption of Notes at the
Option of the Company....... The Notes will not be redeemable at the option of the Company
prior to , 1999. Beginning on , 1999, the
Company may redeem the Notes for cash as a whole at any time,
or from time to time in part, at the redemption prices set
forth herein. See "Description of the Notes -- Optional
Redemption -- Redemption at the Option of the Company".
Purchase of Notes at the
Option of the Holder........ In the event of a Change of Control (as defined herein), then
each holder of Notes will have the right, at the holder's
option, subject to the terms and conditions of the Indenture,
to require the Company to purchase for cash all or any part
(provided that the principal amount at maturity must be
$1,000 or an integral multiple thereof) of the holder's Notes
equal to 100% of the principal amount plus interest. The
Change of Control purchase feature of the Notes may in
certain circumstances have an anti-takeover effect. See
"Description of the Notes -- Repurchase Rights".
Use of Proceeds............... The net proceeds of this offering will be approximately
$96,475,000. The Company intends to use a portion of such
proceeds to repay outstanding amounts under its term loans
which totaled approximately $35,624,000 as of May 31, 1996,
plus accrued interest to the anticipated date of payment of
approximately $42,200. The balance of such net proceeds will
be used for general corporate purposes. See "Use of
Proceeds".
</TABLE>
6
<PAGE> 8
SUMMARY FINANCIAL AND OPERATING INFORMATION
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED YEAR ENDED
--------------------------- -------------------------------------------------------------------
MAY 4, APRIL 29, FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30, FEBRUARY 1,
1996 1995 1996(1) 1995 1994 1993 1992
------------ ------------ ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS, RATIOS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales.................. $ 237,454 $ 244,342 $ 1,102,384 $ 1,272,693 $ 1,254,122 $ 1,178,714 $ 1,020,656
Costs of goods sold, buying
and occupancy expenses... 184,122 186,777 917,064 932,138 863,381 804,963 705,047
Gross profit(2)............ 53,332 57,565 185,320 340,555 390,741 373,751 315,609
Interest expense........... 2,888 539 3,666 2,304 2,557 2,958 3,473
Restructuring charge....... -- -- 103,000(3) -- -- -- --
Income (loss) before income
taxes and cumulative
effect of accounting
change................... (8,437) (6,069) (214,988) 62,519 111,732 119,133 85,472
Net income (loss).......... (6,158) (4,370) (139,241) 44,689 79,756(4) 81,127 58,302
Net income (loss) per
share(5)................. (.06) (.04) (1.35) .42 .74(4) .75 .55
Dividends per share........ --(6) .023 .045(6) .09 .09 .08 .06
Weighted average number of
common shares and share
equivalents(5)........... 103,509,837 102,922,381 103,038,224 107,207,660 108,390,583 108,681,305 106,267,242
Ratio of earnings to fixed
charges(7)............... --(8) --(8) --(8) 2.8 4.7 5.5 4.8
OPERATING DATA:
Percentage increase
(decrease) in total
comparable store sales... 2.9% (22.8)% (17.1)% (6.3)% (1.8)% 6.5% 6.2%
Net sales per square
foot(9).................. $20 $19 $85 $105 $120 $130 $126
Number of stores open at
the end of the period.... 1,225 1,416 1,301 1,428 1,333 1,220 1,137
Total square footage at the
end
of the period............ 11,504,000 13,073,000 12,238,000 13,073,000 11,468,000 9,695,000 8,667,000
Capital expenditures....... $ 2,164,000 $ 10,488,000 $30,007,000 $75,656,000 $79,023,000 $64,988,000 $46,678,000
Depreciation and
amortization............. $11,363,000 $ 12,540,000 $49,183,000 $49,459,000 $46,084,000 $38,577,000 $34,684,000
Working capital
turnover(10)............. 1.2 1.3 5.6 6.8 6.6 6.2 6.4
</TABLE>
<TABLE>
<CAPTION>
AS OF MAY 4, 1996
---------------------------
AS
ACTUAL ADJUSTED(11)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................................................................... $200,384 $261,235
Total assets.......................................................................... 679,517 687,167
Long-term debt, including current portion............................................. 95,594 103,244
Total stockholders' equity............................................................ 414,252 414,252
</TABLE>
- ---------------
(1) Fiscal 1996 consists of 53 weeks.
(2) Gross profit equals net sales less cost of goods sold, buying and occupancy
expenses.
(3) During the fourth quarter of Fiscal 1996, the Company's Board of Directors
approved the Restructuring Plan that resulted in a fourth quarter pre-tax
charge of $103,000,000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of
Operations -- Restructuring Charge."
(4) Net income and net income per share for Fiscal 1994 is after an increase
for the cumulative effect of an accounting change of $3,991,000 or $0.04
per share. See Notes to Consolidated Financial Statements "Summary of
Significant Accounting Policies -- Income Taxes" contained herein.
(5) Net income per common share is based on the weighted average number of
shares and share equivalents outstanding during each period. Common stock
equivalents include the effect of dilutive stock options. Share equivalents
are not included in the weighted average shares outstanding for determining
net loss per common share as the result would be antidilutive.
(6) On October 2, 1995, the Company's Board of Directors announced an
indefinite suspension of dividends on the Company's Common Stock. See
"Market Prices and Dividend Policy".
(7) The ratio of earnings to fixed charges is based on income from continuing
operations and has been computed on a total enterprise basis. Earnings
represent income (loss) before income taxes, cumulative effect of
accounting change and fixed charges, net of capitalized interest. Fixed
charges consist of interest expense before reduction for capitalized
interest, debt amortization costs, and one-third (the percent deemed
representative of the interest factor) of minimum lease payments.
(8) Earnings for the thirteen weeks ended May 4, 1996 and April 29, 1995 and
for Fiscal 1996 were insufficient to cover fixed charges by $8,437,000,
$6,367,000 and $215,548,000, respectively. Excluding the restructuring
charge in connection with the Restructuring Plan, earnings for Fiscal 1996
were insufficient to cover fixed charges by $112,548,000.
(9) Net sales per square foot is determined by dividing total net sales by the
average of total square footage at the beginning and end of each fiscal
quarter.
(10) Working capital turnover is determined by dividing total net sales by the
average of working capital at the beginning and end of the period.
(11) As adjusted to give effect to (i) this offering and the application of the
net proceeds therefrom and (ii) the repayment in May 1996 of $56,726,000 of
one of the Company's term loans with the proceeds of an income tax refund.
See "-- Recent Developments".
7
<PAGE> 9
RISK FACTORS
The Notes are subject to a number of material risks, including those
enumerated below. Investors should carefully consider the risk factors
enumerated below together with all of the information set forth or incorporated
by reference in this Prospectus in determining whether to purchase any of the
Notes.
RECENT OPERATING LOSSES
Net income has decreased significantly since the fiscal year ended January
30, 1993 and the Company experienced a significant loss for the fiscal year
ended February 3, 1996 ("Fiscal 1996") and continuing losses in the first
quarter of the fiscal year ending February 1, 1997 ("Fiscal 1997"). While the
Company has taken steps to implement a new business strategy as discussed below
under "-- Implementation of New Business Strategy", there can be no assurance
that losses will not continue in the future.
IMPLEMENTATION OF NEW BUSINESS STRATEGY
Under the direction of Dorrit J. Bern and her new management team, during
the fourth quarter of Fiscal 1996, management began implementing a new business
strategy in response to the Company's declining sales productivity and profit
performance. See "Description of Business -- New Business Strategy". Management
expects this new business strategy will likely result in lower initial unit
sales prices and higher unit costs of merchandise product. However, management
also believes that such results will be offset by (i) a reduced need for
aggressive price promotions, resulting in improved gross margins, (ii) increased
sales productivity and (iii) enhanced inventory management flexibility,
resulting in reduced inventory investment, in each case, as compared to Fiscal
1996. Due to purchase commitments made by the Company in Fiscal 1996 for planned
sales in Fiscal 1997, however, the full effect of this strategic change is not
expected until the latter half of Fiscal 1997. The Company's future results and
financial condition are dependent on the successful implementation of this new
business strategy. While the Company believes that this strategy will enable it
to improve its financial results, there can be no assurance that this new
strategy will be successful, that the anticipated benefits of this new strategy
will be realized, that management will be able to implement such strategy on a
timely basis, that the Company will return to profitability levels experienced
prior to Fiscal 1996 or that losses will not continue in the future.
RECENT RESTRUCTURING
While the Company believes that the $103,000,000 restructuring charge taken
in the fourth quarter of Fiscal 1996 in connection with the Restructuring Plan
should be sufficient to cover all expenses associated with the Restructuring
Plan, in the event such costs, including litigation expenses in relation to the
Restructuring Plan, are higher than anticipated, or additional restructuring
charges are taken, either in connection with the Restructuring Plan or
otherwise, this could have a material adverse effect on the Company's results of
operations and financial condition. In addition, certain aspects of the
Company's expense reduction initiative, such as renegotiation of store lease
obligations, are not fully within the control of the Company and as a result
there can be no assurance that such initiative will be successful. To the extent
these anticipated costs savings do not materialize, this will have an adverse
effect on the Company's expenses and will reduce expected earnings levels.
DEPENDENCE ON KEY MANAGEMENT
The Company's success and its ability to successfully implement its new
business strategy depend largely on the efforts and abilities of Ms. Bern and
her management team. The loss of the services of one or more of such key
personnel could have a material adverse effect on the Company's business and
financial results. The Company has taken certain steps to encourage such
employees to remain in the Company's employ, including providing the opportunity
for equity participation through adoption of employee stock option plans and
annual cash incentive programs. In addition, certain of such employees,
including Ms. Bern, have employment contracts. Individuals employed by the
Company may, however, choose to leave the Company at any time to
8
<PAGE> 10
pursue other opportunities. The Company does not maintain key-man insurance
policies with respect to any of its employees.
NATURE OF INDUSTRY
Predicting fashion trends is often difficult and since a significant
portion of the Company's sales are related to fashion merchandise, rapid changes
in or miscalculation of fashion trends have in the past and may in the future
require higher than expected markdowns resulting in a decrease in gross margins
and either losses or reduced profits. In particular, the Company believes that
its disappointing results in Fiscal 1996 are attributable to a disappointing
response to the Company's merchandise assortment resulting in the need for
aggressive price reductions to stimulate consumer demand. While management
believes that the new business strategy will allow it to reduce these risks by
decreasing inventory lead times and allowing it to respond more quickly to
current fashion trends, there can be no assurance that this new strategy will be
successful and that significant markdowns will not be required in the future.
Retail sales are also frequently affected by weather conditions. As a result,
any extreme or unseasonable weather conditions may also have a significant
effect on the Company's sales requiring significant markdowns thereby reducing
gross margins and resulting in losses or reduced profits.
COMPETITION
The retail industry, and particularly the women's apparel retail sector, is
a highly competitive industry which has operated and continues to operate in a
highly promotional environment. The Company competes primarily with moderate
price department stores, discount department stores and certain other low to
moderate price specialty apparel stores, many of which are larger and have
greater resources than the Company. This competitive environment may force the
Company to lower prices to meet competition. The primary elements of competition
are merchandise style, size, selection, quality, display and price, as well as
store location, design, advertising and promotion and personalized service to
customers. The Company believes that it differentiates itself from its
competitors through its strategically located stores (the substantial majority
of which are located in strip shopping centers) and its proprietary credit card.
IMPACT OF ECONOMIC CONDITIONS ON INDUSTRY RESULTS
As with other retail businesses, the Company's operations may be adversely
affected by a number of factors beyond its control, including economic downturns
and cyclical variations in the retail market for women's fashion apparel. In
particular, the Company's results for Fiscal 1996 were affected by a continuing
general weakness in women's apparel sales. While demand for women's apparel
showed marginal improvement in the first quarter of Fiscal 1997 over the last
quarter of Fiscal 1996, there can be no assurance that such improvement will
continue. Demand for apparel at the retail level is largely dependent on the
strength of the overall economy. A weakness in overall consumer demand, or
increased inflation, could have an adverse effect on the Company's sales and
gross margins. As a result, changes in governmental trade, monetary, fiscal and
taxing policies may all adversely affect the Company's sales and earnings. In
addition, as store payroll is the single largest expense in the Company's retail
operations, any increase in the Federal (or State) minimum wage could have a
major impact on the Company's hourly pay rates, which would have an adverse
effect on the Company's selling and administrative expenses. In particular,
while the Company does not believe that the current Federal minimum wage
legislation under consideration by Congress would have a material adverse effect
on the Company's results of operations, if adopted in its current form, there
can be no assurance as to the effect of any change to such legislation, or as to
the effect of the adoption of different legislation. A prolonged economic
downturn and weakness in demand for women's apparel would have a material
adverse impact on the Company's results of operations. In addition, the recent
acceleration in the rate of business failures in the retail industry can also
have a cascade effect on other retailers, including an increased need for price
promotions. Such acceleration in the rate of business failures, among other
things, may result in vendors requiring more onerous payment terms, resulting in
increased financing costs or the unavailability of certain merchandise. Any of
these results could have a material adverse effect on the Company's results of
operations and financial condition.
9
<PAGE> 11
RELIANCE ON REVOLVING CREDIT FACILITY
Following this offering, the Company's primary source of liquidity (other
than cash flow from operations and its proprietary credit card securitization
agreements) will be its revolving credit facility which expires on June 1, 1998
and has a maximum availability of $150,000,000, subject to limitations based on
eligible inventory. As of May 4, 1996, the availability under this facility was
approximately $127,713,000, against which the Company had outstanding letters of
credit of $66,391,000 and short-term seasonal borrowings of $5,910,000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments". The primary purpose of this facility is to
enable the Company to issue letters of credit for overseas purchases of
merchandise as well as to provide for seasonal cash borrowings. Such facility
contains covenants, including a minimum net worth covenant of $350,000,000,
limitations on the ability of the Company to incur indebtedness and restrictions
on the payment of dividends. In addition, such facility is secured by
substantially all of the assets of the Company and its subsidiaries. The loss of
certain or all of such collateral would have a material adverse effect on the
Company's results of operations and financial condition. In addition,
availability under the facility will be affected by reductions in eligible
inventory (as defined therein) and may be reduced or eliminated at the
discretion of the lender in certain circumstances. As the Company relies on such
facility to provide liquidity, if such facility were to become unavailable to
the Company or prohibitively expensive this could have a material adverse effect
on the Company's results of operations and financial condition. In addition, the
terms of this facility could impair the Company's ability to obtain financing in
the future or to take advantage of significant business opportunities that may
arise. The terms of this facility may also increase the vulnerability of the
Company to an increase in interest rates, adverse general economic and retailing
industry conditions and to increased competitive pressures.
ABILITY TO SECURITIZE CREDIT CARD RECEIVABLES AND CREDIT RISK
During Fiscal 1996, credit cards sales under the Company's proprietary
credit card program accounted for approximately 40% of net sales. The Company
has formed a trust to which it has transferred, at face value, its interest in
receivables created under this proprietary credit card program. The Company,
together with the trust, has entered into various agreements whereby it can
sell, on a revolving basis, interests in these receivables for a specified term.
Through the end of Fiscal 1996, the trust has securitized $371.8 million of
receivables, of which $28.5 million were retained by the Company. Additionally,
as of the end of Fiscal 1996, the Company had $5.5 million in a collateral
account in support of the Company's securitizations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations". In
the event of a deterioration in the performance of the receivables portfolio the
Company will be required to increase its contribution to the cash collateral
account. Such increase will be funded solely from distributions otherwise due to
the Company from the trust. In the event the cash collateral account is released
to the investors, the Company will have a subordinated interest equal to its
contribution to the released amounts. Management does not believe that such
events will have a material adverse effect on the Company.
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. If such securitization agreements were to become
unavailable to the Company or prohibitively expensive, this could have a
material adverse effect on the Company's results of operations and financial
position. In addition, given the nature of the Company's business, the Company's
credit card customers tend to have a higher credit risk than traditional credit
card customers. As a result, although the Company's securitization agreements
provide for the Company to continue to service the credit card receivables and
control credit policies, a significant increase in the rate of bad debt
experience among its credit card customers, could have a material adverse effect
on the Company's results of operations. Since late 1995, the Company, like
certain other retailers with proprietary credit cards, has experienced an
increase in its bad debt experience. During the two fiscal quarters ended
February 3, 1996 and May 4, 1996 as compared to the corresponding period in the
prior fiscal years, the Company has experienced a 1.5% increase in its bad debt
expense as a percentage of receivables on an annualized basis. Management does
not believe that this increase has had a significant effect on the Company's
results of operations.
10
<PAGE> 12
FOREIGN SOURCING
While the Company has significantly reduced its dependence on foreign
sourcing, it expects to continue to source approximately 35% of its merchandise
abroad. The Company's foreign sourcing operation will continue to be based
primarily in its Hong Kong office and China's assumption of control of Hong Kong
in 1997 could potentially create a disruption in the operations of this office.
The overseas sourcing operation could also be adversely affected by political
instability in countries from which merchandise and/or fabrics are purchased,
including but not limited to: Hong Kong, Singapore, Indonesia, Korea,
Philippines, Pakistan, India, the Dominican Republic, Turkey, China, Macau and
Taiwan. Moreover, trade restrictions or sanctions imposed by the United States
or foreign governments, changes in quota regulations and reductions in quota, by
either the United States or foreign governments, or increases in duty rates
applicable to these foreign-made goods imported into the United States, could
cause products to become unavailable or wholesale prices to increase, resulting
in increased prices at the retail level and a decrease in unit sales and gross
margins. The Company is not currently aware of any such restrictions, sanctions,
changes, reductions or increases which would have a material adverse effect on
its results of operations. In addition, such operation may be adversely affected
by exchange rate fluctuations. Any events giving rise to a delay in shipping of
merchandise, or increased costs of transportation, including but not limited to
increased energy prices and adverse weather conditions, could also have an
adverse effect on the Company's earnings.
SUBORDINATION
The payment of principal of, and interest on, and any premium or other
amounts owing in respect of, the Notes will be effectively subordinated to the
prior payment in full of all existing and future Senior Debt (as defined herein)
of the Company and indebtedness of the Company's subsidiaries. As of May 31,
1996, as adjusted for this offering, including application of the proceeds
thereof, and the repayment of certain indebtedness of the Company in May 1996 as
described under "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments", Senior Debt of the Company and
the aggregate indebtedness of its subsidiaries, on a consolidated basis,
totalled approximately $70,714,000, excluding accrued interest. The Notes do not
contain any restrictions on the creation of additional Senior Debt or any other
indebtedness of the Company or any subsidiary of the Company. Consequently, in
the event of any bankruptcy, liquidation, dissolution, reorganization, or
similar proceeding with respect to the Company, assets of the Company will be
available to pay obligations on the Notes only after all Senior Debt of the
Company has been paid in full, and there can be no assurance that there will be
sufficient assets to pay amounts due on all or any of the Notes. In addition,
the Company effectively operates through its network of approximately 1,300
subsidiaries. As a result, any right of the holders of the Notes to participate
in the assets of any of the subsidiaries upon such subsidiary's liquidation or
recapitalization will be effectively subordinated to the claims of such
subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor of such subsidiary.
DEPENDENCE ON DIVIDENDS AND OTHER ADVANCES FROM SUBSIDIARIES
The Company is a holding company, substantially all of the operations of
which are conducted through subsidiaries. Consequently, the Company relies
principally on dividends or advances from its subsidiaries for the funds
necessary for, among other things, the payment of principal of and interest on
the Notes and the other indebtedness of the Company. The ability of such
subsidiaries to pay dividends is subject to applicable state law and certain
other restrictions, including restrictions contained in the revolving credit
facility which restrict the ability of all U.S. subsidiaries of the Company,
excluding those subsidiaries related to the proprietary credit card program, to
pay dividends except for the purposes of paying corporate overhead consistent
with past business practice, and the funding of certain investments permitted
under such facility. The subsidiaries will also be permitted to pay dividends to
the Company for the purpose of servicing the principal of, premium, if any, and
interest on the Notes.
11
<PAGE> 13
VOLATILITY OF PRICE OF COMMON STOCK
The market price of the Company's Common Stock has been highly volatile in
recent years and on November 28, 1995 reached a 52-week low of $2 1/16. Factors
such as quarter-to-quarter variations in the Company's revenues and earnings and
variations in monthly sales figures have caused and will continue to cause the
market price of the Company's Common Stock to fluctuate significantly. In
addition, in recent years the stock markets have experienced significant
volatility, which often may be unrelated to the operating performance of the
affected companies. Such volatility may also adversely affect the market price
of the Company's Common Stock. See "Market Prices and Dividend Policy -- Market
Prices".
DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS
On October 2, 1995, the Company's Board of Directors announced an
indefinite suspension of dividends on the Company's Common Stock. Additionally,
the Company's revolving credit facility requires, among other things, that the
Company not pay dividends on its Common Stock. See "Market Prices and Dividend
Policy -- Dividends" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations". Certain institutional investors may invest
only in dividend-paying equity securities or may operate under other
restrictions that may prohibit or limit their ability to invest in the Common
Stock.
SHAREHOLDERS RIGHTS PLAN AND CERTAIN OTHER ANTITAKEOVER PROVISIONS
In April 1989, the Board of Directors adopted a Shareholder Rights Plan. In
addition, the Company's Articles of Association and By-laws, as well as the
Pennsylvania Business Corporation Law contains certain "antitakeover"
provisions. See "Description of Capital Stock -- Shareholder Rights Plan" and
"-- Antitakeover Provisions of Applicable Pennsylvania Law and the Company's
Articles and Bylaws". Such Shareholders Rights Plan and provisions may
discourage open market purchases of the Company's Common Stock or a
non-negotiated tender or exchange offer for such stock and, accordingly, may
limit a shareholder's ability to realize a premium over the market price of the
Common Stock in connection with any such transaction.
LACK OF PUBLIC MARKET FOR THE NOTES
The Company does not intend to list the Notes on any securities exchange or
over-the-counter quotation system. The Notes are a new series of securities with
no established trading market. The Company has been advised by the Underwriters
that they intend to make a market in the Notes but they are not obligated to do
so and may discontinue market making at any time without notice. No assurance
can be given as to the liquidity of the trading market for the Notes or whether
any active market will develop, and therefore the Notes may be considered an
illiquid investment. See "Underwriting".
FORWARD LOOKING STATEMENTS
This Prospectus contains certain forward looking statements concerning the
Company's operations, performance and financial condition including, in
particular, forward looking statements regarding the Company's expectations of
future performance following implementation of its new business strategy, recent
restructuring and expense reduction initiative and the expected benefits
thereof. In addition, the information contained herein includes certain forward
looking statements regarding store openings and closings, foreign sourcing
operations, capital requirements and other matters. Such forward looking
statements are subject to various risks and uncertainties. Actual results could
differ materially from those currently anticipated due to a number of factors,
including those identified under "Risk Factors" and elsewhere in this
Prospectus.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $96,475,000
million. The Company intends to use a portion of such proceeds to repay all
outstanding amounts under its term loans which totaled $35,624,000 as of May 31,
1996, plus accrued interest to the anticipated date of payment of approximately
$42,200. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial
12
<PAGE> 14
Condition -- Liquidity and Capital Resources". The term loans mature on June 1,
1998. One term loan bears interest at 11.8% and the other term loan bears
interest at 2% above the prime rate (10.25% at May 31, 1996). The balance of
such net proceeds will be used for general corporate purposes. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition -- Liquidity and
Capital Resources".
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for each of the periods set forth
below has been computed on a consolidated basis and should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto contained herein.
<TABLE>
<CAPTION>
THIRTEEN WEEKS
ENDED YEAR ENDED
----------------------- ---------------------------------------------------------------------
MAY 4, APRIL 29, FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30, FEBRUARY 1,
1996 1995 1996 1995 1994 1993 1992
---------- ---------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings
to fixed
charges........ -- -- -- 2.8 4.7 5.5 4.8
Deficiency of
earnings to
fixed charges
(in
thousands)..... $8,437,000 $6,367,000 $215,548,000(1) -- -- -- --
</TABLE>
- ---------------
(1) Excluding the restructuring charge in connection with the Restructuring
Plan, earnings for Fiscal 1996 were insufficient to cover fixed charges by
$112,548,000.
The ratio of earnings to fixed charges is based on income from continuing
operations and has been computed on a total enterprise basis. Earnings represent
income (loss) before income taxes, cumulative effect of accounting change and
fixed charges, net of capitalized interest. Fixed charges consist of interest
expense before reduction for capitalized interest, debt amortization costs, and
one-third (the percent deemed representative of the interest factor) of minimum
lease payments.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth as of May 4, 1996 (i) the actual cash and
cash equivalents, short-term debt and capitalization of the Company and (ii) the
pro forma cash and cash equivalents, short-term debt and capitalization of the
Company as adjusted to give effect to (A) the sale by the Company of the Notes
and the application of the estimated net proceeds therefrom and (B) the partial
repayment in May 1996 of $56,726,000 of the Company's term loans with the
proceeds of an income tax refund. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments" This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and the notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
MAY 4, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
CASH AND CASH EQUIVALENTS............................................. $ 24,360 $ 85,211
====== ======
SHORT-TERM DEBT:
Current portion - long-term debt.................................... $ 59,971 $ 730
====== ======
LONG-TERM DEBT, EXCLUDING CURRENT PORTION:
Total long-term debt, excluding current portion..................... $ 35,623 $ 2,514
Notes offered hereby................................................ -- 100,000
------ ------
Total long-term debt, excluding current portion....................... 35,623 102,514
STOCKHOLDERS' EQUITY:
Common stock; $.10 par value, 300,000,000 shares authorized,
103,851,659 shares issued and outstanding........................... 10,385 10,385
Additional paid-in capital.......................................... 57,259 57,259
Deferred employee compensation........................................ (3,439) (3,439)
Unrealized losses on available-for-sale securities (net of income
taxes
of ($9))............................................................ 13 13
Retained earnings................................................... 350,034 350,034
------ ------
TOTAL STOCKHOLDERS' EQUITY............................................ 414,252 414,252
------ ------
TOTAL CAPITALIZATION.................................................. $449,875 $ 516,766
====== ======
</TABLE>
14
<PAGE> 16
MARKET PRICES AND DIVIDEND POLICY
MARKET PRICES
The Company's Common Stock is traded on the over-the-counter market and
quoted on Nasdaq under the symbol "CHRS". The following table sets forth, for
the periods indicated, the high and low closing sales prices for the Company's
Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH $ LOW $
-------- ---------
<S> <C> <C> <C> <C>
Fiscal 1993
First Quarter........................................... $16 7/16 $12 11/16
Second Quarter.......................................... 16 3/8 13 5/16
Third Quarter........................................... 18 1/2 14 1/16
Fourth Quarter.......................................... 19 16 5/8
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Fiscal 1994
First Quarter........................................... 19 1/8 13 3/4
Second Quarter.......................................... 18 1/4 12 1/4
Third Quarter........................................... 14 7/8 11 1/2
Fourth Quarter.......................................... 14 1/4 10 3/4
Fiscal 1995
First Quarter........................................... 13 7/8 10 1/4
Second Quarter.......................................... 10 5/8 8 15/16
Third Quarter........................................... 9 3/8 7 1/4
Fourth Quarter.......................................... 7 1/2 5 15/16
Fiscal 1996
First Quarter........................................... 6 5/8 5
Second Quarter.......................................... 5 3/8 3 7/8
Third Quarter........................................... 5 5/8 2 1/4
Fourth Quarter.......................................... 3 1/2 2 1/8
Fiscal 1997
First Quarter........................................... 6 9/16 3
Second Quarter (through June 28, 1996).................. 8 1/4 6 9/16
</TABLE>
On June 28, 1996, the last reported sales price of the Common Stock on
Nasdaq was $7 1/16 per share. As of June 26, 1996, the Company's Common Stock
was held of record by 3,215 holders. This number excludes individual
stockholders holding stock under nominee security position listings.
15
<PAGE> 17
DIVIDENDS
The following table sets forth, for the periods indicated, the dividends
declared and paid with respect to the Company's Common Stock.
<TABLE>
<CAPTION>
DIVIDENDS
PER SHARE
---------
<S> <C>
Fiscal 1995
First Quarter.............................................. $ .0225
Second Quarter............................................. .0225
Third Quarter.............................................. .0225
Fourth Quarter............................................. .0225
Fiscal 1996
First Quarter.............................................. $ .0225
Second Quarter............................................. .0225
Third Quarter.............................................. --
Fourth Quarter............................................. --
Fiscal 1997
First Quarter.............................................. --
</TABLE>
On October 2, 1995, the Company's Board of Directors announced an
indefinite suspension of dividends on the Company's Common Stock. Additionally,
the Company's revolving credit facility, entered into in November 1995,
requires, among other things, that the Company not pay dividends on its Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition -- Liquidity and Capital
Resources".
16
<PAGE> 18
SELECTED FINANCIAL AND OPERATING INFORMATION
The following table sets forth selected historical statement of income,
operating and balance sheet data of the Company. The statement of income and
balance sheet data for each fiscal year has been derived from the Company's
consolidated financial statements, which have been audited by Ernst & Young LLP,
independent auditors. Their report for each of the three fiscal years in the
period ended February 3, 1996 appears elsewhere herein. The information set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and notes thereto of the Company contained elsewhere in
this Prospectus. All references to years are to the fiscal year of the Company,
which ends on the Saturday nearest January 31 in the following calendar year.
All fiscal years for which financial information is set forth below had 52
weeks, with the exception of Fiscal 1996, which had 53 weeks.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED YEAR ENDED
--------------------------- -------------------------------------------------------------------------
MAY 4 APRIL 29, FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30, FEBRUARY 1,
1996 1995 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS, RATIOS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales........... $ 237,454 $ 244,342 $ 1,102,384 $ 1,272,693 $ 1,254,122 $ 1,178,714 $ 1,020,656
Costs of goods sold,
buying and
occupancy
expenses.......... 184,122 186,777 917,064 932,138 863,381 804,963 705,047
Gross profit(1)..... 53,332 57,565 185,320 340,555 390,741 373,751 315,609
Interest expense.... 2,888 539 3,666 2,304 2,557 2,958 3,473
Restructuring
charge............ -- -- 103,000(2) -- -- -- --
Income (loss) before
income taxes and
cumulative effect
of accounting
change............ (8,437) (6,069) (214,988) 62,519 111,732 119,133 85,472
Net income (loss)... (6,158) (4,370) (139,241) 44,689 79,756(3) 81,127 58,302
Net income (loss)
per
share(4).......... (.06) (.04) (1.35) .42 .74(3) .75 .55
Dividends per
share............. --(5) .023 .045(5) .09 .09 .08 .06
Weighted average
number of common
shares and share
equivalents(4).... 103,509,837 102,922,381 103,038,224 107,207,660 108,390,583 108,681,305 106,267,242
Ratio of earnings to
fixed
charges(6)........ --(7) --(7) --(7) 2.8 4.7 5.5 4.8
OPERATING DATA:
Percentage increase
(decrease) in
total comparable
store sales....... 2.9% (22.8)% (17.1)% (6.3)% (1.8)% 6.5% 6.2%
Net sales per square
foot(8)........... $20 $19 $85 $105 $120 $130 $126
Number of stores
open at the end of
the period........ 1,225 1,416 1,301 1,428 1,333 1,220 1,137
Total square footage
at the end of the
period............ 11,504,000 13,073,000 12,238,000 13,073,000 11,468,000 9,695,000 8,667,000
Capital
expenditures...... $ 2,164,000 $10,488,000 $30,007,000 $75,656,000 $79,023,000 $64,988,000 $46,678,000
Depreciation and
amortization...... $11,363,000 $12,540,000 $49,183,000 $49,459,000 $46,084,000 $38,577,000 $34,684,000
Working capital
turnover(9)....... 1.2 1.3 5.6 6.8 6.6 6.2 6.4
BALANCE SHEET DATA (AS
OF
PERIOD END):
Working capital..... $ 200,384 $ 181,496 $ 199,457 $ 191,815 $ 181,906 $ 200,083 $ 182,289
Total assets........ 679,517 872,964 681,746 840,809 829,233 737,251 637,015
Long-term debt,
including current
portion........... 95,594 22,122 95,793 22,300 27,303 31,074 36,019
Total stockholders'
equity............ 414,252 553,402 419,029 558,822 522,100 445,309 362,208
</TABLE>
17
<PAGE> 19
- ---------------
(1) Gross profit equals net sales less cost of goods sold, buying and occupancy
expenses.
(2) During the fourth quarter of Fiscal 1996, the Company's Board of Directors
approved the Restructuring Plan that resulted in a fourth quarter pre-tax
charge of $103,000,000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of
Operations -- Restructuring Charge".
(3) Net income and net income per share for the fiscal year ended January 29,
1994 is after an increase for the cumulative effect of an accounting change
of $3,991,000 or $0.04 per share. See Notes to Consolidated Financial
Statements "Summary of Significant Accounting Policies -- Income Taxes"
contained herein.
(4) Net income per common share is based on the weighted average number of
shares and share equivalents outstanding during each period. Common stock
equivalents include the effect of dilutive stock options. Share equivalents
are not included in the weighted average shares outstanding for determining
net loss per common share as the result would be antidilutive.
(5) On October 2, 1995, the Company's Board of Directors announced an indefinite
suspension of dividends on the Company's Common Stock. See "Market Prices
and Dividend Policy".
(6) The ratio of earnings to fixed charges is based on income from continuing
operations and has been computed on a total enterprise basis. Earnings
represent income (loss) before income taxes, cumulative effect of accounting
change and fixed charges, net of capitalized interest. Fixed charges consist
of interest expense before reduction for capitalized interest, debt
amortization costs, and one-third (the percent deemed representative of the
interest factor) of minimum lease payments.
(7) Earnings for the thirteen weeks ended May 4, 1996 and April 29, 1995 and for
Fiscal 1996 were insufficient to cover fixed charges by $8,437,000,
$6,367,000 and $215,548,000, respectively. Excluding the restructuring
charge in connection with the Restructuring Plan, earnings for Fiscal 1996
were insufficient to cover fixed charges by $112,548,000.
(8) Net sales per square foot is determined by dividing total net sales by the
average of total square footage at the beginning and end of each fiscal
quarter.
(9) Working capital turnover is determined by dividing total net sales by the
average of working capital at the beginning and end of the period.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
During May 1996, the Company received a $56,726,000 income tax refund as a
result of net operating loss carrybacks for taxes paid in prior years. In
accordance with the terms of the Company's $82,862,000 term loan entered into in
November 1995, the tax refund has been used to reduce the amount of such term
loan to $26,136,000 as of May 15, 1996. In addition, as a result of such
payment, a letter of credit in the amount of $22,000,000 issued under the
Company's revolving credit facility as security for the payment of such tax
refund has been cancelled and a $7,000,000 cash deposit in support of such
letter of credit has been released. As a result of the release of such cash
deposit, the maximum availability under the revolving credit facility has been
reduced from $157,000,000 to $150,000,000, subject to limitations based upon
eligible inventory.
RESULTS OF OPERATIONS
FINANCIAL SUMMARY
The following table sets forth certain financial data expressed as a
percentage of net sales and on a comparative basis:
<TABLE>
<CAPTION>
PERCENTAGE INCREASE (DECREASE)
PERCENTAGE OF NET SALES FROM PRIOR YEAR
-------------------------------------------------------- ----------------------------------------
FIRST QUARTER FIRST QUARTER FISCAL FISCAL FISCAL FIRST QUARTER FISCAL FISCAL
FISCAL 1997 FISCAL 1996 1996 1995 1994 FISCAL 1996-1997 1995-1996 1994-1995
------------- ------------- ------ ------ ------ ---------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................ 100.0% 100.0% 100.0% 100.0% 100.0% (2.8)% (13.4)% 1.5%
Cost of goods sold,
buying and occupancy
expenses............... 77.5 76.5 83.2 73.2 68.9 (1.4) (1.6) 8.0
Selling, general and
administrative
expenses............... 25.0 26.6 27.1 22.4 22.8 (8.6) 5.0 (0.2)
Interest................. 1.2 0.2 0.3 0.2 0.2 435.8 59.1 (9.9)
Restructuring charge..... -- -- 9.3 -- -- NA NA NA
Income tax (benefit)
expense................ 1.0 0.7 (6.9) 1.4 2.9 (39.0) NA (50.4)
Net income (loss)........ 2.6 1.8 (12.6) 3.5 6.1(1) (40.9) NA (41.0)
</TABLE>
- ---------------
(1) Net income for the fiscal year ended January 29, 1994 is before the
cumulative effect of an accounting change of $3,991,000 or $.04 per share.
See Notes to Consolidated Financial Statements "Summary of Significant
Accounting Policies -- Income Taxes".
IMPLEMENTATION OF NEW BUSINESS STRATEGY AND RECENT RESTRUCTURING
Dorrit J. Bern joined the Company as President and Chief Executive Officer
in September 1995. During the fourth quarter of Fiscal 1996, Ms. Bern and her
new management team began implementing a new business strategy in response to
the Company's declining sales productivity and profit performance. This strategy
is aimed at enhancing sales productivity and improving financial performance
beginning in Fiscal 1997 through expansion of the variety of choices in its
merchandise assortment, improvement in merchandise quality and implementation of
a more realistic value pricing strategy. In addition, the Company is expanding
its merchandise assortment in previously underdeveloped products, such as career
wear and dresses, and petite sizes are being offered for the first time. As part
of this new business strategy, management has placed increased focus on meeting
the demands of its primary customers. Such customers are generally in the 20 to
45 year old age group, and in the lower-middle to middle income range, and tend
to follow, rather than set, fashion trends. Therefore, the Company, which had
previously placed heavy reliance on internally developed product sourced
overseas, has shifted a significant portion of its purchases to the domestic
market, allowing management to decrease lead times and respond more quickly to
current fashion trends. The Company continues to use its overseas sourcing
operation, which has been reorganized to support this strategic change, to
procure basic low-risk commodity merchandise. Management expects that this
strategy will likely result in lower initial unit sales prices and higher unit
costs of merchandise product. However, management
19
<PAGE> 21
also believes that such results will be offset by (i) a reduced need for
aggressive price promotions, resulting in improved gross margins, (ii) increased
sales productivity and (iii) enhanced inventory management flexibility,
resulting in reduced inventory investment, in each case as compared to Fiscal
1996. Due to purchase commitments made by the Company in Fiscal 1996 for planned
sales in Fiscal 1997, the full effect of this strategic change is not expected
until the latter half of Fiscal 1997.
During the fourth quarter of Fiscal 1996, the Company's Board of Directors
approved the Restructuring Plan to support the Company's new business strategy.
The Restructuring Plan resulted in a fourth quarter pre-tax charge of
$103,000,000. The primary components of the Restructuring Plan are (i) the
planned closing through Fiscal 1997 of 290 under-performing Fashion Bug(R) and
Fashion Bug Plus(R) stores, (ii) the reorganization and reduction of foreign
merchandise sourcing operations discussed above and (iii) reductions in
corporate support operations which were not necessary to support the Company's
new business strategy. The pre-tax operating loss for Fiscal 1996 for these 290
stores, exclusive of the restructuring charge and before allocation of fixed
overhead, was approximately $34,000,000. Given the Company's disappointing
performance in Fiscal 1996 and the implementation of its new business strategy,
however, such operating loss is not indicative of future savings resulting from
the closing of such stores. The Company has also implemented an expense
reduction initiative to further reduce operating costs. The primary components
of this initiative are (i) the further reduction of distribution, merchandising,
and administrative personnel, (ii) the renegotiation of store lease obligations
and (iii) the reduction of various other overhead costs. The Restructuring Plan
and the further expense reduction initiative are expected to result in a
workforce reduction of approximately 2,300 store employees and 800 non-store
employees. In addition, the Company (i) entered into an agreement with a
commercial finance company to provide a revolving credit facility with a maximum
availability of $157,000,000, subject to limitations based upon eligible
inventory, (ii) negotiated the conversion of $82,862,000 of existing trade
obligations into a term loan and (iii) renegotiated an outstanding term loan in
the amount of $9,488,000. As described above under " -- Recent Developments",
the maximum availability under the Company's revolving credit facility was
reduced to $150,000,000 following release of a $7,000,000 cash deposit in May
1996. This resulted from the receipt of the Company's $56,726,000 tax refund
which was used to repay a portion of the Company's $82,862,000 term loan.
As of the end of Fiscal 1996, the Company had closed 122 stores as part of
the Restructuring Plan. As of May 4, 1996 the Company had closed 200 stores. The
remaining stores are expected to be closed during the remainder of Fiscal 1997.
As of the end of Fiscal 1996, approximately 960 store employees and 250
non-store employees had been terminated. As of May 4, 1996 approximately 1,500
store employees and 600 non-store employees had been terminated.
THIRTEEN WEEKS ENDED MAY 4, 1996 AND APRIL 29, 1995
Net Sales
Net sales for the first quarter of Fiscal 1997 totaled $237,454,000, a 2.8%
decrease from $244,342,000 for the corresponding period of Fiscal 1996. This was
primarily due to a reduction in the number of retail stores from 1,416 on April
29, 1995 to 1,225 on May 4, 1996 as a result of the implementation of the
Company's Restructuring Plan. Sales of stores closed since the first quarter of
Fiscal 1996 equalled 10.2% of sales for the first quarter of Fiscal 1996. The
Company, however, experienced a 2.9% increase in the first quarter of Fiscal
1997 in comparable store sales (sales generated by stores in operation during
the same weeks of each period) as compared to Fiscal 1996. The increase in
comparable store sales was primarily attributable to increased sales of career
sportswear, dresses, men's and accessory merchandise. In addition, Fiscal 1997
first quarter sales from new stores opened less than a full year equaled 3.4% of
Fiscal 1996 first quarter sales.
Cost of Goods Sold, Buying and Occupancy Expenses
Cost of goods sold, buying and occupancy expenses expressed as a percentage
of sales increased 1.0% in the first quarter of Fiscal 1997 as compared to the
corresponding period of Fiscal 1996, primarily as a result of an increase in the
Company's cost of goods sold as a percentage of sales as compared to the
corresponding period of Fiscal 1996. This increase was due to (i) higher retail
markdowns on merchandise which was
20
<PAGE> 22
purchased in Fiscal 1996 prior to the implementation of the Company's new
merchandise strategy and (ii) higher average unit merchandise costs as a result
of the shift of a portion of the Company's purchases to the domestic market. See
"-- Implementation of New Business Strategy and Recent Restructuring". This
increase in costs was partially offset by a change to a more realistic value
pricing strategy, which resulted in a reduction in retail markdowns on
merchandise purchased under the new merchandise strategy. However, due to
purchase commitments made by the Company in Fiscal 1996 for planned sales in
Fiscal 1997, the full effect of this strategic change was not realized in the
first quarter of Fiscal 1997. The increase in cost of goods sold as a percentage
of sales was partially offset by a decrease in buying and occupancy expenses, as
a percentage of sales, as a result of (i) the elimination of occupancy expenses
in the 200 under-performing stores closed as of the end of the first quarter of
Fiscal 1997 as part of the Company's Restructuring Plan and (ii) savings
achieved as part of the Company's expense reduction initiative.
Selling, General and Administrative Expenses
Selling, general and administrative expenses expressed as a percentage of
sales decreased 1.6% in the first quarter of Fiscal 1997 as compared to the
corresponding period of Fiscal 1996. This was primarily attributable to a
reduction in personnel. The reduction resulted from (i) the closing of 200
under-performing stores as part of the Company's Restructuring Plan and (ii)
other reductions of sales and administrative personnel as part of the Company's
expense reduction initiative.
Interest Expense
Interest expense increased in the first quarter of Fiscal 1997 as compared
to the corresponding period of Fiscal 1996 primarily due to the renegotiation of
the terms of certain of the Company's outstanding liabilities and the resulting
increase in long-term debt in the fourth quarter of Fiscal 1996. Additionally,
during the first quarter of Fiscal 1997 the Company incurred interest expense as
a result of seasonal borrowings under its revolving credit facility.
Income Tax (Benefit) Expense
The income tax benefit for the first quarter of Fiscal 1997 was 27% of the
Company's pre-tax loss, as compared to 28% of the pre-tax loss for the first
quarter of Fiscal 1996.
FISCAL 1996, 1995 AND 1994
Net Sales
Net sales for Fiscal 1996 totaled $1,102,384,000, a 13.4% decrease from
$1,272,693,000 for the fiscal year ended January 28, 1995 ("Fiscal 1995"). The
Company experienced a 17.1% decrease in Fiscal 1996 from Fiscal 1995 in
comparable store sales (sales generated by stores in operation during the same
weeks of each period). In addition, sales from new stores open less than a full
year equaled 5.4% of Fiscal 1995 sales; sales of stores closed in Fiscal 1996
equaled 2.7% of Fiscal 1995 sales; and an additional week of sales in Fiscal
1996 equaled 1.1% of Fiscal 1995 sales. The number of retail stores decreased
from 1,428 on January 28, 1995 to 1,301 on February 3, 1996.
Sales for the fourth quarter of Fiscal 1996 totaled $321,822,000, a 6.8%
decrease from $345,382,000 for the corresponding period of Fiscal 1995. The
Company experienced a 10.5% decrease in the fourth quarter of Fiscal 1996 from
the fourth quarter of Fiscal 1995 in comparable store sales. In addition, sales
from new stores open less than a full year equaled 3.7% of Fiscal 1995 fourth
quarter sales; sales of stores closed in Fiscal 1996 equaled 3.9% of Fiscal 1995
fourth quarter sales; and, an additional week of sales in the fourth quarter of
Fiscal 1996 equaled 4.2% of Fiscal 1995 fourth quarter sales.
The decreases in sales were primarily attributable to a disappointing
response to the Company's merchandise assortment resulting in aggressive price
reductions to stimulate customer demand. In addition, the Company was also
affected by a continuing general weakness in women's apparel sales. The Company
believes that its new merchandising strategy should reduce the risks associated
with predicting emerging
21
<PAGE> 23
fashion trends and, combined with a new marketing strategy of realistic value
pricing, should reduce the need for aggressive price reductions in the future.
The net sales increase of 1.5% in Fiscal 1995 was primarily attributable to
the sales generated from the net addition of new stores which was partially
offset by a 6.3% decrease in comparable store sales. Net sales for the fourth
quarter of fiscal 1995 decreased 3.3% as compared to the corresponding period
during the fiscal year ended January 29, 1994 ("Fiscal 1994"). This decrease in
sales was primarily due to a 10.1% decrease in comparable store sales which was
partially offset by sales attributable to newly-opened stores.
Cost of Goods Sold, Buying and Occupancy Expenses
Cost of goods sold, buying and occupancy expenses expressed as a percentage
of sales increased 10.0% in Fiscal 1996 as compared to the prior year and
increased 4.3% in Fiscal 1995 as compared to Fiscal 1994. The Company's cost of
goods sold in relation to sales increased during Fiscal 1996, and to a lesser
extent in Fiscal 1995, as a result of aggressive price reductions initiated to
stimulate consumer demand, which caused a reduction in merchandise gross
margins. In Fiscal 1996, merchandise price reductions were taken earlier, more
frequently and more aggressively than in Fiscal 1995.
Buying and occupancy expenses, which are relatively unaffected by
comparable store sales fluctuations, increased in Fiscal 1996 and Fiscal 1995,
as a percentage of sales, as a result of spreading these costs over decreased
comparable store sales.
Cost of goods sold, buying and occupancy expenses expressed as a percentage
of sales increased 15.7% in the fourth quarter of Fiscal 1996 as compared to the
corresponding period of Fiscal 1995 and increased 8.2% in the fourth quarter of
Fiscal 1995 as compared to the corresponding period of Fiscal 1994. During the
fourth quarter of Fiscal 1996 and Fiscal 1995, the Company's cost of goods sold
as a percentage of sales increased as compared to cost of goods sold as a
percentage of sales for the corresponding period of the previous fiscal year.
The increases resulted from aggressive price reductions initiated to stimulate
consumer demand. Buying and occupancy expenses, as a percentage of sales,
increased in both the fourth quarter of Fiscal 1996 and the fourth quarter of
Fiscal 1995 as a result of spreading these costs over decreased comparable store
sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses expressed as a percentage of
sales increased 4.7% in Fiscal 1996 as compared to Fiscal 1995. This was
primarily attributable to an increase in advertising and promotional expenses as
a result of promotions to stimulate customer demand and the effect of lower
comparable store sales on relatively fixed general and administrative costs. In
Fiscal 1995, selling, general and administrative expenses, as a percentage of
sales, decreased 0.4% from Fiscal 1994. The primary reason for the decrease was
the favorable effect of the lower cost of servicing the Company's proprietary
credit card program as compared to the corresponding period of the prior fiscal
year. This was partially offset by the effect of lower comparable store sales on
relatively fixed general and administrative expenses.
Interest Expense
Interest expense increased in Fiscal 1996 primarily due to renegotiation of
the terms of certain of the Company's outstanding liabilities and the resulting
increase in long-term debt in November 1995. See " -- Financial
Condition -- Liquidity and Capital Resources" and Notes to Consolidated
Financial Statements "Debt". Interest expense remained relatively constant in
Fiscal 1995.
Restructuring Charge
During the fourth quarter of Fiscal 1996, the Company's Board of Directors
approved the Restructuring Plan that resulted in a fourth quarter pre-tax charge
of $103,000,000. The restructuring charge includes an amount of $58,878,000
related to the closing of the 290 stores, including (i) $39,260,000 for the
write-off of store fixtures, equipment and inventories, (ii) $17,270,000 for the
early termination of store leases and (iii) $2,348,000 for severance benefits
and other expenses. Charges of $34,487,000 relate to the reorganization
22
<PAGE> 24
of foreign merchandise sourcing operations. These charges include the write-off
of joint venture investments and advances, settlements related to
non-fulfillment of production commitments, employee severance benefits, and the
write-down of other Company-owned investments. Other charges include $5,445,000
for severance benefits and a $4,190,000 write-off of surplus store construction
fixtures and equipment.
Income Tax (Benefit) Expense
The income tax benefit for Fiscal 1996 was $75,747,000, resulting in a
35.2% effective rate, compared with a $17,830,000 income tax expense, resulting
in a 28.5% effective tax rate for Fiscal 1995. The increase in the effective tax
rate is primarily attributable to a reduction in tax-exempt investment income
and other non-taxable permanent differences. This compares with a $35,967,000
income tax expense, resulting in a 32.2% effective tax rate for Fiscal 1994. The
decrease in the effective tax rate for Fiscal 1995 as compared to Fiscal 1994 is
attributable to an increase in tax-exempt investment income and other
non-taxable permanent differences. See Notes to Consolidated Financial
Statements "Income Taxes".
PERFORMANCE ANALYSIS
The following ratios measure the Company's overall performance as shown by
the return on average stockholders' equity and return on average total assets.
<TABLE>
<CAPTION>
FIRST QUARTER FIRST QUARTER FISCAL FISCAL FISCAL
FISCAL 1997 FISCAL 1996 1996 1995 1994
------------- ------------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net return on average stockholders'
equity.................................... (1.5)% (0.3)% (28.5)% 8.3% 16.5%
Net return on average total assets.......... (0.9) (0.2) (18.3) 5.4 10.2
</TABLE>
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are cash flow from
operations, and its proprietary credit card receivables securitization
agreements and revolving credit facility described below. The Company considers,
and currently uses for internal management purposes, the following measures of
liquidity and capital resources:
<TABLE>
<CAPTION>
FIRST QUARTER FISCAL FISCAL FISCAL
FISCAL 1997 1996 1995 1994
------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Working capital................................. $ 200,384 $199,457 $191,815 $181,906
Cash provided by (used in) operating
activities.................................... (648) (55,434) 70,700 90,236
Current ratio................................... 1.9 2.0 1.8 1.7
Debt to equity ratio............................ 23.1% 22.9% 4.0% 5.2%
</TABLE>
The Company's net cash used in operations decreased $2,997,000 in the first
quarter of Fiscal 1997 as compared to the corresponding period of Fiscal 1996.
The primary reasons for this decrease were a decrease in the Company's
merchandise inventories, net of accounts payable, an increase in accrued
expenses and a decrease in prepayments and other. These changes were partially
offset by an increase in the net loss for the first quarter of Fiscal 1997 as
compared to the corresponding period of Fiscal 1996, a decrease in depreciation
and amortization, and an increase in the income tax refund receivable.
The Company's cash flow from operations decreased $126.1 million in Fiscal
1996 as compared to Fiscal 1995. The primary reason for this decrease was a
$139.2 million loss in Fiscal 1996 as compared to $44.7 million of net income in
Fiscal 1995. In addition, the increases in the income tax refund receivable and
current deferred taxes served to further reduce cash flow from operations.
However, the effects of losses from abandonment of capital assets, the accrual
of restructuring expenses, the reduction of merchandise inventories, net of
accounts payable, and the reduction of prepayments contributed to offset the
majority of the negative impact on cash flow from operations. In Fiscal 1995,
the Company's cash flow from operations decreased $19.5 million as compared to
Fiscal 1994. This was primarily as a result of a reduction in net income of
$35.1
23
<PAGE> 25
million and a reduced benefit from an increase in accrued expenses which was
offset in part by a reduction in the net investment in inventory. During Fiscal
1996, the Company liquidated a significant portion of its portfolio of available
for sale securities to provide additional cash for its operations.
In November 1995, the Company entered into an agreement with a commercial
finance company to provide a revolving credit facility with a maximum
availability of $157,000,000, subject to limitations based upon eligible
inventory. As described above under "-- Recent Developments", the maximum
availability under such facility following receipt of the Company's $56,726,000
tax refund and release of a $7,000,000 cash deposit with the commercial finance
company in May 1996, was reduced to $150,000,000. The primary purpose of this
facility, which expires on June 1, 1998, is to enable the Company to issue
letters of credit for overseas purchases of merchandise as well as to provide
for seasonal cash borrowings. This facility is secured by merchandise inventory,
cash, mortgages on the Company's Bensalem, Pennsylvania and Greencastle, Indiana
corporate and distribution facilities, rights to mortgages on certain retail
store properties, liens on the cash surrender value of Company-owned life
insurance policies and certain other Company assets. As of May 4, 1996, the
availability under this facility was approximately $127,713,000, against which
the Company had outstanding letters of credit of $66,391,000 and short-term
seasonal borrowings of $5,910,000. This agreement, as well as the term loans
discussed below, requires that, among other things, the Company maintain a
minimum net worth of $350,000,000 and not pay dividends on its Common Stock.
In November 1995, the Company renegotiated portions of existing trade
obligations. As a result, $82,862,000 of trade acceptances which had been
recorded as accounts payable were converted into a term loan. The loan is
scheduled to mature on June 1, 1998. The loan is secured by mortgages on the
Company's Bensalem, Pennsylvania and Greencastle, Indiana corporate and
distribution facilities, mortgages on certain retail store properties, liens on
the cash surrender value of Company-owned life insurance policies and liens on
all income tax refunds. The loan is also secured by liens on merchandise
inventory, equipment and certain other Company assets. The Company is required
to make payments on the loan equal to the proceeds of all income tax refunds,
and among other things, certain asset sales and a portion of the proceeds of any
debt or equity offerings. As described above under "-- Recent Developments", the
Company's $56,726,000 tax refund was used to repay a portion of such term loan
in May 1996.
Additionally, the Company renegotiated an outstanding term loan in the
amount of $9,488,000. This note originally had scheduled annual amortizations
through 1998 and carried an interest rate of 9.3%. The loan presently carries an
interest rate of 11.8%, is due June 1, 1998 and is secured by the same
collateral as the aforementioned term loan, although priority with respect to
the collateral varies. The Company is required to make payments on the loan
equal to the proceeds of, among other things, certain asset sales and a portion
of the proceeds of any debt or equity offerings.
A portion of the proceeds of this offering will be used to repay all
outstanding amounts under the aforementioned term loans which at May 31, 1996
totaled in aggregate approximately $35,624,000, plus accrued interest to the
anticipated date of repayment of approximately $42,200.
The Company has formed a trust to which it has transferred, 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 various
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 whereby the principal payments are made to the party
with whom the trust has entered into the securitization agreement. Through the
end of Fiscal 1996, the trust has securitized $371.8 million of receivables, of
which $28.5 million were retained by the Company. See Notes to Consolidated
Financial Statements "Asset Securitization".
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. The agreements provide for the Company to
continue to service the credit card receivables and control credit policies.
This control allows the Company to fund continued credit card receivable growth
and to provide the appropriate customer service and collection activities.
Accordingly, its relationship with its credit card customers is not affected by
these agreements.
The Company has historically entered into interest-rate swap and
interest-rate cap agreements to reduce the impact of increases in interest rates
on the Company's floating-rate credit card securitizations. During 1996, the
Company terminated all of its interest-rate swap agreements and no such
agreements were
24
<PAGE> 26
outstanding as of the end of Fiscal 1996. The Company had entered into
interest-rate cap agreements with an aggregate notional amount of $538.9 million
as of the end of Fiscal 1996. See Notes to Consolidated Financial Statements
"Derivative Financial Instruments Held For Purposes Other Than Trading".
The Company believes that cash flow from operations, its proprietary credit
card receivables securitization agreements and its revolving credit facility are
sufficient to support current operations. The Company continues, however, to
evaluate alternative financing options.
Capital Requirements
In the first quarter of Fiscal 1997, capital expenditures amounted to
$2,164,000 primarily for the fixturing of existing retail stores. The capital
required for these expenditures was partially provided through short-term
borrowings. Capital expenditures amounted to $30.0 million, $75.7 million, $79.0
million in Fiscal 1996, 1995 and 1994, respectively. These expenditures were
primarily for new store construction, the remodeling and expansion of existing
stores and the expansion of the Company's Greencastle, Indiana distribution
center.
During Fiscal 1997, the Company anticipates capital expenditures of
approximately $8 million, which are principally for the fixturing of existing
retail stores. The Company plans to open approximately 4 stores during Fiscal
1997. It is anticipated that the funds required for capital expenditures will be
financed principally through internally generated funds.
The Company has estimated debt maturity payments of $57.7 million in Fiscal
1997. This is comprised primarily of required amortization of one of the
Company's term loans as a result of income tax refunds of approximately $57.0
million anticipated as of the end of Fiscal 1996. See "-- Recent Developments".
In connection with the Restructuring Plan, as of May 4, 1996 and the end of
Fiscal 1996, the Company had approximately $11,544,000 and $19,983,000,
respectively of accrued, unpaid restructuring costs, of which approximately
$4,220,000 and $7,390,000, respectively, relate to severance benefits. These
costs, which are included in current liabilities, are expected to be paid by the
end of Fiscal 1997.
The Company paid no cash dividends during the first quarter of Fiscal 1997
as compared to $2,320,000 during the corresponding period of Fiscal 1996. Cash
dividends were $4,634,000 during Fiscal 1996 as compared to $9,255,000 during
Fiscal 1995. On October 2, 1995, the Company's Board of Directors announced an
indefinite suspension of dividends on the Company's Common Stock. In addition,
the Company's revolving credit facility and term loans (discussed above) require
the Company to refrain from paying dividends on its Common Stock during the term
of such agreements.
Inflation
The Company's financial statements are presented on a historical cost
basis. The Company believes that the impact of inflation has not been material
to its financial condition and results of operations during the periods
presented.
Adoption of New Accounting Standards
The Company adopted the provisions of SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed Of" and
SFAS 123, "Accounting for Stock-Based Compensation" for the fiscal year which
began February 4, 1996. The adoption of these standards has not had a material
impact on the Company's financial statements. SFAS 123 provides two alternative
forms of accounting for stock compensation: pro-forma disclosure of the effects
on net income and earnings per share, or a charge to earnings. The Company will
adopt the pro-forma disclosure alternative in its financial statements.
25
<PAGE> 27
DESCRIPTION OF BUSINESS
GENERAL
Charming Shoppes, Inc. operates a chain of Fashion Bug(R) and Fashion Bug
Plus(R) stores selling moderately and popularly priced women's specialty
apparel. Fashion Bug(R) stores specialize in selling a wide variety of
fashionable merchandise, including junior, misses, large-size and girls-size
sportswear, dresses, coats, lingerie, accessories and casual footwear. Fashion
Bug Plus(R) stores specialize in similar merchandise for the large-size
customer. An assortment of men's casual apparel and accessories is also
available in most Fashion Bug(R) stores and certain stores carry a selection of
petite women's apparel. The Company's stores sell both brand-name and private
label merchandise. As of May 4, 1996, the Company operated a total of 1,225
stores in 46 states, the substantial majority of which are located in strip
shopping centers in the Northeast quadrant of the United States. 1,159 of such
stores were operated as Fashion Bug(R) stores, with the remainder operated as
Fashion Bug Plus(R) stores.
From Fiscal 1990 to Fiscal 1994, the Company significantly expanded its
market presence in the value oriented women's specialty apparel industry as the
number of Fashion Bug(R) and Fashion Bug Plus(R) stores grew from 1,013 in
Fiscal 1990 to 1,333 in Fiscal 1994. Net income increased from $36,410,000 to
$75,765,000 during the same period. The Company pursued a strategy of (i)
offering its customer one-stop shopping for her apparel needs, gradually
expanding the variety and depth of its merchandise assortment, (ii)
strategically locating its stores in strip shopping centers which have lower
store occupancy costs as compared to malls and (iii) increasing the internal
development of fashion merchandise and its manufacture in lower cost foreign
markets, which by Fiscal 1994 accounted for approximately 59% of the Company's
purchases.
In Fiscal 1995, then-current management made the strategic decision to
increase significantly the Company's reliance on overseas sourcing, narrow the
assortment of merchandise offered and increase the initial markup on its
merchandise to allow for increased promotional pricing. By Fiscal 1996, over 70%
of the Company's merchandise was developed in-house by product developers and
then purchased from overseas sources which generally required lead times of six
to twelve months in advance of the selling season. A higher initial markup was
achieved on the products purchased overseas, but because foreign sourcing
required such lengthy lead times, the Company was unable to react quickly to
changes in fashion trends. In addition, the customer did not respond favorably
to the Company's narrow merchandise selections. As a result, sales productivity
and profitability declined sharply from Fiscal 1994 levels resulting in a
significant loss in Fiscal 1996.
NEW MANAGEMENT TEAM
In response to this declining sales productivity and profit performance,
the Company made significant changes in its management, with Dorrit J. Bern
joining the Company as President and Chief Executive Officer in September 1995.
Ms. Bern had been employed by Sears, Roebuck & Co. ("Sears") since 1987 and had
most recently held the position of Group Vice President for Women's Apparel and
Home Fashions at Sears. Ms. Bern was instrumental in the creation and execution
of the women's apparel strategy at Sears. In addition to Ms. Bern, the Company
is led by new senior merchandising executives, a newly appointed Chief Financial
Officer and a new Executive Vice President of Sourcing.
NEW BUSINESS STRATEGY
Under the direction of Ms. Bern and her new management team, during the
fourth quarter of Fiscal 1996 management re-examined many aspects of the
Company's business strategy and made significant changes in merchandising,
marketing, purchasing, distribution and finance. The new business strategy is
aimed at enhancing sales productivity and improving financial performance, while
capitalizing on the Company's competitive strengths. The Company believes that
such strengths include (i) the Company's strategically located stores (the
substantial majority of which are located in strip shopping centers which have
lower store occupancy costs as compared to malls), (ii) its customer base,
including approximately 3,300,000 active
26
<PAGE> 28
proprietary credit card customers, (iii) its existing management information
systems and (iv) its recently upgraded distribution centers. During the fourth
quarter of Fiscal 1996, the Board of Directors approved a restructuring plan to
support the Company's new business strategy and management implemented an
expense reduction initiative to further reduce operating costs. The Company's
new business strategy focuses on meeting the demands of its primary customers,
which management believes are generally 20 to 45 year old women with
lower-middle to middle incomes who look for value, fashion and convenience. The
Company believes that these customers tend to follow fashion trends and visit
strip shopping centers more frequently than malls for their shopping needs
because of the mix of the tenants in, and the convenience of, strip shopping
centers.
- Improved Merchandise Selection. The Company has responded to the needs
of its customers by expanding the variety of choices in its merchandise
assortment. Furthermore, the Company is expanding its merchandise assortment in
previously underdeveloped products such as career wear and dresses, and petite
sizes are being offered for the first time. Product assortments are also being
tailored to area demographics, and merchandise will be available for six
distinct seasons -- spring, summer, transitional, fall, holiday and
transitional -- rather than two seasons as in the past. In addition, the Company
has raised its quality standards with respect to merchandise fabrication,
construction and fit.
- Switch to A More Realistic Value Pricing Strategy. The Company has
implemented a more realistic value pricing strategy which reduces the initial
price markup of fashion merchandise in order to increase the percentage of sales
at the ticketed price. Management believes this new strategy should result in a
greater degree of credibility with the customer, reducing the need for
aggressive price promotions. The Company expects to continue to achieve a higher
initial markup in basic low-risk commodity merchandise that is purchased through
its overseas sourcing operation.
- Shift to Responsive Sourcing Strategy. The Company, which had previously
placed heavy reliance on internally developed product sourced overseas, has
shifted a significant portion of its purchases to the domestic market. This
allows management to respond more quickly to current fashion trends. While
overseas sourcing resulted in lower product costs and increased initial markups,
six to twelve month lead times were generally required to procure merchandise.
Use of the domestic market allows the Company to make purchase decisions
generally with two to four month lead times and quickly replenish merchandise
inventory as necessary (generally with one to two month lead times). The Company
continues to use its overseas sourcing operation, which has been reorganized to
support this strategic change, to procure basic low-risk commodity merchandise.
Management expects that such merchandise will account for approximately 35% of
the Company's purchases in Fiscal 1997.
- Shift Toward Direct Mail and Mass-Media Advertising. The Company has
shifted a greater proportion of its advertising expenditures from in-store
promotions to radio and newspaper advertising, and management is actively
utilizing targeted direct mail advertising to its list of 3,300,000 active
proprietary credit card customers.
- Improvement in Inventory Flow. The Company's new merchandise and
purchasing strategy, and enhancements to the Company's inventory management,
facilitate the timely and orderly purchase and flow of merchandise, thereby
enabling the stores to offer fresh product assortments on a regular basis.
Management expects that such changes and enhancements should improve inventory
turnover, reduce the expense of outside storage facilities and decrease
borrowing costs incurred in connection with merchandise procurement.
- Increased Liquidity. In November 1995, the Company (i) entered into an
agreement with a commercial finance company to provide a revolving credit
facility with a maximum availability of $157,000,000, subject to limitations
based upon eligible inventory, (ii) negotiated the conversion of $82,862,000 of
existing trade obligations into a term loan, and (iii) renegotiated an
outstanding term loan in the amount of $9,488,000. As described above under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments", the maximum availability under the Company's
revolving credit facility was reduced to $150,000,000 following release of a
$7,000,000 cash deposit in May 1996. This resulted from the receipt of the
Company's $56,726,000 tax refund which was used to repay a portion of the
Company's $82,862,000 term loan. In accordance with the provisions of the
Company's term
27
<PAGE> 29
loan agreements, a portion of the proceeds of the Notes offering will be used to
repay all amounts remaining outstanding thereunder. Management believes that its
revolving credit facility together with cash flow from operations and certain
proprietary credit card securitization agreements are sufficient to support
current operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition -- Liquidity and
Capital Resources".
Management expects that this new business strategy will (i) enhance sales
productivity by expanding the number of choices available to its customer at
competitive, value oriented prices, (ii) increase the number of store visits by
customers by changing product selections more frequently and by direct mail and
mass-media advertising, (iii) improve gross margins by reducing the need for
aggressive price promotions, (iv) allow the Company to respond more quickly to
current fashion trends while enhancing inventory management flexibility and (v)
increase financial flexibility through increased liquidity.
RECENT RESTRUCTURING AND EXPENSE REDUCTION INITIATIVE
The Restructuring Plan approved by the Board of Directors during the fourth
quarter of Fiscal 1996 resulted in a fourth quarter pre-tax charge of
$103,000,000. The primary components of the Restructuring Plan are (i) the
planned closing through Fiscal 1997 of 290 under-performing Fashion Bug(R) and
Fashion Bug Plus(R) stores, (ii) the reorganization and reduction of foreign
merchandise sourcing operations discussed above and (iii) reductions in
corporate support operations which were not necessary to support the Company's
new business strategy. The pre-tax operating loss for Fiscal 1996 for these 290
stores, exclusive of the restructuring charge and before allocation of fixed
overhead, was approximately $34,000,000. Given the Company's disappointing
performance in Fiscal 1996 and the implementation of its new business strategy,
however, such operating loss is not indicative of future savings resulting from
the closing of such stores, which are likely to be lower. As of May 4, 1996, the
Company had closed 200 stores.
The Company has also implemented an expense reduction initiative to further
reduce operating costs. The primary components of this initiative are (i) the
further reduction of distribution, merchandising, and administrative personnel,
(ii) the renegotiation of store lease obligations and (iii) the reduction of
various other overhead costs. Due to the early stage of such initiatives and to
various factors not wholly within the Company's control, such as lease
renegotiations, it is difficult to sufficiently quantify the anticipated
reduction in such costs. The Restructuring Plan and the further expense
reduction initiative are expected to result in a workforce reduction of
approximately 2,300 store employees and 800 non-store employees.
MERCHANDISING AND MARKETING
The Company has implemented a new merchandise strategy which increases the
variety of choices in its merchandise assortment. The Company now utilizes
domestic fashion market guidance, fashion advisory services and in-store testing
to determine the optimal product assortment for its customer base. Management
believes that this should result in a higher degree of accuracy in predicting
consumer preferences while reducing the Company's inventory investment and risk.
The purpose of this new strategy is to enable the Company to provide merchandise
assortments to meet its customers' preferences.
In addition, the Company is expanding its merchandise assortment in
previously underdeveloped products such as career wear and dresses, and petite
sizes are being offered for the first time. Product assortments will also be
tailored to area demographics, and merchandise will be available for six
distinct seasons -- spring, summer, transitional, fall, holiday and
transitional -- rather than two seasons as in the past. The Company has also
begun to redefine its merchandise assortments to reflect the needs and demands
of diverse customer groups and distribution systems are in place whereby stores
which are identified as having certain customer profiles, can be merchandised
with products specifically targeted to such customers. The Company intends to
improve inventory turnover by better managing the inventory receipt flow of
seasonal merchandise to its stores across all geographic regions. Further, the
Company has addressed the different lifestyle needs of its customers with
respect to fashion by varying the depth and assortments of career and casual
merchandise. Quality standards have also been raised with respect to merchandise
fabrication, construction and fit.
The Company has implemented a more realistic value pricing strategy which
reduces the initial price markup of fashion merchandise in order to increase the
percentage of sales at the ticketed price. Management believes this new strategy
should result in a greater degree of credibility with the customer, reducing the
need
28
<PAGE> 30
for aggressive price promotions. The Company expects to continue to achieve a
higher initial markup in basic low-risk commodity merchandise that is purchased
through its overseas sourcing operation.
The Company continues to be promotionally oriented. In accordance with its
new strategy, the Company has shifted a greater proportion of its advertising
expenditures from in-store promotions to radio and newspaper advertising, and
management is actively utilizing targeted direct mail advertising to its list of
approximately 3,300,000 active proprietary credit card customers. In addition,
the Company is exploring alternative forms of advertising such as network
television in selected markets. Pricing policies, displays, store promotions,
and convenient store hours are also used to attract customers. With the planning
and guidance of specialized home office personnel, each store provides such
displays and advertising as may be necessary to feature certain merchandise or
certain promotional selling prices from time to time.
As a result of management's increased focus on meeting the demands of its
primary customer, the Company has shifted a significant portion of its purchases
to the domestic market. This allows management to decrease lead times and
respond more quickly to current fashion trends. Use of the domestic market
allows the Company to make purchase decisions generally with two to four month
lead times, and quickly replenish merchandise inventory as necessary (generally
with one to two month lead times). In previous years, the Company had placed an
increasing reliance on its ability to develop and dictate fashion trends to its
customers. By Fiscal 1996, over 70% of its merchandise was developed in-house by
product developers, and then purchased primarily through the Company's overseas
sources (see "-- Purchasing") which generally required lead times of six to
twelve months in advance of the selling season. A higher initial markup was
achieved on the products purchased overseas, but because the Company's foreign
sourcing operations required such lengthy lead times, the Company was unable to
react quickly to changes in fashion trends. Further, the Company had narrowed
the assortment of its merchandise, and the customer did not respond favorably to
the Company's selections. These factors led to large price reductions and losses
in Fiscal 1996. The Company continues to use its overseas sourcing operation,
which has been reorganized to support this strategic change, to procure basic
low-risk commodity merchandise, which generally requires three to eight months
lead time. Management expect that such merchandise will account for
approximately 35% of the Company's purchases in Fiscal 1997.
The retail sale of women's apparel is a highly competitive business with
numerous competitors, including moderate price department stores, discount
department stores and other low to moderate price specialty apparel stores. The
Company cannot estimate the number of competitors or its relative competitive
position, due to the large number of companies selling women's apparel. The
primary elements of competition are merchandise style, size, selection, quality,
display and price, as well as store location, design, advertising and promotion
and personalized service to the customers.
The Company experiences a normal seasonal sales pattern for the retail
apparel industry, with its peak sales occurring during the Christmas season and
other, less significant, increases around Easter and Labor Day. The Company
generally builds inventory levels prior to these peak selling periods. To keep
inventory current and fashionable, the Company reduces the price of slow-moving
merchandise throughout the year. End-of-season sales are conducted with the
objective of carrying a minimal amount of seasonable merchandise over from one
season to another. Sales for the four quarters of Fiscal 1996, as a percent of
total sales, were 22.2%, 24.3%, 24.3% and 29.2%, respectively.
The Company encourages sales on its proprietary credit card. The
proprietary credit program has approximately 3,300,000 active accounts which
accounted for approximately 40% of retail sales in Fiscal 1996. The Company
believes that the credit card is a promotional vehicle in itself, engendering
customer loyalty, creating a substantial base for targeted direct mail promotion
and encouraging incremental sales. The Company controls and services its entire
proprietary credit card file, and has entered into various agreements whereby it
securitizes and sells substantially all of these receivables. In each
securitization, the receivables are transferred to a trust which issues and
sells certificates representing ownership interests in the trust. Under these
agreements, the Company continues to service the receivables and control credit
policies. This allows the Company to continue to fund receivable growth, provide
customer service and collect past-due accounts. Accordingly, its relationship
with its credit card customers is not affected by the securitization agreements.
29
<PAGE> 31
The Company's proprietary credit card portfolio is administered by Spirit of
America National Bank, a national banking association and wholly-owned
subsidiary of the Company. Spirit of America National Bank approves credit
applications and a third party performs all billing and collection activities
under the direction of the Company. The Company's proprietary credit card
customers tend to be a higher credit risk than bank issued credit card
customers.
The Company's stores feature wall and selling-floor displays which
coordinate merchandise in order to promote multiple sales. The stores, which the
Company believes must present a fresh, contemporary shopping environment, are
redecorated or remodeled as necessary. The Company is constantly testing and
implementing new store designs and fixture packages aimed at providing an
effective merchandise presentation.
The Company emphasizes customer service, including the presence of
salespeople in the stores, rather than self-service; lay-away plans; and
acceptance of merchandise returns for cash or credit within a reasonable time
period.
PURCHASING
Purchasing is conducted on a departmental basis for each of the Fashion
Bug(R) and Fashion Bug Plus(R) merchandise groups by a staff of buyers
supervised by one or more merchandise managers. The Company believes that
specialization of buyers within their departments enhances their expertise in
obtaining quality merchandise at a cost which will permit attractive selling
prices, while obtaining the desired markup for the Company.
The merchandising staff obtains store and chain-wide inventory information
generated by a merchandise information system utilizing point-of-sale terminals,
through which merchandise can be followed from the placement of the order to the
actual sale. Based upon this data, the merchandise managers compare budgeted-
to-actual sales and make merchandising decisions, as indicated, including
re-order, markdowns and changes in the buying plans for upcoming seasons.
The Company does not own or operate any significant manufacturing
facilities. During Fiscal 1996, the Company purchased merchandise from
approximately 700 suppliers, none of which accounted for more than 4% of its
purchases. The shift in the Company's merchandising strategy toward greater
reliance on the domestic market will result in an increase in the size of the
Company's vendor base. As a result of the Company's merchandise strategy of
shifting to the domestic market, the Company's wholly-owned contracting and
buying offices, headquartered in Hong Kong, have been reorganized. The Company
has also reduced the size and scope of this office's operation. During Fiscal
1996, the Company's Hong Kong office conducted its sourcing operations in 23
countries with satellite offices in 14 of these countries. By the end of Fiscal
1997, the Company expects to be sourcing merchandise from approximately 12
countries while maintaining satellite offices in 4 of these countries. For
Fiscal 1997, the Hong Kong office is expected to manage the procurement of
approximately 35% of the Company's merchandise purchases.
DISTRIBUTION
The Company operates two distribution centers. One is located in Bensalem,
Pennsylvania, adjacent to the Company's corporate headquarters. This automated
facility, which also contains executive, administrative and buying offices,
occupies approximately 515,000 square feet. The second distribution facility is
located in Greencastle, Indiana. The 150-acre tract of land contains a building
of approximately 525,000 square feet, which includes a 175,000 square foot
expansion completed during Fiscal 1996. Although the Company intends to open
only approximately 4 new stores during Fiscal 1997, the Company estimates that,
by operating multiple shifts, it would have the ability to service over 2,000
stores from these two distribution centers.
The majority of merchandise purchased by the Company is received at these
centers, where it is prepared for distribution to the stores. The functions
performed at these central facilities include quality control inspection,
receiving, ticketing, packing and shipping. The Company's automated sortation
system in its Bensalem, Pennsylvania distribution center enhances the flow of
merchandise from receipt to shipment. A similar system was implemented in the
Greencastle, Indiana facility during Fiscal 1996. Shipments to each
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<PAGE> 32
store are made by trucks operated principally by common carriers. The Company
utilizes a computerized automated distribution model which enhances the
efficiency of the distribution department and enables that department to build
various customer profiles into each store's plan to determine not only the
number of units, but also the type of unit to be distributed to each store.
The Company's new merchandise and purchasing strategy, and enhancements to
the Company's inventory management, facilitate the timely and orderly purchase
and flow of merchandise, thereby enabling the stores to offer fresh product
assortments on a regular basis. Management expects that changes and enhancements
should reduce the expense of outside storage facilities, and decrease borrowing
costs incurred in connection with merchandise procurement. Due to the early
stages of the implementation of the Company's merchandise and purchasing
strategy, and the enhancement of inventory management, it is difficult to
sufficiently quantify the anticipated reduction of such expenses and costs.
STORES
The Company's 1,225 stores, as of May 4, 1996, are primarily located in
suburban areas and small towns. Approximately eighty percent of these stores are
located in strip shopping centers, while the balance are located in community
and regional malls. Typically, stores are open seven days per week, eleven hours
per day Monday through Saturday and seven hours on Sunday.
The Fashion Bug(R) stores range in size, generally, from 6,000 square feet
to 14,000 square feet, averaging approximately 9,700 square feet. The Fashion
Bug Plus(R) stores range in size, generally, from 3,000 square feet to 5,000
square feet, averaging approximately 4,000 square feet. During the fourth
quarter of Fiscal 1996, the Company announced that it would close 290 of its
under-performing Fashion Bug(R) and Fashion Bug Plus(R) stores as part of its
Restructuring Plan. As of May 4, 1996, 200 of these 290 stores were closed. The
Company expects to close the remaining stores during Fiscal 1997. Total leased
space decreased to 11,504,000 square feet as of May 4, 1996, from 13,073,000
square feet as of April 29, 1995, a 12% decrease. Although the Company has
suspended its expansion program, it intends to open approximately 4 new stores
during Fiscal 1997. The Company's store expansion over the past five fiscal
years is set forth in the following table:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
FISCAL QUARTER ENDED ----------------------------------------------------------
MAY 4, FEB. 3, JAN. 28, JAN. 29, JAN. 30, FEB. 1,
NUMBER OF STORES 1996 1996 1995 1994 1993 1992
- ------------------------------- -------------------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Open at beginning of period.... 1,301 1,428 1,333 1,220 1,137 1,058
Opened during period........... 2 47 126 157 129 111
Closed or combined during
period....................... (78) (174) (31) (44) (46) (32)
----- ----- ----- ----- ----- -----
Total................ 1,225 1,301 1,428 1,333 1,220 1,137
===== ===== ===== ===== ===== =====
STORE TYPE
Fashion Bug(R)................. 1,159 1,234 1,346 1,248 1,116 1,011
Fashion Bug Plus(R)............ 66 67 82 85 104 126
----- ----- ----- ----- ----- -----
Total................ 1,225 1,301 1,428 1,333 1,220 1,137
===== ===== ===== ===== ===== =====
</TABLE>
STORE MANAGEMENT AND EMPLOYEES
All stores are operated under the direct management of the Company. Each
store has a manager and an assistant manager who are in daily operational
control. The Company has 106 district managers who travel to all stores in their
district on a frequent basis to supervise store operations, each having
responsibility for an average of approximately 12 stores. The district managers
are supervised by 12 regional managers who report to the Director of Stores.
Generally, store managers are appointed from the group of assistant managers,
and district managers are appointed from the group of existing store managers.
The Company's policy is to motivate its store personnel through promotion from
within, with competitive wages and various incentive, medical and retirement
plans. Store operational and purchasing policies are developed centrally,
leaving individual store management with the principal duties of display,
selling and reporting through point-of-sale terminals. As of May 4, 1996, the
Company employed approximately 11,650 people, approximately 5,800 of
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<PAGE> 33
whom were employed on a part-time basis. In addition, a number of temporary
employees are hired during the Christmas season. None of such employees are
covered by a collective bargaining agreement.
PROPERTIES
The Company leases all store premises, with the exception of 9 stores,
which the Company owns. Typically, store leases have initial terms of 5 to 20
years and contain provisions for renewal options, additional rental charges
based on sales performance and payment of real estate taxes and common area
charges. During the fourth quarter of Fiscal 1996, the Company announced the
intention to close 290 under-performing stores, of which 3 operated on
Company-owned real estate. The Company has either entered into termination
agreements or is negotiating termination agreements for those leased stores
scheduled to close. The 3 Company-owned properties scheduled to close are
currently for sale or lease. As of May 4, 1996, 200 of these 290 stores were
closed. With respect to leased stores open as of May 4, 1996 that the Company
intends to continue to operate or for which the Company has no agreed-upon
termination as of May 4, 1996, the following table shows the number of store
leases expiring during the periods indicated, assuming the exercise of the
Company's renewal options:
<TABLE>
<CAPTION>
NUMBER OF
LEASES
PERIOD EXPIRING
------------------------------------------------------ ---------
<S> <C>
1996.................................................. 7
1997 - 2001........................................... 49
2002 - 2006........................................... 101
2007 - 2011........................................... 215
2012 - 2016........................................... 209
2017 - 2043........................................... 611
</TABLE>
The Company owns offices and an approximately 515,000 square foot
distribution center in Bensalem, Pennsylvania and a 525,000 square foot
distribution center in Greencastle, Indiana. The Company also owns approximately
22 acres in two parcels across the street from the Company's offices and
distribution center in Bensalem, Pennsylvania. This 22-acre tract contains a
110,000 square foot office building which houses the Company's data processing
facility and additional administrative offices. Spirit of America National Bank,
a wholly owned subsidiary of the Company, which is the Company's proprietary
credit card bank, occupies 15,000 square feet of leased office space in Milford,
Ohio. The Company owns or leases a total of 100,000 square feet of office and
warehouse space in Hong Kong.
TRADEMARKS AND SERVICEMARKS
Fashion Bug(R), Fashion Bug Plus(R), Glitter(R), Sopre(R), Maggie
Lawrence(R), Stefano(R), Stefano Man(R), L.A. Blues(R), Details(R), Best United
Garment Company(R) and several other trademarks and servicemarks of lesser
importance to the Company have been registered with the United States Patent and
Trademark Office and in other countries.
LEGAL MATTERS
The Company is from time to time involved in routine litigation incident to
the conduct of its business. The Company does not believe that any currently
pending litigation to which it is a party will have a material adverse effect on
its results of operations or financial condition.
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<PAGE> 34
MANAGEMENT
The executive officers of the Company and their respective ages and
positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- ---------------------------------------------------
<S> <C> <C>
Dorrit J. Bern....................... 46 Vice Chairman of the Board, President and Chief
Executive Officer
Patricia DeRosa...................... 43 Executive Vice President - Business Development
Anthony A. DeSabato.................. 47 Executive Vice President and Corporate Director of
Human Resources
Colin D. Stern....................... 47 Executive Vice President and General Counsel
Elizabeth Williams................... 42 Executive Vice President - Merchandising
Jeffrey M. Zelenko................... 40 Executive Vice President - Merchandising
Erna Zint............................ 52 Executive Vice President - Sourcing
Dwight L. Klingenberg................ 50 Vice President - Chief Administrative Officer
Eric M. Specter...................... 38 Vice President - Chief Financial Officer
Vivian Behrens....................... 43 Vice President - Marketing
Bernard Brodsky...................... 56 Vice President, Treasurer and Secretary
Jon A. Goldberg...................... 36 Vice President, Corporate Controller
Terry G. Pritikin.................... 47 Vice President - Director of Stores
</TABLE>
Dorrit J. Bern, has served as President, Chief Executive Officer and Vice
Chairman of the Board of Directors since September 1995. Prior to that, she
served as Group Vice President of Women's Apparel and Home Fashions at Sears,
Roebuck & Co. from December 1993 to August 1995. She also served at Sears,
Roebuck & Co. as Category Vice President of Women's Apparel from December 1992
to December 1993 and as Divisional Vice President of Misses and Junior
Sportswear, Dresses, Outerwear, Petite and Large Size Sportswear and Dresses,
and Maternity from 1987 to December 1992. Ms. Bern's term as a Director expires
in 1996.
Patricia DeRosa, has served as Executive Vice President - Business
Development since August 1995. Prior to that, she served as President, Gap Kids
Division at Gap Stores, Inc. from August 1993 to April 1995 and as Executive
Vice President, Gap Division from April 1991 to July 1993.
Anthony A. DeSabato, has served as Executive Vice President and Corporate
Director of Human Resources for more than five years.
Colin D. Stern, has served as Executive Vice President and General Counsel
for more than five years.
Elizabeth Williams, has served as Executive Vice President - Merchandising
since October 1995. Prior to that, she served as Divisional Vice
President - Misses Sportswear and Special Sizes at Sears, Roebuck & Co. from
February 1994 to October 1995 and as Divisional Merchandise Manager from August
1990 to February 1994.
Jeffrey M. Zelenko, has served as Executive Vice President - Merchandising
since June 1995. Prior to that, he served as Senior Vice President - General
Merchandise Manager - Junior Division of Petrie Retail, Inc. from August 1993 to
June 1995. From June 1992 to August 1993, he was self-employed in the garment
manufacturing industry. Prior to that, he was Vice President - Merchandising at
Charming Shoppes, Inc. for more than five years.
Erna Zint, has served as Executive Vice President - Sourcing since January
1996. Prior to that, she served as Corporate Vice President - Southeast Asia
Operations for Leslie Fay Companies, Inc. from December 1990 to December 1995.
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<PAGE> 35
Dwight L. Klingenberg, has served as Vice President - Chief Administrative
Officer since June 1996. Prior to that he served as Vice President with the
Marshalls division of Melville Corporation from July 1995 until April 1996 and
as Assistant Corporate Controller of the Melville Corporation from 1993 until
July 1995. Prior to that, he served as Vice President - Chief Financial Officer
of the Bob's Stores division of Melville Corporation from 1991 until 1993.
Eric M. Specter, has served as Vice President - Chief Financial Officer
since December 1995. Prior to that, he served as Vice President - Corporate
Controller for more than five years.
Vivian Behrens, has served as Vice President - Marketing since September
1994. Prior to that, she served as Vice President - Marketing with the Lane
Bryant Division of The Limited, Inc. from November 1990 to August 1994.
Bernard Brodsky, has served as Vice President, Treasurer and Secretary for
more than five years.
Jon A. Goldberg, has served as Vice President - Corporate Controller since
December 1995. Prior to that, he served as Vice President - Retail Controller
from May 1995 to December 1995 and as Retail Controller from August 1990 to May
1995.
Terry G. Pritikin, has served as Vice President - Director of Stores since
November 1994. Prior to that, he served as President of Retail Specialty, Tommy
Hilfiger, USA, from March 1994 until November 1994 and as Executive Vice
President of Stores with the Lerner Division of The Limited, Inc. from May 1988
to March 1994.
There are no family relationships among any executive officers.
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<PAGE> 36
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to an Indenture dated as of ,
1996 (the "Indenture"), between the Company and First Union National Bank, as
trustee (the "Trustee"). The following summary of the material provisions of the
Indenture is qualified in its entirety by reference to the Indenture, copies of
which will be available for inspection at the corporate trust office of the
Trustee in Philadelphia, Pennsylvania and at the offices of the Paying Agent
referred to below. The definitions of certain terms used in the following
summary are set forth below under "-- Certain Definitions". Capitalized terms
used but not defined herein have the meanings ascribed to them in the Notes and
the Indenture.
The Notes will be unsecured obligations of the Company, subordinated in
right of payment to all existing and future Senior Debt of the Company to the
extent set forth in the Indenture. The Indenture does not limit the amount of
other indebtedness or securities that may be issued by the Company or any of its
Subsidiaries.
PRINCIPAL, MATURITY AND INTEREST
The Notes will bear interest from , 1996, at the rate per annum
set forth on the cover page of this Prospectus and will mature on ,
2006. The Notes will be limited to $100,000,000 aggregate principal amount
(subject to increase in the event of exercise of all or a portion of the
Underwriters' over-allotment option).
Interest on the Notes will be payable semiannually on and
of each year (each an "Interest Payment Date"), commencing on
, 1997, to holders of record at the close of business on the
of or of (each a "Regular Record Date")
immediately preceding such Interest Payment Date. Interest will be computed on
the basis of a 360-day year comprised of twelve 30-day months. Interest on the
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from , 1996. See also "-- Payment and
Conversion" below.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Notes will be issued in fully registered
form. The Notes will each initially be represented by a global certificate in
fully registered form (the "Global Note") which will be deposited with the
Trustee as custodian for The Depository Trust Company ("DTC") and registered in
the name of DTC or its nominee.
Global Note
The Company expects that upon the issuance of the Global Note, DTC or its
custodian will credit, on its book-entry registration and transfer system, the
respective principal amount of Notes of the individual beneficial interests
represented by such Global Note to the accounts of persons who have accounts
with such depositary. Such accounts initially will be designated by or on behalf
of the Underwriters. Ownership of beneficial interests in the Global Note will
be limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. Ownership of beneficial interests in the
Global Note will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of the
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in the Global Note will be able to transfer that interest except in accordance
with DTC's applicable procedures.
Payments of the principal of, premium, if any, and interest on, the Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. Neither the Company, the Trustee nor any Paying Agent will have
any responsibility or liability for any aspect of the records relating to or
payments made
35
<PAGE> 37
on account of beneficial ownership interests in the Global Note or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in such Global Note
held through such participants will be governed by standing instructions and
customary practice, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more participants to
whose account the DTC interests in the Global Note are credited and only in
respect of such portion of the aggregate principal amount of Notes as to which
such participant or participants has or have given such direction. However, if
there is an Event of Default under the Notes or the Indenture, DTC will, if
requested by the Trustee, exchange the Global Note for definitive Notes in
certificated form ("Certificated Notes"), which will be distributed to its
participants.
DTC has advised the Company that DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers (including the
Underwriters), banks, trust companies and clearing corporations and certain
other organizations. Indirect access to the DTC system is available to others,
such as banks, brokers, dealers and trust companies, that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Certificated Notes
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Note or if DTC ceases to be a clearing agency registered under the
Exchange Act or otherwise ceases to be eligible as a depositary and a successor
depositary is not appointed by the Company within 90 days, or in the
circumstances set forth in "-- Global Note" above, Certificated Notes will be
issued in exchange for the Global Note.
The Company will initially appoint the Trustee at its corporate trust
office as Paying Agent, Transfer Agent, Registrar and Conversion Agent for the
Notes. In such capacities, the Trustee will be responsible for, among other
things, (i) maintaining a record of the aggregate holdings of Notes and
accepting Notes for exchange and registration of transfer, (ii) ensuring that
payments of principal, premium, if any, and interest in respect of the Notes
received by the Trustee from the Company are duly paid to the holders of the
Notes, (iii) transmitting to the Company any notices from holders, (iv)
accepting conversion notices and related documents, and transmitting the
relevant items to the Company and (v) delivering certificates for Common Stock
issued on conversion of the Notes.
The Company will cause to be kept at the office of the Registrar a register
in which, subject to such reasonable regulations as it may prescribe, the
Company will provide for the registration of the Notes and registration of
transfers of the Notes. The Company may vary or terminate the appointment of any
Paying Agent, Transfer Agent, Registrar or Conversion Agent, or appoint
additional or other such agents or approve any change in the office through
which any such agent acts, provided that until the Notes have been delivered to
the Trustee for cancellation, or moneys sufficient to pay the principal of and
premium, if any, and interest on the Notes have been made available for payment
and either paid or refunded to the Company as provided in the Indenture, there
shall at all times be a Paying Agent, a Transfer Agent, a Registrar and a
Conversion Agent in Charlotte, North Carolina. The Company will cause notice of
any resignation, termination or
36
<PAGE> 38
appointment of the Trustee or any Paying Agent, Transfer Agent, Registrar or
Conversion Agent, and of any change in the office through which any such agent
will act, to be provided to Holders of the Notes in accordance with
"-- Selection and Notice" below.
At the option of the holder thereof and subject to the terms of the Notes
and of the Indenture, Certificated Notes, if any, will be exchangeable for an
equal aggregate principal amount of Certificated Notes of different authorized
denominations at the office of the Trustee in Charlotte, North Carolina, in each
case without service charge (other than the cost of delivery) and upon payment
of any taxes and other governmental charges. The registered holder of a Note
will be treated by the Company, the Trustee and their respective agents for all
purposes as the owner of such Note.
In the event of a partial redemption, the Company will not be required (i)
to register the transfer or exchange of Notes for a period of 15 days
immediately preceding the date on which notice is given identifying the serial
numbers of the Notes called for such redemption or (ii) to register the transfer
or exchange of any Note, or portion thereof, called for redemption.
OPTIONAL REDEMPTION
Redemption at the Option of the Company
The Notes will not be subject to redemption prior to , 1999, and
will be redeemable on such date and thereafter at the option of the Company, in
whole or in part (in any integral multiple of $1,000), upon prior notice as
described under "-- Selection and Notice" below, at the following redemption
prices (expressed as percentages of the principal amount), if redeemed during
the 12-month period beginning of the years indicated:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---------------------------------------------------------------- ----------
<S> <C>
1999............................................................ %
2000............................................................
2001............................................................
2002............................................................
2003............................................................
2004............................................................
</TABLE>
and at , 2005 and thereafter, 100%, in each case together with accrued
interest up to but not including the redemption date (subject to the right of
holders of record on the relevant record date to receive interest due on an
Interest Payment Date). If less than all Notes are to be redeemed, the Trustee
will select the Notes to be redeemed by lot. On or after the redemption date,
interest will cease to accrue on the Notes, or portion thereof, called for
redemption unless the Company defaults in making such redemption.
Redemption Procedures
Notice of intention to redeem Notes will be given to holders of the Notes
in accordance with "-- Selection and Notice" below, not more than 60 nor less
than 30 days prior to the redemption date.
Notice of redemption will specify, among other things, the redemption date,
the applicable redemption price and, in the case of partial redemption, the
aggregate principal amount of Notes to be redeemed and the aggregate principal
amount of the Notes which will be outstanding after such partial redemption. In
addition, in the case of a partial redemption, such notice will specify the last
date on which issuances, exchanges or registration of transfers of Notes may be
made pursuant to the provisions described under "-- Book-Entry; Delivery and
Form -- Certificated Securities" above and will specify the serial numbers and
the portions thereof called for redemption, which will be selected in such
manner as the Trustee shall deem to be fair and appropriate.
37
<PAGE> 39
Cancellation and Reacquisition
All Notes that are redeemed or purchased by the Company or any of its
Subsidiaries will forthwith be canceled and accordingly may not be reissued or
resold.
The Company or any Subsidiary or affiliate of the Company may at any time
purchase Notes in the open market or otherwise.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee by lot, provided that no Notes
of $1,000 or less shall be redeemed in part. Notice of redemption shall be
mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption unless the
Company defaults in making such payment.
REPURCHASE RIGHTS
Upon any Change of Control (as defined below) with respect to the Company,
each holder of Notes will have the right (the "Repurchase Right"), at the
holder's option, to require the Company to repurchase all of such holder's
Notes, or a portion thereof which is $1,000 or any integral multiple thereof, on
the date (the "Repurchase Date") that is 45 days after the date of the Company
Notice (as defined below) at a price equal to 100% of the principal amount of
the Notes, plus accrued interest, if any, to the Repurchase Date; provided,
however, that if a Repurchase Date is on or after a Regular Record Date and on
or before the related Interest Payment Date, any accrued interest shall be
payable to the registered holders of the applicable Notes on the relevant
Regular Record Date and no additional interest will be payable to holders who
tender Notes.
Within 30 days after the occurrence of a Change of Control, the Company or
the Trustee is obligated to give notice (the "Company Notice") as provided in
the Indenture, of the occurrence of such Change of Control and the Repurchase
Right arising as a result thereof. To exercise the Repurchase Right, a holder of
Notes must deliver on or before the 30th day after the date of the Company
Notice irrevocable written notice to the Paying Agent of the holder's exercise
of such right together with the Notes with respect to which the right is being
exercised, duly endorsed for transfer. The submission of a Note pursuant to the
exercise of a Repurchase Right will be irrevocable on the part of the holder
(unless the Company fails to repurchase the Note on the Repurchase Date) and the
right to convert such Note will expire upon such submission.
The Company will comply with the requirements of Rules 13e-4 and 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations are applicable in connection with the
repurchase of the Notes in connection with a Change of Control.
On the Repurchase Date, the Company will, to the extent lawful, (1) accept
for payment Notes or portions thereof tendered, (2) deposit with the Paying
Agent an amount equal to the purchase price in respect of all Notes or portions
thereof so tendered and accepted plus accrued interest thereon payable on such
Repurchase Date and (3) deliver or cause to be delivered to the Trustee the
Notes so accepted together with an Officers' Certificate stating the Notes or
portions thereof tendered to the Company and accepted for payment. The Paying
Agent shall promptly mail to each holder of Notes so accepted payment in an
amount equal to the purchase price for such Notes plus accrued interest thereon
payable on such Repurchase Date, and the Trustee shall promptly authenticate and
mail to each holder a new Note equal in principal amount to
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<PAGE> 40
any unpurchased portion of the Notes surrendered, if any; provided, that each
such new Note shall be in a principal amount of $1,000 or an integral multiple
thereof. The Company will publicly announce the results of the offer to
repurchase on or as soon as practicable after the Repurchase Date. There can be
no assurance that the Company will have the financial resources necessary to
repurchase the Notes in such circumstances.
A "Change of Control" will be deemed to have occurred when: (i) any
"person" or "group" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than the Company, any Subsidiary of the Company or any
employee benefit plan of the Company or any Subsidiary of the Company is or
becomes the "Beneficial Owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, including all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total voting power of
the Voting Stock of the Company or (ii) the merger or consolidation of the
Company with or into another Person or the merger of another Person with or into
the Company, or the sale of all or substantially all the assets of the Company
to another Person (other than a Person that is controlled by the Company), and,
in the case of any such merger or consolidation, the securities of the Company
that are outstanding immediately prior to such transaction and which represent
100% of the aggregate voting power of the Voting Stock of the Company are
changed into or exchanged for cash, securities or property, unless pursuant to
such transaction such securities are changed into or exchanged for, in addition
to any other consideration, securities of the surviving corporation that
represent, immediately after such transaction, at least a majority of the
aggregate voting power of the Voting Stock of the surviving corporation.
The term "all or substantially all" as used in the definition of "Change of
Control" has not been interpreted under New York law (which is the governing law
of the Indenture) to represent a specific quantitative test. As a consequence,
in the event the holders of the Notes elected to exercise their rights under the
Indenture and the Company elected to contest such election, there would be no
assurance as to how a court interpreting New York law would interpret the
phrase.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
Except as described above with respect to a Change of Control, the
Indenture does not contain any other provisions that permit the holders of the
Notes to require that the Company repurchase or redeem the Notes in the event of
a takeover, recapitalization or similar restructuring.
The Change of Control purchase feature of the Notes may in certain
circumstances make more difficult or discourage a takeover of the Company, and,
thus, the removal of incumbent management. Such purchase feature, however, is
not the result of management's knowledge of any specific effort to accumulate
the Company's stock or to obtain control of the Company by means of a merger,
tender offer, solicitation or otherwise, or part of a plan by management to
adopt a series of anti-takeover provisions. Instead, such purchase feature is a
result of negotiations between the Company and the Underwriters. Management has
no present intention to engage in a transaction involving a Change of Control,
although it is possible that the Company could decide to do so in the future.
Subject to the limitation on mergers, consolidations and sale of assets
described herein, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of debt (including Senior Debt) outstanding at such
time or otherwise affect the Company's capital structure or credit ratings. The
payment of the purchase price is subordinated to the prior payment of Senior
Debt as described under "-- Subordination of Notes" below.
Current credit agreements of the Company contain, and future credit
agreements or other agreements relating to debt of the Company may contain,
prohibitions or restrictions on the Company's ability to effect the repurchase
of the Notes. In the event a Change of Control occurs at a time when such
prohibitions or restrictions are in effect, the Company could seek the consent
of its lenders to the purchase of Notes or could attempt to refinance the
borrowings that contain such prohibition. If the Company does not obtain such a
consent or repay such borrowings, the Company will be effectively prohibited
from purchasing Notes. In such
39
<PAGE> 41
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture.
CONVERSION
The holder of any Note will have the right, exercisable at any time prior
to maturity, to convert the principal amount thereof (or any portion thereof
that is an integral multiple of $1,000) into shares of Common Stock at the
conversion price set forth on the cover page of this Prospectus, subject to
adjustment as described below (the "Conversion Price"), except that if a Note is
called for redemption, the conversion right will terminate at the close of
business on the business day immediately preceding the date fixed for
redemption, and except that if a Note is submitted pursuant to the exercise of a
Repurchase Right, the right to convert such Note will expire upon such
submission. Except as described below, no adjustment will be made on conversion
of any Notes for interest accrued thereon or for dividends on any Common Stock
issued. If Notes are converted after a record date for the payment of interest
and prior to the next succeeding Interest Payment Date, such Notes must be
accompanied by funds equal to the interest payable on such succeeding Interest
Payment Date on the principal amount so converted (unless such Notes are subject
to redemption on a redemption date between such record date and the business day
immediately following such Interest Payment Date). No fractional shares will be
issued upon conversion but a cash adjustment will be made for any fractional
interest.
The Conversion Price is subject to adjustment upon the occurrence of
certain events, including: (i) the issuance of shares of Common Stock as a
dividend or distribution on the Common Stock; (ii) the subdivision or
combination of the outstanding Common Stock; (iii) the issuance to all holders
of Common Stock of rights or warrants to subscribe for or purchase Common Stock
(or securities convertible into Common Stock) at a price per share less than the
then current market price per share (determined as provided in the Indenture);
(iv) the distribution of shares of Capital Stock of the Company (other than
Common Stock), evidences of indebtedness or other assets (excluding dividends or
distributions in cash, except as described in clause (v) below) to all holders
of Common Stock; (v) the distribution, by dividend or otherwise, of cash to all
holders of Common Stock in an aggregate amount that, together with the aggregate
of any other distributions of cash that did not trigger a Conversion Price
adjustment to all holders of its Common Stock within the 12 months preceding the
date fixed for determining the stockholders entitled to such distribution and
all Excess Payments (as defined below) in respect of each tender offer by the
Company or any of its Subsidiaries for Common Stock concluded within the
preceding 12 months not triggering a Conversion Price adjustment, exceeds 10% of
the product of the market price per share (determined as provided in the
Indenture) on the date fixed for the determination of stockholders entitled to
receive such distribution times the number of shares of Common Stock outstanding
on such date; (vi) payment of an Excess Payment in respect of a tender offer by
the Company or any of its Subsidiaries for Common Stock, if the aggregate amount
of such Excess Payment, together with the aggregate amount of cash distributions
made within the preceding 12 months not triggering a Conversion Price adjustment
and all Excess Payments in respect of each tender offer by the Company or any of
its Subsidiaries for Common Stock concluded within the preceding 12 months not
triggering a Conversion Price adjustment, exceeds 10% of the product of the
market price per share (determined as provided in the Indenture) on the
expiration of such tender offer times the number of shares of Common Stock
outstanding on such date; and (vii) the distribution to substantially all
holders of Common Stock of rights or warrants to subscribe for securities or
other assets (other than those securities referred to in clause (iii) above). In
the event of a distribution to substantially all holders of Common Stock of
rights or warrants to subscribe for additional shares of the Company's Capital
Stock (other than those securities referred to in clause (iii) above), the
Company may, instead of making any adjustment in the Conversion Price, make
proper provision so that each holder of a Note who converts such Note after the
record date for such distribution and prior to the expiration or redemption of
such rights or warrants shall be entitled to receive upon such conversion, in
addition to shares of Common Stock, an appropriate number of such rights or
warrants. No adjustment of the Conversion Price will be made until cumulative
adjustments amount to one percent or more of the Conversion Price as last
adjusted.
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<PAGE> 42
If the Company reclassifies or changes its outstanding Common Stock, or
consolidates with or in certain circumstances merges into any person or
transfers or leases all or substantially all its assets, the Notes will become
convertible into the kind and amount of securities, cash or other assets which
the holders of the Notes would have owned immediately after the transaction if
the holders had converted the Notes immediately before the effective date of the
transaction.
The Indenture also provides that if rights or warrants expire unexercised,
the Conversion Price shall be readjusted to take into account the actual number
of such rights or warrants which were exercised.
An "Excess Payment" means the excess of (A) the aggregate of the cash and
fair market value of other consideration paid by the Company or any of its
subsidiaries with respect to the shares acquired in a tender offer over (B) the
market value of such acquired shares after giving effect to the completion of
the tender offer.
In the event of a taxable distribution to holders of Common Stock (or other
transaction) which results in any adjustment of the Conversion Price, the
holders of Notes may, in certain circumstances, be deemed to have received a
distribution subject to United States income tax as a dividend; in certain other
circumstances, the absence of such an adjustment may result in a taxable
dividend to the holders of Common Stock.
The Company may, at its option, make such reductions in the Conversion
Price, in addition to those set forth above, as the Board of Directors deems
advisable in order that any stock dividend, subdivision of shares, distribution
of rights to purchase stock or securities or distribution of securities
convertible into or exchangeable for stock made by the Company to its
stockholders will not be taxable to its recipients.
SUBORDINATION OF NOTES
The payment of the principal of, premium, if any, and interest on or any
other amounts due on the Notes will be subordinated in right of payment to the
prior payment in full of all existing and future Senior Debt of the Company.
Upon the maturity of any Senior Debt of the Company by lapse of time,
acceleration or otherwise, such Senior Debt shall first be paid in full, or duly
provided for, before any payment may be made with respect to the Notes. In
addition, no payment on account of principal, premium, if any, or interest on,
or redemption or repurchase of, the Notes may be made by the Company if there is
a default in the payment of principal, premium, if any, or interest or other
amounts (including a default under any repurchase or redemption obligation) with
respect to any Senior Debt or if any other event of default with respect to any
Senior Debt, permitting the holders thereof to accelerate the maturity thereof,
shall have occurred and shall not have been cured or waived or shall not have
ceased to exist after written notice to the Company and the Trustee by any
holder of Senior Debt.
As of May 31, 1996, as adjusted for this offering, including application of
the proceeds thereof, the Senior Debt of the Company and the aggregate
indebtedness of its Subsidiaries, on a consolidated basis, totalled $70,714,000
(excluding accrued interest). In addition, the Notes will be structurally
subordinated to all indebtedness and other liabilities (including trade payables
and lease obligations) of the Company's Subsidiaries, as any right of the
Company to receive any assets of its Subsidiaries upon their liquidation or
reorganization (and the consequent right of the holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
that Subsidiary's creditors (including trade creditors), except to the extent
that the Company itself is recognized as a creditor of such Subsidiary, in which
case the claims of the Company would still be subordinate to any security
interest in the assets of such Subsidiary and any indebtedness of such
Subsidiary senior to that held by the Company. There are no restrictions in the
Indenture on the creation of additional Senior Debt or any other indebtedness of
the Company or any Subsidiary of the Company.
Upon any distribution of its assets in connection with any dissolution,
winding-up, liquidation or reorganization of the Company or acceleration of the
principal amount due on the Notes because of an Event of Default, all Senior
Debt must be paid in full before the holders of the Notes are entitled to any
payments whatsoever.
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If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of Senior Debt or the
trustee(s) for such Senior Debt of the acceleration. The Company may not pay the
Notes until five days after such holders or trustee(s) of Senior Debt receive
notice of such acceleration and, thereafter, may pay the Notes only if the
subordination provisions of the Indenture otherwise permit payment at that time.
As a result of these subordination provisions, in the event of the
Company's insolvency, holders of the Notes may recover ratably less than general
creditors of the Company.
The Company will be obligated to pay reasonable compensation to the Trustee
and to indemnify the Trustee against any losses, liabilities or expenses
incurred by it in connection with its duties relating to the Notes. The
Trustee's claims for payments will be senior to those of holders of Notes in
respect of all funds collected or held by the Trustee.
PAYMENT AND CONVERSION
Payment of principal of and premium, if any, on the Notes will be made to
the registered holder thereof against surrender of such Notes at the corporate
trust office of the Trustee in Charlotte, North Carolina, or, subject to any
applicable laws and regulations, at the office of the Paying Agent, by dollar
check drawn on a bank in Charlotte, North Carolina, or by transfer to a dollar
account (such transfer to be made only to holders of an aggregate principal
amount of Notes in excess of $5,000,000) maintained by the holder. Interest on
the Notes will be payable semiannually on and of each year
to the person in whose name such Note is registered at the close of business on
the preceding and (a "Regular Record Date"). Payments of
such interest will be made by a dollar check drawn on a bank in Charlotte, North
Carolina mailed to the holder at such holder's registered address or, upon
application by the holder thereof to the Registrar, not later than the
applicable Regular Record Date, by transfer to a dollar account (such transfer
to be made only to holders of an aggregate principal amount of Notes in excess
of $5,000,000) maintained by the holder.
The Company has initially appointed the Trustee at its corporate trust
office as Paying Agent and Conversion Agent. The Company may at any time
terminate the appointment of any Paying Agent or Conversion Agent and appoint
additional or other Paying Agents and Conversion Agents, provided that until the
Notes have been delivered to the Trustee for cancellation, or moneys sufficient
to pay the principal of and premium, if any, and interest on the Notes have been
made available for payment and either paid or refunded to the Company as
provided in the Indenture, it will maintain a Paying Agent and Conversion Agent
in Charlotte, North Carolina for payments with respect to the Notes and for
surrender of the Notes for conversion. Notice of any such termination or
appointment and of any change in the office through which any Paying Agent or
Conversion Agent will act will be given in accordance with "-- Selection and
Notice" above.
All monies paid by the Company to a Paying Agent for the payment of
principal of or premium, if any, or interest on any Notes which remain unclaimed
at the end of two years after such payment has become due and payable will be
repaid to the Company, and the holder of such Note will thereafter look only to
the Company for payment thereof.
In any case where the due date for the payment of the principal of and
premium, if any, on or interest with respect to any Note or the date fixed for
redemption or repurchase of any Note shall be at any place of payment a day on
which banking institutions are authorized or obligated by law to close, then
payment of principal and premium, if any, or interest need not be made on such
date at such place but may be made on the next succeeding day at such place
which is not a day on which banking institutions are authorized or obligated to
close, with the same force and effect as if made on the date for such payment or
the date fixed for redemption or repurchase, and no interest shall accrue with
respect to the period after such date.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture will provide that the Company may not consolidate or merge
with or into any Person (whether or not the Company is the surviving
corporation), or sell, assign, transfer, lease, convey or otherwise
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dispose of all or substantially all of its properties or assets unless (i)(a)
the Company is the surviving or continuing corporation or (b) the person formed
by or surviving any such consolidation or merger (if other than the Company), or
the person which acquires by sale, assignment, transfer, lease, conveyance or
other disposition the properties and assets of the Company, is a corporation
organized or existing under the laws of the United States, any state thereof or
the District of Columbia; (ii) the entity or person formed by or surviving any
such consolidation or merger (if other than the Company) assumes all the
obligations of the Company, pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee, under the Notes and the Indenture, (iii)
such sale, assignment, transfer, lease, conveyance or other disposition of all
or substantially all of the Company's properties or assets shall be as an
entirety or virtually as an entirety to one person and such person shall have
assumed all the obligations of the Company, pursuant to a supplemental indenture
in a form reasonably satisfactory to the Trustee, under the Notes and the
Indenture; (iv) immediately after such transaction no Default or Event of
Default exists; and (v) the Company or such person shall have delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
such transaction and the supplemental indenture comply with the Indenture and
that all conditions precedent in the Indenture relating to such transaction have
been satisfied. Under certain circumstances described above involving a Change
of Control, each holder of Notes may have the right to require the Company to
repurchase such Notes. See "-- Repurchase Rights".
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Notes; (ii) default in payment when due of principal, or premium, if any, on the
Notes; (iii) failure by the Company to make a payment with respect to repurchase
of the Notes in accordance with the provisions described under "-- Repurchase
Rights" above; (iv) failure by the Company for 60 days after notice to comply
with any other covenants and agreements contained in the Indenture or the Notes;
(v) default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any indebtedness for money
borrowed by the Company or any of its Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Subsidiaries), whether such indebtedness
or guarantee now exists or is created after the date on which the Notes are
first authenticated and issued, which default (a) is caused by a failure to pay
when due principal or interest on such indebtedness within the grace period
provided in such indebtedness (which failure continues beyond any applicable
grace period) (a "Payment Default") or (b) results in the acceleration of such
indebtedness prior to its express maturity and, in each case, the principal
amount of any such indebtedness, together with the principal amount of any other
such indebtedness under which there has been a Payment Default which is
continuing or the maturity of which has been so accelerated, aggregates $15
million or more; provided, however, that no such default by a Subsidiary shall
be covered by this clause (v) unless such Subsidiary alone or together with all
other Subsidiaries which are then in default as described by subclauses (a) or
(b) in this clause (v), would, in the aggregate, constitute a Material
Subsidiary; (vi) failure by the Company or any Subsidiary of the Company to pay
final judgments (other than any judgment as to which a reputable insurance
company has accepted full liability) aggregating in excess of $15 million, which
judgments are not stayed within 60 days after their entry; provided, however,
that no such failure by a Subsidiary shall be covered by this clause (vi) unless
such Subsidiary alone or together with all other Subsidiaries which then have
such final judgments outstanding, would, in the aggregate, constitute a Material
Subsidiary and (vii) certain events of bankruptcy or insolvency with respect to
the Company or any of its Material Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company or any Material
Subsidiary, all outstanding Notes will become due and payable without further
action or notice. Subject to certain limitations, holders of a majority in
principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
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In the event of a declaration of acceleration under the Indenture because
an Event of Default set forth in subclause (v) of the preceding paragraph has
occurred and is continuing, such declaration of acceleration will be
automatically annulled if the holders of the indebtedness which is the subject
of such Event of Default have waived such Payment Default or rescinded their
declaration of acceleration in respect of such indebtedness or if such Payment
Default has been cured within 30 days thereof and no other Event of Default has
occurred during such 30-day period which has not been cured or waived. The
holders of a majority in aggregate principal amount of outstanding Notes may
rescind and annul a declaration of acceleration and its consequences if the
rescission would not conflict with any judgment or decree and if all Events of
Default, other than the nonpayment of amounts which become due by acceleration,
have been cured or waived as provided in the Indenture.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraph, the Indenture or the
Notes may be amended or supplemented with the consent of the holders of at least
a majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for Notes), and any
existing Default or Event of Default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the holders of a
majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a nonconsenting holder of Notes) (i) reduce
the amount of Notes whose holders must consent to an amendment, supplement or
waiver, (ii) reduce the principal of or change the fixed maturity of any Note or
alter the provisions with respect to the redemption of the Notes, (iii) reduce
the rate of or change the time for payment of interest on any Note, (iv) waive a
default in the payment of principal of, premium, if any, or interest on any
Notes (except a rescission of acceleration of the Notes by the holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or Events of
Default or the rights of holders of Notes to receive payments of principal of or
interest on the Notes, (vii) waive a redemption payment with respect to any
Note, (viii) impair the right to convert the Notes into Common Stock or waive or
otherwise adversely affect the Repurchase Rights, (ix) modify the conversion or
subordination provisions of the Indenture in a manner adverse to the holders of
the Notes or (x) make any change in the foregoing amendment and waiver
provisions.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to certificated Notes, to provide for the assumption of the
Company's obligations to holders of the Notes in the case of a merger or
consolidation or in the event of certain reclassifications or changes of the
Company's Common Stock, to make any change that would provide any additional
rights or benefits to the holders of the Notes or that does not adversely affect
the legal rights under the Indenture of any such holder, or to comply with
requirements of the Commission in order to maintain the qualification of the
Indenture under the Trust Indenture Act of 1939.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
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The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that, in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care and skill of a prudent man in
the conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any holder of Notes, unless such holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) equity of such Person,
including any preferred stock, but excluding any debt securities convertible
into such equity.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Material Subsidiary" means any Subsidiary of the Company, including its
Subsidiaries, which meets any of the following conditions:
(1) The Company's and its other Subsidiaries' investments in and
advances to the Subsidiary exceed 10 percent of the total assets of the
Company and its Subsidiaries consolidated as of the end of the most
recently completed fiscal year (for a proposed business combination to be
accounted for as a pooling of interest, this condition is also met when the
number of common shares exchanged or to be exchanged by the Company exceeds
10 percent of its total common shares outstanding at the date the
combination is initiated); or
(2) The Company's and its other Subsidiaries' proportionate share of
the total assets (after intercompany eliminations) of the Subsidiary
exceeds 10 percent of the total assets of the Company's and its
Subsidiaries consolidated as of the end of the most recently completed
fiscal year; or
(3) The Company's and its other Subsidiaries' equity in the income
from continuing operations before income taxes, extraordinary items and
cumulative effect of a change in accounting principle of the Subsidiary
exceeds 10 percent of such income of the Company and its Subsidiaries
consolidated for the most recently completed fiscal year; or
(4) Except in the case of an Event of Default specified in (vii) above
under "-- Events of Defaults and Remedies" in which case this clause (4)
shall not apply, the total revenues of the Subsidiary exceed 5 percent of
total revenues of the Company and its Subsidiaries consolidated as of the
end of the most recently completed fiscal year.
For purposes of making the prescribed income test set forth above, the
following guidance should be applied:
1. When a loss has been incurred by either the Company and its
Subsidiaries consolidated or the tested Subsidiary, but not both, the
equity in the income or loss of the tested Subsidiary should be excluded
from the income of the Company and its Subsidiaries consolidated for
purposes of the computation.
2. If income of the Company and its Subsidiaries consolidated for the
most recent fiscal year is at least 10 percent lower than the average of
the income for the last five fiscal years, such average income should be
substituted for purposes of the computation. Any loss years should be
omitted for purposes of computing average income.
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"Senior Debt" means (a) all indebtedness of the Company, including the
principal of, premium, if any, and interest on such indebtedness whether
outstanding on the date of the Indenture or thereafter created (including
interest accruing after the filing of a petition in bankruptcy whether or not
allowed as a claim in bankruptcy), and all reasonable fees, costs, expenses and
indemnity payments in connection therewith (i) for borrowed money, (ii)
constituting purchase money indebtedness for the payment of which the Company is
directly or contingently liable, (iii) constituting reimbursement obligations
under bank letters of credit, (iv) under interest rate and currency swaps, caps,
floors, collars or similar agreements or arrangements intended to protect the
Company against fluctuations in interest or currency exchange rates, (v) for
commitment, standby and other fees due and payable to financial institutions
with respect to credit facilities available to the Company, (vi) constituting
customary obligations arising in connection with the sale or other transfer of
credit card accounts receivable originated by the Company or its Subsidiaries in
the ordinary course of business, (vii) under any lease of any real or personal
property, whether outstanding on the date of execution of the Indenture or
thereafter created, incurred or assumed, which obligations are (x) capitalized
on the books of the Company in accordance with generally accepted accounting
principles or (y) made as part of any sale and leaseback transaction, (viii)
indebtedness or obligations of others of the kinds described in the preceding
clauses (i)-(vii) that the Company has guaranteed the payment thereof, or (ix)
constituting indebtedness or obligations of others (of the kind described in the
preceding clauses (i)-(vii)) secured in whole or in part by a lien on any of the
Company's property, unless, in any such case, by the terms of the instrument
creating or evidencing such indebtedness it is provided that such indebtedness
is not superior in right of payment to the Notes or to other indebtedness which
is pari passu with, or subordinated to, the Notes, and (b) any modifications,
refundings, deferrals, renewals or extensions of any such Senior Debt, or
securities, notes or other evidences of indebtedness issued in exchange for such
Senior Debt. As used in the preceding sentence the term "purchase money
indebtedness" shall mean indebtedness incurred, issued or given in connection
with the acquisition of any business, properties or assets of any kind acquired
by the Company or any Subsidiary; provided, however, that, without limiting the
generality of the foregoing, such term shall not include any account payable.
"Subsidiary" means any corporation, association or other business entity of
which more than 50% of the total voting power of shares of Capital Stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled directly or indirectly, by any Person or one or more of the other
Subsidiaries of that Person or a combination thereof.
GOVERNING LAW
The Indenture and the Notes will be governed by and construed in accordance
with the law of the State of New York.
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DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 300,000,000 shares of
Common Stock, $.10 par value per share, and 1,000,000 shares of preferred stock,
$1.00 par value per share, of which 300,000 shares of Series A Junior
Participating Preferred Shares, $1.00 par value per share ("Series A Preferred
Shares"), have been authorized for issuance pursuant to the Company's
Shareholder Rights Plan discussed below.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted upon by shareholders generally, including the election of directors.
Shareholders are entitled to receive such dividends as may be declared from time
to time by the Board of Directors out of funds legally available for dividends
and in the event of liquidation, dissolution or winding up of the Company, to
share ratably in all assets remaining after the payment of liabilities and any
liquidation preference associated with outstanding preferred stock. On October
2, 1995, however, the Company's Board of Directors announced an indefinite
suspension of dividends on the Company's Common Stock. Additionally, the
Company's revolving credit facility requires, among other things, that the
Company not pay dividends on its Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition -- Liquidity and Capital Resources". The holders of Common Stock have
no cumulative voting rights, no preemptive rights and no conversion rights. The
Common Stock outstanding as of the date of this Prospectus is fully paid and
nonassessable.
The transfer agent for the Company's Common Stock is Chemical Mellon
Shareholder Services, LLC.
PREFERRED STOCK
The Board of Directors is authorized under the Company's restated articles
of incorporation, as amended (the "Articles"), to provide, without further
shareholder action, for the issuance of preferred stock in one or more series
with such designations, rights and preferences as shall be set forth in
resolutions adopted by the Board of Directors of the Company. Accordingly, the
Board of Directors is empowered to issue preferred stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of the Company's Common Stock. For
example, the issuance of series preferred stock could result in a class of
securities outstanding that will have certain preferences with respect to
dividends and in liquidation over the Common Stock, and may enjoy certain voting
rights, contingent or otherwise, in addition to that of the Common Stock, and
could result in the dilution of the voting rights, net income per share and net
book value of the Common Stock.
Except for the Series A Preferred Shares, the Company has not authorized
for issuance any preferred stock.
Series A Preferred Shares
In connection with the adoption of the Shareholder Rights Plan described
below, the Board of Directors authorized 300,000 Series A Preferred Shares. As
of the date of this Prospectus, there were no Series A Preferred Shares
outstanding. The following description of voting, dividend and liquidation
rights for the authorized Series A Preferred Shares in the succeeding three
paragraphs reflects the effects of the Company's two-for-one Common Stock split,
which was effected on December 7, 1992.
As of the date of this Prospectus, holders of Series A Preferred Shares are
entitled to 600 votes per share on all matters to be voted upon by shareholders
of the corporation. If the Company shall at any time after the date of this
Prospectus: (i) declare a dividend on Common Stock payable in shares of Common
Stock; (ii) subdivide the outstanding shares of Common Stock; or (iii) combine
the outstanding shares of Common Stock into a smaller number of shares (with
each of (i)-(iii) being a "Preferred Adjustment Event"); then, in each such
case, the number of votes per share to which a holder of Series A Preferred was
entitled immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately after such event, and the
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denominator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event (the "Preferred Adjustment Factor").
Dividends on Series A Preferred Shares accrue quarterly, on a cumulative
basis, and shall be paid out of funds legally available for such purpose. As of
the date of this Prospectus, the rate of dividends payable on the first day of
March, June, September and December or such other quarterly date as shall be
specified by the Board of Directors shall be in an amount per Series A Preferred
Share equal to the greater of (i) $1.50 or (ii) subject to the provision for
adjustment set forth below, 600 times the aggregate per share amount of cash
dividends and 600 times the aggregate per share amount of all non-cash dividends
or other distributions, other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock, declared on the
Common Stock since the immediately preceding quarterly dividend payment date, or
with respect to the first quarterly dividend payment date, since the first
issuance of any share or fraction of a share of the Series A Preferred Shares.
If a Preferred Adjustment Event occurs at any time after the date of this
Prospectus, the amount of dividends specified in (ii) to which holders of Series
A Preferred Shares were entitled immediately prior to such event shall be
adjusted by multiplying such number by the Preferred Adjustment Factor.
In the event of any liquidation, dissolution or winding up of the Company,
holders of Series A Preferred Shares shall be entitled to receive the greater of
(i) $1 per Series A Preferred Share, plus accrued dividends to the date of
distribution, whether or not earned or declared, or (ii) an amount per share,
subject to the provision for adjustment set forth below, equal to 600 times the
aggregate amount to be distributed per share to the holders of Common Stock. If
a Preferred Adjustment Event occurs any time after the date of this Prospectus,
then the liquidation payment contemplated by (ii) shall be adjusted by
multiplying such amount by the Preferred Adjustment Factor.
In the event that dividends upon the Series A Preferred Shares shall be in
arrears in an amount equal to six full quarterly dividends thereon, the holders
of such series shall be entitled solely to elect two directors. Such voting
rights shall continue until all accumulated and unpaid dividends have been paid
or set aside for such purpose. At any time when such a right to elect directors
has vested, the Company may, and upon the written request of not less than 20%
of the then outstanding total number of Series A Preferred Shares having the
right to elect directors in such circumstances shall, call a special meeting of
holders of such Series A Preferred Shares for the election of directors;
provided that the Company shall not be required to call a special meeting if the
request is received less than 120 days before the next scheduled annual meeting
or special meeting of the shareholders.
The Series A Preferred Stock is not redeemable, and will rank junior with
respect to payment of dividends and on liquidation to all other series of the
Company's preferred stock, except to the extent that any such series
specifically provides that it shall rank on parity with or junior to the Series
A Preferred Stock.
SHAREHOLDER RIGHTS PLAN
In April 1989, the Board of Directors adopted a Shareholder Rights Plan
(the "Shareholder Rights Plan") and declared a dividend of one right (a "Right")
for each outstanding share of Common Stock. In connection with the Company's
two-for-one stock split which was effected on December 7, 1992, the number of
Rights associated with each outstanding share of Common Stock was adjusted from
one Right per share of Common Stock to one-half of a Right per share of Common
Stock.
The Rights will separate from the Common Stock and a distribution date
("Distribution Date") will occur upon the earlier of (i) 10 days following a
public announcement that a person or group of affiliated or associated persons
(an "Acquiring Person") has acquired, or obtained the right to acquire,
beneficial ownership of 20% or more of the outstanding Common Stock (the "Stock
Acquisition Date"), or (ii) the close of business on such date as may be fixed
by the Board of Directors, which date shall not be more than 65 days following
the commencement of a tender offer or exchange offer that would result in a
person or group beneficially owning 20% or more of the outstanding Common Stock.
The surrender for transfer of any certificates of Common Stock outstanding will
also constitute the transfer of the Rights associated with the Common Stock
represented by such certificates.
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The Rights are not exercisable until the Distribution Date and will expire
at the close of business on April 26, 1999, unless earlier redeemed by the
Company as described below or unless certain transactions set forth in the
Shareholder Rights Agreement have occurred.
Except in the circumstances described below, after the Distribution Date,
each Right will be exercisable into one three-hundredth of a Series A Preferred
Share (a "Series A Preferred Share Fraction"). The voting and dividend rights of
the Series A Preferred Shares are subject to adjustment in the event of
dividends, subdivisions and combinations with respect to the Common Stock of the
Company. In lieu of issuing certificates for Series A Preferred Share Fractions
which are less than an integral multiple of one Series A Preferred Share (i.e.
300 Series A Preferred Share Fractions), the Company may pay cash representing
the current market value of the Series A Preferred Share Fractions.
In the event that at any time following the Stock Acquisition Date, (i) the
Company is the surviving corporation in a merger with an Acquiring Person and
its Common Stock remains outstanding, (ii) a Person becomes the beneficial owner
of more than 20% of the then outstanding Common Stock other than pursuant to a
tender offer that provides fair value to all shareholders, (iii) an Acquiring
Person engages in one or more "self-dealing" transactions as set forth in the
Shareholder Rights Agreement, or (iv) during such time as there is an Acquiring
Person an event occurs that results in such Acquiring Person's ownership
interest being increased by more than one percent (e.g., a reverse stock split),
each holder of a Right will thereafter have the right to receive, upon exercise,
Common Stock (or, in certain circumstances, cash, property or other securities
of the Company) having a value equal to approximately two times the exercise
price of the Right. In lieu of requiring payment of the Purchase Price upon
exercise of the Rights following any such event, the Company may permit the
holders simply to surrender the Rights, in which event they would be entitled to
receive Common Stock (and other property, as the case may be) with a value of
50% of what could be purchased by payment of the full Purchase Price.
Notwithstanding any of the foregoing, following the occurrence of any of the
events set forth in clauses (i), (ii), (iii) or (iv) of this paragraph, all
Rights that are, or (under certain circumstances specified in the Shareholder
Rights Agreement) were, beneficially owned by any Acquiring Person who was
involved in the transaction giving rise to any such event will be null and void.
However, Rights are not exercisable following the occurrence of any of the
events set forth above until such time as the Rights are no longer redeemable by
the Company as set forth below.
In the event that, at any time following the Stock Acquisition Date, (i)
the Company is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation (other than a merger that is
described in, or that follows a tender offer or exchange offer described in, the
preceding paragraph), or (ii) 50% or more of the Company's assets or earning
power is sold or transferred, each holder of a Right (except Rights that
previously have been voided as set forth above) shall thereafter have the right
to receive, upon exercise, common shares of the acquiring company having a value
equal to approximately two times the exercise price of the Right. Again,
provision is made to permit surrender of the Rights in exchange for one-half of
the value otherwise purchasable. The events set forth in this paragraph and in
the preceding paragraph are referred to as the "Triggering Events".
The Purchase Price payable and/or the number of Units of Series A Preferred
Shares or other securities or property issuable upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Series A Preferred Shares, (ii) if holders of the Series A Preferred Shares are
granted certain rights or warrants to subscribe for Series A Preferred Shares or
convertible securities at less than the current market price of the Series A
Preferred Shares, or (iii) upon the distribution to holders of the Series A
Preferred Shares of evidences of indebtedness or assets (excluding regular
quarterly dividends) or of subscription rights or warrants (other than those
referred to above).
At any time until ten days following the Stock Acquisition Date, the
Company may redeem the Rights in whole, but not in part, at a price of $.01 per
Right. That ten day redemption period may be extended by the Board of Directors
so long as the Rights are still redeemable. Under certain circumstances set
forth in the Shareholder Rights Agreement, the decision to redeem will require
the concurrence of a majority of the Continuing Directors (as defined below).
Immediately upon the action of the Board of Directors ordering
49
<PAGE> 51
redemption of the Rights, with, where required, the concurrence of the
Continuing Directors, the Rights will terminate and the only rights of the
holders of Rights will be to receive the $.01 redemption price.
The term "Continuing Directors" means any member of the Board of Directors
of the Company who was a member of the Board prior to the date of the
Shareholder Rights Agreement, and any person who is subsequently elected to the
Board if such person is recommended or approved by a majority of the Continuing
Directors, but shall not include an Acquiring Person, or an affiliate or
associate of an Acquiring Person, or any representative of the foregoing
entities.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to shareholders or to the Company, shareholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Series A Preferred Shares (or other consideration) of the
Company or for common shares of the acquiring company as set forth above.
Other than those provisions relating to the principal economic terms of the
Rights, any of the provisions of the Shareholder Rights Agreement may be amended
by the Board of Directors of the Company prior to the Distribution Date. After
the Distribution Date, the provisions of the Shareholder Rights Agreement may be
amended by the Board (in certain circumstances, with the concurrence of the
Continuing Directors) in order to cure any ambiguity, to make changes that do
not adversely affect the interests of holders of Rights (excluding the interests
of any Acquiring Person), or to shorten or lengthen any time period under the
Shareholder Rights Agreement; provided, however, that no amendment to adjust the
time period governing redemption shall be made at such time as the Rights are
not redeemable.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on a substantial number of Rights being acquired
or redeemed. The Rights should not interfere with any merger or other business
combination approved by the Board of Directors of the Company because (i) the
Board of Directors (under certain circumstances, with the concurrence of the
Continuing Directors) may, at its option, at any time prior to the close of
business on the earlier of (a) the tenth day following the Stock Acquisition
Date or (b) April 21, 1999, redeem all but not less than all of the then
outstanding Rights at $.01 per Right, and (ii) in any event, the Shareholder
Rights Agreement does not apply to an offer which is determined by the
Continuing Directors to provide fair value to all shareholders. The Board of
Directors may, as discussed above, extend the ten day redemption period so long
as the Rights are still redeemable.
ANTITAKEOVER PROVISIONS OF APPLICABLE PENNSYLVANIA LAW AND THE COMPANY'S
ARTICLES AND BYLAWS
Certain provisions of the Pennsylvania Business Corporation Law of 1988, as
amended (the "PBCL"), and the Company's Articles and Bylaws, summarized in the
following paragraphs, may be deemed to have an antitakeover effect and may
delay, deter or prevent a tender offer or takeover attempt that a shareholder
might consider in his or her best interest, including those attempts that might
result in a premium over the market price for the shares of Common Stock held by
shareholders.
Pennsylvania Business Combination Law
Generally, Subchapters 25E, F, G, H, I and J of the PBCL place certain
procedural requirements and establish certain restrictions upon the acquisition
of voting shares of a corporation which would entitle the acquiring person to
cast or direct the casting of a certain percentage of votes in an election of
directors. As a consequence of amendments to the Company's Bylaws that were
effected in 1984 and 1990, only Subchapter 25F of the PBCL applies to the
Company.
In general, Subchapter 25F of the PBCL delays for five years, and imposes
conditions upon, "business combinations" between an "interested shareholder" and
the Company. The term "business combination" is defined broadly in the PBCL to
include various merger, consolidation, division, exchange or sale transactions,
including transactions utilizing the Company's assets for purchase price
amortization or refinancing purposes.
50
<PAGE> 52
An "interested shareholder", in general under the PBCL, would be a beneficial
owner of at least 20% of the Company's voting shares. The foregoing description
of the PBCL does not purport to be complete.
Articles and Bylaws Provisions
Certain provisions of the Company's Articles and Bylaws may have the effect
of discouraging unilateral tender offers or other attempts to takeover and
acquire the business of the Company. These provisions may discourage some
potentially interested purchaser from attempting a unilateral takeover bid for
the Company on terms which some shareholders might favor. These provisions may
also reduce the likelihood of a change in the management or voting control of
the Company without the consent of the then incumbent Board of Directors.
The Articles and Bylaws provide for a classified Board of Directors
consisting of three classes as nearly equal in number as practicable. The
members of each class are elected for a period of three years, and the term of
at least one class shall expire in each year. The terms of the existing three
classes expire in 1997, 1998 and 1999, respectively. The Board of Directors, a
class of the Board Directors, or any individual director may be removed from
office without assigning cause by the vote of the holders of at least 80% of the
combined voting power of the then outstanding shares of stock of all classes and
series of the Company then entitled to vote generally in the election of
directors, voting together as a single class ("Voting Power").
The Articles provide that at least 80% of the Voting Power shall be
required to approve any "business combination" with an "interested shareholder"
unless the Board of Directors shall have approved by resolution, prior to the
time such person became an "interested shareholder", a memorandum of
understanding or agreement with the "interested shareholder" setting forth, in
general, the substance of the terms of the "business combination" transaction to
be consummated. The term "business combination" is broadly defined in the
Articles to include, among other things, the following transactions involving
the Company, or its subsidiaries, and an "interested shareholder": specified
mergers, consolidations, sales or similar dispositions involving $5 million or
more in consideration; issuances or transfers by the Company or any subsidiaries
of any securities of the Company or any subsidiary involving $5 million or more
in consideration; liquidation or dissolution proposals; and reclassifications or
recapitalizations. The term "interested shareholder" is broadly defined in the
Articles to include, among other things, a person or persons, and his, her, its
or their affiliates and associates, who acquire or beneficially own 10% or more
of the Company's Voting Power, unless in certain circumstances such Voting Power
has been maintained for more than ten years. A majority of the Board of
Directors who are disinterested (i.e., unaffiliated with an "interested
shareholder" and on the Board of Directors before such person became an
"interested shareholder") shall have the power and duty to determine "interested
shareholder", "Voting Power", "affiliation", "association" and "business
combination" matters, as such terms are defined or provided for in the Articles.
At least 80% of the Voting Power is required to alter, amend or repeal, or
adopt provisions inconsistent with, the provisions of the Articles described in
the two preceding paragraphs.
The Company's Articles do not permit cumulative voting in the election of
directors. Under cumulative voting, it is possible for representation on a class
of the Board of Directors to be obtained by an individual or group of
individuals which owns less than a majority of the Voting Power.
The Company's Bylaws establish advance notice procedures with regard to the
nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors. These procedures
generally provide that the notice of proposed shareholder nominations for the
election of directors must be given in writing to the Secretary of the Company
not later than the date on which a shareholder proposal would be required to be
submitted to the Company in order to be set forth in the Company's proxy
statement, in accordance with Exchange Act rules. Such notice generally must (i)
identify the name and address of the nominating shareholder and nominee, (ii)
contain representations concerning the nominating shareholder's ownership of
Common Stock and intention to appear at the meeting and make the nomination and
(iii) include all relevant information concerning the nominee and his or her
relationship or transactions with the Company that are required to be disclosed
in the proxy statement pursuant to Exchange Act rules.
51
<PAGE> 53
UNDERWRITING
Under the terms and subject to the conditions set forth in the underwriting
agreement dated the date hereof (the "Underwriting Agreement") between the
Company and each of the Underwriters named below (the "Underwriters"), each of
the Underwriters has severally agreed to purchase, and the Company has agreed to
sell to them, the aggregate principal amount of Notes set forth opposite their
names below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITER OF NOTES
----------------------------------------------------------------------- ------------
<S> <C>
Lazard Freres & Co. LLC................................................
Bear, Stearns & Co. Inc................................................
------------
Total........................................................ $100,000,000
============
</TABLE>
The Underwriting Agreement provides that the several obligations of the
Underwriters to pay for and accept delivery of the Notes offered hereby are
subject to the approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to purchase all Notes if any are
purchased.
The Company has been advised by Lazard Freres & Co. LLC that the several
Underwriters propose initially to offer the Notes offered hereby directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession of % of
the principal amount of the Notes. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of % of the amount of the Notes to
other Underwriters or to certain other dealers. After the offering, the public
offering price and such concessions may be changed by the Underwriters.
The Notes are a new issue of securities with no established trading market.
The Company has been advised by the Underwriters that they intend to make a
market in the Notes but are not obligated to do so and may discontinue market
making at any time without notice. No assurance can be given as to the liquidity
of the trading market for the Notes.
The Company has agreed that, subject to certain limited exceptions, during
the period beginning on the date of this Prospectus and continuing to and
including the date 90 days after the date of this Prospectus, it will not offer,
sell, contract to sell, or otherwise dispose of any securities of the Company
that are substantially similar to the Notes or the Common Stock, including but
not limited to any securities that are convertible into or exchangeable for, or
that represent the right to receive, Common Stock or any such substantially
similar securities without the prior written consent of the Underwriters.
Lazard Freres & Co. LLC has provided investment banking services to the
Company from time to time for which it has received customary fees. In addition,
Michael Solomon, a Managing Director of Lazard Freres & Co. LLC, is a director
of the Company.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
LEGAL MATTERS
Certain legal matters and the validity of the Notes will be passed upon for
the Company by Davis Polk & Wardwell. Certain other legal matters and the
validity of the Common Shares issued upon conversion thereof will be passed upon
for the Company by Morgan, Lewis & Bockius LLP. Certain legal matters will be
passed upon for the Underwriters by Milbank, Tweed, Hadley & McCloy.
EXPERTS
The Consolidated Financial Statements of the Company as of February 3, 1996
and January 28, 1995, and for each of the three fiscal years in the period ended
February 3, 1996 included herein and incorporated herein by reference have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein and incorporated herein by reference and are
included and incorporated herein by reference in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
52
<PAGE> 54
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheets (Unaudited) -- May 4, 1996 and February 3,
1996................................................................................. F-2
Condensed Consolidated Statements of Income (Unaudited) -- thirteen weeks ended May 4,
1996 and April 29, 1995.............................................................. F-3
Condensed Consolidated Statements of Cash Flows (Unaudited) -- thirteen weeks ended May
4, 1996 and April 29, 1995........................................................... F-4
Notes to Condensed Consolidated Financial Statements (Unaudited)....................... F-5
Report of independent auditors......................................................... F-6
Consolidated Balance Sheets -- February 3, 1996 and
January 28, 1995..................................................................... F-7
Consolidated Statements of Income -- years ended February 3, 1996,
January 28, 1995 and January 29, 1994................................................ F-8
Consolidated Statements of Cash Flows -- years ended February 3, 1996,
January 28, 1995 and January 29, 1994................................................ F-9
Consolidated Statements of Stockholders' Equity -- years ended February 3, 1996,
January 28, 1995 and January 29, 1994................................................ F-10
Notes to Consolidated Financial Statements............................................. F-11
</TABLE>
F-1
<PAGE> 55
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 4, FEBRUARY 3,
1996 1996
-------- -----------
<S> <C> <C>
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................... $ 24,360 $ 25,117
Restricted cash..................................................... 7,000 7,000
Available-for-sale securities....................................... 36,576 34,054
Income tax refund receivable........................................ 59,940 56,953
Merchandise inventories............................................. 237,091 220,850
Deferred taxes...................................................... 13,409 13,409
Prepayments and other............................................... 33,139 48,178
-------- --------
TOTAL CURRENT ASSETS.................................................. 411,515 405,561
Property, equipment and leasehold improvements........................ 435,740 435,531
Less: accumulated depreciation and amortization....................... 209,804 200,943
-------- --------
NET PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS.................... 225,936 234,588
Available-for-sale securities (including fair value adjustments of $22
and $22, respectively).............................................. 7,952 7,309
Other assets.......................................................... 34,114 34,288
-------- --------
TOTAL ASSETS.......................................................... $679,517 $ 681,746
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt..................................................... $ 5,910 $ 0
Accounts payable.................................................... 46,925 40,471
Accrued expenses.................................................... 86,781 87,959
Accrued restructuring expenses...................................... 11,544 19,983
Current portion -- long-term debt................................... 59,971 57,691
-------- --------
TOTAL CURRENT LIABILITIES............................................. 211,131 206,104
Deferred taxes........................................................ 18,511 18,511
Long-term debt........................................................ 35,623 38,102
STOCKHOLDERS' EQUITY
Common Stock $.10 par value
Authorized 300,000,000 shares
Issued and outstanding 103,851,659 and 103,252,650 shares........... 10,385 10,325
Additional paid-in capital............................................ 57,259 54,913
Deferred employee compensation........................................ (3,439) (2,414)
Unrealized gains (losses) on available-for-sale securities (net of
income tax expense of $9 and $9, respectively)...................... 13 13
Retained earnings..................................................... 350,034 356,192
-------- --------
TOTAL STOCKHOLDERS' EQUITY............................................ 414,252 419,029
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................ $679,517 $ 681,746
======== ========
</TABLE>
F-2
<PAGE> 56
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------
MAY 4, APRIL 29,
1996 1995
----------- -----------
<S> <C> <C>
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
Net sales....................................................... $237,454 $244,342
Other income.................................................... 519 1,907
-------- --------
TOTAL REVENUE................................................... 237,973 246,249
-------- --------
Cost of goods sold, buying and occupancy expenses............... 184,122 186,777
Selling, general and administrative expenses.................... 59,400 65,002
Interest expense................................................ 2,888 539
-------- --------
TOTAL EXPENSES.................................................. 246,410 252,318
-------- --------
Loss before income taxes........................................ (8,437) (6,069)
Income tax benefit.............................................. 2,279 1,699
-------- --------
NET LOSS........................................................ $ (6,158) $ (4,370)
======== ========
PER-SHARE DATA
Net loss........................................................ $(.06) $(.04)
======== ========
Cash dividends.................................................. -- $.0225
======== ========
Weighted average number of common shares outstanding............ 103,509,837 102,922,381
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-3
<PAGE> 57
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
----------------------
APRIL
MAY 4, 29,
(IN THOUSANDS) 1996 1995
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.............................................................. $ (6,158) $ (4,370)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization....................................... 10,532 12,062
Amortization of deferred compensation expense....................... 831 478
Gain on sale of available-for-sale securities....................... 0 (18)
Changes in operating assets and liabilities:
Income tax refund receivable..................................... (2,987) 0
Prepayments and other............................................ 15,289 12,081
Merchandise inventories.......................................... (16,241) (61,631)
Accounts payable................................................. 6,454 48,579
Accrued expenses................................................. 71 (10,826)
Accrued restructuring expenses................................... (8,439) 0
--------- --------
NET CASH USED IN OPERATING ACTIVITIES................................. (648) (3,645)
--------- --------
INVESTING ACTIVITIES
Investment in capital assets.......................................... (2,164) (10,488)
Proceeds from sales of available-for-sale securities.................. 0 12,870
Gross purchases of available-for-sale securities...................... (3,165) (5,018)
Increase in other assets.............................................. (791) (4,794)
--------- --------
Net cash used in investing activities................................. (6,120) (7,430)
--------- --------
FINANCING ACTIVITIES
Proceeds from short-term borrowings................................... 245,895 0
Reduction of short-term borrowings.................................... (239,985) 0
Reduction of long-term borrowings..................................... (199) (178)
Proceeds from exercise of stock options............................... 300 35
Dividends paid........................................................ 0 (2,320)
--------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................... 6,011 (2,463)
--------- --------
DECREASE IN CASH AND CASH EQUIVALENTS................................. (757) (13,538)
Cash and cash equivalents, beginning of period........................ 25,117 43,923
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............................. $ 24,360 $ 30,385
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-4
<PAGE> 58
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of May 4, 1996 and the
condensed consolidated statements of income and cash flows for the thirteen week
periods ended May 4, 1996 and April 29, 1995 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 May 4, 1996 and the results of operations and cash flows for the thirteen
week periods ended May 4, 1996 and April 29, 1995 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 February 3, 1996 annual report on Form 10-K.
The results of operations for the thirteen week periods ended May 4, 1996 and
April 29, 1995 are not necessarily indicative of operating results for the full
fiscal year.
2. STOCKHOLDERS' EQUITY
During the thirteen week period ended May 4, 1996, stockholders' equity
changed to reflect the following items: a net loss of $6,158,000; amortization
of deferred compensation expense of $831,000; and an increase in common stock
and additional paid-in capital of $550,000 from the exercise of options for
Common Stock.
3. NET LOSS PER SHARE
Net loss per share is based on the weighted average number of shares of
Common Stock outstanding during the periods. Common Stock equivalents are not
included in the weighted average shares outstanding for determining net loss per
common share as the result would be anti-dilutive.
4. SUBSEQUENT EVENTS
Subsequent to May 4, 1996, the Company received a $56,726,000 income tax
refund as a result of net operating loss carrybacks for taxes paid in prior
years. In accordance with the terms of the Company's $82,862,000 term loan
entered into in November 1995, the tax refund has been used to reduce the amount
of such term loan to $26,136,000. The average interest rate on the repaid debt
at the time of repayment was average interest rate on the repaid debt at the
time of repayment was approximately 11.2%. The interest rate on the remaining
balance of the term loan is 2% above the prime rate. In addition, as a result of
such payment, a letter of credit in the amount of $22,000,000 issued under the
Company's revolving credit facility as security for the payment of such refund
has been canceled and a $7,000,000 cash deposit in support of such letter of
credit has been released. As a result of the release of such cash deposit, the
maximum availability under the revolving credit facility has been reduced from
$157,000,000 to $150,000,000, subject to limitations based upon eligible
inventory.
On May 21, 1996, the Company filed with the Securities and Exchange
Commission a registration statement on Form S-3. The Form S-3 was filed in
connection with a proposed public offering of $100,000,000 aggregate principal
amount of Convertible Subordinated Notes due 2006. The Company has granted the
underwriters for the offering an option to purchase up to an additional
$15,000,000 aggregate principal amount of Convertible Subordinated Notes to
cover any over-allotments. The Company intends to use the proceeds of the
offering to repay its outstanding term debt and for general corporate purposes.
F-5
<PAGE> 59
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
Charming Shoppes, Inc.
We have audited the accompanying consolidated balance sheets of Charming
Shoppes, Inc. and subsidiaries as of February 3, 1996 and January 28, 1995, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three fiscal years in the period ended February 3, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Charming
Shoppes, Inc. and subsidiaries at February 3, 1996 and January 28, 1995, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended February 3, 1996, in conformity with
generally accepted accounting principles.
As discussed in the Notes to Consolidated Financial Statements, the Company
changed its method of accounting for investments as of January 30, 1994 and its
method of accounting for income taxes as of January 31, 1993.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 20, 1996
F-6
<PAGE> 60
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
(IN THOUSANDS EXCEPT SHARES
AND PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents........................................... $ 25,117 $ 43,923
Restricted Cash..................................................... 7,000 0
Available-for-Sale Securities....................................... 34,054 40,180
Income Tax Refund Receivable........................................ 56,953 7,493
Merchandise Inventories............................................. 220,850 258,552
Deferred Taxes...................................................... 13,409 2,376
Prepayments and Other............................................... 48,178 79,191
-------- --------
TOTAL CURRENT ASSETS................................................ 405,561 431,715
Property, Equipment and Leasehold Improvements -- at Cost........... 435,531 483,372
Less: Accumulated Depreciation and Amortization..................... 200,943 197,119
-------- --------
NET PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS.................. 234,588 286,253
AVAILABLE-FOR-SALE SECURITIES [including a fair value adjustment of
$22 as of February 3, 1996 and ($2,591) as of January 28, 1995]... 7,309 76,988
OTHER ASSETS........................................................ 34,288 45,853
-------- --------
TOTAL ASSETS........................................................ $ 681,746 $ 840,809
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable.................................................... $ 40,471 $ 137,622
Accrued Expenses.................................................... 87,959 97,276
Accrued Restructuring Expenses...................................... 19,983 0
Current Portion -- Long-Term Debt................................... 57,691 5,002
-------- --------
TOTAL CURRENT LIABILITIES........................................... 206,104 239,900
DEFERRED TAXES...................................................... 18,511 24,789
LONG-TERM DEBT...................................................... 38,102 17,298
STOCKHOLDERS' EQUITY
Common Stock $.10 par value
Authorized 300,000,000 Shares Issued and Outstanding 103,252,650
and 102,894,239 Shares............................................ 10,325 10,289
Additional Paid-In Capital.......................................... 54,913 55,176
Deferred Employee Compensation...................................... (2,414) (5,025)
Unrealized Gains (Losses) on Available-for-Sale Securities [net of
income tax (expense) benefit of ($9) as of February 3, 1996 and
$906 as of January 28, 1995]...................................... 13 (1,685)
Retained Earnings................................................... 356,192 500,067
-------- --------
TOTAL STOCKHOLDERS' EQUITY.......................................... 419,029 558,822
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $ 681,746 $ 840,809
======== ========
</TABLE>
- ---------------
Certain prior-year amounts have been reclassified to conform to current-year
presentation.
See Notes to Consolidated Financial Statements
F-7
<PAGE> 61
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------
FEBRUARY 3, JANUARY 28, JANUARY 29,
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS EXCEPT SHARES
AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net Sales........................................ $ 1,102,384 $ 1,272,693 $ 1,254,122
Other Income..................................... 5,655 9,358 9,352
---------- ---------- ----------
TOTAL REVENUE.......................... 1,108,039 1,282,051 1,263,474
Cost of Goods Sold, Buying and Occupancy
Expenses....................................... 917,064 932,138 863,381
Selling, General and Administrative Expenses..... 299,297 285,090 285,804
Restructuring Charge............................. 103,000 0 0
Interest Expense................................. 3,666 2,304 2,557
---------- ---------- ----------
TOTAL EXPENSES......................... 1,323,027 1,219,532 1,151,742
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE.................... (214,988) 62,519 111,732
Income Tax (Benefit) Expense..................... (75,747) 17,830 35,967
---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE.............................. (139,241) 44,689 75,765
Cumulative Effect of Adoption of SFAS 109........ 0 0 3,991
---------- ---------- ----------
NET INCOME (LOSS)...................... $ (139,241) $ 44,689 $ 79,756
========== ========== ==========
PER SHARE DATA
Net Income (Loss) Before Cumulative Effect of
Accounting Change.............................. $ (1.35) $ .42 $ .70
Cumulative Effect of Accounting Change........... .00 .00 .04
---------- ---------- ----------
Net Income (Loss)................................ $ (1.35) $ .42 $ .74
---------- ---------- ----------
Cash Dividends................................... $ .045 $ .09 $ .09
---------- ---------- ----------
Weighted Average Number of Common Shares and
Share Equivalents Outstanding During the
Year........................................... 103,038,224 107,207,660 108,390,583
========== ========== ==========
</TABLE>
- ---------------
The fiscal year ended February 3, 1996 consists of 53 weeks.
See Notes to Consolidated Financial Statements
F-8
<PAGE> 62
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------
FEBRUARY 3, JANUARY 28, JANUARY 29,
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss)........................................ $ (139,241) $ 44,689 $ 79,756
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by (Used In) Operating Activities:
Deferred Income Taxes.................................. (21,065) 4,682 2,007
Depreciation and Amortization.......................... 46,988 46,924 42,487
Amortization of Deferred Compensation Expense.......... 2,195 2,535 3,597
Cumulative Effect of an Accounting Change.............. 0 0 (3,991)
(Gain) loss on Sale of Available-for-Sale Securities... 44 (174) (115)
Loss from Abandonment of Capital Assets................ 37,546 1,153 2,333
Changes in Operating Assets and Liabilities:
Income Tax Refund Receivable........................ (49,460) (7,493) 0
Merchandise Inventories............................. 37,702 975 (51,082)
Accounts Payable.................................... (14,289) (10,016) 413
Prepayments and Other............................... 33,480 (4,096) (9,475)
Income Taxes Payable................................ 0 (8,521) 2,949
Accrued Expenses.................................... (9,317) 42 21,357
Accrued Restructuring Expenses...................... 19,983 0 0
--------- -------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES...... (55,434) 70,700 90,236
INVESTING ACTIVITIES
Investment in Capital Assets............................. (30,007) (75,656) (79,023)
Gross Purchases of Available-for-Sale Securities......... (30,525) (91,118) (107,557)
Proceeds from Sales of Available-for-Sale Securities..... 108,898 100,518 87,107
(Increase) Decrease in Other Assets...................... 8,703 706 (25,022)
Purchase of Accounts Receivable.......................... 0 0 (186,857)
Sale of Accounts Receivable.............................. 0 0 186,857
--------- -------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES...... 57,069 (65,550) (124,495)
FINANCING ACTIVITIES
Proceeds from Short-Term Borrowings...................... 247,822 0 0
Reduction of Short-Term Borrowings....................... (247,822) 0 0
Proceeds from Long-Term Borrowings....................... 0 0 1,200
Reduction of Long-Term Borrowings........................ (9,369) (5,003) (4,971)
Increase in Restricted Cash.............................. (7,000) 0 0
Proceeds from Exercise of Stock Options.................. 562 641 870
Dividends Paid........................................... (4,634) (9,255) (9,236)
--------- -------- ---------
NET CASH USED IN FINANCING ACTIVITIES.................... (20,441) (13,617) (12,137)
DECREASE IN CASH AND CASH EQUIVALENTS.................... (18,806) (8,467) (46,396)
Cash and Cash Equivalents, Beginning of Year............. 43,923 52,390 98,786
--------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR................... $ 25,117 $ 43,923 $ 52,390
========= ======== =========
</TABLE>
- ---------------
The year ended February 3, 1996 consists of 53 weeks.
Certain prior-year amounts have been reclassified to conform to current-year
presentation.
See Notes to Consolidated Financial Statements
F-9
<PAGE> 63
CHARMING SHOPPES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED
----------------------- PAID-IN EMPLOYEE
SHARES AMOUNT CAPITAL COMPENSATION
----------- ------- ---------- ------------
(IN THOUSANDS EXCEPT SHARES)
<S> <C> <C> <C> <C>
BALANCE, JANUARY 30, 1993................... 102,448,158 $10,245 $51,708 $(10,757)
Issued to Employees, Net.................... (69,193) (7) (822) 145
Exercise of Stock Options................... 356,472 36 1,524
Amortization................................ 3,597
Tax benefit -- Employee Stock Programs...... 1,798
----------- ------- ------ --------
BALANCE, JANUARY 29, 1994................... 102,735,437 10,274 54,208 (7,015)
Issued to Employees, Net.................... (44,939) (5) 87 (545)
Exercise of Stock Options................... 203,741 20 506
Amortization................................ 2,535
Tax Benefit -- Employee Stock Programs...... 375
----------- ------- ------ --------
BALANCE, JANUARY 28, 1995................... 102,894,239 10,289 55,176 (5,025)
Issued to Employees, Net.................... 88,406 9 (169) 416
Exercise of Stock Options................... 270,005 27 279
Amortization................................ 2,195
Tax Expense -- Employee Stock Programs...... (373)
----------- ------- ------ --------
BALANCE, FEBRUARY 3, 1996................... 103,252,650 $10,325 $54,913 $ (2,414)
=========== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED GAINS
(LOSSES) ON
AVAILABLE-FOR-SALE RETAINED
SECURITIES EARNINGS
------------------ ---------
(IN THOUSANDS)
<S> <C> <C>
BALANCE, JANUARY 30, 1993........................................ $ 0 $ 394,113
Cash Dividends................................................... (9,236)
Net Income....................................................... 79,756
------- ---------
BALANCE, JANUARY 29, 1994........................................ 0 464,633
Unrealized Losses [net of income taxes of $906].................. (1,685) 500,067
Cash Dividends................................................... (9,255)
Net Income....................................................... 44,689
------- ---------
BALANCE, JANUARY 28, 1995........................................ (1,685) 500,067
Unrealized Gains [net of income taxes of ($914)]................. 1,698
Cash Dividends................................................... (4,634)
Net Loss......................................................... (139,241)
------- ---------
BALANCE, FEBRUARY 3, 1996........................................ $ 13 $ 356,192
======= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-10
<PAGE> 64
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED FEBRUARY 3, 1996
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company operates a chain of specialty stores located throughout the
continental United States which merchandises moderately priced junior, misses,
large-size and girls size sportswear, dresses, coats, lingerie, accessories and
casual footwear. The Company also has a selection of petite women's apparel in
certain stores. An assortment of casual men's apparel and accessories is also
available in most stores.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. All significant
intercompany accounts and transactions are eliminated. The parent and its
subsidiaries have a 52-53 week fiscal year ending the Saturday nearest January
31.
FOREIGN OPERATIONS
The Company follows the practice of using a December 31 fiscal year for all
foreign subsidiaries in order to expedite the year-end closing.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. These amounts are
stated at cost, which approximates market value.
INVESTMENTS
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." The Company adopted the provisions
of the new standard for investments held as of or acquired after January 30,
1994. The cumulative effect of adopting SFAS 115 was an increase in
Stockholders' Equity of $1,357,000. In accordance with SFAS 115, prior-period
financial statements were not restated. Pursuant to SFAS 115, management has
determined that the Company's investments should be classified as
available-for-sale. As available-for-sale investments, these securities are
carried at fair value (previously carried at amortized cost) and unrealized
gains and losses are reported in a separate component of stockholders' equity.
The cost of investments is adjusted for amortization of premiums and the
accretion of discounts to maturity. Such amortization is included in other
income. Realized gains and losses and interest from investments are also
included in other income. The cost of securities sold is based on the specific
identification method.
Short-term investments include investments with an original maturity of
greater than three months and a remaining maturity of less than one year.
Short-term investments are stated at cost which approximates market value.
F-11
<PAGE> 65
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Merchandise inventories are valued at the lower of cost or market as
determined by the retail method (average cost basis).
PROPERTY AND DEPRECIATION
Depreciation and amortization for financial reporting purposes are
principally computed by the straight-line method over the estimated useful lives
of the assets, or in the case of leasehold improvements, over the lives of the
respective leases. Accelerated depreciation methods are used for income tax
reporting purposes. Depreciation expense was $44,126,000, $42,583,000 and
$36,417,000 in Fiscal 1996, 1995 and 1994, respectively.
COMMON STOCK PLANS
Deferred compensation expense relating to Employee Stock Option and Stock
Incentive Plans is amortized over the required employment period.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs
charged to expense were $26,211,000, $11,894,000 and $13,242,000 in Fiscal 1996,
1995 and 1994, respectively.
INCOME TAXES
Effective January 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes" and has
separately reported the cumulative effect of that change in the Consolidated
Statement of Income for the fifty-two weeks ended January 29, 1994. SFAS 109
requires a change from the deferred method of accounting for income taxes under
APB Opinion 11 to the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are adjusted to reflect
the effect of changes in enacted tax rates on expected reversals of financial
statement and income tax carrying value differences. As permitted by SFAS 109,
the Company has elected not to restate the financial statements for any prior
years. The effect of the change on pre-tax income from continuing operations for
the twelve months ended January 29, 1994 was not material; however, the
cumulative effect of the change increased net income by $3,991,000 or $.04 per
share.
U.S. income taxes have not been provided on undistributed earnings of
foreign subsidiaries accumulated prior to February 3, 1996 because the Company
intends to reinvest such undistributed earnings in the operations. Presently,
income taxes would not be significantly increased if such earnings were remitted
because of available foreign tax credits.
NET INCOME PER SHARE
Net income per common share is based on the weighted average number of
shares and share equivalents outstanding during each fiscal year. Common stock
equivalents include the effect of dilutive stock options. Share equivalents are
not included in the weighted average shares outstanding for determining net loss
per common share as the result would be antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company will adopt the provisions of SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed Of" and
SFAS 123, "Accounting for Stock-Based Compensation" in the fiscal year beginning
February 4, 1996. The adoption of these standards is not expected
F-12
<PAGE> 66
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to have a material impact on the Company's financial statements. SFAS 123
provides two alternative forms of accounting for stock compensation: pro-forma
disclosure of the effects on net income and earnings per share, or a charge to
earnings. The Company intends to adopt the pro-forma disclosure alternative in
its financial statements.
RESTRICTED CASH
The Company has a $7,000,000 cash deposit with a commercial finance company
which provides the Company's working capital line of credit. The cash is
collateral against a letter of credit issued to guarantee payment of up to
$22,000,000 of the Company's tax refund receivable by January 31, 1997 to
certain long-term debt lenders. To the extent that such refunds are less than
$30,000,000 and the long-term lenders draw against such letter of credit, the
restricted cash will be paid to the commercial finance company.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
<TABLE>
<CAPTION>
LIVES
(YEARS) 1996 1995
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Land........................................................ $ 4,191 $ 4,845
Buildings and Improvements.................................. 10 to 33 72,822 69,718
Store Fixtures.............................................. 5 to 10 102,127 120,808
Equipment................................................... 3 to 10 116,995 105,216
Leasehold Improvements...................................... 10 to 20 139,396 172,168
Construction in Progress.................................... 0 10,617
-------- --------
Total at Cost............................................... 435,531 483,372
Less Accumulated Depreciation and Amortization.............. 200,943 197,119
-------- --------
$234,588 $286,253
======== ========
</TABLE>
AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities as of February
3, 1996:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Charming Shoppes Master Trust Certificates....... $28,502 $ 0 $0 $28,502
Charming Shoppes Master Trust Note............... 5,500 0 0 5,500
U. S. Treasury and Government Agency Bonds....... 2,202 22 0 2,224
Low Income Housing Partnerships.................. 4,560 0 0 4,560
Other............................................ 577 0 0 577
--
------- --- -------
$41,341 $22 $0 $41,363
======= === == =======
</TABLE>
- ---------------
The gross realized gains and (losses) on available-for-sale securities totaled
$592,000 and ($636,000), respectively, for the fiscal year ended February 3,
1996.
F-13
<PAGE> 67
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of available-for-sale securities as of January
28, 1995:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Charming Shoppes Master Trust Certificates.... $ 30,680 $ 0 $ 0 $ 30,680
Charming Shoppes Master Trust Note............ 5,500 0 0 5,500
Municipal Bonds and Municipal Bond Funds...... 49,743 18 (926) 48,835
Government Agency Mortgage-Backed
Securities.................................. 11,428 0 (1,746) 9,682
U. S. Treasury and Government Agency Bonds.... 15,324 470 (295) 15,499
Low Income Housing Partnerships............... 3,208 0 0 3,208
Preferred Stocks.............................. 3,096 52 (144) 3,004
Other......................................... 780 0 (20) 760
-------- ---- ------- --------
$119,759 $540 $ (3,131) $ 117,168
======== ==== ======= ========
</TABLE>
- ---------------
The gross realized gains and (losses) on available-for-sale securities totaled
$198,000 and ($24,000), respectively, for the fiscal year ended January 28,
1995.
The contractual maturities of available-for-sale securities at February 3,
1996 were:
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in One Year or Less....................................... $34,054 $ 34,054
Due After One Year Through Five Years......................... 2,727 2,749
------- -------
36,781 36,803
Equity Securities............................................. 4,560 4,560
------- -------
$41,341 $ 41,363
======= =======
</TABLE>
INCOME TAXES
The Company adopted SFAS 109 as of January 31, 1993. The cumulative effect
of this change in accounting for income taxes of $3,991,000 was determined as of
January 31, 1993 and is reported separately in the consolidated statement of
income for the year ended January 29, 1994.
The components of income (loss) before income taxes and the cumulative
effect of an accounting change consist of the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic........................................... $(212,698) $58,279 $106,755
Foreign............................................ (2,290) 4,240 4,977
--------- ------- --------
$(214,988) $62,519 $111,732
========= ======= ========
</TABLE>
F-14
<PAGE> 68
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax (benefit) expense consists of:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CURRENT:
Federal............................................ $(56,953) $ 8,771 $29,971
State.............................................. 591 2,046 2,393
Foreign............................................ 1,680 2,331 1,596
-------- ------- -------
(54,682) 13,148 33,960
DEFERRED:
Federal............................................ (19,026) 5,653 2,250
State.............................................. (2,039) (971) (243)
-------- ------- -------
(21,065) 4,682 2,007
-------- ------- -------
$(75,747) $17,830 $35,967
======== ======= =======
</TABLE>
- ---------------
The Company made income tax payments of $3,531,000, $30,081,000 and
$33,674,000 during the years ended February 3, 1996, January 28, 1995 and
January 29, 1994, respectively.
The components of deferred tax assets and liabilities for the year ended
February 3, 1996 are as follows:
<TABLE>
<CAPTION>
NET CURRENT NET LONG-TERM
ASSETS ASSETS
(LIABILITIES) (LIABILITIES)
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Property, Equipment and Leasehold Improvements........ $(21,472)
Alternative Minimum Tax Credits....................... 8,194
Accrued Restructuring Expense......................... $ 6,525
Inventory............................................. (5,033)
Deferred Employee Compensation........................ 4,388
Prepaid Employee Benefits............................. 1,984
Accounts Receivable................................... 4,472
Deferred Rent......................................... 3,197
Other................................................. 2,264 (9,621)
------- --------
$13,409 $(18,511)
======= ========
</TABLE>
The components of deferred tax assets and liabilities for the year ended
January 28, 1995 are as follows:
<TABLE>
<CAPTION>
NET CURRENT NET LONG-TERM
ASSETS ASSETS
(LIABILITIES) (LIABILITIES)
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Property, Equipment and Leasehold Improvements........ $(23,886)
Inventory............................................. $(8,250)
Deferred Employee Compensation........................ 4,278
Prepaid Employee Benefits............................. (1,815)
Accounts Receivable................................... 4,510
Deferred Rent......................................... 3,802
Other................................................. 4,129 (5,181)
------- --------
$ 2,376 $(24,789)
======= ========
</TABLE>
F-15
<PAGE> 69
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the effective tax rate with the statutory federal
income tax rate follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory Federal Income Tax Rate...................................... 35.0% 35.0% 35.0%
State Income Tax, Net of Federal Income Tax Benefit.................... 0.4 1.1 1.3
Foreign Income......................................................... (1.1) 1.4 (0.1)
Investment Income...................................................... 0.3 (1.7) (1.1)
Employee Benefits...................................................... 1.6 (3.9) (1.6)
Other, Net............................................................. (1.0) (3.4) (1.3)
---- ---- ----
35.2% 28.5% 32.2%
==== ==== ====
</TABLE>
DEBT
Long-term debt at year end consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Variable Rate Term Loan, Interest Rate 3.5% Above Prime, Due 1998
(11.75% at 2/3/96)..................................................... $60,862 $ 0
Variable Rate Term Loan, Interest Rate 2% Above Prime, Due 1998
(10.25% at 2/3/96)..................................................... 22,000 0
11.8% Note Payable, Due 1998............................................. 9,488 17,143
Variable Rate Mortgage Note, Interest Rate 1.25% Above Hong Kong Prime
Rate, Payable Monthly Through 2001 (10.25% at 2/3/96).................. 357 425
Variable Rate Mortgage Note, Interest Rate 1% Above HIBOR, Payable
Monthly Through 2000 (6.875% at 2/3/96)................................ 2,217 2,692
Variable Rate Mortgage Note, Interest Rate 1% Above SIBOR, Payable
Monthly Through 2000 (6.94% at 2/3/96)................................. 714 885
Other.................................................................... 155 155
Variable Rate Mortgage Due 1996.......................................... 0 1,000
------- -------
Total Long-Term Debt..................................................... 95,793 22,300
Less Current Portion..................................................... 57,691 5,002
------- -------
$38,102 $17,298
======= =======
</TABLE>
In November 1995, the Company renegotiated portions of existing trade and
working capital facilities. As a result, $82,862,000 of trade acceptances which
had been recorded as accounts payable were converted into a term loan. The loan
is scheduled to mature on June 1, 1998. The loan is secured by mortgages on the
Company's Bensalem, Pennsylvania and Greencastle, Indiana corporate and
distribution facilities, mortgages on certain retail store properties, liens on
the cash surrender value of Company-owned life insurance policies and liens on
all income tax refunds. The loan is also secured by liens on merchandise
inventory, equipment and certain other Company assets. The Company is required
to make payments on the loan equal to the proceeds of all income tax refunds
and, among other things, certain asset sales and a portion of the proceeds of
any debt or equity offerings. The Company expects to receive a refund of income
taxes of approximately $56,953,000 as a result of net operating loss carrybacks
against taxes paid in prior years. If such refunds received by January 31, 1997
are less than $30,000,000, any shortfall will be paid from a letter of credit up
to an amount of $22,000,000 issued under the Company's revolving credit facility
discussed below. The Company has a $7,000,000 cash deposit which serves as
collateral against this letter of credit. To the extent that such refunds are
less than $30,000,000 and the long-term lenders draw against such letter of
credit, the restricted cash will be paid to the provider of the revolving credit
facility. In addition, upon payment of at least $30,000,000
F-16
<PAGE> 70
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
toward this loan, the remaining balance would then carry an interest rate of 2%
above the prime rate. The unpaid portion of the loan is due at maturity.
Additionally, the Company renegotiated an outstanding term loan in the
amount of $9,488,000. This note originally had scheduled annual amortizations
through 1998 and carried an interest rate of 9.3%. The loan presently carries an
interest rate of 11.8%, is due June 1, 1998 and is secured by the same
collateral as the aforementioned term loan, although priority with respect to
the collateral varies. The Company is required to make payments on the loan
equal to the proceeds of, among other things, certain asset sales and a portion
of the proceeds of any debt or equity offerings.
In November 1995, the Company entered into an agreement with a commercial
finance company to provide a revolving credit facility with a maximum
availability of $157,000,000, subject to limitations based upon eligible
inventory. The primary purpose of this facility, which expires on June 1, 1998,
is to enable the Company to issue letters of credit for overseas purchases of
merchandise as well as to provide for seasonal cash borrowings. This facility is
secured by merchandise inventory, cash, mortgages on the Company's Bensalem,
Pennsylvania and Greencastle, Indiana corporate and distribution facilities,
rights to mortgages on certain retail store properties, liens on the cash
surrender value of Company-owned life insurance policies and certain other
Company assets. There is a fee of 3/8 of 1% on the unused portion of the first
$105,000,000 of the facility, and an annual servicing fee of $100,000. As of
February 3, 1996, the availability under this facility was approximately
$132,000,000, against which the Company had outstanding letters of credit of
$65,400,000. There were no cash borrowings outstanding under this agreement as
of February 3, 1996. This agreement, as well as the aforementioned term loans,
requires that, among other things, the Company maintain a minimum net worth of
$350,000,000 and not pay dividends on its Common Stock.
Term loans and the revolving credit facility are collateralized by
mortgages on buildings with a net book value of $50,675,000, as well as the cash
surrender value of Company-owned life insurance policies with a carrying value
of $5,697,000. The variable rate mortgages are collateralized by buildings with
a net book value of $8,827,000.
During the fiscal years ended February 3, 1996, January 28, 1995 and
January 29, 1994, the Company made interest payments of $4,267,000, $2,436,000
and $2,688,000, respectively.
The carrying amount of the Company's variable rate debt approximates its
fair value. The carrying amount of the Company's $9,488,000 11.8% note payable
approximates its fair value, as the interest rate on the note approximates the
Company's current rate for similar borrowing arrangements.
Aggregate maturities of long-term debt during the next five fiscal years
are:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997........................................................... $ 57,691
1998........................................................... 747
1999........................................................... 36,154
2000........................................................... 760
2001........................................................... 364
</TABLE>
STOCKHOLDERS' EQUITY
The Company's capital consists of 1,000,000 shares of Series Participating
Preferred Stock, $1.00 par value, of which 300,000 shares of Participating
Series A Junior Preferred Stock, $1.00 par value have been authorized; and
300,000,000 shares of Common Stock, $.10 par value.
F-17
<PAGE> 71
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTION AND STOCK INCENTIVE PLANS
The Company's 1993 Employee Stock Incentive Plan provides for the grant of
options to purchase up to 9,000,000 shares of Common Stock plus 9% of shares
issued by the Company after the effective date of the plan and any shares
available but unissued under the 1990 Plan described below. The form of the
grants and exercise price where applicable, are at the discretion of the Stock
Option Committee of the Board of Directors. As of February 3, 1996, 799,560
options were exercisable.
The Company's 1990 Employees' Stock Incentive Plan provides for the grant
of options to purchase Common Stock to key employees of the Company. The
exercise price of such options may not be less than the fair market value at the
date of the grant. As a result of the adoption of the 1993 Employees' Stock
Incentive Plan, the Company no longer intends to issue shares under this Plan.
As of February 3, 1996, 5,475,669 options were exercisable.
The Company's 1989 Non-Employee Director Stock Option Plan provides for the
grant of options to purchase up to 30,000 shares of Common Stock to each member
of the Board of Directors who is a non-employee of the Company. The exercise
price of such options shall be equal to the fair market value of the stock on
the date that the option is granted. As of February 3, 1996, 114,000 options
were exercisable.
The Company's 1988 Key Employee Stock Option Plan provides for the grant of
options to purchase up to 3,000,000 shares of Common Stock to key employees of
the Company. The exercise price of options granted under this plan is $1.00 per
share. As of February 3, 1996, 1,263,105 options were exercisable.
The table below summarizes the activity in all Stock Option Plans:
<TABLE>
<CAPTION>
AVERAGE OPTION
OPTION OPTION PRICES
SHARES PRICE PER SHARE
---------- ------- ---------------
<S> <C> <C> <C>
Outstanding at January 30, 1993 9,098,206 $ 4.927 $ .222 - 18.563
Granted.............................................. 1,270,000 14.253 1.000 - 18.875
Canceled............................................. (327,224) 4.376 .500 - 18.875
Exercised............................................ (356,472) 8.621 .222 - 13.500
---------- ------- ---------------
Outstanding at January 29, 1994...................... 9,684,510 6.045 .222 - 18.563
Granted.............................................. 2,206,050 10.047 1.000 - 13.250
Canceled............................................. (188,518) 2.582 .500 - 18.563
Exercised............................................ (203,741) 9.160 .222 - 10.938
---------- ------- ---------------
Outstanding at January 28, 1995...................... 11,498,301 6.818 .222 - 17.000
Granted.............................................. 3,976,800 5.089 1.000 - 6.125
Canceled............................................. (2,099,554) 9.403 .500 - 17.000
Exercised............................................ (270,005) 1.134 .222 - 4.500
---------- ------- ---------------
Outstanding at February 3, 1996...................... 13,105,542 $ 5.996 $ .222 - 17.000
========== ======= ===============
</TABLE>
At February 3, 1996, 3,932,629 shares were available for future grant under
the 1988 Key Employee Stock Option and the 1993 Employees' Stock Incentive
plans.
The Company's Non-Employee Directors Restricted Stock Plan provides for a
one-time grant of 5,000 shares of restricted Common Stock to each member of the
Board of Directors who is a non-employee of the Company at the time of the
inception of this plan and a pro-rata grant to each non-employee Director who is
elected thereafter. Directors will pay no cash consideration for the restricted
stock granted to them. Under this
F-18
<PAGE> 72
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plan, 40,000 shares of the Company's Common Stock have been reserved for
issuance, of which 0, 0 and 3,250 shares were issued during the fiscal years
ended February 3, 1996, January 28, 1995 and January 29, 1994, respectively.
The Company's Restricted Stock Award Plan for Associates was adopted by the
Company's Board of Directors on January 26, 1995. The plan provides for
discretionary awards of rights to receive up to 200,000 shares of restricted
Common Stock to associates who are not directors or executive officers of the
Company. Associates will pay no cash consideration for restricted stock received
under an award. As of February 3, 1996, rights to receive 88,615 shares have
been granted and 1,202 shares have been issued.
The shares issued and options granted under the above plans are subject to
forfeiture if the employees do not remain employed by the Company for a
specified period of time, or, in the case of the 1989 Non-Employee Director
Stock Option Plan, if the individual ceased to remain a Director of the Company.
EMPLOYEE STOCK PURCHASE PLAN
The 1994 Employee Stock Purchase Plan was approved by shareholders at the
1994 annual meeting. The Plan permits employees to purchase shares during each
quarterly offering period at a price equal to 85% of the market price of the
Company's Common Stock on either the first day of the offering period or the
fifth business day after the end of the offering period, whichever is lower. The
shares are purchased through the accumulation of payroll deductions up to 10% of
each participating employee's compensation during such offering period. Under
this plan, 2,000,000 shares have been reserved for grant. During fiscal 1996,
88,626 shares were purchased under the plan.
SHAREHOLDER RIGHTS PLAN
In April 1989, the Board of Directors adopted a Shareholder Rights Plan and
declared a dividend of one Right for each outstanding share of Common Stock. In
connection with the Company's two-for-one stock split which was effected on
December 7, 1992, the number of Rights associated with each outstanding share of
Common Stock was adjusted from one Right per share of Common Stock to one-half
of a Right per share of Common Stock. Such Rights only become exercisable or
transferable apart from the Common Stock, ten days after a person or group
(Acquiring Person) acquires beneficial ownership of, or commences a tender or
exchange offer for, 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
combination of securities and assets of equivalent value at a price of $70,
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, or, upon the occurrence 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), 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 26, 1999.
RESTRUCTURING CHARGE
During the fourth quarter of the year ended February 3, 1996, the Company's
Board of Directors approved a restructuring plan that resulted in a fourth
quarter pre-tax charge of $103,000,000. The restructuring plan includes the
planned closing of 290 under-performing "Fashion Bug" and "Fashion Bug
F-19
<PAGE> 73
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Plus" stores, the reorganization and reduction of foreign merchandise sourcing
operations and reductions in corporate support operations.
The restructuring charge includes an amount of $58,878,000 related to the
closing of the 290 stores, including (i) $39,260,000 for the write-off of store
fixtures, equipment and inventories, (ii) $17,270,000 for the early termination
of store leases and (iii) $2,348,000 for severance benefits and other expenses.
Charges of $34,487,000 relate to the reorganization of foreign merchandise
sourcing operations. These charges include (i) $15,853,000 for the write-off of
joint-venture investments and advances, (ii) $8,818,000 for settlements related
to non-fulfillment of production commitments, (iii) $3,126,000 for employee
severance benefits and (iv) $6,690,000 for the write-down of other Company-owned
investments. Other charges include $5,445,000 for severance benefits and a
$4,190,000 write-off of surplus store construction fixtures and equipment. The
restructuring charge includes severance with respect to a workforce reduction of
approximately 2,300 store employees and 600 non-store employees.
As of February 3, 1996, the Company had approximately $19,983,000 of
accrued, unpaid restructuring costs, of which approximately $7,390,000 relate to
severance benefits. These costs, which are included in current liabilities, are
expected to be paid by the end of fiscal 1997. As of February 3, 1996,
approximately 960 store employees and 250 non-store employees have been
terminated.
Sales and Operating Income (Loss) from the 290 stores to be closed in
connection with the restructuring plan were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales...................................... $159,657 $177,500 $159,757
Operating Income (Loss)(1)................. (34,000) (5,525) 9,178
</TABLE>
- ---------------
(1) Includes Income (Loss) before allocation of fixed overhead and income taxes.
EMPLOYEE RETIREMENT BENEFIT PLAN
The Company provides a comprehensive retirement benefit program for its
employees. This plan provides for a noncontributory profit-sharing contribution
which covers substantially all full-time employees who meet age and service
requirements. The contribution is completely discretionary and is determined by
the Board of Directors on an annual basis.
The program also includes a 401(k) employee savings plan, whereby eligible
participating employees may elect to contribute up to 15% of their compensation
to an investment trust. The Company contributes an amount equal to 30% of the
participant's elective contribution, up to 6% of the participant's compensation.
The total expense for the above plans amounted to $741,442, $3,394,241 and
$3,323,000 for the years ended February 3, 1996, January 28, 1995 and January
29, 1994, respectively.
ASSET SECURITIZATION
The Company securitizes and sells substantially all of its private label
credit card receivables in the public and private markets. These asset-backed
securities are generally credit-enhanced by a third party to provide an AAA
credit rating at the time of issuance. In each securitization, credit card
receivables are transferred to a trust which issues certificates representing
ownership interests in the trust to institutional investors. The Company retains
a participation interest in the trust, reflecting the excess of the total amount
of receivables transferred to the trust over the portion represented by
certificates sold to investors. The retained participation interests in the
credit card trust were $28,502,000 and $30,680,000 at February 3, 1996 and
January 28, 1995, respectively, and are included as available-for-sale
securities in the accompanying consolidated balance sheets.
F-20
<PAGE> 74
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Although the Company continues to service the underlying credit card accounts
and maintain the customer relationships, these transactions are treated as sales
for financial reporting purposes to the extent of the investors' interests in
the trusts. Accordingly, the associated credit card receivables are not
reflected on the balance sheets.
Due to the relatively short average life of credit card loans, no gain or
loss is recorded at the time of sale. Rather, loan servicing fees (credit card
interest income and fees in excess of interest paid to certificate holders,
credit losses and other expenses) are recognized monthly over the life of the
transaction when earned as a reduction of selling, general and administrative
expenses. Transaction expenses are deferred and amortized over the reinvestment
period of the transaction as a component of selling, general and administrative
expenses. The monthly pattern of recording loan servicing fees is similar to the
revenue recognition that the Company would have experienced if the loans had not
been securitized.
The Company is subject to certain recourse provisions in connection with
these securitizations. At February 3, 1996 and January 28, 1995, the Company had
reserves of $25,599,000 and $26,649,000, respectively, related to these recourse
provisions. At February 3, 1996, the Company had $5,500,000 of receivables from
the credit card securitizations which were subject to liens in favor of the
providers of the credit enhancement facilities for the individual
securitizations. Fashion SPC, Inc., a wholly-owned subsidiary of the Company, is
a special-purpose corporation. Its assets of $21,800,000 of Charming Shoppes
Master Trust Certificates will be available first and foremost to satisfy the
claims of its creditors, including certain claims of investors in 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.
As of February 3, 1996, the Company had securitized approximately $371.8
million of receivables. The facilities under which the securitizations were
originated mature as follows, provided an early amortization event does not
occur: $153.5 million -- 1996 and $218.3 million -- 1999.
The Company is active in originating private label credit card lines to the
customers of the Company's retail stores. Holders of credit cards issued by the
Company are located throughout the United States and have various available
lines of credit which are made on an unsecured basis after reviewing each
potential cardholder's credit application and evaluating their financial history
and ability to repay.
DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
The Company has historically entered into interest-rate swap and
interest-rate cap agreements to reduce the impact of increases in interest rates
on the Company's floating-rate credit card securitizations. During 1996, the
Company terminated all of its interest-rate swap agreements and no such
agreements were outstanding as of February 3, 1996. In addition, the Company had
no material deferred gains or losses related to terminated contracts as of
February 3, 1996. As of January 28, 1995, $100 million notional amount of such
"pay-fixed" swaps were in effect.
The Company has entered into interest-rate cap agreements with an aggregate
notional amount of $538.9 million as of February 3, 1996, which mature as
follows: $435.0 million -- 1996, $93.9 million -- 1997, $10.0 million -- 1999.
The agreements effectively entitle the Company to receive from a bank the
amount, if any, by which the interest rates on the Company's floating-rate
credit card securitizations exceed 9% for $300.0 million notional amount, 10%
for $128.9 million notional amount and 12% for $110.0 million notional amount.
The premiums paid for these interest-rate cap agreements are included in other
assets and are being amortized to selling, general and administrative expense
over the respective lives of the individual interest-rate cap agreements. Any
payments that may be received as a result of the cap will be accrued as a
reduction of selling, general and administrative expense.
F-21
<PAGE> 75
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's credit exposure on interest-rate caps is limited to the value
of interest-rate caps that have become favorable to the Company, but the Company
does not anticipate non-performance by any of these counterparties. The amount
of such exposure is generally the unrealized gains in the contracts. The market
value of interest-rate caps as of February 3, 1996 and January 28, 1995 was
$11,000 and $175,000, respectively. The market value of interest-rate caps was
determined on the basis of valuation pricing models which take into account
current market and contractual prices of the underlying instruments, as well as
the time value and yield curve or volatility factors underlying the positions.
LEASES
The Company leases substantially all of its stores under non-cancelable
operating lease agreements. Generally, these leases have initial periods of 5 to
20 years and contain provisions for renewal options, additional rentals based on
a percentage of sales and payment of certain real estate taxes. The Company also
leases certain other buildings and equipment.
Rental expense was:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Minimum Rental.............................. $103,440 $ 97,976 $82,425
Contingent Rental........................... 14,841 14,302 12,413
-------- -------- -------
$118,281 $112,278 $94,838
======== ======== =======
</TABLE>
Minimum annual rental commitments for all non-cancelable leases for the
next five fiscal years and thereafter are:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997........................................................... $ 98,782
1998........................................................... 89,661
1999........................................................... 79,377
2000........................................................... 69,703
2001........................................................... 60,929
Thereafter..................................................... 206,323
</TABLE>
F-22
<PAGE> 76
CHARMING SHOPPES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
FISCAL 1996 QUARTER QUARTER QUARTER QUARTER(1)
- --------------------------------------------- -------- -------- -------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net Sales.................................... $244,342 $268,448 $267,772 $ 321,822
Gross Profit................................. 57,565 60,717 40,291 26,747
Net Loss..................................... (4,370) (3,133) (24,706) (107,032)(2)
Net Loss per Share........................... (.04) (.03) (.24) (1.04)
</TABLE>
- ---------------
(1) Consists of 14 weeks
(2) Includes a pre-tax restructuring charge of $103,000
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
FISCAL 1995 QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------- -------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net Sales.................................... $297,611 $323,417 $306,283 $ 345,382
Gross Profit................................. 86,896 93,682 77,261 82,716
Net Income................................... 13,955 18,064 7,507 5,163
Net Income per Share......................... .13 .17 .07 .05
</TABLE>
F-23
<PAGE> 77
- ---------------------------------------------------------------
- ---------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH
THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information......................... 2
Incorporation of Certain Documents by
Reference................................... 2
Prospectus Summary............................ 3
Summary Financial and Operating Information... 7
Risk Factors.................................. 8
Use of Proceeds............................... 12
Ratio of Earnings to Fixed Charges............ 13
Capitalization................................ 14
Market Prices and Dividend Policy............. 15
Selected Financial and Operating
Information................................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 19
Description of Business....................... 26
Management.................................... 33
Description of the Notes...................... 35
Description of Capital Stock.................. 47
Underwriting.................................. 52
Legal Matters................................. 52
Experts....................................... 52
Index to Consolidated Financial Statements.... F-1
- -----------------------------------------------------
- -----------------------------------------------------
</TABLE>
- ---------------------------------------------------------------
- ---------------------------------------------------------------
$100,000,000
CHARMING SHOPPES, INC.
% CONVERTIBLE
SUBORDINATED NOTES
DUE 2006
----------------------
PROSPECTUS
----------------------
LAZARD FRERES & CO. LLC
BEAR, STEARNS & CO. INC.
, 1996
- ---------------------------------------------------------------
- ---------------------------------------------------------------
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses payable by the Registrant in
connection with this Registration Statement. All of such expenses are estimates,
other than the filing fees payable to the Securities and Exchange Commission and
the National Association of Securities Dealers, Inc.
<TABLE>
<S> <C>
SEC Registration Fee...................................................... $ 39,656
NASD Fee.................................................................. 12,000
Printing and Engraving Expenses........................................... 30,000
Legal Fees and Expenses................................................... 250,000
Accounting Fees and Expenses.............................................. 65,000
Blue Sky Fees and Expenses................................................ 18,000
Trustee's Fees and Expenses............................................... 11,000
Rating Agency Fees........................................................ 79,500
Miscellaneous............................................................. 19,844
-------
Total........................................................... $525,000
=======
</TABLE>
- ---------------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1741 of the Pennsylvania Business Corporation Law of 1988 provides
the Company the power to indemnify any officer or director acting in his
capacity as a representative of the Company who was or is a party or is
threatened to be made a party to any action or proceeding against expenses,
judgments, penalties, fines and amounts paid in settlement in connection with
such action or proceeding whether the action was instituted by a third party or
arose by or in the right of the Company. Generally, the only limitation on the
ability of the Company to indemnify its officers and directors is if the act or
failure to act is finally determined by a court to have constituted willful
misconduct or recklessness.
The Company's Bylaws provide that the Company is required to indemnify its
officers, directors and employees to the fullest extent permitted under
Pennsylvania law as from time to time in effect. As a result, indemnification
will be a contract right of directors, officers and employees of the Company, as
opposed to a matter within the discretion of the Board, as will the payment of
expenses by the Company in advance of a proceeding's final disposition.
The Bylaws provide a clear and unconditional right to indemnification to
the full extent permitted by law, for expenses (including attorneys' fees),
damages, punitive damages, judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by any person whether or not the
indemnified liability arises or arose from any threatened, pending or completed
proceeding by or in the right of the Company (a derivative action) by reason of
the fact that such person is or was serving as a director, officer or employee
of the Company, or, at the request of the Company, as a director, officer,
partner, fiduciary or trustee of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, even if the act or
failure to act giving rise to the claim for indemnification entails the
negligence or gross negligence of the indemnified party unless such act or
failure to act is finally determined by a court to have constituted willful
misconduct or recklessness. The Bylaws provide for the advancement of expenses
to an indemnified party upon receipt of an undertaking by the party to repay
those amounts if it is finally determined that the indemnified party is not
entitled to indemnification.
The Bylaws authorize the Company to take steps to ensure that all persons
entitled to the indemnification are properly indemnified, including, if the
Board so determines, purchasing and maintaining insurance, entering into
indemnification agreements, creating a reserve, trust, escrow or other fund or
account, granting security interests, obtaining a letter of credit or using
other means that may be available from time to time.
II-1
<PAGE> 79
The Company maintains insurance covering its directors and officers against
certain liabilities incurred by them in their capacities as such, including
among other things, certain liabilities under the Securities Act of 1933.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
- --------
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Form of Indenture between Charming Shoppes, Inc., as issuer, and
First Union National Bank, as Trustee relating to the Notes,
including the form of Note.
4.2 Specimen certificate for Common Stock.
5.1 Opinion of Morgan, Lewis & Bockius.
5.2 Opinion of Davis Polk & Wardwell.
12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Morgan, Lewis & Bockius. See Exhibit 5.1.
23.2 Consent of Davis Polk & Wardwell. See Exhibit 5.2.
23.3 Consent of Ernst & Young LLP.
24.1 Power of Attorney.**
25.1 Statement of Eligibility of Trustee on Form T-1.
</TABLE>
- ---------------
** Previously filed.
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(2) The undersigned Registrant hereby undertake that, insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, such Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in such Act and will be governed by the final
adjudication of such issue.
(3) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective.
(4) The undersigned Registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-2
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Bensalem, State of Pennsylvania, on
this 1st day of July, 1996.
CHARMING SHOPPES, INC.
By: /s/ Dorrit J. Bern
------------------------------------
Dorrit J. Bern
Vice Chairman of the Board,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- -------------------------------------- --------------
<S> <C> <C>
* Chairman of the Board July 1, 1996
- -----------------------------------
Joseph L. Castle II
/s/ Dorrit J. Bern Vice Chairman of the Board, President July 1, 1996
- ----------------------------------- and Chief Executive Officer
Dorrit J. Bern
* Vice President and Chief Financial July 1, 1996
- ----------------------------------- Officer
Eric M. Specter
* Chief Accounting Officer July 1, 1996
- -----------------------------------
Jon A. Goldberg
* Director July 1, 1996
- -----------------------------------
Geoffrey W. Levy
* Director July 1, 1996
- -----------------------------------
Alan Rosskamm
* Director July 1, 1996
- -----------------------------------
Marvin L. Slomowitz
* Director July 1, 1996
- -----------------------------------
Michael Solomon
*By /s/ Dorrit J. Bern
-----------------------------
Attorney-In-Fact
</TABLE>
II-3
<PAGE> 81
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
----------------
<C> <S> <C>
1.1 Form of Underwriting Agreement........................................
4.1 Form of Indenture between Charming Shoppes, Inc., as issuer, and First
Union National Bank, as Trustee relating to the Notes, including the
form of Note..........................................................
4.2 Specimen certificate for Common Stock.................................
5.1 Opinion of Morgan, Lewis & Bockius....................................
5.2 Opinion of Davis Polk & Wardwell......................................
12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges.......
23.1 Consent of Morgan, Lewis & Bockius. See Exhibit 5.1...................
23.2 Consent of Davis Polk & Wardwell. See Exhibit 5.2.....................
23.3 Consent of Ernst & Young LLP..........................................
24.1 Power of Attorney**...................................................
25.1 Statement of Eligibility of Trustee on Form T-1.......................
</TABLE>
- ---------------
** Previously filed.
<PAGE> 1
EXHIBIT 1.1
$100,000,000
CHARMING SHOPPES, INC.
% CONVERTIBLE SUBORDINATED NOTES DUE 2006
UNDERWRITING AGREEMENT
, 1996
Lazard Freres & Co. LLC
Bear, Stearns & Co. Inc.
c/o Lazard Freres & Co. LLC
30 Rockefeller Plaza
New York, New York 10020
Dear Sirs:
SECTION 1. Introductory. Charming Shoppes, Inc., a Pennsylvania
corporation (the "Company"), proposes to offer and sell to the several
underwriters named in Schedule I hereto (the "Underwriters") $100,000,000
aggregate principal amount of its % Convertible Subordinated Notes Due 2006
(the "Firm Securities") and also proposes to grant to the Underwriters an
option, exercisable one time, to purchase an aggregate of up to $15,000,000
principal amount (the "Optional Securities") of its % Convertible
Subordinated Notes Due 2006 to be issued under an indenture dated as
of , 1996 (the "Indenture"), between the Company and First Union
National Bank, as trustee (the "Trustee"). The Firm Securities and the Optional
Securities which the Underwriters may elect to purchase pursuant to Section 3
hereof are collectively referred to herein as the "Securities". The Securities
are convertible into the Company's common stock, par value $0.10 per share (the
"Common Stock").
The Company agrees with the Underwriters as follows:
SECTION 2. Representations, Warranties and Agreements of the Company. The
Company represents and warrants to, and agrees with, the several Underwriters
that:
(a) The Company meets the registrant requirements for use of Form S-3
under the Securities Act of 1933, as amended (the "Act"). A registration
statement on Form S-3 (No. 333-4137), including a prospectus relating to
the offering of the Securities has been filed with the Securities and
Exchange Commission (the "Commission"). Such registration statement is not
proposed to be amended and has been declared effective under the Act, and
any post-effective amendments filed with the Commission prior to the
execution and delivery of this Agreement have been declared effective. For
purposes of this Agreement, "Effective Time" means the date and time as of
which such registration statement or the most recent post-effective
amendment thereto (if any) filed prior to the execution and delivery of
this Agreement was declared effective by the Commission. "Effective Date"
means the date of the Effective Time. No other document relating to such
registration statement has been filed with the Commission other than any
amendment thereto or any document incorporated by reference in the
prospectus contained therein, and no proceeding for the purpose of
suspending such effectiveness has been initiated or, to the knowledge of
the Company, threatened by the Commission. Such registration statement, as
amended at the Effective Time, including all material incorporated by
reference therein and including all information (if any) deemed to be a
part of such registration statement as of the Effective Time pursuant to
Rule 430A(b) or Rule 434 under the Act and including a registration
statement (if any) filed pursuant to Rule 462(b) under the Act, is
hereinafter referred to as the "Registration Statement", and the prospectus
relating to the Securities in the form first filed with the Commission
pursuant to and in accordance with Rule 424(b) ("Rule 424(b)") under the
Act (including any prospectus subject to
<PAGE> 2
completion and any term sheet meeting the requirements of Rule 434(b) under
the Act, taken together, as the prospectus provided by the Company to meet
the requirements of Section 10(a) of the Act) is hereinafter referred to as
the "Prospectus".
(b) (i) On the Effective Date, the Registration Statement complied, on
the date of this Agreement, the Registration Statement complies, and on the
date the Prospectus is filed pursuant to Rule 424(b), the Registration
Statement, any amendment thereto, and the Prospectus or any amendment or
supplement thereto will comply, as to form in all material respects with
the requirements of the Act and the rules and regulations of the Commission
thereunder (the "Rules and Regulations") and the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"), (ii) each document, if any,
filed or to be filed pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and incorporated by reference in the
Prospectus complied or will comply when so filed in all material respects
with the Exchange Act and the applicable rules and regulations of the
Commission thereunder, (iii) on the Effective Date, the Registration
Statement did not include any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, (iv) any amendment to the
Registration Statement, as of its date and as of its effective date, filed
after the date of this Agreement will not include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, (v) on
the Effective Date and on the Closing Date (as defined below), the
Indenture did and will comply in all material respects with the
requirements of the Trust Indenture Act and the rules thereunder and (vi)
the Prospectus or any amendment or supplement thereto on the Effective
Date, the date of this Agreement, as of its date, as of the date of any
amendment or supplement thereto, and at the Closing Date do not and will
not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading. The
foregoing representations and warranties do not apply to (i) that part of
the Registration Statement which shall constitute the Statement of
Eligibility and Qualification (Form T-1) under the Trust Indenture Act of
the trustee or (ii) statements or omissions in the Registration Statement
or the Prospectus, as amended or supplemented, if applicable, made in
reliance upon and in conformity with the information furnished in writing
to the Company by you specified in Section 8(a).
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, except as otherwise stated
therein, there has not been any material adverse change, or any development
involving a prospective material adverse change, in the financial
condition, results of operations or business of the Company and its
subsidiaries considered as a whole (a "Material Adverse Change").
(d) This Agreement has been duly authorized, executed and delivered by
the Company.
(e) The Indenture has been duly authorized by the Company and has been
duly qualified under the Trust Indenture Act and, when executed and
delivered by the Company and the Trustee, will constitute a legal, valid
and binding obligation of the Company enforceable against the Company in
accordance with its terms (subject to applicable bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws affecting
creditors' rights generally from time to time in effect, and subject, as to
enforceability, to general principles of equity, regardless of whether such
enforceability is considered in a proceeding in law or at equity); the
Securities have been duly authorized and, when duly authenticated by the
Trustee and delivered and paid for in accordance with the terms of this
Agreement, will be validly issued and binding instruments (subject to
applicable bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws affecting creditors' rights generally from time
to time in effect, and subject, as to enforceability, to general principles
of equity, regardless of whether such enforceability is considered in a
proceeding in law or at equity); and the offer and sale of the Securities
is not subject to restrictions on transfer (other than those imposed by the
Act, the Rules and Regulations, state securities or Blue Sky laws).
(f) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the Commonwealth of
Pennsylvania with power and authority to conduct its business as described
in the Registration Statement and Prospectus; and the Company is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which it owns or
2
<PAGE> 3
leases property or in which the conduct of its business requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the
financial condition, results of operations or business of the Company and
its subsidiaries considered as a whole (a "Material Adverse Effect").
(g) The Company has an authorized capitalization as set forth in the
Registration Statement, and when the Securities are delivered and paid for
pursuant to this Agreement on each Closing Date, such Securities will be
convertible into shares of Common Stock (the "Underlying Common Stock") in
accordance with the terms of the Indenture; the Underlying Common Stock
initially issuable upon conversion of the Securities has been duly
authorized and reserved for issuance upon such conversion and, when issued
upon such conversion in accordance with the terms of the Indenture, will be
validly issued, fully paid and nonassessable; the outstanding Common Stock
has been duly authorized, validly issued, fully paid and nonassessable; the
Common Stock conforms to the description thereof contained in the
Registration Statement, and the stockholders of the Company have no
preemptive rights with respect to the Securities or the Underlying Common
Stock.
(h) Each of the subsidiaries of the Company has been duly incorporated
and is validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation and has power to conduct its business
as described in the Registration Statement and Prospectus, except where
failure to be so would not, individually or in the aggregate, have a
Material Adverse Effect, and each of the subsidiaries of the Company is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which it owns or leases properties or in
which the conduct of its business requires such qualification, except to
the extent that the failure to be so qualified or be in good standing would
not, individually or in the aggregate, have a Material Adverse Effect.
(i) No consent, approval, authorization, order, registration, filing
or qualification of or with any court or governmental authority or agency
is required for the execution and delivery of the Indenture and this
Agreement and the issuance and sale of the Securities or the offer of the
Underlying Common Stock as contemplated by this Agreement and the
Prospectus, except such as may be required and have been obtained under the
Act and the Rules and Regulations in connection with the registration under
the Act of the Securities and the Underlying Common Stock and under the
Trust Indenture Act and except such as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Securities by the Underwriters; and the execution and
delivery of the Indenture and this Agreement and the issuance and sale of
the Securities and the offer of the Underlying Common Stock as contemplated
herein and in the Prospectus will not conflict with or constitute a breach
of, or default under, or result in the creation or imposition of any
security interest, mortgage, pledge, lien, encumbrance, adverse claim or
equity (collectively, "Liens") upon any property or assets of the Company
or any of its subsidiaries pursuant to, any contract, indenture, mortgage,
loan agreement, note, lease or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which it or any of them
may be bound or to which any of the property or assets of the Company or
any of its subsidiaries is subject (other than those for which waivers and
consents have been obtained), nor will any such action result in any
violation of the provisions of the charter or Bylaws of the Company or any
of its subsidiaries or any law, administrative regulation or administrative
or court decree or order applicable to the Company or any of its
subsidiaries except such as would not, individually or in the aggregate,
have a Material Adverse Effect or a material adverse effect on this
transaction.
(j) The Company is not in violation of its Certificate of
Incorporation or Bylaws or in default in the performance or observance of
any obligation, covenant or condition contained in any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument to
which it is a party or by which it or any of its properties may be bound
except for any such defaults as would not have, individually or in the
aggregate (including defaults of the Company's subsidiaries contemplated in
(k) below), a Material Adverse Effect.
(k) None of the Company's subsidiaries is in violation of its
Certificate of Incorporation or Bylaws nor in default in the performance or
observance of any obligation, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which it is a party or by which it or any of its
properties may be bound except for any such violations or defaults as
3
<PAGE> 4
would not have, individually or in the aggregate (including defaults of the
Company contemplated in (j) above), a Material Adverse Effect.
(l) The Company has good and marketable title to all real properties
and all other properties and assets owned by it, in each case free from
Liens and defects that would materially affect the value thereof or
materially interfere with the use made or to be made thereof by it, except
as disclosed in the Prospectus (including, but not limited to, Liens
pursuant to the term loans and revolving credit facility referenced
therein); and the Company holds any leased real or personal property under
valid and enforceable leases except as disclosed in the Prospectus or as
would not, individually or in the aggregate, have a Material Adverse
Effect.
(m) The Company's subsidiaries have good and marketable title to all
real properties and all other properties and assets owned by them, in each
case free from Liens and defects that would affect the value thereof or
interfere with the use made or to be made thereof by them except as
disclosed in the Prospectus (including, but not limited to, Liens pursuant
to the term loans and revolving credit facility referenced therein) or
would not, individually or in the aggregate, have a Material Adverse
Effect; and the Company's subsidiaries hold any leased real or personal
property under valid and enforceable leases except as disclosed in the
Prospectus or as would not, individually or in the aggregate, have a
Material Adverse Effect.
(n) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(o) The Company and its subsidiaries own, possess or can acquire on
reasonable terms adequate trademarks, trade names and other rights
necessary to conduct the business now operated by them, or presently
employed by them, and have not received any notice of infringement of or
conflict with asserted rights of others with respect to any trademarks,
trade names and other rights that, if determined adversely to the Company
or any of its subsidiaries, would individually or in the aggregate have a
Material Adverse Effect.
(p) Except as disclosed in the Prospectus, neither the Company nor any
of its subsidiaries is in violation of any statute, any rule, regulation,
decision or order of any governmental agency or body or any court, domestic
or foreign, relating to the use, disposal or release of hazardous or toxic
substances or relating to the protection or restoration of the environment
or human exposure to hazardous or toxic substances (collectively,
"environmental laws"), owns or operates any real property contaminated with
any substance that is subject to any environmental laws, is liable for any
off-site disposal or contamination pursuant to any environmental laws, or
is subject to any claim relating to any environmental laws, which
violation, contamination, liability or claim would individually or in the
aggregate have a Material Adverse Effect; and the Company is not aware of
any pending investigation which might lead to such a claim.
(q) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any of its
subsidiaries or any of their respective properties that are reasonably
likely to have, individually or in the aggregate, a Material Adverse
Effect, or would materially and adversely affect the ability of the Company
to perform its obligations under this Agreement or the Indenture; and no
such actions, suits or proceedings are, to the Company's knowledge,
threatened.
(r) The financial statements with respect to the Company included in
the Prospectus present fairly the financial position of the Company and its
subsidiaries on a consolidated basis as of the dates shown and their
results of operations and cash flows for the periods shown, and such
financial statements have been prepared in conformity with generally
accepted accounting principles in the United States applied on a consistent
basis.
(s) Ernst & Young LLP, who have certified certain financial statements
of the Company and its subsidiaries, are independent public accountants as
required by the Act and the rules and regulations of the Commission
thereunder.
4
<PAGE> 5
(t) Except as disclosed in the Prospectus, since the date of the
latest audited consolidated financial statements of the Company included in
the Prospectus, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.
(u) There are no contracts, agreements or understandings between the
Company, on the one hand, and any person, on the other hand, granting such
person the right to require the Company to file a registration statement
under the Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such securities
in the securities registered pursuant to the Registration Statement or in
any securities being registered pursuant to any other registration
statement filed by the Company under the Act, except as stated in the
Prospectus.
(v) The Company is not, and after giving effect to the offering and
sale of the Securities, will not be an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act.
(w) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes.
SECTION 3. Purchase, Sale and Delivery of Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company hereby agrees to sell to each
Underwriter, and each Underwriter agrees, severally and not jointly, to purchase
from the Company at the purchase price of % of the principal amount
thereof the principal amount of Securities set forth opposite such Underwriter's
name in Schedule I hereto.
The Company will deliver the Securities to you through the facilities of
The Depositary Trust Company ("DTC"), against payment of the purchase price by
certified or official bank check or checks in Federal (same day) funds payable
to the order of the Company at the offices of Milbank, Tweed, Hadley & McCloy,
at 9:00 a.m., New York City time, on , 1996, or at such place or time not
later than five full business days thereafter as you and the Company may agree
in writing, such time and date being referred to herein as the "First Closing
Date". The Securities will be made available for checking at the office of
Milbank, Tweed, Hadley & McCloy at least 24 hours prior to the First Closing
Date.
In addition, upon written notice from Lazard Freres & Co. LLC given to the
Company not more than 30 days subsequent to the First Closing Date, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per principal amount of Securities (including any accrued
interest thereon to the related Optional Closing Date) to be paid for the Firm
Securities. The Company agrees to sell to the Underwriters the number of
Optional Securities specified in such notice and the Underwriters agree,
severally and not jointly, to purchase such Optional Securities. Such Optional
Securities shall be purchased from the Company for the account of each
Underwriter in the same proportions as the principal amount of Firm Securities
set forth opposite such Underwriter's name bears to the total principal amount
of Firm Securities (subject to adjustment by Lazard Freres & Co LLC to eliminate
fractions) and may be purchased by the Underwriters only for the purpose of
covering over-allotments made in connection with the sale of the Firm
Securities. No Optional Securities shall be sold or delivered unless the Firm
Securities previously have been, or simultaneously are, sold and delivered.
The time for the delivery of and payment for the Optional Securities, being
herein referred to as the "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and the Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by Lazard
Freres & Co. LLC, but shall not be later than seven full business days after
written notice of election to purchase Optional Securities is given.
The Company will deliver the Optional Securities to you through the
facilities of DTC, against payment of the purchase price by certified or
official bank check or checks in Federal (same day) funds payable to the order
of the Company at the offices of Milbank, Tweed, Hadley & McCloy. The Optional
Securities to be purchased on an Optional Closing Date will be made available
for checking at the office of Milbank, Tweed, Hadley & McCloy at least 24 hours
prior to such Optional Closing Date.
5
<PAGE> 6
SECTION 4. Offering by Underwriters. After the Registration Statement
becomes effective the several Underwriters will offer the Securities for sale to
the public on the terms and conditions set forth in the Prospectus.
SECTION 5. Covenants of the Company. The Company covenants and agrees with
the several Underwriters that:
(a) The Company will file the prospectus with the Commission pursuant
to and in accordance with subparagraph (1) (or, if applicable, and with
your consent, subparagraph (4)) of Rule 424(b) not later than the second
business day following the earlier of (i) the date of execution and
delivery of this Agreement and (ii) the date a prospectus is first used
after the Effective Date. The Company will promptly file all reports and
any definitive proxy or information statements required to be filed by the
Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of the Prospectus and for so
long as the delivery of a prospectus is required in connection with the
offering or sale of the Securities. The Company will advise you promptly of
any proposal to amend or supplement the Registration Statement or the
prospectus prior to the Closing Date, and will not effect such amendment or
supplement without your consent, which will not be unreasonably withheld;
the Company will also advise you promptly of the filing or effectiveness of
any amendment or supplement to the Registration Statement or the
Prospectus, of receipt of notification of the institution by the Commission
of any stop order proceedings in respect of the Registration Statement or
of any order preventing or suspending the use of any preliminary prospectus
or any prospectus, of the suspension of the qualification of the Securities
or the Underlying Common Stock for offer or sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose or of any
request by the Commission to amend or supplement the Registration Statement
or Prospectus or for additional information, and will use its best efforts
to prevent the issuance of any such stop order or of any order preventing
or suspending the use of any preliminary prospectus or any prospectus
relating to the Securities or suspending any such qualification and to
obtain as soon as possible its lifting, if issued.
(b) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of
which the Prospectus as then amended or supplemented would, in the judgment
of the Underwriters, include an untrue statement of a material fact, or
omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading,
or if it is necessary at any time to amend or supplement the Prospectus or
the Registration Statement or to file under the Exchange Act any document
incorporated by reference in the Prospectus to comply with the Act, the
Exchange Act, the Trust Indenture Act or any other law, the Company
promptly will prepare and file with the Commission, subject to the second
sentence of paragraph (a) of this Section 5, an amendment or supplement
which will correct such statement or omission or an amendment which will
effect such compliance or will file such other document and, upon your
request, prepare and furnish without charge to each Underwriter and to any
dealer in securities as many copies as you may from time to time reasonably
request of an amended Prospectus or supplements to the Prospectus which
will correct such statement or omission or effect such compliance.
(c) As soon as practicable, the Company will make generally available
to the Company's security holders and the Underwriters an earnings
statement which will satisfy the provisions of Section 11(a) of the Act and
the Rules and Regulations thereunder (including Rule 158).
(d) The Company will deliver to each Underwriter one signed and as
many conformed copies of the Registration Statement (as originally filed)
and of each amendment thereto (including exhibits filed therewith and
documents incorporated therein by reference) as you may reasonably request.
The Company will also furnish you with the Prospectus, and all amendments
or supplements thereto, as soon as available and in such quantities
reasonably requested by you. The terms "supplement" and "amendment" or
"amend" as used in this Agreement shall include all documents subsequently
filed by the Company with the Commission pursuant to the Exchange Act that
are deemed to be incorporated by reference in the Prospectus prior to the
Closing Date.
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<PAGE> 7
(e) The Company will take such action as you may request, to qualify
the Securities and the Underlying Common Stock for offering and sale under
the applicable securities laws of such states and other jurisdictions of
the United States as you may designate, and will maintain such
qualifications in effect for as long as may be required for the
distribution of the Securities; provided, however, that in no event shall
the Company be obligated in connection therewith to qualify as a foreign
corporation, or to execute a general consent to service of process. Subject
to the foregoing, the Company will file such statements and reports as may
be required by the laws of each jurisdiction in which the Securities have
been qualified as above provided.
(f) The Company will use its best efforts to obtain the listing,
subject to notice of issuance, of the Underlying Common Stock on the Nasdaq
National Market.
(g) The Company will reserve and keep available at all times, free of
preemptive rights, shares of Common Stock for the purpose of enabling the
Company to satisfy any obligations to issue shares of its Common Stock upon
conversion of the Securities.
(h) For a period of 90 days after the date of the Prospectus, neither
the Company nor any of its subsidiaries will offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any debt securities
of the Company which mature more than one year from the date of the
Prospectus and which are substantially similar to the Securities or any
shares of Common Stock or securities convertible into or exercisable or
exchangeable for shares of Common Stock or publicly disclose the intention
to make any such offer, sale, pledge or disposal, without the prior written
consent of Lazard Freres & Co. LLC except (i) issuances of Common Stock
pursuant to the exercise of warrants or options, in each case outstanding
on the date hereof and (ii) grants of employee stock options or restricted
stock pursuant to the terms of a plan in effect on the date hereof.
(i) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to shareholders, and to
deliver to you as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any
national securities exchange on which the Securities or any class of
securities of the Company is listed.
(j) To use the net proceeds received by it from the sale of the
Securities pursuant to this Agreement in the manner specified in the
Prospectus under the caption "Use of Proceeds".
SECTION 6. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm
Securities on the First Closing Date and the Optional Securities on the Optional
Closing Date will be subject to the provisions of Section 10 herein, to the
accuracy of and compliance with the representations and warranties on the part
of the Company herein, to the accuracy of the statements of Company officers
made in any certificate furnished pursuant to the provisions hereof, to the
performance by the Company of its obligations hereunder and to the following
additional conditions precedent:
(a) The Company shall have filed the Prospectus with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for
such filing by the Rules and Regulations and in accordance with Section
5(a) of this Agreement. Prior to such Closing Date, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and not lifted and no proceedings for that purpose shall have been
instituted and continue to be pending, or, to the knowledge of the Company
or you, shall be threatened by the Commission and all requests for
additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction.
(b) You shall have received an opinion addressed to you of Davis Polk
& Wardwell, New York counsel for the Company, dated such Closing Date, to
the effect that:
(i) To the best of such counsel's knowledge, there is no contract
or other document of a character required to be described in the
Prospectus, or to be filed as an exhibit to the Registration Statement,
which is not described or filed as required.
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<PAGE> 8
(ii) The Registration Statement is effective under the Act; to
their knowledge, no stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued under the Act
and no proceedings for that purpose have been instituted or are
threatened by the Commission.
(iii) No consent, approval, authorization, order, registration,
filing or qualification of or with any court or governmental authority
or agency is required for the execution and delivery of the Indenture
and this Agreement and the issuance and sale of the Securities or the
offer of the Underlying Common Stock as contemplated by this Agreement
and the Prospectus, except such as may be required and have been
obtained under the Act and the Rules and Regulations in connection with
the registration under the Act of the Securities and the Underlying
Common Stock, and under the Trust Indenture Act, and except such as may
be required under state securities or Blue Sky laws in connection with
the purchase and distribution of the Securities by the Underwriters.
(iv) The execution and delivery of the Indenture and this Agreement
by the Company and the issuance and sale of the Securities and the offer
of the Underlying Common Stock, will not result in any violation of any
United States or New York law or administrative regulation or, to the
best of such counsel's knowledge, in any violation of any administrative
or court decree or order which is applicable to the Company or any of
its significant subsidiaries (as defined in Rule 405 under the Act) (the
"Significant Subsidiaries").
(v) The Securities conform in all material respects to the
description thereof contained in the Prospectus; assuming the Indenture
has been duly authorized, executed and delivered by the Company and the
Trustee, the Indenture constitutes a legal, valid and binding obligation
of the Company enforceable against the Company in accordance with its
terms except (i) as such enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
creditors' rights and remedies generally, (ii) as such enforcement may
be limited by general principles of equity, regardless of whether
enforcement is sought in a proceeding at law or in equity, and (iii) to
the extent that a waiver of rights under any usury law may be
unenforceable; and assuming the Securities have been duly authorized,
executed and authenticated in accordance with the provisions of the
Indenture and delivered to and paid for by the Underwriters pursuant to
this Agreement, the Securities will constitute the legal, valid and
binding obligations of the Company entitled to the benefits of the
Indenture enforceable against the Company in accordance with their terms
except (i) as such enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
and remedies generally, (ii) as such enforcement may be limited by
general principles of equity, regardless of whether enforcement is
sought in a proceeding at law or in equity, and (iii) to the extent that
a waiver of rights under any usury law may be unenforceable. The
Indenture has been duly qualified under the Trust Indenture Act.
(vi) To the best of such counsel's knowledge, except as described
in the Prospectus, there are no contracts, agreements or understandings
between the Company, on the one hand, and any person, on the other hand,
granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered pursuant
to the Registration Statement.
(vii) The statements set forth in the Prospectus under the heading
"Description of the Notes", insofar as such statements purport to
describe the provisionsof the laws and documents referred to therein,
are accurate, complete and fair.
(viii) The Company is not an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in
the Investment Company Act.
(ix) Spirit of America National Bank is duly organized and validly
existing in good standing as a national banking association under the
laws of the United States, with power and authority to conduct its
business as described in the Registration Statement and the Prospectus.
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(x) Except as disclosed in the Prospectus, all issued and
outstanding capital stock of Spirit of America National Bank has been
duly authorized and validly issued and is fully paid and nonassessable,
and the Company owns, directly or through subsidiaries, all of the
shares of capital stock of such subsidiary free and clear of any Liens.
(xi) Spirit of America National Bank is not in violation of its
Certificate of Incorporation or Bylaws.
(xii) Each document filed pursuant to the Exchange Act and
incorporated by reference in the Registration Statement or the
Prospectus or any further amendment or supplement thereto prior to the
Closing Date (except for financial statements and other financial data
included therein as to which such counsel need express no opinion)
complied when so filed as to form in all material respects with the
Exchange Act and the applicable Rules and Regulations of the Commission
thereunder; and the Registration Statement, as of the Effective Date,
and the Prospectus and any further amendments or supplements thereto, as
of their dates or the Closing Date (each except for financial statements
and other financial data included therein and the Statement of
Eligibility (Form T-1) included as an exhibit to the Registration
Statement as to which such counsel need express no opinion) complied as
to form in all material respects with the Securities Act and the
applicable Rules and Regulations of the Commission thereunder.
Such counsel shall also state that they have not themselves checked
the accuracy or completeness of, or otherwise verified, the information
furnished with respect to matters in the Registration Statement and the
Prospectus other than those items referred to in (vii) above, but that they
have generally reviewed and discussed with certain officers and other
representatives of the Company, its independent public accountants and
representatives of the Underwriters and their counsel the information
furnished, whether or not subject to such counsel's check or verification.
On the basis of such review and discussion, but without independent check
or verification, except as stated, nothing came to their attention that
causes them to believe that (except for the financial statements and other
financial data included therein and the Statement of Eligibility (Form T-1)
included as an exhibit to the Registration Statement, as to which such
counsel need express no opinion) as of the Effective Date, the Registration
Statement contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, or that the Prospectus, as of its
date and as of the Closing Date, includes an untrue statement of a material
fact or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the State
of New York, the State of Delaware (but only to the extent of the corporate
laws thereof) or the United States, to the extent deemed proper and
specified in such opinion, upon the opinion of other counsel of good
standing believed to be reliable and who are satisfactory to counsel for
the Underwriters and (B) as to matters of fact, to the extent deemed
proper, on certificates of responsible officers of the Company and public
officials. References to the Prospectus in this paragraph (b) include any
supplements thereto at the Closing Date.
(c) You shall have received an opinion addressed to you, of Colin
Stern, Esq., the General Counsel for the Company (or in lieu thereof
opinions addressed to you of the General Counsel and other counsel to the
Company as provided below), dated such Closing Date, in each case
substantially to the effect that:
(i) To the best of such counsel's knowledge, after inquiry of
employees of the Company, each of the Company's subsidiaries is duly
incorporated and validly existing as a corporation in good standing
under the laws of its respective jurisdiction of incorporation, with
power and authority to conduct its business as described in the
Registration Statement and the Prospectus except where the failure so to
be would not have, individually or in the aggregate, a Material Adverse
Effect.
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(ii) Except as disclosed in the Prospectus, all issued and
outstanding capital stock of (x) each of the Company's Significant
Subsidiaries, and (y) to the best of such counsel's knowledge after
inquiry of employees of the Company, each of the Company's other
subsidiaries is duly authorized and validly issued and is fully paid and
nonassessable except where failure so to be (in the case of subsidiaries
other than the Significant Subsidiaries) would not have, individually or
in the aggregate, a Material Adverse Effect, and, except as disclosed in
the Prospectus (including, but not limited to, Liens pursuant to the
term loans and revolving credit facility referenced therein), the
Company is the registered holder of (and to the best of such counsel's
knowledge after inquiry of employees of the Company, is the sole
beneficial owner of) all of the shares of capital stock of each of its
subsidiaries and holds such shares free and clear of any Liens except
where the failure so to be or hold would not have, individually or in
the aggregate, a Material Adverse Effect.
(iii) The Company and, to the best of such counsel's knowledge
after inquiry of employees of the Company, each of its subsidiaries is
duly qualified as a foreign corporation to transact business and is in
good standing in any jurisdiction in which it owns or leases properties
or in any jurisdiction in which the conduct of its business requires
such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have, individually or in the
aggregate, a Material Adverse Effect.
(iv) The Company and, to the best of such counsel's knowledge after
inquiry of employees of the Company, its subsidiaries have good and
marketable title to all real properties and all other properties and
assets owned by them, in each case free from Liens and defects that
would affect the value thereof or interfere with the use made or to be
made thereof by them except as disclosed in the Prospectus (including,
but not limited to, Liens pursuant to the term loans and revolving
credit facility referenced therein) or except where the failure so to
have would not, individually or in the aggregate, have a Material
Adverse Effect and the Company and, to the best of such counsel's
knowledge after inquiry of employees of the Company, its subsidiaries
hold any leased real or personal property under valid and enforceable
leases except as disclosed in the Prospectus or except where the failure
so to hold would not, individually or in the aggregate, have a Material
Adverse Effect.
(v) Neither the Company nor, to the best of his knowledge after
inquiry of employees of the Company, any of its subsidiaries is in
violation of its Certificate of Incorporation or Bylaws or in default in
the performance or observance of any obligation, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement,
lease or other agreement or instrument to which it is a party or by
which it or any of its properties may be bound except where the
violation or default would not have, individually or in the aggregate, a
Material Adverse Effect.
(vi) The execution and delivery of this Agreement and the
Indenture, the issuance and sale of the Securities and the offer of the
Underlying Common Stock as contemplated by this Agreement and the
Prospectus will not, to the best of such counsel's knowledge after
inquiry of employees of the Company, conflict with or constitute a
breach of, or default under, or result in the creation or imposition of
any Lien upon any property or assets of the Company or any of its
subsidiaries pursuant to, any material contract, indenture, mortgage,
agreement, note or lease to which the Company or any of its subsidiaries
is a party or by which it or any of them may be bound or to which any of
the property or assets of the Company or any of such subsidiaries is
subject (other than those for which waivers and consents have been
obtained), nor will such action result in any violation of the
provisions of the charter or Bylaws of any of its subsidiaries, or to
the best of such counsel's knowledge any law, administrative regulation
or administrative or court decree or order which is applicable to the
Company or any of its subsidiaries.
(vii) To the best of such counsel's knowledge, after inquiry of
employees of the Company, there is no pending or threatened action, suit
or proceeding before any court or governmental agency, authority or body
or any arbitrator involving the Company or any of its subsidiaries, of a
character required to be disclosed in the Prospectus which is not
adequately disclosed therein.
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(viii) Although such counsel does not assume any responsibility for
the accuracy, completeness or fairness of the statements contained in
the Registration Statement or the Prospectus, nothing has come to the
attention of such counsel that leads such counsel to believe that
(except for the financial statements and other financial data included
therein and the Statement of Eligibility (Form T-1) included as an
exhibit to the Registration Statement, as to which such counsel need
express no belief) as of the Effective Date, the Registration Statement
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus, as of its
date and as of the Closing Date, included or includes an untrue
statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
Commonwealth of Pennsylvania or the United States, to the extent deemed
proper and specified in such opinion, upon the opinion of other counsel of
good standing believed to be reliable and who are satisfactory to counsel
for the Underwriters and (B) as to matters of fact, to the extent deemed
proper, on certificates of responsible officers of the Company and public
officials. Such counsel shall also state that Milbank, Tweed, Hadley &
McCloy shall be entitled to rely on such opinion as though such opinion
were addressed to it with respect to matters of Pennsylvania law in
connection with the opinion to be given pursuant to Section 6(e).
(d) You shall have received an opinion addressed to you of Morgan,
Lewis & Bockius LLP, Pennsylvania counsel for the Company, dated the
Closing Date, to the effect that:
(i) This Agreement has been duly authorized, executed and delivered
by the Company.
(ii) Each of the Company and Charming Shoppes of Delaware, Inc. is
duly incorporated and validly existing as a corporation in good standing
under the laws of the Commonwealth of Pennsylvania, with the power and
authority to conduct its business as described in the Registration
Statement and the Prospectus.
(iii) Except as disclosed in the Prospectus, all issued and
outstanding capital stock of each of Charming Shoppes of Delaware, Inc.
is duly authorized and validly issued and is fully paid and
nonassessable, and the Company owns, directly or through subsidiaries,
all of the shares of capital stock of each such Significant Subsidiary
free and clear of any Liens.
(iv) The authorized capital stock of the Company is as set forth in
the Prospectus and, all of the issued and outstanding shares of capital
stock of the Company have been duly and validly authorized and issued
and are fully paid and non-assessable; and the shares of Underlying
Common Stock initially issuable upon conversion of the Securities have
been duly and validly authorized and reserved for issuance and, when
issued and delivered in accordance with the provisions of the Securities
and the Indenture, will be duly and validly issued and fully paid and
non-assessable, and will conform to the description of the Common Stock
contained in the Prospectus.
(v) The Indenture has been duly authorized, executed and delivered
by the Company and the Securities have been duly authorized, executed
and delivered by the Company and assuming the Securities have been duly
authenticated by the Trustee and have been paid for by the Underwriters
in accordance with this Agreement, the Securities will be validly
issued.
(vi) No consent, approval, authorization, order, registration,
filing or qualification of or with any court or governmental authority
or agency is required under the laws or regulations of the Commonwealth
of Pennsylvania for the execution of the Indenture or this Agreement,
the offer and sale of the Securities or the offer of the Underlying
Common Stock as contemplated by this Agreement (except such as may be
required under state securities or Blue Sky laws); and the execution and
delivery of this Agreement and the Indenture, the issuance and sale of
the Securities and the offer of the Common Stock will not result in any
violation of the charter or Bylaws of the Company or Charming Shoppes of
Delaware, Inc. or any law, administrative regulation or
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administrative or court decree or order known to such counsel under the
laws of the Commonwealth of Pennsylvania which is applicable to the
Company or any of its subsidiaries.
(vii) The statements set forth in the Prospectus under the heading
"Description of Capital Stock", insofar as such statements purport to
describe the provisions of the laws and documents referred to therein,
are accurate, complete and fair.
(viii) Neither the Company nor Charming Shoppes of Delaware, Inc.
is in violation of its Certificate of Incorporation or Bylaws.
Such counsel shall state that Milbank, Tweed, Hadley & McCloy shall be
entitled to rely on such opinion as though such opinion were addressed to
it with respect to matters of Pennsylvania law in connection with the
opinion to be given pursuant to Section 6(e).
(e) You shall have received from Milbank, Tweed, Hadley & McCloy,
special New York counsel for the Underwriters, and such counsel in other
jurisdictions, if any, selected by you such opinion or opinions, dated such
Closing Date, with respect to the Registration Statement, the Prospectus,
the Indenture and other related matters as you may reasonably require, and
the Company shall have furnished to such counsel such documents and
information as they reasonably request for the purpose of enabling them to
pass upon such matters.
(f) The Company shall have furnished to the Underwriters a certificate
of the Company, signed by the Chairman of the Board or the President and
Chief Executive Officer and the principal financial or accounting officer
of the Company, dated the Closing Date, to the effect that the signers of
such certificate have carefully examined the Registration Statement, the
Prospectus, any supplement to the Prospectus, the Indenture and this
Agreement and that:
(i) The representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of
such Closing Date with the same effect as if made on such Closing Date
and the Company has complied in all material respects with all
agreements and satisfied in all material respects all conditions on its
part to be performed or satisfied hereunder at or prior to such Closing
Date.
(ii) To the Company's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or threatened by the
Commission.
(iii) Since the date of this Agreement, there has been no Material
Adverse Change.
(g) Subsequent to the execution and delivery of this Agreement and
prior to such Closing Date, there shall not have been any downgrading, nor
shall any notice have been given of any intended or potential downgrading
or of any review for a possible change that does not indicate the direction
of the possible change, in the rating accorded any of the Company's
securities (including the Securities) by any "nationally recognized
statistical rating organization", as such term is defined for purposes of
Rule 436(g)(2) under the Act.
(h) You shall have received from Ernst & Young LLP, independent public
accountants, letters, the first dated the date of this Agreement and the
others dated such Closing Date, addressed to the Underwriters,
substantially in the form annexed hereto with such variations as are
acceptable to you.
SECTION 7. Payment of Expenses. The Company will pay all costs, expenses,
fees, disbursements and taxes incident to (i) the preparation by the Company,
printing, filing and distribution under the Act of the Registration Statement
(including financial statements and exhibits), the Prospectus (including any
preliminary prospectus), and all amendments and supplements to any of them prior
to or during the period specified in Section 5(b), (ii) the preparation,
printing (including word processing and duplication costs) and delivery of the
Preliminary and Supplemental Blue Sky Memoranda, (iii) the registration with the
Commission of the Securities and the Underlying Common Stock and the offer and
sale of the Securities, (iv) the registration or qualification of the Securities
and the Underlying Common Stock for offer and sale under the securities or
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Blue Sky laws of the several states (including the reasonable fees and
disbursements of your counsel relating to such registration or qualification),
(v) any fees charged by securities rating services for rating the Securities,
(vi) fees and expenses, if any, incurred in connection with the inclusion of the
Underlying Common Stock on the Nasdaq National Market, (vii) filings and
clearance with the National Association of Securities Dealers, Inc., in
connection with the offering and (viii) the performance by the Company of its
other obligations under this Agreement.
If the sale of the Securities provided for herein is not consummated
because any condition to the obligations of the Underwriters set forth in
Section 6 hereof is not satisfied, because of any termination pursuant to
Section 10 hereof or because of any refusal, failure or inability of the Company
to perform any agreement herein or comply with any provision hereof other than
by reason of a default by any Underwriter, the Company shall reimburse you for
all of your reasonable out-of-pocket expenses incurred in connection with
marketing and preparing for the offering of the Securities, including the
reasonable fees and disbursements of counsel for the Underwriters but the
Company shall be under no further liability to any Underwriter except as
provided in Section 8 hereof.
SECTION 8. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of
either Section 15 of the Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages and liabilities (or actions in
respect thereof) (including, without limiting the foregoing, the reasonable
legal and other expenses incurred in connection with investigating or
defending any action, suit or proceeding or any claim asserted, as such
expenses are incurred) arising out of or based on any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus or any preliminary prospectus with respect to
the Securities, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses,
claims, damages, liabilities or expenses are caused by any such untrue
statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with the information furnished in writing
to the Company by you in (i) the last paragraph of text on the cover page
of the Prospectus concerning the terms of the offering by the Underwriters,
(ii) the penultimate paragraph of page 2 of the Prospectus concerning
over-allotment and stabilization by the Underwriters and (iii) the third
paragraph, the second sentence of the fourth paragraph and the first
sentence of the sixth paragraph of text under the caption "Underwriting" in
the Prospectus; provided, however, that the foregoing indemnity agreement
with respect to any preliminary prospectus shall not inure to the benefit
of any Underwriter from whom the person asserting any such losses, claims,
damages or liabilities purchased Securities, or any person controlling such
Underwriter, if a copy of the Prospectus (as then amended or supplemented
if the Company shall have furnished any amendments or supplements thereto)
was not sent or given by or on behalf of such Underwriter to such person,
if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Securities to such person, if the
Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such losses, claims, damages or liabilities, and the Company
had provided such Underwriter in writing notice of such default on or prior
to the execution of this Agreement. This indemnity agreement will be in
addition to any liability which the Company may otherwise have to the
persons referred to above in this Section 8(a).
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, the directors of the Company, the officers
of the Company who sign the Registration Statement and each person, if any,
who controls the Company within the meaning of either Section 15 of the Act
or Section 20 of the Exchange Act, from and against any and all losses,
claims, damages and liabilities (or actions in respect thereof) caused by
any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or the Prospectus or any
preliminary prospectus, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, but only with reference to the
information furnished to the Company by the Underwriters specified in
Section 8(a). This indemnity agreement will
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be in addition to any liability which the Underwriters may otherwise have
to the persons referred to above in this Section 8(b).
(c) In case any action or proceeding (including any governmental or
regulatory investigation or proceeding) shall be instituted involving any
person in respect of which indemnity may be sought pursuant to either of
the two preceding paragraphs, such person (hereinafter called the
indemnified party) shall promptly notify the person against whom such
indemnity may be sought (hereinafter called the indemnifying party) in
writing; however, the omission to so notify the indemnifying party shall
relieve the indemnifying party from liability only to the extent prejudiced
thereby. The indemnifying party, upon request of the indemnified party,
shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to the indemnified party to represent the
indemnified party and any others that the indemnifying party may designate
and shall pay the fees and disbursements of such counsel related to such
proceeding. In any such action or proceeding any indemnified party shall
have the right to retain its own counsel, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed to
the retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying
party and the indemnified party and representation of both parties by the
same counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the indemnifying party shall
not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for (a) the reasonable fees and expenses of more
than one separate firm (in addition to any local counsel) for all
Underwriters and all persons, if any, who control Underwriters within the
meaning of either Section 15 of the Act or Section 20 of the Exchange Act,
and (b) the reasonable fees and expenses of more than one separate firm (in
addition to any local counsel) for the Company, its directors, its officers
who sign the Registration Statement and each person, if any, who controls
the Company within the meaning of either such Section, and that all fees
and expenses to be paid pursuant to each of clauses (a) and (b) of this
sentence shall be reimbursed as they are incurred. In the case of any such
separate firm for the Underwriters and such control persons of
Underwriters, such firm shall be designated in writing by Lazard Freres &
Co. LLC. In the case of any such separate firm for the Company, and such
directors, officers and control persons of the Company, such firm shall be
designated in writing by the Company.
(d) If the indemnification provided for in this Section 8 is
insufficient or unavailable to an indemnified party in respect of any
losses, claims, damages or liabilities (or actions in respect thereof)
referred to therein, then each indemnifying party, in lieu of indemnifying
such indemnified party, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages,
liabilities and expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and
the Underwriters on the other from the offering of the Securities or (ii)
if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause (i) above but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company on
the one hand and the Underwriters on the other shall be deemed to be in the
same proportions as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discount and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
of the Company on the one hand and the Underwriters on the other shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission.
(e) The Company and the Underwriters agree that it would not be just
and equitable if contribution pursuant to Section 8(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the
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equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to in Section 8(d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of Section 8(d), in no event shall any
Underwriter be required to contribute any amount in excess of the amount by
which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to Section 8(d) are
several in proportion to the respective principal amount of securities set
forth opposite their names in Schedule I hereto and not joint.
SECTION 9. Representations, Warranties and Agreements To Survive
Delivery. All representations, warranties and agreements contained in this
Agreement, or contained in certificates of officers of the Company submitted
pursuant hereto, including indemnity and contribution agreements, shall remain
operative and in full force and effect, regardless of any investigation, or any
statement as to the results thereof, made by or on behalf of any Underwriter or
any person controlling any Underwriter or by or on behalf of the Company, its
officers or directors or controlling persons, and shall survive acceptance of
and payment for Securities hereunder.
SECTION 10. Termination. This Agreement may be terminated for any reason
at any time prior to delivery and payment for the Securities by Lazard Freres &
Co. LLC upon the giving of written notice of such termination to the Company, if
prior to such time (i) there has been, since the respective dates as of which
information is given in the Registration Statement and the Prospectus, any
Material Adverse Change, whether or not arising in the ordinary course of
business, or (ii) there has occurred any outbreak or escalation of hostilities
or other calamity or crisis or material change in existing national or
international financial, political, economic or securities market conditions,
the effect of which is such as to make it, in your judgment, impracticable or
unadvisable to market the Securities in the manner contemplated in the
Prospectus or enforce contracts for the sale of the Securities or (iii) trading
in the Common Stock of the Company on the Nasdaq National Market has been
suspended, trading generally on any of the American Stock Exchange, the Nasdaq
National Market or the New York Stock Exchange has been suspended, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices for
securities have been required, by any of such exchanges or by order of the
Commission or any other governmental authority, or if a banking moratorium has
been declared by either Federal or New York authorities. In the event of any
such termination, the provisions of Sections 7, 8, 9 and 14 shall remain in
effect.
SECTION 11. Default of Underwriters. If any one or more of the
Underwriters default in their obligations to purchase Securities hereunder on a
Closing Date and the principal amount of Securities which such defaulting
Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of
the aggregate principal amount of Securities to be purchased on such Closing
Date by all Underwriters, each nondefaulting Underwriter shall be obligated
severally, in proportion to its respective commitments hereunder, to purchase
the Securities which such defaulting Underwriters agreed but failed or refused
to purchase on such date; provided that in no event shall the principal amount
of Securities that any Underwriter has agreed to purchase pursuant to Section 3
be increased pursuant to this Section 11 by an amount in excess of one-ninth of
such principal amount of Securities without the written consent of such
Underwriter. If any Underwriter or Underwriters so default and the aggregate
principal amount of Securities with respect to which such default or defaults
occur is more than 10% of the total principal amount of Securities which the
Underwriters are so obligated to purchase on such date and arrangements
satisfactory to the Representatives and satisfactory to the Company for the
purchase of such Securities by other persons are not made within 36 hours after
such default, this Agreement may be terminated by you or by the Company without
liability on the part of any nondefaulting Underwriter or the Company, except
for the expenses to be paid or reimbursed by the Company pursuant to Section 7
and the respective obligations of the Company and the Underwriters
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pursuant to Section 8; provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement shall not
terminate as to the Firm Securities. In the event that, within the respective
prescribed periods, you notify the Company that you have arranged for the
purchase of such Securities, or the Company notifies you that it has so arranged
for the purchase of such Securities, you or the Company shall have the right to
postpone such Closing Date for a period of not more than seven days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and the
Company agrees to file promptly any amendments to the Registration Statement or
the Prospectus which in your opinion may thereby be made necessary. As used in
this Agreement, the term "Underwriter" includes any person substituted for a
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 12. Notices. All communications hereunder will be in writing and,
if sent to the Underwriters, will be mailed, delivered or telegraphed and
confirmed to Lazard Freres & Co. LLC at 30 Rockefeller Plaza, New York, N.Y.
10020, Attn: Syndicate Department; or, if sent to the Company, will be mailed,
delivered or telecopied and confirmed to it at Charming Shoppes, Inc., 450 Winks
Lane, Bensalem, Pennsylvania 19020, Attn: Colin Stern.
SECTION 13. Parties. This Agreement shall inure to the benefit of and be
binding upon the Company, its directors and officers who signed the Registration
Statement, the Underwriters, any controlling persons referred to herein and
their respective successors and assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any other person, firm or
corporation any legal or equitable right, remedy or claim under or in respect of
this Agreement or any provision herein contained. No purchaser of Securities
from any Underwriter shall be deemed to be a successor by reason merely of such
purchase.
SECTION 14. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
SECTION 15. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
If the foregoing is in accordance with your understanding of our agreement,
please sign this Agreement and return to us six counterparts hereof.
Very truly yours,
CHARMING SHOPPES, INC.
By:
------------------------------------
Name:
Title:
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written by:
LAZARD FRERES & CO. LLC
BEAR, STEARNS & CO. INC.
By:
- ----------------------------------------------------
16
<PAGE> 17
SCHEDULE I
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF SECURITIES
UNDERWRITERS TO BE PURCHASED
------------------------------------------------------------ ------------------------------
<S> <C>
Lazard Freres & Co. LLC..................................... $
Bear, Stearns & Co. Inc.....................................
------------
Total............................................. $100,000,000
============
</TABLE>
<PAGE> 18
ANNEX
DESCRIPTION OF COMFORT LETTER
Pursuant to Section 6(h) of the Underwriting Agreement, Ernst & Young LLP
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company and its subsidiaries within the meaning of the Act and the
applicable rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, prospective
financial statements and/or pro forma financial information) examined by
them and included or incorporated by reference in the Prospectus or the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Act or the Exchange Act, as
applicable, and the related rules and regulations thereunder; and, if
applicable, they have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited consolidated interim financial statements, selected financial
data, pro forma financial information, prospective financial statements
and/or condensed financial statements derived from audited financial
statements of the Company for the periods specified in such letter, as
indicated in their reports attached to such letters, copies of which have
been furnished to the Underwriters;
(iii) They have made a review in accordance with standards established
by the American Institute of Certified Public Accountants of the unaudited
condensed consolidated statement of income, consolidated balance sheets and
consolidated statements of cash flows included in the Prospectus and/or
included in the Company's quarterly report on Form 10-Q incorporated by
reference into the Prospectus as indicated in their reports thereon, copies
of which have been furnished to the Underwriters, and on the basis of
specified procedures including inquiries of officials of the Company who
have responsibility for financial and accounting matters regarding whether
the unaudited condensed consolidated financial statements referred to in
paragraph (vi)(A)(i) below comply as to form in all material respects with
the applicable accounting requirements of the Act and the Exchange Act and
the related rules and regulations, nothing came to their attention that
caused them to believe that the unaudited condensed consolidated financial
statements do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the Exchange Act and the
related rules and regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company
for the five most recent fiscal years included in the Prospectus and
included or incorporated by reference in Item 6 of the Company's Annual
Report on Form 10-K for the most recent fiscal year agrees with the
corresponding amounts (after restatement where applicable) in the audited
consolidated financial statements for such five fiscal years which were
included or incorporated by reference in the Company's Annual Reports on
Form 10-K for such fiscal years;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and on
the basis of limited procedures specified in such letter nothing came to
their attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an audit in
accordance with generally accepted auditing standards, consisting of a
reading of the unaudited financial statements and other information
referred to below, a reading of the latest available interim financial
statements of the Company and its subsidiaries, inspection of the minute
books of the Company and its subsidiaries since the date of the latest
audited financial statements included or incorporated by reference in the
Prospectus, inquiries of officials of the Company and its subsidiaries
responsible for financial and accounting matters
<PAGE> 19
and such other inquiries and procedures as may be specified in such letter,
nothing came to their attention that caused them to believe that:
(A) (i) the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus and/or included or incorporated by reference
in the Company's Quarterly Reports on Form 10-Q incorporated by
reference in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Exchange Act
and the related rules and regulations, or (ii) any material
modifications should be made to the unaudited consolidated statements of
income, consolidated balance sheets and consolidated statements of cash
flows included or incorporated by reference in the Company's Quarterly
Reports on Form 10-Q incorporated by reference in the Prospectus, for
them to be in conformity with generally accepted accounting principles;
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited consolidated financial statements from which such
data and items were derived, and any such unaudited data and items were
not determined on a basis substantially consistent with the basis for
the corresponding amounts in the audited consolidated financial
statements included or incorporated by reference in the Company's Annual
Report on Form 10-K for the most recent fiscal year;
(C) the unaudited financial statements which were not included in
the Prospectus but from which were derived the unaudited condensed
financial statements referred to in clause (A) and any unaudited income
statement data and balance sheet items included in the Prospectus and
referred to in clause (B) were not determined on a basis substantially
consistent with the basis for the audited financial statements included
or incorporated by reference in the Company's Annual Report on Form 10-K
for the most recent fiscal year;
(D) any unaudited pro forma consolidated condensed financial
statements included or incorporated by reference in the Prospectus do
not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations or the
pro forma adjustments have not been properly applied to the historical
amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the consolidated
capital stock (other than issuances of capital stock upon exercise of
options and stock appreciation rights, upon earn-outs of performance
shares and upon conversions of convertible securities, in each case
which were outstanding on the date of the latest balance sheet included
or incorporated by reference in the Prospectus) or any increase in the
consolidated long-term debt of the Company and its subsidiaries, or any
decreases in consolidated net current assets or stockholders' equity, or
any changes in any other items specified by the Underwriters, in each
case as compared with amounts shown in the latest balance sheet included
or incorporated by reference in the Prospectus, except in each case for
changes, increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(F) for the period from the date of the latest financial statements
included or incorporated by reference in the Prospectus to the specified
date referred to in clause (E) there were any decreases in consolidated
net revenues or operating profit or the total or per share amounts of
consolidated net income, or any changes in any other items specified by
the Underwriters, in each case as compared with the comparable period of
the preceding year and with any other period of corresponding length
specified by the Underwriters, except in each case for decreases or
increases which the Prospectus discloses have occurred or may occur and
which are described in such letter; and
(iv) In addition to the examination referred to in their report(s)
included or incorporated by reference in the Prospectus and the limited
procedures, inspection of minute books, inquiries and other procedures
referred to in paragraphs (iii) and (iv) above, they have carried out
certain specified procedures, not constituting an audit in accordance with
generally accepted auditing standards, with
2
<PAGE> 20
respect to certain amounts, percentages and financial information specified
by the Underwriters which are derived from the general accounting records
of the Company and its subsidiaries, which appear in the Prospectus
(excluding documents incorporated by reference), or in Part II of, or in
exhibits and schedules to, the Registration Statement specified by the
Representatives or in documents incorporated by reference in the Prospectus
specified by the Underwriters, and have compared certain of such amounts,
percentages and financial information with the accounting records of the
Company and its subsidiaries and have found them to be in agreement.
All capitalized terms used herein have the meanings ascribed to them in the
underwriting agreement to which this Description is annexed.
3
<PAGE> 1
EXHIBIT 4.1
CHARMING SHOPPES, INC.
AS COMPANY
------------------------------------
[ ]% CONVERTIBLE SUBORDINATED NOTES DUE 2006
------------------------------------
INDENTURE
DATED AS OF [ ], 1996
------------------------------------
FIRST UNION NATIONAL BANK
AS TRUSTEE
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C> <C>
ARTICLE I
Definitions and Incorporation by Reference............................ 1
SECTION 1.01. Definitions........................................................... 1
SECTION 1.02. Other Definitions..................................................... 4
SECTION 1.03. Incorporation by Reference of Trust Indenture Act..................... 4
SECTION 1.04. Rules of Construction................................................. 5
ARTICLE II
The Notes............................................................. 5
SECTION 2.01. Form and Dating....................................................... 5
SECTION 2.02. Execution and Authentication.......................................... 6
SECTION 2.03. Registrar, Paying Agent and Conversion Agent.......................... 6
SECTION 2.04. Paying Agent To Hold Money in Trust................................... 7
SECTION 2.05. Noteholder Lists...................................................... 7
SECTION 2.06. Transfer and Exchange................................................. 7
SECTION 2.07. Replacement Notes..................................................... 7
SECTION 2.08. Outstanding Notes..................................................... 8
SECTION 2.09. Treasury Notes........................................................ 8
SECTION 2.10. Temporary Notes....................................................... 8
SECTION 2.11. Cancellation.......................................................... 8
SECTION 2.12. Defaulted Interest.................................................... 8
SECTION 2.13. CUSIP Numbers......................................................... 8
ARTICLE III
Redemption............................................................ 9
SECTION 3.01. Notices to Trustee.................................................... 9
SECTION 3.02. Selection of Notes to be Redeemed..................................... 9
SECTION 3.03. Notice of Redemption.................................................. 9
SECTION 3.04. Effect of Notice of Redemption........................................ 10
SECTION 3.05. Deposit of Redemption Price........................................... 10
SECTION 3.06. Notes Redeemed in Part................................................ 10
SECTION 3.07. Optional Redemption................................................... 10
SECTION 3.08. Change of Control Offer............................................... 10
ARTICLE IV
Covenants............................................................. 11
SECTION 4.01. Payment of Notes...................................................... 11
SECTION 4.02. Reports by Company.................................................... 11
SECTION 4.03. Stay, Extension and Usury Laws........................................ 12
SECTION 4.04. Corporate Existence................................................... 12
SECTION 4.05. Taxes................................................................. 13
SECTION 4.06. Change of Control..................................................... 13
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
------
<S> <C> <C>
ARTICLE V
Conversion............................................................ 13
SECTION 5.01. Conversion Privilege.................................................. 13
SECTION 5.02. Conversion Procedure.................................................. 13
SECTION 5.03. Fractional Shares..................................................... 14
SECTION 5.04. Taxes on Conversion................................................... 14
SECTION 5.05. Company To Provide Stock.............................................. 14
SECTION 5.06. Adjustment of Conversion Price........................................ 14
SECTION 5.07. No Adjustment......................................................... 17
SECTION 5.08. Other Adjustments..................................................... 17
SECTION 5.09. Adjustments for Tax Purposes.......................................... 17
SECTION 5.10. Adjustments by the Company............................................ 17
SECTION 5.11. Notice of Adjustment.................................................. 17
SECTION 5.12. Notice of Certain Transactions........................................ 17
SECTION 5.13. Effect of Reclassifications, Consolidations, Mergers or Sales on
Conversion Privilege................................................ 18
SECTION 5.14. Trustee's Disclaimer.................................................. 18
ARTICLE VI
Subordination......................................................... 19
SECTION 6.01. Agreement To Subordinate.............................................. 19
SECTION 6.02. No Payment on Notes if Senior Debt in Default......................... 19
SECTION 6.03. Distribution on Acceleration of Notes; Dissolution and Reorganization;
Subrogation of Notes................................................ 19
SECTION 6.04. Reliance by Senior Debt on Subordination Provisions................... 21
SECTION 6.05. No Waiver of Subordination Provisions................................. 21
SECTION 6.06. Trustee's Relation to Senior Debt..................................... 22
SECTION 6.07. Other Provisions Subject Hereto....................................... 22
ARTICLE VII
Consolidation, Merger, Conveyance, Transfer or Lease.................. 22
SECTION 7.01. Company May Consolidate, Etc., Only on Certain Terms.................. 22
SECTION 7.02. Successor Corporation Substituted..................................... 23
ARTICLE VIII
Defaults and Remedies................................................. 23
SECTION 8.01. Events of Default..................................................... 23
SECTION 8.02. Acceleration.......................................................... 24
SECTION 8.03. Other Remedies........................................................ 25
SECTION 8.04. Waiver of Past Defaults............................................... 25
SECTION 8.05. Control by Majority................................................... 25
SECTION 8.06. Limitation on Suits................................................... 25
SECTION 8.07. Rights of Noteholders To Receive Payment.............................. 25
SECTION 8.08. Collection Suit by Trustee............................................ 25
SECTION 8.09. Trustee May File Proofs of Claim...................................... 25
SECTION 8.10. Priorities............................................................ 26
SECTION 8.11. Undertaking for Costs................................................. 26
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
------
<S> <C> <C>
ARTICLE IX
Trustee............................................................... 26
SECTION 9.01. Duties of Trustee..................................................... 26
SECTION 9.02. Rights of Trustee..................................................... 27
SECTION 9.03. Individual Rights of Trustee.......................................... 27
SECTION 9.04. Trustee's Disclaimer.................................................. 27
SECTION 9.05. Notice of Defaults.................................................... 27
SECTION 9.06. Reports by Trustee to Noteholders..................................... 27
SECTION 9.07. Compensation and Indemnity............................................ 28
SECTION 9.08. Replacement of Trustee................................................ 28
SECTION 9.09. Successor Trustee by Merger, Etc...................................... 29
SECTION 9.10. Eligibility; Disqualification......................................... 29
SECTION 9.11. Preferential Collection of Claims Against Company..................... 29
SECTION 9.12. Sections Applicable to Registrar, Paying Agent and Conversion Agent... 29
ARTICLE X
Discharge of Indenture................................................ 29
SECTION 10.01. Termination of Company's Obligations.................................. 29
SECTION 10.02. Repayment to Company.................................................. 29
ARTICLE XI
Amendments, Supplements and Waivers................................... 30
SECTION 11.01. Without Consent of Noteholders........................................ 30
SECTION 11.02. With Consent of Noteholders........................................... 30
SECTION 11.03. Compliance with Trust Indenture Act................................... 31
SECTION 11.04. Revocation and Effect of Consents..................................... 31
SECTION 11.05. Notation on or Exchange of Notes...................................... 31
SECTION 11.06. Trustee Protected..................................................... 31
ARTICLE XII
Miscellaneous......................................................... 31
SECTION 12.01. Trust Indenture Act Controls.......................................... 31
SECTION 12.02. Notices............................................................... 31
SECTION 12.03. Communication by Noteholders with Other Noteholders................... 32
SECTION 12.04. Certificate and Opinion as to Conditions Precedent.................... 32
SECTION 12.05. Statements Required in Certificate or Opinion......................... 32
SECTION 12.06. Rules by Trustee and Agents........................................... 32
SECTION 12.07. Legal Holidays........................................................ 32
SECTION 12.08. Counterparts.......................................................... 33
SECTION 12.09. Variable Provisions................................................... 33
SECTION 12.10. GOVERNING LAW......................................................... 33
SECTION 12.11. No Adverse Interpretation of Other Agreements......................... 33
SECTION 12.12. Successors............................................................ 33
SECTION 12.13. Severability.......................................................... 33
SECTION 12.14. Table of Contents, Headings, Etc...................................... 33
SIGNATURES............................................................................. 34
EXHIBIT A FORM OF CONVERTIBLE SUBORDINATED NOTE................................. 35
</TABLE>
iii
<PAGE> 5
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TIA INDENTURE
SECTION SECTION
- ---------- ---------
<S> <C> <C>
310(a)(1) .......................................................................... 9.10
(a)(2) .......................................................................... 9.10
(a)(3) .......................................................................... NA
(a)(4) .......................................................................... NA
...........................................................................9.08; 9.10
(b)
(c) .......................................................................... NA
311(a) .......................................................................... 9.11
(b) .......................................................................... 9.11
(c) .......................................................................... NA
312(a) .......................................................................... 2.05
(b) .......................................................................... 12.03
(c) .......................................................................... 12.03
313(a) .......................................................................... 9.06
(b)(1) .......................................................................... NA
(b)(2) .......................................................................... 9.06
(c) .......................................................................... 9.06
(d) .......................................................................... 9.06
314(a) .......................................................................... 4.02
(b) .......................................................................... NA
(c)(1) .......................................................................... 12.04
(c)(2) .......................................................................... 12.04
(c)(3) .......................................................................... NA
(d) .......................................................................... NA
(e) .......................................................................... 12.05
(f) .......................................................................... NA
315(a) .......................................................................... 9.01(b)
(b) .......................................................................... 9.05
(c) .......................................................................... 9.01(a)
(d) .......................................................................... 9.01(c)
(e) .......................................................................... 8.11
316(a) last sentence................................................................ 2.09
(a)(1)(A)........................................................................ 6.05
(a)(1)(B)........................................................................ 6.04
(a)(2) .......................................................................... NA
(b) .......................................................................... 6.07
(c) .......................................................................... 1.04
317(a)(1) .......................................................................... 8.08
(a)(2) .......................................................................... 8.09
(b) .......................................................................... 2.04
318(a) .......................................................................... NA
NA means not applicable
</TABLE>
- ---------------
*This Cross-Reference Table is not part of the Indenture.
iv
<PAGE> 6
INDENTURE dated as of , 1996 between Charming Shoppes, Inc., a
Pennsylvania corporation (the "Company") and First Union National Bank, a
National Banking Association, as trustee (the "Trustee").
Each party agrees as follows for the benefit of the other party and for the
equal and ratable benefit of the Noteholders of the Company's [ ]% Convertible
Subordinated Notes Due 2006 (the "Notes"):
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling",
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities or by agreement or otherwise;
provided, however, that beneficial ownership of 10% or more of the voting
securities of a Person shall be deemed to be control.
"Agent" means any Registrar, Paying Agent, Conversion Agent or
co-registrar.
"Board of Directors" means the board of directors of the Company or any
authorized committee thereof.
"Board Resolution" means a duly authorized resolution of the Board of
Directors.
"Business Day" means any day that is not a Legal Holiday.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) equity of such Person,
including any preferred stock, but excluding any debt securities convertible
into such equity.
A "Change of Control " will be deemed to have occurred when: (i) any
"person" or "group" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act, other than the Company, any Subsidiary of the Company or any
employee benefit plan of the Company or any Subsidiary of the Company is or
becomes the "Beneficial Owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, including all shares that any such person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total voting power of
the Voting Stock of the Company or (ii) the merger or consolidation of the
Company with or into another Person or the merger of another Person with or into
the Company, or the sale of all or substantially all the assets of the Company
to another Person (other than a Person that is controlled by the Company), and,
in the case of any such merger or consolidation, the securities of the Company
that are outstanding immediately prior to such transaction and which represent
100% of the aggregate voting power of the Voting Stock of the Company are
changed into or exchanged for cash, securities or property, unless pursuant to
such transaction such securities are changed into or exchanged for, in addition
to any other consideration, securities of the surviving corporation that
represent, immediately after such transaction, at least a majority of the
aggregate voting power of the Voting Stock of the surviving corporation.
"Common Stock" means the common stock, par value $0.10 per share of the
Company as the same exists at the date of the execution of this Indenture or as
such stock may be constituted from time to time.
"Company" means the party named as such above until a successor replaces it
in accordance with Article VII and thereafter means the successor.
"Daily Market Price" means the price of a share of Common Stock on the
relevant date, determined (a) on the basis of the last reported sale price
regular way of the Common Stock as reported on the Nasdaq National Market (the
"NNM"), or if the Common Stock is not then listed on the NNM, as reported on
such national securities exchange upon which the Common Stock is listed, or (b)
if there is no such reported sale
1
<PAGE> 7
on the day in question, on the basis of the average of the closing bid and asked
quotations regular way as so reported, or (c) if the Common Stock is not listed
on the NNM or on any national securities exchange, on the basis of the average
of the high bid and low asked quotations regular way on the day in question in
the over-the-counter market as reported by The Nasdaq Stock Market, Inc.'s OTC
Bulletin Board Service, or if not so quoted, as reported by National Quotation
Bureau, Incorporated, or a similar organization.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Depositary" means The Depository Trust Company, its nominees and their
respective successors.
"Excess Payment" means the excess of (a) the aggregate of the cash and fair
market value of other consideration paid by the Company or any of its
Subsidiaries with respect to the shares acquired in a tender offer over (b) the
market value of such acquired shares after giving effect to the completion of
the tender offer.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Indenture" means this Indenture, as amended from time to time.
"Issuance Date" means the date on which the Notes are first authenticated
and issued.
"Material Subsidiary" means any Subsidiary of the Company including its
Subsidiaries, which meets any of the following conditions:
(1) The Company's and its other Subsidiaries' investments in and
advances to the Subsidiary exceed 10 percent of the total assets of the
Company and its Subsidiaries consolidated as of the end of the most
recently completed fiscal year (for a proposed business combination to be
accounted for as a pooling of interest, this condition is also met when the
number of common shares exchanged or to be exchanged by the Company exceeds
10 percent of its total common shares outstanding at the date the
combination is initiated); or
(2) The Company's and its other Subsidiaries' proportionate share of
the total assets (after intercompany eliminations) of the Subsidiary
exceeds 10 percent of the total assets of the Company's and its
Subsidiaries consolidated as of the end of the most recently completed
fiscal year; or
(3) The Company's and its other Subsidiaries' equity in the income
from continuing operations before income taxes, extraordinary items and
cumulative effect of a change in accounting principle of the Subsidiary
exceeds 10 percent of such income of the Company and its Subsidiaries
consolidated for the most recently completed fiscal year; or
(4) Except in the case of an Event of Default specified in clauses (g)
and (h) of Section 8.01 hereof in which case this clause (4) shall not
apply, the total revenues of the Subsidiary exceed 5 percent of total
revenues of the Company and its Subsidiaries consolidated as of the end of
the most recently completed fiscal year.
For purposes of making the prescribed income test set forth above, the following
guidance should be applied:
1. When a loss has been incurred by either the Company and its Subsidiaries
consolidated or the tested Subsidiary, but not both, the equity in the income or
loss of the tested Subsidiary should be excluded from the income of the Company
and its Subsidiaries consolidated for purposes of the computation.
2. If income of the Company and its Subsidiaries consolidated for the most
recent fiscal year is at least 10 percent lower than the average of the income
for the last five fiscal years, such average income should be substituted for
purposes of the computation. Any loss years should be omitted for purposes of
computing average income.
"Noteholder" or "holder" means a Person in whose name a Note is registered.
"Notes" means the Notes described above issued, authenticated and delivered
under this Indenture.
2
<PAGE> 8
"Officers' Certificate" means a certificate signed by two Officers, one of
whom must be the Chairman of the Board, the President, the Treasurer or a
Vice-President.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"principal" of a debt security means the principal of the security plus the
premium, if any, on the security.
"Representative" means the trustee, agent or representative (if any) for an
issue of Senior Debt.
"SEC " means the Securities and Exchange Commission.
"Senior Debt" means (a) all indebtedness of the Company, including the
principal of, premium, if any, and interest on such indebtedness whether
outstanding on the date of the Indenture or thereafter created (including
interest accruing after the filing of a petition in bankruptcy whether or not
allowed as a claim in bankruptcy), and all reasonable fees, costs, expenses and
indemnity payments in connection therewith (i) for borrowed money, (ii)
constituting purchase money indebtedness for the payment of which the Company is
directly or contingently liable, (iii) constituting reimbursement obligations
under bank letters of credit, (iv) under interest rate and currency swaps, caps,
floors, collars or similar agreements or arrangements intended to protect the
Company against fluctuations in interest or currency exchange rates, (v) for
commitment, standby and other fees due and payable to financial institutions
with respect to credit facilities available to the Company, (vi) constituting
customary obligations arising in connection with the sale or other transfer of
credit card accounts receivable originated by the Company or its Subsidiaries in
the ordinary course of business, (vii) under any lease of any real or personal
property, whether outstanding on the date of execution of the Indenture or
thereafter created, incurred or assumed, which obligations are (x) capitalized
on the books of the Company in accordance with generally accepted accounting
principles or (y) made as part of any sale and leaseback transaction, (viii)
indebtedness or obligations of others of the kinds described in the preceding
clauses (i)-(vii) that the Company has guaranteed the payment thereof, or (ix)
constituting indebtedness or obligations of others (of the kind described in the
preceding clauses (i)-(vii)) secured in whole or in part by a lien on any of the
Company's property, unless, in any such case, by the terms of the instrument
creating or evidencing such indebtedness it is provided that such indebtedness
is not superior in right of payment to the Notes or to other indebtedness which
is pari passu with, or subordinated to, the Notes, and (b) any modifications,
refundings, deferrals, renewals or extensions of any such Senior Debt, or
securities, notes or other evidences of indebtedness issued in exchange for such
Senior Debt. As used in the preceding sentence the term "purchase money
indebtedness" shall mean indebtedness incurred, issued or given in connection
with the acquisition of any business, properties or assets of any kind acquired
by the Company or any Subsidiary; provided, however, that, without limiting the
generality of the foregoing, such term shall not include any account payable.
"Subsidiary" means any corporation, association or other business entity of
which more than 50% of the total voting power of shares of Capital Stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by any Person or one or more of the other
Subsidiaries of that Person or a combination thereof.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code
sec.sec.77aaa-77bbbb) as in effect on the date of execution of this Indenture,
except as provided in Section 11.03.
"Trading Day" shall mean (A) if the applicable security is listed or
admitted for trading on the New York Stock Exchange or another national
securities exchange, a day on which the New York Stock Exchange or another
national securities exchange is open for business, (B) if the applicable
security is quoted on the NNM, a day on which trades may be made thereon or (C)
if the applicable security is not so listed, admitted
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for trading or quoted, any day other than a Saturday or Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by law
or executive order to close.
"Trustee" means the party named as such above until a successor replaces it
in accordance with the applicable provisions of this Indenture and thereafter
means the successor.
"Trust Officer", when used with respect to the Trustee, means any officer
of the Trustee customarily performing trust functions, and also means, with
respect to a particular corporate trust matter, any officer to whom such
corporate trust matter is referred because of his knowledge of and familiarity
with the particular subject.
"Underwriters" means Lazard Freres & Co. LLC and Bear, Stearns & Co. Inc.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
SECTION 1.02. Other Definitions.
<TABLE>
<CAPTION>
DEFINED IN
TERM SECTION
- ----------------------------------------------------------------------------------- ----------
<S> <C>
"Agent Members".................................................................... 2.01
"Bankruptcy Law"................................................................... 8.01
"Certificated Notes"............................................................... 2.01
"Change of Control Offer".......................................................... 4.06
"Change of Control Payment"........................................................ 4.06
"Change of Control Payment Date"................................................... 3.08
"Commencement Date"................................................................ 3.08
"Company Notice"................................................................... 3.08
"Conversion Agent"................................................................. 2.03
"Conversion Date".................................................................. 5.02
"Conversion Price"................................................................. 5.01
"Conversion Shares"................................................................ 5.06
"Custodian"........................................................................ 8.01
"Distribution Date"................................................................ 5.06
"Distribution Record Date"......................................................... 5.06
"Event of Default"................................................................. 8.01
"Global Note"...................................................................... 2.01
"Legal Holiday".................................................................... 12.07
"NNM".............................................................................. 1.02
"Offer Amount"..................................................................... 3.08
"Officer".......................................................................... 12.09
"Paying Agent"..................................................................... 2.03
"Payment Default".................................................................. 8.01
"Purchase Date".................................................................... 5.06
"Registrar"........................................................................ 2.03
"Rights"........................................................................... 5.06
</TABLE>
SECTION 1.03. Incorporation by Reference of Trust Indenture Act. Whenever
this Indenture refers to a provision of the TIA, the provision is incorporated
by reference in and made a part of this Indenture.
The following TIA terms have the following meanings as applied to this
Indenture:
"indenture securities" means the Notes;
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<PAGE> 10
"indenture security holder" means a Noteholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee; and
"obligor" on the Notes means the Company or any other obligor on the
Notes.
All other terms used in this Indenture that are defined by the TIA, defined
by TIA reference to another statute or defined by SEC rule under the TIA have
the meanings so assigned to them.
SECTION 1.04. Rules of Construction. Unless the context otherwise
requires:
(a) a term has the meaning assigned to it;
(b) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles as of the
date hereof consistently applied;
(c) "or" is not exclusive;
(d) words in the singular include the plural, and words in the plural
include the singular; and
(e) provisions apply to successive events and transactions.
ARTICLE II
THE NOTES
SECTION 2.01. Form and Dating. The Notes and the Trustee's certificate of
authentication shall be substantially in the form of Exhibit A which is hereby
incorporated in and expressly made a part of this Indenture. The Notes may have
notations, legends or endorsements required by law, stock exchange rule,
agreements to which the Company is subject, if any, or usage (provided that any
such notation, legend or endorsement is in a form acceptable to the Company).
The Company shall furnish any such legend not contained in Exhibit A to the
Trustee in writing. Each Note shall be dated the date of its authentication. The
terms and provisions of the Notes set forth in Exhibit A are part of the terms
of this Indenture and to the extent applicable, the Company and the Trustee, by
their execution and delivery of this Indenture, expressly agree to such terms
and provisions and to be bound thereby.
(a) Global Notes. The Notes shall be issued in the form of one or more
global Notes in fully registered form without interest coupons with the Global
Notes Legend set forth in Exhibit A hereto (each, a "Global Note"). The
aggregate principal amount of the Global Note may from time to time be increased
or decreased by adjustments made on the records of the Trustee and the
Depositary or its nominee as hereinafter provided.
(b) Book-Entry Provisions. This Section 2.01(b) shall apply only to a
Global Note deposited with or on behalf of the Depositary.
The Company shall execute and the Trustee shall, in accordance with this
Section 2.01(b), authenticate and deliver initially one or more Global Notes
that (a) shall be registered in the name of Cede & Co. or other nominee of such
Depositary and (b) shall be delivered by the Trustee to such Depositary or
pursuant to such Depositary's instructions or held by the Trustee as custodian
for the Depositary pursuant to a FAST Balance Certificate Agreement between the
Depositary and the Trustee.
Members of, or participants in, the Depositary ("Agent Members") shall have
no rights under this Indenture with respect to any Global Note held on their
behalf by the Depositary or by the Trustee as the custodian of the Depositary or
under such Global Note, and the Depositary may be treated by the Company, the
Trustee and any agent of the Company or the Trustee as the absolute owner of
such Global Note for all purposes whatsoever. Nothing herein shall prevent the
Company, the Trustee or any agent of the Company or the Trustee from giving
effect to any written certification, proxy or other authorization furnished by
the Depositary or impair, as between the Depositary and its Agent Members, the
operation of customary practices of such Depositary governing the exercise of
the rights of a holder of a beneficial interest in any Global Note.
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<PAGE> 11
Except as provided in subparagraph (c) below, owners of a beneficial interest in
a Global Note will not be entitled to have Notes registered in their names, will
not receive or be entitled to receive Notes in definitive registered form and
will not be considered owners or holders thereof under this Indenture.
(c) Certificated Notes. Except as provided in this subparagraph (c), Notes
will not be issued in definitive registered form. If at any time the Depositary
notifies the Company that it is unwilling or unable to continue as depositary
for the Global Notes or if at any time the Depositary ceases to be a clearing
agency registered under the Exchange Act, or otherwise ceases to be eligible to
be a depositary, the Company shall appoint a successor depositary with respect
to the Global Notes. If a successor depositary for the Global Notes is not
appointed by the Company within 90 days after the Company receives such notice
or becomes aware of such ineligibility, the Company shall execute Notes in
definitive registered form without coupons ("Certificated Notes") and the
Trustee, upon receipt thereof, shall authenticate and deliver such Certificated
Notes, in denominations of U.S.$1,000 and integral multiples thereof, in an
aggregate principal amount equal to the aggregate principal amount of such
Global Notes as of the exchange date. Upon the exchange of the Global Notes for
Certificated Notes, the Trustee shall cancel such Global Notes. In addition, if
there is an Event of Default under the Notes or the Indenture, the Depositary
will, if the Trustee so requests, exchange the Global Notes for Certificated
Notes, which will be distributed to its participants.
In the event of the occurrence of either of the events specified in this
Section 2.01(c), the Company will promptly make available to the Trustee a
reasonable supply of Certificated Notes.
SECTION 2.02. Execution and Authentication. The Notes shall be signed on
behalf of the Company by the Chairman of its Board of Directors, any Vice
Chairman of its Board of Directors, its Chief Executive Officer, its President,
any Executive Vice President, or any Vice President, under its corporate seal.
Such signatures may be the manual or facsimile signatures of the present or any
future such officers. The seal of the Company may be in the form of a facsimile
thereof and may be impressed, affixed, imprinted or otherwise reproduced on the
Notes and shall be attested by the Secretary or an Assistant Secretary of the
Company. Typographical and other minor errors or defects in any such
reproduction of the seal or any such signature shall not affect the validity or
enforceability of any Note that has been duly authenticated and delivered by the
Trustee.
In case any officer of the Company who shall have signed any of the Notes
shall cease to be such officer before the Note so signed shall be authenticated
and delivered by the Trustee or disposed of by the Company, such Note
nevertheless may be authenticated and delivered or disposed of as though the
Person who signed such Note had not ceased to be such officer of the Company;
and any Note may be signed on behalf of the Company by such Persons as, at the
actual date of the execution of such Note, shall be the proper officers of the
Company, although at the date of the execution and delivery of this Indenture
any such Person was not such an officer.
A Note shall not be valid until authenticated by the manual signature of an
authorized signatory of the Trustee. The signature shall be conclusive evidence
that the Note has been authenticated under this Indenture.
Upon a written order of the Company signed by two Officers, the Trustee
shall authenticate the Notes for original issue up to an aggregate principal
amount of $100,000,000 (plus up to $15,000,000 aggregate principal amount of
Notes that may be sold by the Company pursuant to the over-allotment option
granted to the Underwriters pursuant to the Underwriting Agreement dated
[ ], 1996 between the Company and the Underwriters). The aggregate
principal amount of Notes outstanding at any time shall not exceed such amount
except as provided in Section 2.07.
The Trustee may appoint an authenticating agent acceptable to the Company
to authenticate Notes. An authenticating agent may authenticate Notes whenever
the Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes authentication by such agent. An authenticating agent has the
same rights as an Agent to deal with the Company or an Affiliate of the Company.
SECTION 2.03. Registrar, Paying Agent and Conversion Agent. The Company
shall maintain (i) an office or agency where Notes may be presented for
registration of transfer or for exchange, (ii) an office or
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<PAGE> 12
agency where Notes may be presented for payment and (iii) an office or agency
where Notes may be presented for conversion. The Trustee is hereby appointed (i)
"Registrar" for the purpose of registering Notes and transfers of Notes as
herein provided, (ii) "Paying Agent" for the purpose of making payments on the
Notes as herein provided and (iii) "Conversion Agent" for the purpose of
effecting conversion of the Notes as herein provided. The Registrar shall keep a
register of the Notes and of their transfer and exchange. The Company may
appoint one or more co-registrars, one or more additional paying agents and one
or more additional conversion agents in such other locations as it shall
determine. The term "Paying Agent" includes any additional paying agent and the
term "Conversion Agent" includes any additional conversion agent. The Company
may change any Paying Agent, Registrar, co-registrar or Conversion Agent without
prior notice to any Noteholder. The Company shall notify the Trustee of the name
and address of any Agent not a party to this Indenture. If the Company fails to
appoint or maintain another entity as Registrar, Paying Agent or Conversion
Agent, the Trustee shall act as such. The Company or any of its Affiliates may
act as Paying Agent, Registrar, co-registrar or Conversion Agent.
SECTION 2.04. Paying Agent To Hold Money in Trust. The Company shall
require each Paying Agent other than the Trustee to agree in writing that the
Paying Agent will hold in trust for the benefit of Noteholders or the Trustee
all money held by the Paying Agent for the payment of principal or interest on
the Notes, and will notify the Trustee of any default by the Company in making
any such payment. While any such default continues, the Trustee may require a
Paying Agent to pay all money held by it to the Trustee. The Company at any time
may require a Paying Agent to pay all money held by it to the Trustee and to
account for any money disbursed by it. Upon payment over to the Trustee, the
Paying Agent (if other than the Company or an Affiliate of the Company) shall
have no further liability for the money. If the Company or an Affiliate of the
Company acts as Paying Agent, it shall segregate and hold in a separate trust
fund for the benefit of the Noteholders all money held by it as Paying Agent.
SECTION 2.05. Noteholder Lists. The Trustee shall preserve in as current
a form as is reasonably practicable the most recent list available to it of the
names and addresses of Noteholders. If the Trustee is not the Registrar, the
Company shall furnish to the Trustee on or before each interest payment date and
at such other times as the Trustee may request in writing a list in such form
and as of such date as the Trustee may reasonably require of the names and
addresses of Noteholders.
SECTION 2.06. Transfer and Exchange. Where Notes are presented to the
Registrar or a co-registrar with a request to register a transfer or to exchange
them for an equal principal amount of Notes of other denominations, the
Registrar shall register the transfer or make the exchange if its requirements
for such transactions are met. To permit registrations of transfers and
exchanges, the Company shall issue and the Trustee shall authenticate Notes at
the Registrar's request. No service charge shall be made for any registration of
transfer or exchange (except as otherwise expressly permitted herein), but the
Company may require payment of a sum sufficient to cover any transfer tax or
similar governmental charge payable in connection therewith (other than any such
transfer tax or similar governmental charge payable upon exchanges pursuant to
Sections 2.10, 3.06 or 11.05 hereof).
In the event of a partial redemption, the Company shall not be required (i)
to issue, register the transfer of, or exchange Notes during a period beginning
at the opening of business 15 days before the day of any selection of Notes for
redemption under Section 3.02 hereof and ending at the close of business on the
day of selection, or (ii) to exchange or register the transfer of any Note so
selected for redemption in whole or in part, except the unredeemed portion of
any Note being redeemed in part.
Except as otherwise permitted pursuant to Section 2.01(c), so long as a
Global Note remains outstanding and is held by or on behalf of the Depositary,
transfers of a Global Note shall be limited to transfers of such Global Note in
whole, but not in part, to nominees of the Depositary or to a successor of the
Depositary or such successor's nominee.
SECTION 2.07. Replacement Notes. If the holder of a Note claims that the
Note has been lost, destroyed or wrongfully taken or if such Note is mutilated
and is surrendered to the Trustee, the Company shall issue and the Trustee shall
authenticate a replacement Note if the Trustee's and the Company's requirements
are met. If required by the Trustee or the Company, an indemnity bond must be
provided by the
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<PAGE> 13
holder which is sufficient in the judgment of both to protect the Company, the
Trustee, any Agent or any authenticating agent from any loss which any of them
may suffer if a Note is replaced. The Company may charge for its expenses in
replacing a Note.
In case any such mutilated, destroyed, lost or stolen Note has become or is
about to become due and payable, or is about to be purchased by the Company
pursuant to Article III hereof, the Company in its discretion may, instead of
issuing a new Note, pay or purchase such Note, as the case may be.
Every replacement Note is an additional obligation of the Company.
SECTION 2.08. Outstanding Notes. The Notes outstanding at any time are
all the Notes authenticated by the Trustee except for those cancelled by it,
those delivered to it for cancellation, and those described in this Section as
not outstanding.
If a Note is replaced, paid or purchased pursuant to Section 2.07 hereof,
it ceases to be outstanding unless the Trustee receives proof satisfactory to it
that the replaced, paid or purchased Note is held by a bona fide purchaser.
If Notes are considered paid under Section 4.01 hereof, they cease to be
outstanding and interest on them ceases to accrue.
A Note does not cease to be outstanding because the Company or an Affiliate
of the Company holds the Note.
SECTION 2.09. Treasury Notes. In determining whether the Noteholders of
the required principal amount of Notes have concurred in any direction, waiver
or consent, Notes owned by the Company or an Affiliate of the Company shall be
considered as though they are not outstanding, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, waiver or consent, only Notes which a Trust Officer of the Trustee
actually knows are so owned shall be so disregarded.
SECTION 2.10. Temporary Notes. Until definitive Notes are ready for
delivery, the Company may prepare and the Trustee shall authenticate temporary
Notes. Temporary Notes shall be substantially in the form of definitive Notes
but may have variations that the Company considers appropriate for temporary
Notes. Without unreasonable delay, the Company shall prepare and the Trustee
shall authenticate definitive Notes in exchange for temporary Notes.
SECTION 2.11. Cancellation. The Company at any time may deliver Notes to
the Trustee for cancellation. The Registrar, Paying Agent and Conversion Agent
shall forward to the Trustee any Notes surrendered to them for registration of
transfer, redemption, conversion, exchange or payment. The Trustee shall
promptly cancel all Notes surrendered for registration of transfer, redemption,
conversion, exchange, payment, replacement or cancellation and shall return all
cancelled Notes to the Company. The Company may not issue new Notes to replace
Notes that it has paid or that have been delivered to the Trustee for
cancellation or that any holder has converted pursuant to Article V. All Notes
that are redeemed or purchased by the Company or any of its Subsidiaries will
forthwith be cancelled and accordingly may not be reissued or resold.
SECTION 2.12. Defaulted Interest. If the Company fails to make a payment
of interest on the Notes, it shall pay such defaulted interest plus any interest
payable on the defaulted interest, in any lawful manner. It may pay such
defaulted interest, plus any such interest payable on it, to the Persons who are
Noteholders on a subsequent special record date. The Company shall fix any such
record date and payment date. At least 15 days before any such record date, the
Company shall mail to Noteholders a notice that states the record date, payment
date, and amount of such interest to be paid.
SECTION 2.13. CUSIP Numbers. The Company in issuing Notes may use "CUSIP"
numbers (if then generally in use) in addition to serial numbers; if so, the
Trustee shall use such "CUSIP" numbers in addition to serial numbers in notices
of redemption and repurchase as a convenience to holders; provided, however,
that any such notice may state that no representation is made as to the
correctness of such CUSIP number either as printed on the Notes or as contained
in any notice of a redemption or repurchase and that
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<PAGE> 14
reliance may be placed only on the serial or other identification numbers
printed on the Notes, and any such redemption or repurchase shall not be
affected by any defect in or omission of such CUSIP number. The Company shall
promptly notify the Trustee of any change in the CUSIP number.
ARTICLE III
REDEMPTION
SECTION 3.01. Notices to Trustee. If the Company elects to redeem Notes
pursuant to the optional redemption provision of Section 3.07 hereof, it shall
notify the Trustee of the redemption date and the principal amount of Notes to
be redeemed. The Company shall give each notice provided for in this Section
3.01 at least 45 days before the redemption date.
SECTION 3.02. Selection of Notes to be Redeemed. If less than all the
Notes are to be redeemed, the Trustee shall select the Notes to be redeemed by
lot provided that no Notes of $1,000 or less shall be redeemed in part. The
Trustee shall make the selection not more than 60 days and not less than 30 days
before the redemption date from Notes outstanding not previously called for
redemption. Notes and portions of them selected for redemption shall be in
amounts of $1,000 or integral multiples thereof. Provisions of this Indenture
that apply to Notes called for redemption also apply to portions of Notes called
for redemption. The Trustee shall notify the Company promptly of the Notes or
portions of Notes to be called for redemption.
If any Note selected for partial redemption is converted in part after such
selection, the converted portion of such Note shall be deemed (so far as may be)
to be the portion to be selected for redemption. The Notes (or portions thereof)
so selected shall be deemed duly selected for redemption for all purposes
hereof, notwithstanding that any such Note is converted in whole or in part
before the mailing of the notice of redemption. Upon any redemption of less than
all the Notes, the Company and the Trustee may treat as outstanding any Notes
surrendered for conversion during the period 15 days next preceding the mailing
of a notice of redemption and need not treat as outstanding any Note
authenticated and delivered during such period in exchange for the unconverted
portion of any Note converted in part during such period.
SECTION 3.03. Notice of Redemption. At least 30 days but not more than 60
days before a redemption date, the Company shall mail a notice of redemption to
each holder whose Notes are to be redeemed at such holder's registered address.
The notice shall identify the Notes (including CUSIP number and, if
appropriate, serial numbers) to be redeemed and shall state:
(a) the redemption date;
(b) the redemption price;
(c) if any Note is being redeemed in part, (i) the portion of the
principal amount of such Note to be redeemed (ii) the last date on which
exchanges or registration of transfers of Notes may be made pursuant to
Section 2.06 hereof and (iii) that, after the redemption date, upon
cancellation of such Note, a new Note or Notes in principal amount equal to
the unredeemed portion will be issued in the name of the holder thereof;
(d) in the case of partial redemption of Notes, the aggregate
principal amount of Notes to be redeemed and the aggregate principal amount
of the Notes which will be outstanding after such partial redemption; and
(e) the name and address of the Paying Agent;
(f) that Notes called for redemption must be surrendered to the Paying
Agent to collect the redemption price plus accrued interest;
(g) that, unless the Company defaults in making such redemption
payment or the Paying Agent is prohibited from making such payment pursuant
to the terms of this Indenture, interest on Notes called for redemption
ceases to accrue on and after the redemption date; and
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<PAGE> 15
(h) the paragraph of the Notes pursuant to which the Notes called for
redemption are being redeemed.
Such notice shall also state the current Conversion Price and the date on
which the right to convert such Notes or portions thereof into Common Stock of
the Company will expire.
At the Company's request, the Trustee shall give notice of redemption in
the Company's name and at its expense.
SECTION 3.04. Effect of Notice of Redemption. Once notice of redemption
is mailed, Notes called for redemption become due and payable on the redemption
date at the price set forth in the Note.
SECTION 3.05. Deposit of Redemption Price. On or before the redemption
date, the Company shall deposit with the Trustee or with the Paying Agent money
sufficient to pay the redemption price of and accrued interest up to but not
including the redemption date on all Notes to be redeemed on that date (subject
to the right of holders of record on the relevant record date to receive
interest due on an interest payment date) unless theretofore converted into
Common Stock pursuant to the provisions hereof. The Trustee or the Paying Agent
shall return to the Company any money not required for that purpose.
SECTION 3.06. Notes Redeemed in Part. Upon cancellation of a Note that is
redeemed in part, the Company shall issue and the Trustee shall authenticate for
the holder at the expense of the Company a new Note equal in principal amount to
the unredeemed portion of the Note surrendered.
SECTION 3.07. Optional Redemption. The Company may redeem all or any
portion of the Notes, upon the terms and at the redemption prices set forth in
each of the Notes. Any redemption pursuant to this Section 3.07 shall be made
pursuant to the provisions of Section 3.01 through 3.06 hereof.
SECTION 3.08. Change of Control Offer. (a) In the event that, pursuant to
Section 4.06 hereof, the Company shall commence a Change of Control Offer, the
Company shall follow the procedures in this Section 3.08.
(b) The Change of Control Offer shall remain open for 30 calendar days
following the date of the Company Notice provided pursuant to Section 3.08(e)
(the "Commencement Date"), except to the extent that a longer period is required
by applicable law. On the date that is 45 days after the date of the Company
Notice (the "Change of Control Payment Date"), except to the extent that a
longer period is required by applicable law, the Company shall purchase the
principal amount of Notes required to be purchased pursuant to Section 4.06
hereof (the "Offer Amount").
(c) If the Change of Control Payment Date is on or after an interest
payment record date and on or before the related interest payment date, any
accrued interest will be paid to the Person in whose name a Note is registered
at the close of business on such record date, and no additional interest will be
payable to Noteholders who tender Notes pursuant to the Change of Control Offer.
(d) The Company shall provide the Trustee with notice of the Change of
Control Offer at least 10 Business Days before the Commencement Date.
(e) Within 30 days after the occurrence of a Change of Control, the Company
or the Trustee (at the request and expense of the Company) shall send, by first
class mail, a notice (the "Company Notice") to each of the Noteholders, which
shall govern the terms of the Change of Control Offer and shall state:
(i) that the Change of Control Offer is being made pursuant to this
Section 3.08 and Section 4.06 hereof and that all Notes tendered will be
accepted for payment;
(ii) the Offer Amount, the purchase price (as determined in accordance
with Section 4.06 hereof) the length of time the Change of Control Offer
will remain open and the Change of Control Payment Date;
(iii) that any Note or portion thereof not tendered or accepted for
payment will continue to accrue interest;
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(iv) that, unless the Company defaults in the payment of the Change of
Control Payment, any Note or portion thereof accepted for payment pursuant
to the Change of Control Offer shall cease to accrue interest after the
Change of Control Payment Date;
(v) that Noteholders electing to have a Note or portion thereof
purchased pursuant to any Change of Control Offer will be required to
surrender the Note, with the form entitled "Option of Noteholder To Elect
Purchase" on the reverse of the Note completed, to the Paying Agent at the
address specified in the Company Notice prior to the close of business on
the 30th day after the Commencement Date;
(vi) that, unless the Company defaults in the payment of the Change of
Control Payment, an election pursuant to Clause (v) above shall be
irrevocable, and that the right of the holder to convert the Notes with
respect to which the repurchase right is being exercised shall expire upon
submission of such Notes; and
(vii) that Noteholders whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered, which unpurchased portion must be equal
to $1,000 in principal amount or an integral multiple thereof.
In addition, the notice shall contain all instructions and materials that
the Company shall reasonably deem necessary to enable such Noteholders to tender
Notes pursuant to the Change of Control Offer.
(f) On the Change of Control Payment Date, the Company shall, to the extent
lawful, (i) irrevocably deposit with the Trustee or the Paying Agent in
immediately available funds an amount equal to the Offer Amount plus accrued
interest on such Notes or portions thereof, (ii) accept for payment the Notes or
portions thereof tendered pursuant to the Change of Control Offer, (iii) deliver
or cause to be delivered to the Trustee Notes so accepted and (iv) deliver to
the Trustee an Officers' Certificate stating such Notes or portions thereof have
been accepted for payment by the Company in accordance with the terms of this
Section 3.08. The Paying Agent shall promptly (but in any case not later than
ten (10) calendar days after the Change of Control Payment Date) mail or deliver
to each tendering Noteholder an amount equal to the purchase price of the Notes
tendered by such Noteholder plus accrued interest thereon, and the Trustee shall
promptly authenticate and mail or deliver to each such Noteholder a new Note
equal in principal amount to any unpurchased portion of the Note surrendered, if
any; provided, however, that each new Note shall be in a principal amount of
$1,000 or an integral multiple thereof. Any Notes not so accepted shall be
promptly mailed or delivered by or on behalf of the Company to the holder
thereof. The Company will publicly announce the results of the Change of Control
Offer on, or as soon as practicable after, the Change of Control Payment Date.
(g) The Company will comply with the requirements of Rules 13e-4 and 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations are applicable in connection with the
repurchase of the Notes in connection with a Change of Control.
ARTICLE IV
COVENANTS
SECTION 4.01. Payment of Notes. The Company shall pay the principal of
and interest on the Notes on the dates and in the manner provided in the Notes.
Principal and interest shall be considered paid on the date due if the Paying
Agent (other than the Company or an Affiliate of the Company) holds on that date
money designated for and sufficient to pay all principal and interest then due
and such Paying Agent is not prohibited from paying such money to the
Noteholders on that date pursuant to the terms of this Indenture. To the extent
lawful, the Company shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue installments of interest
(without regard to any applicable grace period) at the rate borne by the Notes,
compounded semiannually.
SECTION 4.02. Reports by Company.
The Company shall:
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(1) file with the Trustee, within 15 days after the Company is
required to file the same with the SEC, copies of the annual reports and of
the information, documents and other reports (or copies of such portions of
any of the foregoing as the SEC may from time to time by rules and
regulations prescribe) which the Company may be required to file with the
SEC pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the
Company is not required to file information, documents or reports pursuant
to either of said Sections, then it shall file with the Trustee and the
SEC, in accordance with rules and regulations prescribed from time to time
by the SEC, such of the supplementary and periodic information, documents
and reports which may be required pursuant to Section 13 of the Exchange
Act in respect of a security listed and registered on a national securities
exchange as may be prescribed from time to time in such rules and
regulations;
(2) file with the Trustee and the SEC, in accordance with rules and
regulations prescribed from time to time by the SEC, such additional
information, documents and reports with respect to compliance by the
Company with the conditions and covenants of this Indenture as may be
required from time to time by such rules and regulations; and
(3) transmit by mail to all Holders, as their names and addresses
appear in the register maintained by the Registrar, within 30 days after
the filing thereof with the Trustee, such summaries of any information,
documents and reports required to be filed by the Company pursuant to
paragraphs (1) and (2) of this Section 402 as may be required by rules and
regulations prescribed from time to time by the SEC.
(4) deliver to the Trustee, within 120 days after the end of each
fiscal year of the Company, an Officers' Certificate stating that a review
of the activities of the Company and its Subsidiaries during the preceding
fiscal year has been made under the supervision of the signing Officers
with a view to determining whether the Company has kept, observed,
performed and fulfilled its obligations under, and complied with the
covenants and conditions contained in, this Indenture, and further stating,
as to each such Officer signing such certificate, that to the best of his
knowledge the Company has kept, observed, performed and fulfilled each and
every covenant, and complied with the covenants and conditions contained in
this Indenture and is not in default in the performance or observance of
any of the terms, provisions and conditions hereof (or, if a Default or
Event of Default shall have occurred, describing all such Defaults or
Events of Default of which he may have knowledge) and that to the best of
his knowledge no event has occurred and remains in existence by reason of
which payments on account of the principal of or interest, if any, on the
Notes are prohibited.
One of the Officers signing such Officers' Certificate shall be either the
Company's principal executive officer, principal financial officer or principal
accounting officer.
The Company will, so long as any of the Notes are outstanding, deliver to
the Trustee, forthwith upon becoming aware of any Default or Event of Default an
Officers' Certificate specifying such Default or Event of Default.
SECTION 4.03. Stay, Extension and Usury Laws. The Company covenants (to
the extent that it may lawfully do so) that it will not at any time insist upon,
plead, or in any manner whatsoever claim or take the benefit or advantage of,
any stay, extension or usury law wherever enacted, now or at any time hereafter
in force, which may affect the covenants or the performance of this Indenture;
and the Company (to the extent it may lawfully do so) hereby expressly waives
all benefit or advantage of any such law, and covenants that it will not, by
resort to any such law, hinder, delay or impede the execution of any power
herein granted to the Trustee, but will suffer and permit the execution of every
such power as though no such law has been enacted.
SECTION 4.04. Corporate Existence. Subject to Article VII hereof, the
Company will do or cause to be done all things necessary to preserve and keep in
full force and effect its corporate existence and the corporate rights (charter
and statutory), corporate licenses and corporate franchises of the Company;
provided, however, that the Company shall not be required to preserve any such
right, license or franchise, if the Board of Directors of the Company shall
determine that the preservation thereof is no longer desirable in
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the conduct of the business of the Company and that the loss thereof is not
adverse in any material respect to the Noteholders.
SECTION 4.05. Taxes. The Company shall, and shall cause each of its
Subsidiaries to, pay prior to delinquency all taxes, assessments and
governmental levies, (i) except for such taxes, assessments and governmental
levies, the nonpayment of which is not reasonably likely to result in a material
adverse change in the financial condition, results of operations or business of
the Company and its subsidiaries, considered as a whole or (ii) except as
contested in good faith and by appropriate proceedings.
SECTION 4.06. Change of Control. (a) Upon the occurrence of a Change of
Control, each holder of Notes shall have the right, in accordance with this
Section 4.06 and Section 3.08 hereof, to require the Company to repurchase all
or any part (equal to $1,000 or an integral multiple thereof) of such holder's
Notes pursuant to the terms of Section 3.08 (the "Change of Control Offer") at a
purchase price equal to 100% of the principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the Change of Control Payment Date (the
"Change of Control Payment").
(b) Within 30 days following any Change of Control, the Company shall mail
to each holder the Company Notice provided by Section 3.08(e).
ARTICLE V
CONVERSION
SECTION 5.01. Conversion Privilege. A holder of a Note may convert the
principal amount thereof (or any portion thereof that is an integral multiple of
$1,000) into fully paid and nonassessable shares of Common Stock of the Company
at any time prior to the close of business (New York time) on the date of the
Note's maturity at the Conversion Price in effect on the Conversion Date (the
"Conversion Price"), except that, with respect to any Note called for
redemption, such conversion right shall terminate at the close of business on
the Business Day immediately preceding the redemption date, and except that if a
Note is submitted pursuant to the exercise of a repurchase right pursuant to
Section 3.08 and Section 4.06 hereof, the right to convert such Note will expire
upon submission (unless the Company shall default in making the redemption
payment or the Change of Control Payment, as the case may be when it becomes
due, in which case the conversion right shall terminate on the date such default
is cured). The number of shares of Common Stock issuable upon conversion of a
Note is determined by dividing the principal amount of the Note converted by the
Conversion Price.
The initial Conversion Price is stated in Section 10 of the Notes and is
subject to adjustment as provided in this Article V.
Provisions of this Indenture that apply to conversion of all of a Note also
apply to conversion of a portion of it. A holder of Notes is not entitled to any
rights of a holder of Common Stock until such holder of Notes has converted such
Notes into Common Stock, and only to the extent that such Notes are deemed to
have been converted into Common Stock under this Article V.
SECTION 5.02. Conversion Procedure. To convert a Note, a holder must
satisfy the requirements in Section 10 of the Notes. The date on which the
holder satisfies all of those requirements is the conversion date (the
"Conversion Date"). As soon as practicable after the Conversion Date, the
Company shall deliver to the holder through the Conversion Agent a certificate
for the number of whole shares of Common Stock issuable upon the conversion and
a check for any fractional share determined pursuant to Section 5.03. The Person
in whose name the certificate is registered shall become the stockholder of
record on the Conversion Date and, as of such date, such Person's rights as a
Noteholder shall cease; provided, however, that no surrender of a Note on any
date when the stock transfer books of the Company shall be closed shall be
effective to constitute the Person entitled to receive the shares of Common
Stock upon such conversion as the stockholder of record of such shares of Common
Stock on such date, but such surrender shall be effective to constitute the
Person entitled to receive such shares of Common Stock as the stockholder of
record thereof for all purposes at the close of business on the next succeeding
day on which such stock transfer books are open; provided further,
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however, that such conversion shall be at the Conversion Price in effect on the
date that such Note shall have been surrendered for conversion, as if the stock
transfer books of the Company had not been closed.
No payment or adjustment will be made for accrued and unpaid interest on a
converted Note or for dividends or distributions on shares of Common Stock
issued upon conversion of a Note. If any holder surrenders a Note for conversion
after the close of business on the record date for the payment of an installment
of interest and prior to the opening of business on the next interest payment
date, then, notwithstanding such conversion, the interest payable on such
interest payment date shall be paid to the holder of such Note on such record
date. In such event, such Note, when surrendered for conversion, must be
accompanied by payment in funds acceptable to the Company of an amount equal to
the interest payable on such interest payment date on the portion so converted
(unless such Notes are subject to redemption on a redemption date between such
record date and the Business Day immediately following such interest payment
date).
If a holder converts more than one Note at the same time, the number of
whole shares of Common Stock issuable upon the conversion shall be based on the
total principal amount of Notes converted.
Upon surrender of a Note that is converted in part, the Trustee shall
authenticate for the holder a new Note equal in principal amount to the
unconverted portion of the Note surrendered.
SECTION 5.03. Fractional Shares. The Company will not issue fractional
shares of Common Stock upon conversion of a Note. In lieu thereof, the Company
will pay an amount in cash based upon the Daily Market Price of the Common Stock
on the trading day prior to the Conversion Date. The value of a fraction of a
share of Common Stock shall be determined by multiplying the Daily Market Price
of a full share of Common Stock by a fraction equalling the fraction of the
share of Common Stock which would otherwise be issued and rounding the amount to
the nearest cent.
SECTION 5.04. Taxes on Conversion. The issuance of certificates for
shares of Common Stock upon the conversion of any Note shall be made without
charge to the converting Noteholder for such certificates or for any tax in
respect of the issuance of such certificates, and such certificates shall be
issued in the respective names of, or in such names as may be directed by, the
holder or holders of the converted Note; provided, however, that in the event
that certificates for shares of Common Stock are to be issued in a name other
than the name of the holder of the Note converted, such Note, when surrendered
for conversion, shall be accompanied by an instrument of transfer, in form
satisfactory to the Company, duly executed by the registered holder thereof or
his duly authorized attorney; and provided further, however, that the Company
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any such certificates in a
name other than that of the holder of the converted Note, and the Company shall
not be required to issue or deliver such certificates unless or until the Person
or Persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid or is not applicable.
SECTION 5.05. Company To Provide Stock. The Company shall at all times
reserve and keep available, free from preemptive rights, out of its authorized
but unissued Common Stock, solely for the purpose of issuance upon conversion of
Notes as herein provided, a sufficient number of shares of Common Stock to
permit the conversion of all outstanding Notes for shares of Common Stock.
All shares of Common Stock which may be issued upon conversion of the Notes
shall be duly authorized, validly issued, fully paid and nonassessable when so
issued.
SECTION 5.06. Adjustment of Conversion Price. The Conversion Price shall
be subject to adjustment from time to time as follows:
(a) In case the Company shall (1) pay a dividend in shares of Common Stock
to holders of Common Stock, (2) make a distribution in shares of Common Stock to
holders of Common Stock, (3) subdivide its outstanding shares of Common Stock
into a greater number of shares of Common Stock or (4) combine its outstanding
shares of Common Stock into a smaller number of shares of Common Stock, the
Conversion Price in effect immediately prior to such action shall be adjusted so
that the holder of any Note thereafter
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surrendered for conversion shall be entitled to receive the number of shares of
Common Stock which he would have owned immediately following such action had
such Notes been converted immediately prior thereto. Any adjustment made
pursuant to this subsection (a) shall become effective immediately after the
record date in the case of a dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision or
combination.
(b) In case the Company shall issue rights or warrants to all holders of
Common Stock entitling them (for a period commencing no earlier than the record
date for the determination of holders of Common Stock entitled to receive such
rights or warrants and expiring not more than 45 days after such record date) to
subscribe for or purchase shares of Common Stock (or securities convertible into
Common Stock) at a price per share less than the current market price (as
determined pursuant to subsection (f) below) of the Common Stock on such record
date, the Conversion Price shall be adjusted so that the same shall equal the
price determined by multiplying the Conversion Price in effect immediately prior
to such record date by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding on such record date, plus the number of
shares of Common Stock which the aggregate offering price of the offered shares
of Common Stock (or the aggregate conversion price of the convertible securities
so offered) would purchase at such current market price, and of which the
denominator shall be the number of shares of Common Stock outstanding on such
record date plus the number of additional shares of Common Stock offered (or
into which the convertible securities so offered are convertible). Such
adjustments shall become effective immediately after such record date. If such
rights or warrants are not so issued, the Conversion Price shall again be
adjusted to be the Conversion Price which would then be in effect if such date
fixed for the determination of stockholders entitled to receive such rights or
warrants had not been fixed.
(c) In case the Company shall distribute to all holders of Common Stock
shares of any class of Capital Stock of the Company other than Common Stock,
evidences of indebtedness or other assets (other than cash), or shall distribute
to all holders of Common Stock rights or warrants to subscribe for securities or
other assets (other than those securities referred to in subsection (b) above),
then in each such case the Conversion Price shall be adjusted so that the same
shall equal the price determined by multiplying the Conversion Price in effect
immediately prior to the date of such distribution by a fraction of which the
numerator shall be the current market price (determined as provided in
subsection (f) below) of the Common Stock on the record date mentioned below
less the then fair market value (as determined by the Board of Directors, whose
determination shall be conclusive evidence of such fair market value and
described in a Board Resolution) of the portion of the assets so distributed or
of such subscription rights or warrants applicable to one share of Common Stock,
and of which the denominator shall be such current market price of the Common
Stock. Such adjustment shall become effective immediately after the record date
for the determination of the holders of Common Stock entitled to receive such
distribution. Notwithstanding the foregoing, in the event that the Company shall
distribute rights or warrants to subscribe for additional shares of the
Company's Capital Stock (other than the Common Stock referred to in subsection
(b) above) ("Rights") pro rata to holders of Common Stock, the Company may, in
lieu of making any adjustment pursuant to this Section 5.06, make proper
provision so that each holder of a Note who converts such Note (or any portion
thereof) after the record date for such distribution and prior to the expiration
or redemption of the Rights shall be entitled to receive upon such conversion,
in addition to the shares of Common Stock issuable upon such conversion (the
"Conversion Shares"), a number of Rights to be determined as follows: (i) if
such conversion occurs on or prior to the date for the distribution to the
holders of Rights of separate certificates evidencing such Rights (the
"Distribution Date"), the same number of Rights to which a holder of a number of
shares of Common Stock equal to the number of Conversion Shares is entitled at
the time of such conversion in accordance with the terms and provisions of and
applicable to the Rights; and (ii) if such conversion occurs after the
Distribution Date, the same number of Rights to which a holder of the number of
shares of Common Stock into which the principal amount of the Note so converted
was convertible immediately prior to the Distribution Date would have been
entitled on the Distribution Date in accordance with the terms and provisions of
and applicable to the Rights. If such rights or warrants are not so issued, the
Conversion Price shall again be adjusted to be the Conversion Price which would
then be in effect if such date fixed for the determination of stockholders
entitled to receive such rights or warrants had not been fixed.
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(d) In case the Company shall, by dividend or otherwise, at any time
distribute to all holders of its Common Stock cash (including any distributions
of cash out of current or retained earnings of the Company) in an aggregate
amount that, together with the sum of (x) the aggregate amount of any other
distributions to all holders of its Common Stock made in cash plus (y) all
Excess Payments, in each case made within the 12 months preceding the date fixed
for determining the stockholders entitled to such distribution (the
"Distribution Record Date") and in respect of which no Conversion Price
adjustment pursuant to paragraph (e) of this Section or this paragraph (d) has
been made, exceeds 10% of the product of the current market price per share
(determined as provided in paragraph (f) of this Section) of the Common Stock on
the Distribution Record Date times the number of shares of Common Stock
outstanding on the Distribution Record Date (excluding shares held in the
treasury of the Company), the Conversion Price shall be reduced so that the same
shall equal the price determined by multiplying such Conversion Price in effect
immediately prior to the effectiveness of the Conversion Price reduction
contemplated by this paragraph (d) by a fraction of which the numerator shall be
(x) the current market price per share (determined as provided in paragraph (f)
of this Section) of the Common Stock on the Distribution Record Date less (y)
the amount determined by dividing the aggregate amount of such cash and other
consideration (including any Excess Payments) so distributed in excess of the
10% referred to above by the shares of Common Stock outstanding on the
Distribution Record Date, and the denominator shall be such current market price
per share (determined as provided in paragraph (f) of this Section) of the
Common Stock on the Distribution Record Date, such reduction to become effective
immediately prior to the opening of business on the day following the
Distribution Record Date.
(e) In case a tender offer made by the Company or any Subsidiary of the
Company for all or any portion of the Common Stock shall be consummated, if an
Excess Payment is made in respect of such tender offer and the amount of such
Excess Payment, together with the sum of (x) the aggregate amount of all Excess
Payments plus (y) the aggregate amount of all distributions to all holders of
the Common Stock made in cash (specifically including distributions of cash out
of current or retained earnings), in each case made within the 12 months
preceding the expiration of such current tender offer, (the "Purchase Date"),
and as to which no adjustment pursuant to paragraph (d) of this Section or this
paragraph (e) has been made, exceeds 10% of the product of the current market
price per share (determined as provided in paragraph (f) of this Section) of the
Common Stock on the Purchase Date times the number of shares of Common Stock
outstanding (including any tendered shares but excluding any shares held in the
treasury of the Company) on the Purchase Date, the Conversion Price shall be
reduced so that the same shall equal the price determined by multiplying such
Conversion Price in effect immediately prior to the effectiveness of the
Conversion Price reduction contemplated by this paragraph (e) by a fraction of
which the numerator shall be (x) the current market price per share (determined
as provided in paragraph (f) of this Section) of the Common Stock on the
Purchase Date less (y) the amount determined by dividing the aggregate amount of
such Excess Payments and such cash distributions, if any, in excess of the 10%
amount referred to above by the shares of Common Stock outstanding on the
Purchase Date, and the denominator shall be such current market price per share
(determined as provided in paragraph (f) of this Section) of the Common Stock on
the Purchase Date, such reduction to become effective immediately prior to the
opening of business on the day following the Purchase Date.
(f) The current market price per share of Common Stock on any date shall be
deemed to be the average of the Daily Market Prices for the shorter of (i) 30
consecutive Trading Days ending on the last full trading day on the exchange or
market referred to in determining such Daily Market Prices prior to the time of
determination or (ii) the period commencing on the date next succeeding the
first public announcement of the issuance of such rights or such warrants or
such other distribution or such Excess Payment through such last full trading
day on the exchange or market referred to in determining such Daily Market
Prices prior to the time of determination.
(g) In any case in which this Section 5.06 shall require that an adjustment
be made immediately following a record date for an event, the Company may elect
to defer, until such event, issuing to the holder of any Note converted after
such record date the shares of Common Stock and other Capital Stock of the
Company issuable upon such conversion over and above the shares of Common Stock
and other Capital Stock
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of the Company issuable upon such conversion only on the basis of the Conversion
Price prior to adjustment; and, in lieu of the shares the issuance of which is
so deferred, the Company shall issue or cause its transfer agents to issue due
bills or other appropriate evidence of the right to receive such shares.
SECTION 5.07. No Adjustment. No adjustment in the Conversion Price shall
be required until cumulative adjustments amount to 1% or more of the Conversion
Price as last adjusted; provided, however, that any adjustments which by reason
of this Section 5.07 are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Article V shall be made to the nearest cent or to the nearest one-hundredth of a
share, as the case may be. No adjustment need be made for rights to purchase
Common Stock pursuant to a Company plan for reinvestment of dividends or
interest. No adjustment need be made for a change in the par value or no par
value of the Common Stock.
SECTION 5.08. Other Adjustments. (a) In the event that, as a result of an
adjustment made pursuant to Section 5.06 above, the holder of any Note
thereafter surrendered for conversion shall become entitled to receive any
shares of Capital Stock of the Company other than shares of its Common Stock,
thereafter the Conversion Price of such other shares so receivable upon
conversion of any Notes shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to Common Stock contained in this Article V.
(b) In the event that shares of Common Stock are not delivered after the
expiration of any of the rights or warrants referred to in Section 5.06(b) and
Section 5.06(c) hereof, the Conversion Price shall be readjusted to the
Conversion Price which would otherwise be in effect had the adjustment made upon
the issuance of such rights or warrants been made on the basis of delivery of
only the number of shares of Common Stock actually delivered.
SECTION 5.09. Adjustments for Tax Purposes. The Company may, at its
option, make such reductions in the Conversion Price, in addition to those
required by Section 5.06 above, as the Board of Directors determines to be
advisable in order that any stock dividend, subdivision of shares, distribution
of rights to purchase stock or securities or distribution of securities
convertible into or exchangeable for stock made by the Company to its
stockholders will not be taxable to the recipients thereof.
SECTION 5.10. Adjustments by the Company. The Company from time to time
may, to the extent permitted by law, reduce the Conversion Price by any amount
for any period of at least 20 days, in which case the Company shall give at
least 15 days' notice of such reduction in accordance with Section 5.11, if the
Board of Directors has made a determination that such reduction would be in the
best interests of the Company, which determination shall be conclusive.
SECTION 5.11. Notice of Adjustment. Whenever the Conversion Price is
adjusted, the Company shall promptly mail to Noteholders at the addresses
appearing on the Registrar's books a notice of the adjustment and file with the
Trustee an Officers' Certificate briefly stating the facts requiring the
adjustment and the manner of computing it. The certificate shall be conclusive
evidence of the correctness of such adjustment.
SECTION 5.12. Notice of Certain Transactions. In the event that:
(1) the Company takes any action which would require an adjustment in the
Conversion Price;
(2) the Company takes any action that would require a supplemental
indenture pursuant to Section 5.13; or
(3) there is a dissolution or liquidation of the Company;
a holder of a Note may wish to convert such Note into shares of Common Stock
prior to the record date for or the effective date of the transaction so that he
may receive the rights, warrants, securities or assets which a holder of shares
of Common Stock on that date may receive. Therefore, the Company shall mail to
Noteholders at the addresses appearing on the Registrar's books and the Trustee
a notice stating the proposed record or effective date, as the case may be. The
Company shall mail the notice at least 15 days before such
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date; however, failure to mail such notice or any defect therein shall not
affect the validity of any transaction referred to in clause (1), (2) or (3) of
this Section 5.12.
SECTION 5.13. Effect of Reclassifications, Consolidations, Mergers or
Sales on Conversion Privilege. If any of the following shall occur, namely: (i)
any reclassification or change of outstanding shares of Common Stock issuable
upon conversion of Notes (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination), (ii) any consolidation or merger to which the Company is a
party other than a merger in which the Company is the continuing corporation and
which does not result in any reclassification of, or change (other than a change
in name, or par value, or from par value to no par value, or from no par value
to par value or as a result of a subdivision or combination) in, outstanding
shares of Common Stock or (iii) any sale or conveyance of all or substantially
all of the property or business of the Company as an entirety, then the Company,
or such successor or purchasing corporation, as the case may be, shall, as a
condition precedent to such reclassification, change, consolidation, merger,
sale or conveyance, execute and deliver to the Trustee a supplemental indenture
in form satisfactory to the Trustee providing that the holder of each Note then
outstanding shall have the right to convert such Note into the kind and amount
of shares of stock and other securities and property (including cash) receivable
upon such reclassification, change, consolidation, merger, sale or conveyance by
a holder of the number of shares of Common Stock deliverable upon conversion of
such Note immediately prior to such reclassification, change, consolidation,
merger, sale or conveyance. Such supplemental indenture shall provide for
adjustments of the Conversion Price which shall be as nearly equivalent as may
be practicable to the adjustments of the Conversion Price provided for in this
Article V. The foregoing, however, shall not in any way affect the right a
holder of a Note may otherwise have, pursuant to clause (ii) of the last
sentence of subsection (c) of Section 5.06, to receive Rights upon conversion of
a Note. If, in the case of any such consolidation, merger, sale or conveyance,
the stock or other securities and property (including cash) receivable thereupon
by a holder of Common Stock includes shares of stock or other securities and
property of a corporation other than the successor or purchasing corporation, as
the case may be, in such consolidation, merger, sale or conveyance, then such
supplemental indenture shall also be executed by such other corporation and
shall contain such additional provisions to protect the interests of the holders
of the Notes as the Board of Directors of the Company shall reasonably consider
necessary by reason of the foregoing. The provision of this Section 5.13 shall
similarly apply to successive consolidations, mergers, sales or conveyances.
In the event the Company shall execute a supplemental indenture pursuant to
this Section 5.13, the Company shall promptly file with the Trustee an Officers'
Certificate briefly stating the reasons therefor, the kind or amount of shares
of stock or securities or property (including cash) receivable by holders of the
Notes upon the conversion of their Notes after any such reclassification,
change, consolidation, merger, sale or conveyance and any adjustment to be made
with respect thereto. Neither the Trustee nor any Conversion Agent shall have
any duty whatsoever to determine whether a supplemental indenture under this
Section 5.13 is required or what the provisions of such supplemental indenture
should be.
SECTION 5.14. Trustee's Disclaimer. The Trustee has no duty to determine
when an adjustment under this Article V should be made, how it should be made or
what such adjustment should be, but may accept as conclusive evidence of the
correctness of any such adjustment, and shall be protected in relying upon the
Officers' Certificate with respect thereto which the Company is obligated to
file with the Trustee pursuant to Section 5.11. The Trustee makes no
representation as to the validity or value of any securities or assets issued
upon conversion of Notes, and the Trustee shall not be responsible for the
Company's failure to comply with any provisions of this Article V.
The Trustee shall not be under any responsibility to determine the
correctness of any provisions contained in any supplemental indenture executed
pursuant to Section 5.13, but may accept as conclusive evidence of the
correctness thereof, and shall be protected in relying upon, the Officers'
Certificate with respect thereto which the Company is obligated to file with the
Trustee pursuant to Section 5.13.
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ARTICLE VI
SUBORDINATION
SECTION 6.01. Agreement To Subordinate. The Company, for itself and its
successors, and each Noteholder, by his acceptance of Notes, agree that the
payment of the principal of or interest or any other amounts due on the Notes is
subordinated in right of payment, to the extent and in the manner stated in this
Article VI, to the prior payment in full of all existing and future Senior Debt.
SECTION 6.02. No Payment on Notes if Senior Debt in Default. Anything in
this Indenture to the contrary notwithstanding, no payment on account of
principal, or interest on, or redemption, repurchase or other amounts due on the
Notes, and no redemption, purchase, or other acquisition of the Notes, shall be
made by or on behalf of the Company (i) unless full payment of amounts then due
for principal and interest or other amounts then due on all Senior Debt has been
made or duly provided for pursuant to the terms of the instrument governing such
Senior Debt or (ii) if there shall have occurred an event of default (other than
a default in the payment of principal, sinking funds or interest or other
amounts) with respect to any Senior Debt, as defined therein or in the
instrument under which the same is outstanding, permitting the holders thereof
to accelerate the maturity thereof and written notice of such occurrence shall
have been given to the Company and to the Trustee under this Indenture by any
holder or holders of such Senior Debt and such event of default shall not have
been cured or waived or shall not have ceased to exist.
In the event that, notwithstanding the provisions of this Section 6.02,
payments are made by or on behalf of the Company in contravention of the
provisions of this Section 6.02, such payments shall be held by the Trustee, any
Paying Agent or the holders, as applicable, in trust for the benefit of, and
shall be paid over to and delivered to, the Representative of the holders of
Senior Debt or the trustee under the indenture or other agreement (if any),
pursuant to which any instruments evidencing any Senior Debt may have been
issued for application to the payment of all Senior Debt ratably according to
the aggregate amounts remaining unpaid to the extent necessary to pay all Senior
Debt in full in accordance with the terms of such Senior Debt, after giving
effect to any concurrent payment or distribution to or for the holders of Senior
Debt.
The Company shall give prompt written notice to the Trustee and any Paying
Agent of any default or event of default under any Senior Debt or under any
agreement pursuant to which any Senior Debt may have been issued.
SECTION 6.03. Distribution on Acceleration of Notes; Dissolution and
Reorganization; Subrogation of Notes. (a) If the Notes are declared due and
payable because of the occurrence of an Event of Default, the Company shall give
prompt written notice to the holders of all Senior Debt or to the trustee(s) or
other Representative for such Senior Debt of such acceleration. The Company may
not pay the principal of, interest or any other amounts due on the Notes until
five days after such holders or trustee(s) of Senior Debt receive such notice
and, thereafter, the Company may pay the principal of, interest or any other
amounts due on the Notes only if the provisions of this Article VI permit such
payment.
(b) Upon (i) any acceleration of the principal amount due on the Notes
because of an Event of Default or (ii) any distribution of assets of the
Company upon any dissolution, winding up, liquidation or reorganization of
the Company (whether in bankruptcy, insolvency or receivership proceedings
or upon an assignment for the benefit of creditors or any other
dissolution, winding up, liquidation or reorganization of the Company):
(1) the holders of all Senior Debt shall first be entitled to receive
payment in full of the principal thereof, the interest thereon and any
other amounts due thereon before the Noteholders are entitled to receive
payment on account of the principal of or interest on or any other amounts
due on the Notes;
(2) any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities (other than
securities of the Company as reorganized or readjusted or securities of the
Company or any other corporation provided for by a plan of reorganization
or readjustment the payment of which is subordinate, at least to the extent
provided in this Article with respect to the Notes, to the payment in full
without diminution or modification by such plan of all Senior Debt), to
which the
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holders or the Trustee would be entitled except for the provisions of this
Article, shall be paid by the liquidating trustee or agent or other Person
making such a payment or distribution, directly to the holders of Senior
Debt (or their Representatives(s) or trustee(s) acting on their behalf),
ratably according to the aggregate amounts remaining unpaid on account of
the principal of, interest and other amounts due on the Senior Debt held or
represented by each, to the extent necessary to make payment in full of all
Senior Debt remaining unpaid, after giving effect to any concurrent payment
or distribution to the holders of such Senior Debt; and
(3) in the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company of any kind or character, whether in
cash, property or securities (other than securities of the Company as
reorganized or readjusted, or securities of the Company or any other
corporation provided for by a plan of reorganization or readjustment the
payment of which is subordinate, at least to the extent provided in this
Article with respect to the Notes, to the payment in full without
diminution or modification by such plan of Senior Debt), shall be received
by the Trustee or the Noteholders before all Senior Debt is paid in full,
such payment or distribution shall be held in trust for the benefit of, and
be paid over to upon written request by a holder of the Senior Debt, the
holders of the Senior Debt remaining unpaid (or their Representatives) or
trustee(s) acting on their behalf, ratably as aforesaid, for application to
the payment of such Senior Debt until all such Senior Debt shall have been
paid in full, after giving effect to any concurrent payment or distribution
to the holders of such Senior Debt.
Subject to the payment in full of all Senior Debt, the Noteholders shall be
subrogated to the rights of the holders of Senior Debt to receive payments or
distributions of cash, property or securities of the Company applicable to the
Senior Debt until the principal of and interest on the Notes shall be paid in
full and, for purposes of such subrogation, no such payments or distributions to
the holders of Senior Debt of cash, property or securities which otherwise would
have been payable or distributable to Noteholders shall, as between the Company,
its creditors other than the holders of Senior Debt, and the Noteholders, be
deemed to be a payment by the Company to or on account of the Senior Debt, it
being understood that the provisions of this Article are and are intended solely
for the purpose of defining the relative rights of the Noteholders, on the one
hand, and the holders of Senior Debt, on the other hand.
Nothing contained in this Article or elsewhere in this Indenture or in the
Notes is intended to or shall (i) impair, as between the Company and its
creditors other than the holders of Senior Debt, the obligation of the Company,
which is absolute and unconditional, to pay to the Noteholders the principal of
and interest on the Notes as and when the same shall become due and payable in
accordance with the terms of the Notes, (ii) affect the relative rights of the
Noteholders and creditors of the Company other than holders of Senior Debt or,
as between the Company and the Trustee, the obligations of the Company to the
Trustee, or (iii) prevent the Trustee or the holders from exercising all
remedies otherwise permitted by applicable law upon default under this
Indenture, subject to the rights, if any, under this Article of the holders of
Senior Debt in respect of cash, property and securities of the Company received
upon the exercise of any such remedy.
Upon distribution of assets of the Company referred to in this Article, the
Trustee, subject to the provisions of Section 9.01 hereof, and the Noteholders
shall be entitled to rely upon a certificate of the liquidating trustee or agent
or other Person making any distribution to the Trustee or to the Noteholders for
the purpose of ascertaining the Persons entitled to participate in such
distribution, the holders of the Senior Debt and other indebtedness of the
Company, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article.
The Trustee, however, shall not be deemed to owe any fiduciary duty to the
holders of Senior Debt. Nothing contained in this Article or elsewhere in this
Indenture, or in any of the Notes, shall prevent the good faith application by
the Trustee of any moneys which were deposited with it hereunder, prior to its
receipt of written notice of facts which would prohibit such application, for
the purpose of the payment of or on account of the principal of or interest on
the Notes unless, prior to the date on which such application is made by the
Trustee, the Trustee shall have received at the address specified in Section
12.09 hereof written notice in accordance with Section 6.03(d) hereof of the
facts which would prohibit the making of such application.
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(c) The provisions of this Article shall not be applicable to any
cash, properties or securities received by the Trustee or by any holder
when received as a holder of Senior Debt and nothing in Section 9.11 hereof
or elsewhere in this Indenture shall deprive the Trustee or such holder of
any of its rights as such holder.
(d) The Company shall give prompt written notice to the Trustee of any
fact known to the Company which would prohibit the making of any payment of
money to or by the Trustee in respect of the Notes pursuant to the
provisions of this Article. Notwithstanding the provisions of this Article
or any other provisions of this Indenture, the Trustee shall not be charged
with knowledge of the existence of any fact which would prohibit the making
of any payment of moneys to or by the Trustee in respect of the Notes
pursuant to the provisions in this Article, unless and until three Business
Days after the Trustee shall have received written notice thereof at the
address specified in Section 12.09 hereof from the Company or any holder or
holders of Senior Debt or from any trustee therefor; and, prior to the
receipt of any such written notice, the Trustee, subject to the provisions
of Section 9.01 hereof, shall be entitled in all respects conclusively to
assume that no such facts exist; provided, however, that if on a date not
less than three Business Days immediately preceding the date upon which, by
the terms hereof, any such moneys may become payable for any purpose
(including, without limitation, the principal of or interest on any Note),
the Trustee shall not have received with respect to such moneys the notice
provided for in this Section 6.03(d), then anything herein contained to the
contrary notwithstanding, the Trustee shall have full power and authority
to receive such moneys and to apply the same to the purpose for which they
were received, and shall not be affected by any notice to the contrary
which may be received by it on or after such prior date.
The Trustee shall be entitled to conclusively rely on the delivery to it of
a written notice by a Person representing himself to be a holder of Senior Debt
(or a trustee on behalf of such holder) to establish that such notice has been
given by a holder of Senior Debt (or a trustee on behalf of any such holder or
holders). In the event that the Trustee determines in good faith that further
evidence is required with respect to the right of any Person as a holder of
Senior Debt to participate in any payment or distribution pursuant to this
Article, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Debt held by
such Person, the extent to which such Person is entitled to participate in such
payment or distribution and any other facts pertinent to the rights of such
Person under this Article, and, if such evidence is not furnished, the Trustee
may defer any payment to such Person pending judicial determination as to the
right of such Person to receive such payment; nor shall the Trustee be charged
with knowledge of the curing or waiving of any default of the character
specified in Section 6.02 hereof or that any event or any condition preventing
any payment in respect of the Notes shall have ceased to exist, unless and until
the Trustee shall have received written notice to such effect.
(e) The provisions of this Section 6.03 applicable to the Trustee
shall (unless the context requires otherwise) also apply to any Paying
Agent for the Company.
SECTION 6.04. Reliance by Senior Debt on Subordination Provisions. Each
Noteholder by his acceptance thereof acknowledges and agrees that the foregoing
subordination provisions are, and are intended to be, an inducement and a
consideration for each holder of any Senior Debt, whether such Senior Debt was
created or acquired before or after the issuance of the Notes, to acquire and
continue to hold, or to continue to hold, such Senior Debt, and such holder of
Senior Debt shall be deemed conclusively to have relied on such subordination
provisions in acquiring and continuing to hold, or in continuing to hold, such
Senior Debt. Notice of any default in the payment of any Senior Debt, except as
expressly stated in this Article, and notice of acceptance of the provisions
hereof are hereby expressly waived. Except as otherwise expressly provided
herein, no waiver, forbearance or release by any holder of Senior Debt under
such Senior Debt or under this Article shall constitute a release of any of the
obligations or liabilities of the Trustee or holders of the Notes provided in
this Article.
SECTION 6.05. No Waiver of Subordination Provisions. Except as otherwise
expressly provided herein, no right of any present or future holder of any
Senior Debt to enforce subordination as herein provided shall at any time in any
way be prejudiced or impaired by any act or failure to act on the part of the
Company
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or by any act or failure to act, in good faith, by any such holder, or by any
noncompliance by the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof any such holder may have or be
otherwise charged with.
Without in any way limiting the generality of the foregoing paragraph, the
holders of Senior Debt may, at any time and from time to time, without the
consent of, or notice to, the Trustee or the holders of the Notes, without
incurring responsibility to the holders of the Notes and without impairing or
releasing the subordination provided in this Article VI or the obligations
hereunder of the holders of the Notes to the holders of Senior Debt, do any one
or more of the following: (i) change the manner, place or terms of payment of,
or renew or alter, Senior Debt, or otherwise amend or supplement in any manner
Senior Debt or any instrument evidencing the same or any agreement under which
Senior Debt is outstanding; (ii) sell, exchange, release or otherwise dispose of
any property pledged, mortgaged or otherwise securing Senior Debt; (iii) release
any Person liable in any manner for the collection of Senior Debt; and (iv)
exercise or refrain from exercising any rights against the Company or any other
Person.
SECTION 6.06. Trustee's Relation to Senior Debt. The Trustee in its
individual capacity shall be entitled to all the rights set forth in this
Article in respect of any Senior Debt at any time held by it, to the same extent
as any holder of Senior Debt, and nothing in Section 9.11 hereof or elsewhere in
this Indenture shall deprive the Trustee of any of its rights as such holder.
With respect to the holders of Senior Debt, the Trustee undertakes to
perform or to observe only such of its covenants and obligations, as are
specifically set forth in this Article, and no implied covenants or obligations
with respect to the holders of Senior Debt shall be read into this Indenture
against the Trustee. The Trustee shall not owe any fiduciary duty to the holders
of Senior Debt but shall have only such obligations to such holders as are
expressly set forth in this Article.
Each Noteholder by his acceptance thereof authorizes and directs the
Trustee on his behalf to take such action as may be necessary or appropriate to
effectuate the subordination provided in this Article and appoints the Trustee
his attorney- in-fact for any and all such purposes, including, in the event of
any dissolution, winding up or liquidation or reorganization under any
applicable bankruptcy law of the Company (whether in bankruptcy, insolvency or
receivership proceedings or otherwise), the timely filing of a claim for the
unpaid balance of such Noteholder's Notes in the form required in such
proceedings and the causing of such claim to be approved. If the Trustee does
not file a claim or proof of debt in the form required in such proceedings prior
to 30 days before the expiration of the time to file such claims or proofs, then
any holder or holders of Senior Debt or their representative or representatives
shall have the right to demand, sue for, collect, receive and receipt for the
payments and distributions in respect of the Notes which are required to be paid
or delivered to the holders of Senior Debt as provided in this Article and to
file and prove all claims therefor and to take all such other action in the name
of the holders or otherwise, as such holders of Senior Debt or representative
thereof may determine to be necessary or appropriate for the enforcement of the
provisions of this Article.
SECTION 6.07. Other Provisions Subject Hereto. Expect as expressly stated
in this Article, notwithstanding anything contained in this Indenture to the
contrary, all the provisions of this Indenture and the Notes are subject to the
provisions of this Article. However, nothing in this Article shall apply to or
adversely affect the claims of, or payment to, the Trustee pursuant to Section
9.07. Notwithstanding the foregoing, the failure to make a payment on account of
principal of or interest on the Notes by reason of any provision of this Article
VI shall not be construed as preventing the occurrence of an Event of Default
under Section 8.01.
ARTICLE VII
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 7.01. Company May Consolidate, Etc., Only on Certain Terms. The
Company may not consolidate or merge with or into any Person (whether or not the
Company is the surviving corporation), or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its properties or assets
unless:
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(a) the Company is the surviving or continuing corporation or the
Person formed by or surviving any such consolidation or merger (if other
than the Company) or the Person which acquires by sale, assignment,
transfer, lease, conveyance or other disposition the properties and assets
of the Company, is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia;
(b) the entity or Person formed by or surviving any such consolidation
or merger (if other than the Company) assumes all the obligations of the
Company, pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee, under the Notes and this Indenture;
(c) such sale, assignment, transfer, lease, conveyance or other
disposition of all or substantially all of the Company's properties or
assets shall be as an entirety or virtually as an entirety to one Person
and such Person shall have assumed all the obligations of the Company,
pursuant to a supplemental indenture in a form reasonably satisfactory to
the Trustee, under the Notes and this Indenture;
(d) immediately after such transaction no Default or Event of Default
exists; and
(e) the Company or such Person shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
transaction and the supplemental indenture comply with this Indenture and
that all conditions precedent in this Indenture relating to such
transaction have been satisfied.
SECTION 7.02. Successor Corporation Substituted. Upon any consolidation
or merger, or any sale, assignment, transfer, lease, conveyance or other
disposition of all or substantially all of the assets of the Company in
accordance with Section 7.01 hereof, the successor corporation formed by such
consolidation or into or with which the Company is merged or to which such sale,
assignment, transfer, lease, conveyance or other disposition is made shall
succeed to, and be substituted for and may exercise every right and power of,
the Company under this Indenture with the same effect as if such successor
Person has been named as the Company herein; provided, however, that the
predecessor Company in the case of a sale, assignment, transfer, lease,
conveyance or other disposition shall not be released from the obligations under
this Indenture and the Notes.
ARTICLE VIII
DEFAULTS AND REMEDIES
SECTION 8.01. Events of Default. An "Event of Default" occurs if:
(a) the Company defaults in the payment of interest on any Note when
the same becomes due and payable, whether or not such payments shall be
prohibited by Article VI, and the Default continues for a period of 30 days
after such date;
(b) the Company defaults in the payment of the principal on any Note
when the same becomes due and payable at maturity, upon redemption, upon
required repurchase or otherwise, whether or not such payment shall be
prohibited by Article VI;
(c) failure by the Company to make a payment with respect to
repurchase of Notes in accordance with the provisions contained in Section
4.06 hereof, whether or not such purchase shall be prohibited by Article
VI;
(d) the Company fails to observe or perform any other covenant or
agreement contained in this Indenture or the Notes, required by it to be
performed, and the Default continues for a period of 60 days after the
receipt of written notice from the Trustee to the Company or from the
holders of 25% in aggregate principal amount of the then outstanding Notes
to the Company and the Trustee stating that such notice is a "Notice of
Default";
(e) there is a default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or
evidenced any indebtedness for money borrowed by the Company or
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any Subsidiary of the Company (or the payment of which is guaranteed by the
Company or any Subsidiary of the Company), whether such indebtedness or
guarantee now exists or is created after the Issuance Date, which default
(i) is caused by a failure to pay when due principal of or interest on such
indebtedness within the grace period provided for in such indebtedness
(which failure continues beyond any applicable grace period) (a "Payment
Default") or (ii) results in the acceleration of such indebtedness prior to
its express maturity and, in each case, the principal amount of any such
indebtedness, together with the principal amount of any other such
indebtedness under which there has been a Payment Default which is
continuing or the maturity of which has been so accelerated, aggregates $15
million or more; provided, however, that no such default by a Subsidiary
shall be covered by this clause (e) unless such Subsidiary alone or
together with all other Subsidiaries which are then in default as described
by subclauses (i) or (ii) in this clause (e), would, in the aggregate,
constitute a Material Subsidiary;
(f) failure by the Company or any Subsidiary of the Company to pay
final judgments (other than any judgment as to which a reputable insurance
company has accepted full liability) aggregating in excess of $15 million,
which judgments are not stayed within 60 days after their entry; provided,
however, that no such default by a Subsidiary shall be covered by this
subsection (f) unless such Subsidiary alone or together with all other
Subsidiaries which then have such final judgments outstanding, would, in
the aggregate, constitute a Material Subsidiary;
(g) the Company or any Material Subsidiary pursuant to or within the
meaning of any Bankruptcy Law: (i) commences a voluntary case, (ii)
consents to the entry of an order for relief against it in an involuntary
case in which it is the debtor, (iii) consents to the appointment of a
Custodian of it or for all or substantially all of its property, (iv) makes
a general assignment for the benefit of its creditors, or (v) makes the
admission in writing that it generally is unable to pay its debts as the
same become due; or
(h) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that: (i) is for relief against the Company or any
Material Subsidiary of the Company in an involuntary case, (ii) appoints a
Custodian of the Company or any Material Subsidiary of the Company or for
all or substantially all of its property, and the order or decree remains
unstayed and in effect for 60 days, or (iii) orders the liquidation of the
Company or any Material Subsidiary of the Company, and the order or decree
remains unstayed and in effect for 60 days.
The term "Bankruptcy Law" means Title 11, U.S. Code or any similar federal
or state law for the relief of debtors. The term "Custodian" means any receiver,
trustee, assignee, liquidator or similar official under any Bankruptcy Law.
SECTION 8.02. Acceleration. If any Event of Default (other than an Event
of Default specified in clauses (g) and (h) of Section 8.01 hereof) occurs and
is continuing, the Trustee by notice to the Company, or the Noteholders of at
least 25% in principal amount of the then outstanding Notes by notice to the
Company and the Trustee, may declare all the Notes to be due and payable. Upon
such declaration, the principal of and accrued and unpaid interest on the Notes
shall be due and payable immediately. If an Event of Default specified in clause
(g) or (h) of Section 8.01 hereof occurs, the principal of and accrued and
unpaid interest on the Notes shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Noteholder. In the event of a declaration of acceleration hereunder because an
Event of Default set forth in paragraph (e) of Section 8.01 has occurred and is
continuing, such declaration of acceleration will be automatically annulled if
the holders of the indebtedness which is the subject of such Event of Default
have waived such Payment Default or rescinded their declaration of acceleration
in respect of such indebtedness or if such Payment Default has been cured within
30 days thereof and no other Event of Default has occurred during such 30-day
period which has not been cured or waived. The Noteholders of a majority in
aggregate principal amount of the then outstanding Notes, by written notice to
the Trustee, may rescind and annul an acceleration and its consequences if the
rescission would not conflict with any judgment or decree and if all Events of
Default have been cured or waived except nonpayment of principal or interest
that has become due solely because of the acceleration.
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SECTION 8.03. Other Remedies. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy to collect the payment
of principal or interest on the Notes or to enforce the performance of any
provision of the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of
the Notes or does not produce any of them in the proceeding. A delay or omission
by the Trustee or any Noteholder in exercising any right or remedy accruing upon
an Event of Default shall not impair the right or remedy or constitute a waiver
of or acquiescence in the Event of Default. All remedies are cumulative to the
extent permitted by law.
SECTION 8.04. Waiver of Past Defaults. Subject to Section 11.02, the
Noteholders of a majority in aggregate principal amount of the then outstanding
Notes by notice to the Trustee may on behalf of all the holders waive an
existing Default or Event of Default and its consequences. When a Default or
Event of Default is waived, it is cured and ceases; but no such waiver shall
extend to any subsequent or other Default or impair any right consequent
thereon.
SECTION 8.05. Control by Majority. The Noteholders of a majority in
principal amount of the then outstanding Notes may direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on it. However, the Trustee may refuse
to follow any direction that conflicts with law or this Indenture, is unduly
prejudicial to the rights of other Noteholders, or would involve the Trustee in
personal liability.
SECTION 8.06. Limitation on Suits. A Noteholder may pursue a remedy with
respect to this Indenture or the Notes only if:
(a) the Noteholder gives to the Trustee notice of a continuing Event
of Default;
(b) the Noteholders of at least 25% in principal amount of the then
outstanding Notes make a request to the Trustee to pursue the remedy;
(c) such Noteholder or Noteholders offer to the Trustee indemnity
satisfactory to the Trustee against any loss, liability or expense;
(d) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(e) during such 60-day period the Noteholders of a majority in
principal amount of the then outstanding Notes do not give the Trustee a
direction inconsistent with the request.
A Noteholder may not use this Indenture to prejudice the rights of another
Noteholder or to obtain a preference or priority over another Noteholder.
SECTION 8.07. Rights of Noteholders To Receive Payment. Notwithstanding
any other provision of this Indenture, the right of any Noteholder to convert
such Noteholder's Note and to receive payment of principal and interest on such
Noteholder's Note, on or after the respective due dates expressed in such Note,
or to bring suit for the enforcement of any such payment on or after such
respective dates, shall not be impaired or affected without the consent of the
Noteholder made pursuant to this Section.
SECTION 8.08. Collection Suit by Trustee. If an Event of Default
specified in Section 8.01(a) or (b) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Company for the whole amount of principal and interest remaining unpaid on the
Notes and interest on overdue principal and interest and such further amount as
shall be sufficient to cover the costs and, to the extent lawful, expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel.
SECTION 8.09. Trustee May File Proofs of Claim. The Trustee may file such
proofs of claim and other papers or documents as may be necessary or advisable
in order to have the claims of the Trustee and the Noteholders allowed in any
judicial proceedings relative to the Company, its creditors or its property.
Nothing contained herein shall be deemed to authorize the Trustee to authorize
or consent to or accept or adopt on behalf of any Noteholder any plan of
reorganization, arrangement, adjustment or composition affecting the
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Notes or the rights of any Noteholder thereof, or to authorize the Trustee to
vote in respect of the claim of any Noteholder in any such proceeding.
SECTION 8.10. Priorities. If the Trustee collects any money pursuant to this
Article, it shall pay out the money in the following order:
First: to the Trustee for amounts due under Section 9.07 hereof;
Second: to the holders of Senior Debt to the extent required by
Article VI;
Third: to Noteholders for amounts due and unpaid on the Notes for
principal and interest ratably, without preference or priority of any kind,
according to the amounts due and payable on the Notes for principal and
interest respectively; and
Fourth: to the Company.
Except as otherwise provided in Section 2.12 hereof, the Trustee may fix a
record date and payment date for any payment to Noteholders made pursuant to
this Section.
SECTION 8.11. Undertaking for Costs. In any suit for the enforcement of
any right or remedy under this Indenture or in any suit against the Trustee for
any action taken or omitted by it as a Trustee, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees and expenses, against any party
litigant in the suit, having due regard to the merits and good faith of the
claims or defenses made by the party litigant. This Section does not apply to a
suit by the Trustee, a suit by a holder pursuant to Section 8.07 hereof, or a
suit by Noteholders of more than 25% in principal amount of the then outstanding
Notes.
ARTICLE IX
TRUSTEE
SECTION 9.01. Duties of Trustee. (a) If an Event of Default has occurred
and is continuing, the Trustee shall exercise such of the rights and powers
vested in it by this Indenture, and use the same degree of care and skill in
their exercise, as a prudent man would exercise or use under the circumstances
in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default: (i) the
Trustee need perform only those duties that are specifically set forth in
this Indenture and no others and (ii) in the absence of bad faith on its
part, the Trustee may conclusively rely, as to the truth of the statements
and the correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture. However, in the case of any such certificates or opinions
which by any provision hereof are specifically required to be furnished to
the Trustee, the Trustee shall examine the certificates and opinions to
determine whether or not they conform to the requirements of this
Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own wilful
misconduct, except that: (i) this paragraph does not limit the effect of
paragraph (b) of this Section 9.01; (ii) the Trustee shall not be liable
for any error of judgment made in good faith by a Trust Officer, unless it
is proved that the Trustee was negligent in ascertaining the pertinent
facts and (iii) the Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 8.05 hereof.
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b) and (c) of this Section 9.01. No
provision of this Indenture shall require the Trustee to expend or risk its
own funds or otherwise incur any financial liability in the performance of
any of its duties hereunder, or in the exercise of any of its rights or
powers, if it shall have reasonable grounds for believing that repayment of
such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
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<PAGE> 32
(e) The Trustee may refuse to perform any duty or exercise any right
or power unless it receives indemnity satisfactory to it against any loss,
liability or expense.
(f) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree in writing with the Company. Money
held in trust by the Trustee need not be segregated from other funds except
to the extent required by law.
SECTION 9.02. Rights of Trustee. (a) The Trustee may rely on any document
reasonably believed by it to be genuine and to have been signed or presented by
the proper Person. The Trustee need not investigate any fact or matter stated in
the document.
(b) Before the Trustee acts or refrains from acting, it (unless other
evidence be herein specifically prescribed) may require an Officers'
Certificate or an Opinion of Counsel, or both. The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance
on such Officers' Certificate or Opinion of Counsel.
(c) The Trustee shall not be liable for any action that it takes or
omits to take in good faith, without negligence or wilful misconduct, and
that it reasonably believes to be authorized or within its rights or
powers.
(d) The Trustee shall not be charged with knowledge of any Event of
Default under subsection (c), (d), (e) or (f) of Section 8.01 or of the
identity of any Material Subsidiary unless either (1) a Trust Officer
assigned to its corporate trust department shall have actual knowledge
thereof, or (2) the Trustee shall have received notice thereof in
accordance with Section 12.02 hereof from the Company or any holder.
(e) The Trustee may consult with counsel of its selection and the
advice of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon.
(f) The Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by
it hereunder.
SECTION 9.03. Individual Rights of Trustee. The Trustee in its individual
or any other capacity may become the owner or pledgee of Notes and may otherwise
deal with the Company or an Affiliate of the Company with the same rights it
would have if it were not Trustee. Any Agent may do the same with like rights.
However, the Trustee is subject to Sections 9.10 and 9.11 hereof.
SECTION 9.04. Trustee's Disclaimer. The Trustee makes no representation
as to the validity or adequacy of this Indenture or the Notes, it shall not be
accountable for the Company's use of the proceeds from any Notes authenticated
and delivered by the Trustee in conformity with the provisions of this
Indenture, and it shall not be responsible for any statement of the Company in
the Indenture or any statement in the Notes other than its authentication.
SECTION 9.05. Notice of Defaults. If a Default or Event of Default occurs
and is continuing and if it is actually known to the Trustee, the Trustee shall
mail to Noteholders a notice of the Default or Event of Default within 90 days
after it occurs. Except in the case of a Default or Event of Default in payment
of principal or interest on any Note, the Trustee may withhold the notice if and
so long as a committee of its Trust Officers in good faith determines that
withholding the notice is in the interests of Noteholders.
SECTION 9.06. Reports by Trustee to Noteholders. Within 60 days after the
reporting date stated in Section 12.09, the Trustee shall mail to Noteholders a
brief report dated as of such reporting date that complies with TIA sec. 313(a)
if and to the extent required by such sec. 313(a). The Trustee also shall comply
with TIA sec. 313(b)(2). The Trustee shall also transmit by mail all reports as
required by TIA sec. 313(c).
A copy of each report at the time of its mailing to Noteholders shall be
filed with the SEC and each stock exchange on which the Notes are listed. The
Company shall promptly notify the Trustee when the Notes are listed on any stock
exchange.
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<PAGE> 33
SECTION 9.07. Compensation and Indemnity. The Company shall pay to the
Trustee from time to time such compensation for its services hereunder as shall
be agreed to in writing between the Company and the Trustee. The Trustee's
compensation shall not be limited by any law on compensation of a trustee of an
express trust. The Company shall reimburse the Trustee upon request for all
reasonable and duly documented disbursements, expenses and advances incurred or
made by it. Such disbursements and expenses may include the reasonable and duly
documented disbursements, compensation and expenses of the Trustee's agents and
counsel.
The Company shall indemnify each of the Trustee or any predecessor Trustee
and its officers, directors, employees and all other agents against any and all
loss, damage, claim, expense, including taxes (other than taxes based on the
income of the Trustee) or liability incurred by it except as set forth in the
next paragraph. The Trustee shall notify the Company promptly of any claim for
which it may seek indemnity. The Company shall defend the claim and the Trustee
shall cooperate in the defense. The Trustee may have separate counsel and the
Company shall pay the reasonable and duly documented fees, disbursements and
expenses of such counsel. The Company need not pay for any settlement made
without its consent, which consent shall not be unreasonably withheld.
The Company need not reimburse any expense or indemnify against any loss or
liability incurred by the Trustee through negligence or bad faith.
To secure the Company's payment obligations in this Section, the Trustee
shall have a lien prior to the Notes on all money or property held or collected
by the Trustee, except money or property held in trust to pay principal and
interest on particular Notes.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 8.01(g) or (h) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
The provisions of this Section 9.07 shall survive the termination of this
Indenture, as provided by Section 10.01 hereof.
SECTION 9.08. Replacement of Trustee. A resignation or removal of the
Trustee and appointment of a successor Trustee shall become effective only upon
the successor Trustee's acceptance of appointment as provided in this Section.
The Trustee may resign by so notifying the Company. The Noteholders of a
majority in principal amount of the then outstanding Notes may remove the
Trustee by so notifying the Trustee and the Company. The Company may remove the
Trustee if:
(a) the Trustee fails to comply with Section 9.10 hereof, unless the
Trustee's duty to resign is stayed as provided in TIA sec. 310(b);
(b) the Trustee is adjudged a bankrupt or an insolvent or an order for
relief is entered with respect to the Trustee under any Bankruptcy Law;
(c) a Custodian or public officer takes charge of the Trustee or its
property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office
of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the
Noteholders of a majority in principal amount of the then outstanding Notes may
appoint a successor Trustee to replace the successor Trustee appointed by the
Company.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Noteholders of at least 10% in principal amount of the then outstanding Notes
may petition any court of competent jurisdiction for the appointment of a
successor Trustee.
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<PAGE> 34
If the Trustee fails to comply with Section 9.10 hereof, unless the
Trustee's duty to resign is stayed as provided in TIA sec. 310(b), any
Noteholder who has been a bona fide holder of a Note for at least six months may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Company. Thereupon the resignation or removal
of the retiring Trustee shall become effective, the Company shall promptly pay
all amounts due and payable to the retiring Trustee pursuant to Section 9.07
hereof and the successor Trustee shall have all the rights, powers and duties of
the Trustee under this Indenture. The successor Trustee shall mail a notice of
its succession to Noteholders. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee, subject to the lien
provided for in Section 9.07 hereof. Notwithstanding replacement of the Trustee
pursuant to this Section 9.08, the Company's obligations under Section 9.07
hereof shall continue for the benefit of the retiring trustee with respect to
expenses and liabilities incurred by it prior to such replacement.
SECTION 9.09. Successor Trustee by Merger, Etc. If the Trustee
consolidates, merges or converts into, or transfers all or substantially all of
its corporate trust business to, another corporation, the successor corporation
without any further act shall be the successor Trustee.
SECTION 9.10. Eligibility; Disqualification. This Indenture shall always
have a Trustee who satisfies the requirements of TIA sec. 310(a)(1) and (5). The
Trustee shall always have a combined capital and surplus as stated in Section
12.09 hereof. The Trustee is subject to TIA sec. 310(b).
SECTION 9.11. Preferential Collection of Claims Against Company. The
Trustee is subject to TIA sec. 311(a), excluding any creditor relationship
listed in TIA sec. 311(b). A Trustee who has resigned or been removed shall be
subject to TIA sec. 311(a) to the extent indicated therein.
SECTION 9.12. Sections Applicable to Registrar, Paying Agent and
Conversion Agent. The term "Trustee" as used in Sections 9.01, 9.02, 9.03, 9.04
and 9.07 hereof shall (unless the context requires otherwise) be construed as
extending to and including the Trustee acting in its capacity, if any, as
Registrar, Paying Agent and Conversion Agent.
ARTICLE X
DISCHARGE OF INDENTURE
SECTION 10.01. Termination of Company's Obligations. This Indenture shall
cease to be of further effect (except that obligations under Sections 9.07 and
10.02 hereof shall survive) when all outstanding Notes theretofore authenticated
and issued have been delivered to the Trustee for cancellation and the Company
has paid all sums payable hereunder.
Thereupon, the Trustee, upon written request of the Company, shall
acknowledge in writing the discharge of the Company's obligations under this
Indenture, except for those surviving obligations specified above.
SECTION 10.02. Repayment to Company. The Trustee and the Paying Agent
shall promptly pay to the Company upon written request any excess money or
securities held by them at any time.
The Trustee and the Paying Agent shall pay to the Company upon written
request any money held by them for the payment of principal or interest that
remains unclaimed for two years after the date upon which such payment shall
have become due; provided, however, that the Company shall have first caused
notice of such payment to the Company to be mailed to each Noteholder entitled
thereto no less than 30 days prior to such payment. After payment to the
Company, the Trustee and the Paying Agent shall have no further liability with
respect to such money and Noteholders entitled to the money must look to the
Company for payment as general creditors unless any applicable abandoned
property law designates another Person.
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<PAGE> 35
ARTICLE XI
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 11.01. Without Consent of Noteholders. The Company and the
Trustee may amend or supplement this Indenture or the Notes without the consent
of any Noteholder:
(a) to cure any ambiguity, defect or inconsistency;
(b) to comply with Sections 5.13 and 7.01 hereof;
(c) to provide for uncertificated Notes in addition to certificated
Notes;
(d) to make any change that does not adversely affect the legal rights
hereunder of any Noteholder;
(e) to comply with the requirements of the SEC in order to maintain
the qualification of the Indenture under the TIA; or
(f) to make any change that provides any additional rights or benefits
to the holders of Notes.
An amendment under this Section may not make any change that adversely
affects the rights under Article VI of any holder of Senior Debt then
outstanding unless the holders of such Senior Debt (or any group or
representative thereof authorized to give a consent) consent to such change.
SECTION 11.02. With Consent of Noteholders. Subject to Section 8.07
hereof, the Company and the Trustee may amend or supplement this Indenture or
the Notes with the written consent (including consents obtained in connection
with any tender offer or exchange offer for Notes) of the Noteholders of at
least a majority in principal amount of the then outstanding Notes. Subject to
Sections 8.04 and 8.07 hereof, the Noteholders of a majority in principal amount
of the Notes then outstanding may also by their written consent (including
consents obtained in connection with any tender offer or exchange offer for
Notes) waive any existing Default or Event of Default as provided in Section
8.04 or waive compliance in a particular instance by the Company with any
provision of this Indenture or the Notes. However, without the consent of each
Noteholder affected, an amendment, supplement or waiver under this Section may
not (with respect to any Notes held by a nonconsenting Noteholder):
(a) reduce the amount of Notes whose Noteholders must consent to an
amendment, supplement or waiver;
(b) reduce the rate of or change the time for payment of interest on
any Note;
(c) reduce the principal of or change the fixed maturity of any Note
or alter the redemption provisions with respect thereto;
(d) make any Note payable in money other than that stated in the Note;
(e) make any change in Section 8.04, 8.07 or 11.02 hereof;
(f) waive a default in the payment of the principal of, or interest
on, any Note (except a rescission of acceleration of the Notes by the
Noteholders of at least a majority in aggregate principal amount of the
then outstanding Notes and the waiver of the payment default that resulted
from such acceleration);
(g) waive a redemption payment payable on any Note;
(h) impair the right of Noteholders to convert Notes into Common Stock
of the Company or waive or otherwise adversely affect the rights of any
Noteholders under Section 4.06; or
(i) modify Articles V or VI hereof in a manner adverse to the
Noteholders.
To secure a consent of the Noteholders under this Section 11.02, it shall
not be necessary for the Noteholders to approve the particular form of any
proposed amendment, supplement or waiver, but it shall be sufficient if such
consent approves the substance thereof.
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<PAGE> 36
An amendment under this Section may not make any change that adversely
affects the rights under Article VI of any holder of Senior Debt then
outstanding unless the holders of such Senior Debt (or any group or
representative thereof authorized to give a consent) consent to such change.
After an amendment, supplement or waiver under this Section becomes
effective, the Company shall mail to Noteholders a notice briefly describing the
amendment or waiver.
SECTION 11.03. Compliance with Trust Indenture Act. Every amendment to
this Indenture or the Notes shall be set forth in a supplemental indenture that
complies with the TIA as then in effect.
SECTION 11.04. Revocation and Effect of Consents. Until an amendment,
supplement or waiver becomes effective, a consent to it by a Noteholder of a
Note is a continuing consent by the Noteholder and every subsequent Noteholder
of a Note or portion of a Note that evidences the same debt as the consenting
Noteholder's Note, even if notation of the consent is not made on any Note.
However, any such Noteholder or subsequent Noteholder may revoke the consent as
to such Noteholder's Note or portion of a Note if the Trustee receives the
written notice of revocation at least one business day before the date on which
the Trustee receives an Officers' Certificate certifying that the Noteholders of
the requisite principal amount of Notes have consented to the amendment,
supplement or waiver.
The Company may, but shall not be obligated to, fix a record date for the
purpose of determining the Noteholders entitled to consent to any amendment,
supplement or waiver. If a record date is fixed, then notwithstanding the
provisions of the immediately preceding paragraph, those Persons who were
Noteholders at such record date (or their duly designated proxies), and only
those Persons, shall be entitled to consent to such amendment, supplement or
waiver or to revoke any consent previously given, whether or not such Persons
continue to be Noteholders after such record date. No consent shall be valid or
effective for more than 90 days after such record date unless consents from
Noteholders of the principal amount of Notes required hereunder for such
amendment or waiver to be effective shall have also been given and not revoked
within such 90-day period.
After an amendment, supplement or waiver becomes effective it shall bind
every Noteholder, unless it is of the type described in any of clauses (a)
through (i) of Section 11.02 hereof. In such case, the amendment or waiver shall
bind each Noteholder who has consented to it and every subsequent Noteholder
that evidences the same debt as the consenting Noteholder's Note.
SECTION 11.05. Notation on or Exchange of Notes. The Trustee shall, upon
the written request and expense of the Company, place an appropriate notation
about an amendment or waiver on any Note thereafter authenticated. The Company
in exchange for all Notes may issue and the Trustee shall authenticate new Notes
that reflect the amendment or waiver.
SECTION 11.06. Trustee Protected. The Trustee shall sign all supplemental
indentures, except that the Trustee may, but need not, sign any supplemental
indenture that adversely affects its rights. In executing, or accepting the
additional trusts created by, any supplemental indenture permitted by this
Article or the modification thereby of the trusts created by this Indenture, the
Trustee shall be entitled to receive, and shall be fully protected in relying
upon, an Opinion of Counsel stating that the execution of such supplemental
indenture is authorized or permitted by this Indenture.
ARTICLE XII
MISCELLANEOUS
SECTION 12.01. Trust Indenture Act Controls. If any provision of this
Indenture limits, qualifies, or conflicts with another provision which is
automatically deemed to be incorporated in this Indenture by the TIA, the
incorporated provision shall control.
SECTION 12.02. Notices. Any notice or communication by the Company or the
Trustee to the other is duly given if in writing and delivered in person or
mailed by first-class mail to the other's address stated in
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<PAGE> 37
Section 12.09 hereof. The Company or the Trustee by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
Any notice or communication to a Noteholder shall be mailed by first-class
mail to his address shown on the register kept by the Registrar. Failure to mail
a notice or communication to a Noteholder or any defect in it shall not affect
its sufficiency with respect to other Noteholders.
If a notice or communication is mailed in the manner provided above within
the time prescribed, it is duly given, whether or not the addressee receives it.
If the Company mails a notice or communication to Noteholders, it shall
mail a copy to the Trustee and each Agent at the same time.
All other notices or communications shall also be in writing.
In case by reason of the suspension of regular mail service, or by reason
of any other cause, it shall be impossible to mail any notice as required by the
Indenture, then such method of notification as shall be made with the approval
of the Trustee shall constitute a sufficient mailing of such notice.
SECTION 12.03. Communication by Noteholders with Other
Noteholders. Noteholders may communicate pursuant to TIA sec. 312(b) with other
Noteholders with respect to their rights under this Indenture or the Notes. The
Company, the Trustee, the Registrar and anyone else shall have the protection of
TIA sec. 312(c).
SECTION 12.04. Certificate and Opinion as to Conditions Precedent. Upon
any request or application by the Company to the Trustee to take any action
under this Indenture, the Company shall furnish to the Trustee:
(a) an Officers' Certificate stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and
(b) an Opinion of Counsel stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.
SECTION 12.05. Statements Required in Certificate or Opinion. Each
certificate or opinion with respect to compliance with a condition or covenant
provided for in this Indenture (other than pursuant to Section 4.02) shall
include:
(a) a statement that the person signing such certificate or rendering
such opinion has read such covenant or condition;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of such person, such person has
made such examination or investigation as is necessary to enable such
person to express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(d) a statement as to whether or not, in the opinion of such person,
such condition or covenant has been complied with.
SECTION 12.06. Rules by Trustee and Agents. The Trustee may make
reasonable rules for action by, or a meeting of, Noteholders. The Registrar or
Paying Agent may make reasonable rules and set reasonable requirements for its
functions.
SECTION 12.07. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday
or a day on which banking institutions in the State of New York or a place of
payment are not required to be open. If a payment date is a Legal Holiday at a
place of payment, payment may be made at that place on the next succeeding day
that is not a Legal Holiday, and no interest shall accrue for the intervening
period. If any other operative date for purposes of this Indenture shall occur
on a Legal Holiday then for all purposes the next succeeding day that is not a
Legal Holiday shall be such operative date.
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<PAGE> 38
SECTION 12.08. Counterparts. This Indenture may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
SECTION 12.09. Variable Provisions. "Officer" means the Chairman of the
Board, the President, any Executive Vice-President, any Vice-President, the
Treasurer, the Secretary, any Assistant Treasurer or any Assistant Secretary of
the Company.
The first certificate pursuant to Section 4.02 hereof shall be for the
fiscal year ending on February 1, 1997.
The reporting date for Section 9.06 hereof is [ ] of each year.
The first reporting date is [ ].
The Trustee shall always have a combined capital and surplus of at least
$50,000,000 as set forth in its most recent published annual report of
condition.
<TABLE>
<S> <C>
The Company's address is: Charming Shoppes, Inc.
450 Winks Lane
Bensalem, Pennsylvania 19020
Attention: Chief Financial Officer
Telephone number: (215) 245-9100
Telefax number: (215) 985-7321
with a copy to: Charming Shoppes, Inc.
450 Winks Lane
Bensalem, Pennsylvania 19020
Attention: General Counsel
Telephone number: (215) 245-9100
Telefax number: (215) 638-6648
The Trustee's address is: First Union National Bank
123 South Broad Street
12th Floor
Philadelphia, Pennsylvania 19109
Attention: Corporate Trust
Administration
Telephone Number: (215) 985-7321
Telefax Number: (215) 985-7290
</TABLE>
SECTION 12.10. GOVERNING LAW. THIS INDENTURE AND EACH NOTE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK.
SECTION 12.11. No Adverse Interpretation of Other Agreements. This
Indenture may not be used to interpret another indenture, loan or debt agreement
of the Company or an Affiliate. Any such indenture, loan or debt agreement may
not be used to interpret this Indenture.
SECTION 12.12. Successors. All agreements of the Company in this
Indenture and the Notes shall bind its successor. All agreements of the Trustee
in this Indenture shall bind its successor.
SECTION 12.13. Severability. In case any provision in this Indenture or
in the Notes shall be invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
SECTION 12.14. Table of Contents, Headings, Etc. The Table of Contents,
Cross-Reference Table, and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not to be
considered a part hereof, and shall in no way modify or restrict any of the
terms or provisions hereof.
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<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, all as of the date first written above.
CHARMING SHOPPES, INC.,
as Company
By:
---------------------------
Name:
Title:
FIRST UNION NATIONAL BANK,
as Trustee
By:
---------------------------
Name:
Title:
34
<PAGE> 40
EXHIBIT A
[FORM OF FACE OF NOTE]
[Global Note Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT
NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S
NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO
TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE
REFERRED TO ON THE REVERSE HEREOF.
35
<PAGE> 41
No. ______________ $ ______________
CUSIP No.
CHARMING SHOPPES, INC.
[ ]% CONVERTIBLE SUBORDINATED NOTE
DUE 2006
CHARMING SHOPPES, INC.
Charming Shoppes, Inc., a Pennsylvania corporation (the "Company"),
promises to pay to
or
registered assigns, the principal sum of ______________ Dollars [if this is a
Global Note, insert -- or such other principal sum as is shown on the register
maintained by the Registrar] on [ ], 2006.
Interest Payment Dates: [ ] and
[ ] of each year, commencing [ ],
1997
Record Dates: [ ] and [ ]
Reference is hereby made to the further provisions of this Convertible Note
set forth on the reverse hereof which further provisions shall for all purposes
have the same effect as if set forth at this place.
IN WITNESS WHEREOF, Charming Shoppes, Inc. has caused this Convertible Note
to be signed manually or by facsimile by its duly authorized officers and a
facsimile of its corporate seal to be affixed hereto or imprinted hereon.
CHARMING SHOPPES, INC.,
By:
[SEAL]
ATTEST
Dated:
---------------------------------
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
This is one of the [ ]% Convertible
Subordinated Notes Due 2006 described in
the within-mentioned Indenture.
FIRST UNION NATIONAL BANK, as Trustee,
By:
-----------------------------------
Authorized Signatory
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<PAGE> 42
CHARMING SHOPPES, INC.
[ ]% Convertible Subordinated Note Due 2006
1. Interest. CHARMING SHOPPES, INC., a Pennsylvania corporation (the
"Company"), is the issuer of this [ ]% Convertible Subordinated Note Due
2006 (the "Convertible Note"). The Company promises to pay interest on the
Convertible Notes at the rate per annum shown above, in cash semiannually on
each [ ] and [ ], commencing on [ ], 1997, to holders
of record on the immediately preceding [ ] or [ ], as the case
may be.
Interest on the Convertible Notes will accrue from the most recent date to
which interest has been paid, or if no interest has been paid, from
[ ], 1996. Interest will be computed on the basis of a 360-day year of
12 30-day months. To the extent lawful, the Company shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue installments of interest (without regard to any applicable grace period)
at the rate borne by the Convertible Notes, compounded semi-annually.
2. Method of Payment. The Company will pay interest on the Convertible
Notes (except defaulted interest) to the persons who are registered holders of
the Convertible Notes at the close of business on the record date for the next
interest payment date even though Convertible Notes are cancelled after the
record date and on or before the interest payment date. The Noteholder hereof
must surrender Convertible Notes to a Paying Agent to collect principal
payments. The Company will pay principal and interest in money of the United
States that at the time of payment is legal tender for payment of public and
private debts. The Company may pay principal by check payable in such money or
by wire transfer to a dollar account maintained by the holder (if the holder of
the Convertible Notes holds an aggregate principal amount of Convertible Notes
in excess of $5,000,000). The Company may pay interest by mailing an interest
check to a holder's registered address or, upon application by the holder hereof
to the Registrar, not later than the applicable record date, by wire transfer to
a dollar account maintained by the holder (if the holder of the Convertible
Notes holds an aggregate principal amount of Convertible Notes in excess of
$5,000,000).
3. Paying Agent and Registrar. The Trustee will act as Paying Agent,
Registrar and Conversion Agent. The Company may change any Paying Agent,
Registrar, co-registrar or Conversion Agent without prior notice. The Company or
any of its Affiliates may act in any such capacity.
4. Indenture. The Company issued the Convertible Notes under an
indenture, dated as of [ ], 1996 (the "Indenture"), between the Company
and First Union National Bank, as Trustee. The terms of the Convertible Notes
include those stated in the Indenture and those made part of the Indenture by
the Trust Indenture Act of 1939 (15 U.S. Code sec.sec. 77aaa-77bbbb) as in
effect on the date of the Indenture. The Convertible Notes are subject to, and
qualified by, all such terms, certain of which are summarized hereon, and
Noteholders are referred to the Indenture and such Act for a statement of such
terms. The Convertible Notes are unsecured obligations of the Company limited to
(except as otherwise provided in the Indenture) up to an aggregate principal
amount of $100,000,000 (plus up to $15,000,000 aggregate principal amount of
Convertible Notes that may be sold by the Company pursuant to the over-allotment
option granted pursuant to the Underwriting Agreement dated [ ], 1996
between the Company and the Underwriters), and are subordinated in right of
payment to all existing and future Senior Debt of the Company as provided in the
Indenture. Any holder of this Convertible Note shall be deemed to have agreed to
and be bound by all the terms and conditions contained in the Indenture
applicable to a holder of a Convertible Note.
5. Optional Redemption. The Convertible Notes are not subject to
redemption at the Company's option prior to , 1999. On such date and thereafter,
the Convertible Notes will be subject to redemption at the option of the
Company, in whole or in part (in any integral multiple of $1,000), upon not less
than 30 nor more than 60 days prior notice by mail at the following redemption
prices (expressed as percentages of the principal amount), if redeemed during
the 12-month period beginning [ ] of the years indicated:
37
<PAGE> 43
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---------------------------------------------------------- ----------
<S> <C>
1999...................................................... []%
2000...................................................... []
2001...................................................... []
2002...................................................... []
2003...................................................... []
2004...................................................... []
</TABLE>
and, at [ ], 2005 and thereafter, 100%, in each case together with
accrued interest up to but not including the redemption date (subject to the
right of holders of record on the relevant record date to receive interest due
on an interest payment date). If less than all Notes are to be redeemed, the
Trustee will select the Notes to be redeemed by lot. On or after the redemption
date, interest will cease to accrue on the Convertible Notes, or portion
thereof, called for redemption unless the Company defaults in making such
redemption.
6. Notice of Redemption. Notice of redemption will be mailed at least 30
days but not more than 60 days before the redemption date to each holder of the
Convertible Notes to be redeemed at his address of record. The Convertible Notes
in denominations larger than $1,000 may be redeemed in part but only in integral
multiples of $1,000. In the event of a redemption of less than all of the
Convertible Notes, the Convertible Notes will be chosen for redemption by the
Trustee in accordance with the Indenture. Unless the Company defaults in making
such redemption payment, or the Paying Agent is prohibited from making such
payment pursuant to the Indenture, interest ceases to accrue on the Convertible
Notes or portions of them called for redemption on and after the redemption
date.
If this Convertible Note is redeemed subsequent to a record date with
respect to any interest payment date specified above and on or prior to such
interest payment date, then any accrued interest will be paid to the person in
whose name this Convertible Note is registered at the close of business on such
record date.
7. Mandatory Redemption. The Company will not be required to make
mandatory redemption payments with respect to the Convertible Notes. There are
no sinking fund payments with respect to the Convertible Notes.
8. Repurchase at Option of Holder. If there is a Change of Control, the
Company shall be required to offer to purchase on the Change of Control Payment
Date all outstanding Convertible Notes at a purchase price equal to 100% of the
principal amount thereof on the date of purchase, plus accrued and unpaid
interest to the Change of Control Payment Date. Holders of Convertible Notes
that are subject to an offer to purchase will receive a Change of Control Offer
from the Company prior to any related Change of Control Payment Date and may
elect to have such Convertible Notes or portions thereof in authorized
denominations purchased by completing the form entitled "Option of Noteholder To
Elect Purchase" appearing below.
9. Subordination. The payment of the principal of, interest on or any
other amounts due on the Convertible Notes is subordinated in right of payment
to all existing and future Senior Debt of the Company, as described in the
Indenture. Each Noteholder, by accepting a Convertible Note, agrees to such
subordination and authorizes and directs the Trustee on its behalf to take such
action as may be necessary or appropriate to effectuate the subordination so
provided and appoints the Trustee as its attorney-in-fact for such purpose.
10. Conversion. The holder of any Convertible Note has the right,
exercisable at any time prior to the close of business (New York time) on the
date of the Convertible Note's maturity, to convert the principal amount thereof
(or any portion thereof that is an integral multiple of $1,000) into shares of
Common Stock at the initial Conversion Price of $[ ] per share, subject
to adjustment under certain circumstances, except (i) that if a Convertible Note
is called for redemption, the conversion right will terminate at the close of
business on the Business Day immediately preceding the date fixed for redemption
and (ii) if a Convertible Note is submitted for repurchase in connection with a
Change of Control, the conversion right will terminate with respect to the
portion submitted for repurchase upon such submission.
38
<PAGE> 44
To convert a Convertible Note, a holder must (1) complete and sign a notice
of election to convert substantially in the form set forth below, (2) surrender
the Convertible Note to a Conversion Agent, (3) furnish appropriate endorsements
or transfer documents if required by the Registrar or Conversion Agent and (4)
pay any transfer or similar tax, if required. Upon conversion, no adjustment or
payment will be made for interest or dividends, but if any Noteholder surrenders
a Convertible Note for conversion after the close of business on the record date
for the payment of an installment of interest and prior to the opening of
business on the next interest payment date, then, notwithstanding such
conversion, the interest payable on such interest payment date will be paid to
the registered holder of such Convertible Note on such record date. In such
event, such Convertible Note, when surrendered for conversion, must be
accompanied by payment in funds acceptable to the Company of an amount equal to
the interest payable on such interest payment date on the portion so converted
(unless such Convertible Note is subject to redemption on a redemption date
between such record date and the business day immediately following such
interest payment date). The number of shares of Common Stock issuable upon
conversion of a Convertible Note is determined by dividing the principal amount
of the Convertible Note converted by the Conversion Price in effect on the
Conversion Date. No fractional shares will be issued upon conversion but a cash
adjustment will be made for any fractional interest.
11. Denominations, Transfer, Exchange. The Convertible Notes are in
registered form, without coupons, in denominations of $1,000 and integral
multiples of $1,000. The transfer of Convertible Notes may be registered, and
Convertible Notes may be exchanged, as provided in the Indenture. The Registrar
may require a Noteholder, among other things, to furnish appropriate
endorsements and transfer documents and to pay any taxes and fees required by
law or permitted by the Indenture. The Registrar need not exchange or register
the transfer of any Convertible Note or portion of a Convertible Note selected
for redemption (except the unredeemed portion of any Convertible Note being
redeemed in part). Also, it need not exchange or register the transfer of any
Convertible Note for a period of 15 days before a selection of Convertible Notes
to be redeemed.
12. Persons Deemed Owners. Except as provided in paragraph 2 of this
Convertible Note, the registered Noteholder of a Convertible Note may be treated
as its owner for all purposes.
13. Unclaimed Money. If money for the payment of principal or interest
remains unclaimed for two years, the Trustee and the Paying Agent shall pay the
money back to the Company at its written request. After that, Noteholders of
Convertible Notes entitled to the money must look to the Company for payment
unless an abandoned property law designates another person and all liability of
the Trustee and such Paying Agent with respect to such money shall cease.
14. Defaults and Remedies. The Convertible Notes shall have the Events of
Default as set forth in Section 8.01 of the Indenture. Subject to certain
limitations in the Indenture, if an Event of Default occurs and is continuing,
the Trustee by notice to the Company or the Noteholders of at least 25% in
aggregate principal amount of the then outstanding Convertible Notes by notice
to the Company and the Trustee may declare all the Convertible Notes to be due
and payable immediately, except that in the case of an Event of Default arising
from certain events of bankruptcy or insolvency, all unpaid principal and
interest accrued on the Convertible Notes shall become due and payable
immediately without further action or notice. Upon acceleration as described in
either of the preceding sentences, the subordination provisions of the Indenture
preclude any payment being made to Noteholders for at least 5 days except as
otherwise provided in the Indenture.
The Noteholders of a majority in principal amount of the Convertible Notes
then outstanding by written notice to the Trustee may rescind and annul an
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of the
acceleration. Noteholders may not enforce the Indenture or the Convertible Notes
except as provided in the Indenture. Subject to certain limitations, Noteholders
of a majority in principal amount of the then outstanding Convertible Notes
issued under the Indenture may direct the Trustee in its exercise of any trust
or power. The Company must furnish compliance certificates to the Trustee
annually. The above description of Events of Default and remedies is
39
<PAGE> 45
qualified by reference to, and subject in its entirety by, the more complete
description thereof contained in the Indenture.
15. Amendments, Supplements and Waivers. Subject to certain exceptions,
the Indenture or the Convertible Notes may be amended or supplemented with the
consent of the Noteholders of at least a majority in principal amount of the
then outstanding Convertible Notes (including consents obtained in connection
with a tender offer or exchange offer for Convertible Notes), and any existing
default may be waived with the consent of the Noteholders of a majority in
principal amount of the then outstanding Convertible Notes including consents
obtained in connection with a tender offer or exchange offer for Convertible
Notes. Without the consent of any Noteholder, the Indenture or the Convertible
Notes may be amended, among other things, to cure any ambiguity, defect or
inconsistency, to provide for assumption of the Company's obligations to
Noteholders, to make any change that does not adversely affect the rights of any
Noteholder and to comply with the requirements of the SEC in order to maintain
the qualification of the Indenture under the TIA.
16. Trustee Dealings with the Company. The Trustee, in its individual or
any other capacity, may become the owner or pledgee of Convertible Notes and may
otherwise deal with the Company or an Affiliate with the same rights it would
have if it were not Trustee, subject to certain limitations provided for in the
Indenture and in the TIA. Any Agent may do the same with like rights.
17. Governing Law. THIS CONVERTIBLE NOTE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK.
18. Authentication. The Convertible Notes shall not be valid until
authenticated by the manual signature of an authorized signatory of the Trustee
or an authenticating agent.
19. Abbreviations. Customary abbreviations may be used in the name of a
Noteholder or an assignee, such as: TEN COM (for tenants in common), TEN ENT
(for tenants by the entireties), JT TEN (for joint tenants with right of
survivorship and not as tenants in common), CUST (for Custodian), and U/G/M/A
(for Uniform Gifts to Minors Act).
The Company will furnish to any Noteholder of the Convertible Notes upon
written request and without charge a copy of the Indenture. Request may be made
to:
Bernard Brodsky, Treasurer
Charming Shoppes, Inc.
450 Winks Lane
Bensalem, Pennsylvania 19020
20. Definitions. Capitalized terms not defined in this Convertible Note
have the meaning given to them in the Indenture.
40
<PAGE> 46
OPTION OF NOTEHOLDER TO ELECT PURCHASE
If you want to elect to have this Convertible Note or a portion thereof
repurchased by the Company pursuant to Section 3.08 and 4.06 of the Indenture,
check the box: / /
If the purchase is in part, indicate the portion (in denominations of
$1,000 or any integral multiple thereof) to be purchased: ______________
Your Signature:_____________________________________________________
(Sign exactly as your name appears on the other side
of this Convertible Note)
Date: ____________________________
Signature Guarantee:______________________________
41
<PAGE> 47
ELECTION TO CONVERT
To Charming Shoppes, Inc.:
The undersigned owner of this Convertible Note hereby irrevocably exercises
the option to convert this Convertible Note, or the portion below designated,
into Common Stock of Charming Shoppes, Inc. in accordance with the terms of the
Indenture referred to in this Convertible Note, and directs that the shares
issuable and deliverable upon conversion, together with any check in payment for
fractional shares, be issued in the name of and delivered to the undersigned,
unless a different name has been indicated in the assignment below. If shares
are to be issued in the name of a person other than the undersigned, the
undersigned will pay all transfer taxes payable with respect thereto.
Date:
in whole ___________________
Portions of Convertible Note to be
converted ($1,000 or integral multiples
thereof):
$ ___________________
Signature (for conversion only)
Please Print or Typewrite Name and
Address, Including Zip Code, and Social
Security or Other Identifying Number
Signature Guarantee:
If Shares are to be Issued in the Name
of a Person other than the Undersigned,
Insert Name and Address, Including Zip
Code, and Social Security or Other
Identifying Number:
42
<PAGE> 1
EXHIBIT 4.2
NUMBER SHARES
P
CHARMING SHOPPES, INC.
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA
COMMON STOCK COMMON STOCK
CUSIP 161133 10 3
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE
COMMON STOCK OF THE PAR VALUE OF $0.10 EACH OF
---------------------- CHARMING SHOPPES, INC. ------------------------
transferable on the books of the corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed.
This certificate is not valid unless countersigned and
registered by the Transfer Agent and Registrar. WITNESS the
facsimile seal of the corporation and the facsimile signatures
of its duly authorized officers.
Dated:
CERTIFICATE OF STOCK
<TABLE>
<S> <C> <C>
[SEAL]
/s/ /s/
- ------------------------------------------ ------------------------------------------
SECRETARY CHAIRMAN OF THE BOARD
</TABLE>
COUNTERSIGNED AND REGISTERED
CHASE MELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT
AND REGISTRAR
AUTHORIZED OFFICER
<PAGE> 2
This certificate also evidences a beneficial interest in and entitles the
holder hereof to certain Rights as set forth in the Rights Agreement between
Charming Shoppes, Inc. (the "Company") and Mellon Bank, National Association
(the "Rights Agent") dated as of April 27, 1989 (the "Rights Agreement"), and as
the same may be amended from time to time, the terms of which are hereby
incorporated herein by reference and a copy of which is on file at the principal
offices of the Company. Under certain circumstances, as set forth in the Rights
Agreement, such Rights will be evidenced by separate certificates and beneficial
interests therein will no longer be evidenced by this certificate. The Company
will mail to the holder of this certificate a copy of the Rights Agreement, as
in effect on the date of mailing, without charge promptly after receipt of a
written request therefor. Under certain circumstances set forth in the Rights
Agreement, Rights issued to, or held by, any Person who is, was or becomes an
Acquiring Person or any Affiliate or Associate thereof (as such terms are
defined in the Rights Agreement), whether currently held by or on behalf of such
Person or by any subsequent holder, may become null and void.
THE CORPORATION WILL FURNISH TO ANY SHAREHOLDER UPON REQUEST AND WITHOUT
CHARGE A FULL OR SUMMARY STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS
AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS AUTHORIZED TO BE ISSUED AND,
WITH RESPECT TO ANY AUTHORIZED CLASS OF STOCK ISSUABLE IN SERIES, THE VARIATIONS
IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN THE SHARES OF EACH SERIES OF SUCH
CLASS SO FAR AS THE SAME HAVE BEEN FIXED AND DETERMINED AND THE AUTHORITY OF THE
BOARD OF DIRECTORS TO FIX AND DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF
SUBSEQUENT SERIES.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the -------------------------
entireties (Cust) (Minor)
JT TEN - as joint tenants with Under Uniform Gift to
right of suvivorship and Minors Act_______________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value recieved,_____________, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------
- ----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF
ASSIGNEE)
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
shares of the capital stock represented by the within Certificate, and
do hereby irrevocably constitute and appoint ____________________ Attorney
to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated
----------------------------------------------
SIGNATURE(S) GUARANTEED
By
-------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION, (Banks, Stockbrokers, Savings and Loan Associations and
Credit Unions)
<PAGE> 3
WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM
PURSUANT TO S.E.C. RULE 17Ad-15.
NOTICE: THE SIGNATURE TO THE ASSIGNMENT MUST CORRESPOND WITH THE NAME
AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE> 1
EXHIBIT 5.1
June 28, 1996
Charming Shoppes, Inc.
450 Winks Lane
Bensalem, PA 19020
Re: Form S-3 Registration Statement (File No. 333-4137)
Ladies and Gentlemen:
We have acted as counsel to Charming Shoppes, Inc., a Pennsylvania
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended (the "Securities Act"), of up to $115,000,000
aggregate principal amount of the Company's Convertible Subordinated Notes due
2006 (the "Notes") and such indeterminate number of shares of common stock, $.10
par value per share, of the Company as may be issuable upon conversion of the
Notes (the "Company Stock"), all pursuant to a registration statement on Form
S-3 (File No. 333-04137) initially filed with the Securities and Exchange
Commission (the "Commission") on May 21, 1996 (the "Registration Statement").
We have examined the originals, or copies certified or otherwise identified
to our satisfaction, of (i) the Restated Articles of Incorporation, as amended,
and the Bylaws, as amended, of the Company, (ii) the Registration Statement, as
amended, (iii) a copy of the form of the Indenture (the "Indenture") to be
entered into by and between the Company and First Union National Bank, as
trustee, and filed as Exhibit 4.1 to Amendment No. 1 to the Registration
Statement and (iv) such statutes and other records, instruments and documents
that we have deemed relevant in rendering this opinion. As to matters of fact,
we have relied upon representations and certificates of officers of the Company.
In our examination, we have assumed the completeness and authenticity of
any document submitted to us as an original, the completeness and conformity to
the originals of any document submitted to us as a copy, the authenticity of the
originals of such copies, the genuineness of all signatures and the legal
capacity of natural persons executing agreements, instruments or documents. For
purposes of this opinion, we have assumed that the Notes, the Indenture and an
underwriting agreement concerning the Notes to be executed by the Company and
Lazard Freres & Co. LLC and Bear, Stearns & Co. Inc., as underwriters of the
Notes, will be duly authorized, executed, authenticated (in the case of the
Notes) and delivered by each of the parties thereto pursuant to adequate
corporate or organizational power.
On the basis of and in reliance upon the foregoing, we are of the opinion
that when, as and if (i) the Company shall have received payment in full for the
Notes, (ii) the Notes shall have been issued in accordance with the terms
described in the Registration Statement (in the form declared effective by the
Commission, including such information deemed to be a part thereof pursuant to
Rule 430A under the Securities Act), the Indenture, and the resolutions of the
Company's Board of Directors (and any authorized committee thereof) authorizing
the foregoing, and (iii) the Notes shall have been converted into Company Stock
and such Company Stock shall have been issued and delivered in accordance with
the terms of the Notes and the Indenture and as described in the Registration
Statement (in the form declared effective by the Commission including such
information deemed to be a part thereof pursuant to Rule 430A under the
Securities Act), such Company Stock issued pursuant to the conversion of such
Notes will be validly issued, fully paid and nonassessable.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement. In giving such opinion, we do not thereby admit that we
are acting within the category of persons whose consent is required under
Section 7 of the Securities Act or the rules and regulations of the Commission
thereunder.
Very truly yours,
/s/ MORGAN, LEWIS & BOCKIUS LLP
<PAGE> 1
EXHIBIT 5.2
212-450-4000
June 28, 1996
Charming Shoppes, Inc.
450 Winks Lane
Bensalem, Pennsylvania 19020
Ladies and Gentlemen:
We have acted as counsel to Charming Shoppes, Inc. (the "Company") in
connection with the Company's Registration Statement on Form S-3 (No.
333-4137)(the "Registration Statement") filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended, for the
registration of $115,000,000 aggregate principal amount of Convertible
Subordinated Notes Due 2006 of the Company (the "Notes"). The Notes are to be
issued pursuant to an Indenture (the "Indenture") between the Company and First
Union National Bank, as Trustee (the "Trustee").
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such documents, corporate records, certificates of public
officials and other instruments as we have deemed necessary for the purposes of
rendering this opinion.
On the basis of the foregoing, we are of the opinion that the Indenture and
the Notes have been duly authorized and, assuming the Indenture is duly executed
and delivered by the Company and the Trustee, and the Notes are duly executed
and authenticated in accordance with the Indenture and duly delivered against
payment of the agreed consideration therefor in accordance with the Underwriting
Agreement referred to in the prospectus that is part of the Registration
Statement, the Notes will be valid and binding obligations of the Company.
We are members of the Bar of the State of New York and the foregoing
opinion is limited to the laws of the State of New York, the federal laws of the
United States of America and the General Corporation Law of the State of
Delaware.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In addition, we consent to the reference to us under the
caption "Legal Matters" in the prospectus.
Very truly yours,
/s/ DAVIS POLK & WARDWELL
<PAGE> 1
EXHIBIT 12.1
CHARMING SHOPPES, INC.
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
QUARTER ENDED FISCAL YEAR ENDED
------------------- -----------------------------------------------------
05/04/96 04/29/95 02/03/96 01/28/95 01/29/94 01/30/93 02/01/92
-------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before
Income Taxes and
Cumulative Effect of
Accounting Change..... $ (8,437) $ (6,069) $(214,988) $ 62,519 $111,732 $119,133 $ 85,472
Add: Fixed Charges
Interest Expense......... 2,888 539 3,666 2,304 2,557 2,958 3,473
Debt Amortization
Costs................. 250 0 0 0 0 0 0
Capitalized Interest..... 0 298 560 310 391 82 0
Interest Factor in
Rents................. 7,778 8,508 34,480 32,659 27,475 23,440 19,174
-------- -------- --------- -------- -------- -------- --------
Total Fixed
Charges........ $ 10,916 $ 9,345 $ 38,706 $ 35,273 $ 30,423 $ 26,480 $ 22,647
======= ======= ========= ======= ======== ======== ========
Earnings Before Fixed
Charges, Net of
Capitalized Interest..... $ 2,479 $ 2,978 $(176,842) $ 97,482 $141,764 $145,531 $108,119
======= ======= ========= ======= ======== ======== ========
Ratio of Earnings to Fixed
Charges.................. -- -- -- 2.8 4.7 5.5 4.8
======= ======= ========= ======= ======== ======== ========
Deficiency of Earnings to
Fixed Charges (in
thousands)............... $ 8,437 $ 6,367 $ 215,548 -- -- -- --
======= ======= ========= ======= ======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial and Operating Information" and to the use of our report
dated March 20, 1996, in Amendment No. 3 to the Registration Statement (Form S-3
No. 333-4137) and related Prospectus of Charming Shoppes, Inc. for the
registration of $115,000,000 of Convertible Subordinated Notes Due 2006. We also
consent to the incorporation by reference in Amendment No. 3 to the Registration
Statement (Form S-3 No. 333-4137) and related Prospectus of Charming Shoppes,
Inc. for the registration of $115,000,000 of Convertible Subordinated Notes Due
2006 of our report dated March 20, 1996 with respect to the consolidated
financial statements of Charming Shoppes, Inc. and subsidiaries (the "Company")
included in the Company's Annual Report on Form 10-K for the fiscal year ended
February 3, 1996.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
June 26, 1996
<PAGE> 1
EXHIBIT 25.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(B)(2) / /
------------------------
FIRST UNION NATIONAL BANK
(EXACT NAME OF TRUSTEE AS SPECIFIED IN ITS CHARTER)
22-1147033
(I.R.S. EMPLOYER IDENTIFICATION NO.)
101 NORTHSIDE PLAZA, ELKTON, MARYLAND
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
21921
(ZIP CODE)
FIRST UNION NATIONAL BANK
123 SOUTH BROAD STREET
PHILADELPHIA, PA 19109
ATTENTION: CORPORATE TRUST ADMINISTRATION
(215) 985-6000
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
CHARMING SHOPPES, INC.
(EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
23-1721355
(I.R.S. EMPLOYER IDENTIFICATION NO.)
450 WINKS LANE
BENSALEM, PENNSYLVANIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
19020
(ZIP CODE)
CONVERTIBLE SUBORDINATED NOTES DUE 2006
APPLICATION RELATES TO ALL SECURITIES REGISTERED PURSUANT
TO THE DELAYED OFFERING REGISTRATION STATEMENT
(TITLE OF INDENTURE SECURITIES)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH IT
IS SUBJECT:
Comptroller of the Currency
United States Department of the Treasury
Washington, D.C. 20219
Federal Reserve Bank (3rd District)
Philadelphia, Pennsylvania 19106
Federal Deposit Insurance Corporation
Washington, D.C. 20429
b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
3. VOTING SECURITIES OF THE TRUSTEE.
FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF VOTING SECURITIES OF
THE TRUSTEE:
Not applicable -- see answer to Item 13.
4. TRUSTEESHIPS UNDER OTHER INDENTURES.
IF THE TRUSTEE IS A TRUSTEE UNDER ANOTHER INDENTURE UNDER WHICH ANY OTHER
SECURITIES, OR CERTIFICATES OF INTEREST OR PARTICIPATION IN ANY OTHER
SECURITIES, OF THE OBLIGOR ARE OUTSTANDING, FURNISH THE FOLLOWING INFORMATION:
Not applicable -- see answer to Item 13.
5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR
UNDERWRITERS.
IF THE TRUSTEE OR ANY OF THE DIRECTORS OR EXECUTIVE OFFICERS OF THE TRUSTEE
IS A DIRECTOR, OFFICER, PARTNER, EMPLOYEE, APPOINTEE, OR REPRESENTATIVE OF THE
OBLIGOR OR OF ANY UNDERWRITER FOR THE OBLIGOR, IDENTIFY EACH SUCH PERSON HAVING
ANY SUCH CONNECTION AND STATE THE NATURE OF EACH SUCH CONNECTION.
Not applicable -- see answer to Item 13.
6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS.
FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF THE
TRUSTEE OWNED BENEFICIALLY BY THE OBLIGOR AND EACH DIRECTOR, PARTNER, AND
EXECUTIVE OFFICER OF THE OBLIGOR:
Not applicable -- see answer to Item 13.
1
<PAGE> 3
7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR OFFICIALS.
FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF THE
TRUSTEE OWNED BENEFICIALLY BY EACH UNDERWRITER FOR THE OBLIGOR AND EACH
DIRECTOR, PARTNER, AND EXECUTIVE OFFICER OF EACH SUCH UNDERWRITER:
Not applicable -- see answer to Item 13.
8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
FURNISH THE FOLLOWING INFORMATION AS TO SECURITIES OF THE OBLIGOR OWNED
BENEFICIALLY OR HELD AS COLLATERAL SECURITY FOR OBLIGATIONS IN DEFAULT BY THE
TRUSTEE:
Not applicable -- see answer to Item 13.
9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE.
IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR
OBLIGATIONS IN DEFAULT ANY SECURITIES OF AN UNDERWRITER FOR THE OBLIGOR, FURNISH
THE FOLLOWING INFORMATION AS TO EACH CLASS OF SECURITIES OF SUCH UNDERWRITER ANY
OF WHICH ARE SO OWNED OR HELD BY THE TRUSTEE:
Not applicable -- see answer to Item 13.
10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN
AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR.
IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR
OBLIGATIONS IN DEFAULT VOTING SECURITIES OF A PERSON WHO, TO THE KNOWLEDGE OF
THE TRUSTEE (1) OWNS 10 PERCENT OR MORE OF THE VOTING STOCK OF THE OBLIGOR OR
(2) IS AN AFFILIATE, OTHER THAN A SUBSIDIARY, OF THE OBLIGOR, FURNISH THE
FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF SUCH PERSON:
Not applicable -- see answer to Item 13.
11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON OWNING 50
PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR.
IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL SECURITY FOR
OBLIGATIONS IN DEFAULT ANY SECURITIES OF A PERSON WHO, TO THE KNOWLEDGE OF THE
TRUSTEE, OWNS 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR,
FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF SECURITIES OF SUCH PERSON
ANY OF WHICH ARE SO OWNED OR HELD BY THE TRUSTEE:
Not applicable -- see answer to Item 13.
2
<PAGE> 4
12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
EXCEPT AS NOTED IN THE INSTRUCTIONS, IF THE OBLIGOR IS INDEBTED TO THE
TRUSTEE, FURNISH THE FOLLOWING INFORMATION:
Not applicable -- see answer to Item 13.
13. DEFAULTS BY THE OBLIGOR.
(a) STATE WHETHER THERE IS OR HAS BEEN A DEFAULT WITH RESPECT TO THE
SECURITIES UNDER THIS INDENTURE. EXPLAIN THE NATURE OF ANY SUCH DEFAULT.
None.
(b) IF THE TRUSTEE IS A TRUSTEE UNDER ANOTHER INDENTURE UNDER WHICH ANY
OTHER SECURITIES, OR CERTIFICATES OF INTEREST OR PARTICIPATION IN ANY OTHER
SECURITIES, OF THE OBLIGOR ARE OUTSTANDING, OR IS TRUSTEE FOR MORE THAN ONE
OUTSTANDING SERIES OF SECURITIES UNDER THE INDENTURE, STATE WHETHER THERE HAS
BEEN A DEFAULT UNDER ANY SUCH INDENTURE OR SERIES, IDENTIFY THE INDENTURE OR
SERIES AFFECTED, AND EXPLAIN THE NATURE OF ANY SUCH DEFAULT.
None.
14. AFFILIATIONS WITH THE UNDERWRITERS.
IF ANY UNDERWRITER IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
Not applicable -- see answer to Item 13.
15. FOREIGN TRUSTEE.
IDENTIFY THE ORDER OR RULE PURSUANT TO WHICH THE TRUSTEE IS AUTHORIZED TO
ACT AS SOLE TRUSTEE UNDER INDENTURES QUALIFIED OR TO BE QUALIFIED UNDER THE ACT.
Not applicable -- trustee is a national banking association organized under
the laws of the United States.
16. LIST OF EXHIBITS.
LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY.
- ---- 1. Copy of Articles of Association of the trustee as now in effect.**
- ---- 2. Copy of the Certificate of the Comptroller of the Currency date dated
January 11, 1994, evidencing the authority of the trustee to transact
business.*
- ---- 3. Copy of the Certification of Fiduciary Powers of the trustee by the
Office of the Comptroller of the Currency dated July 24, 1992.*
- ---- 4. Copy of existing by-laws of the trustee.**
- ---- 5. Copy of each indenture referred to in Item 4, if the obligor is in
default.
-- Not Applicable
X 6. Consent of the trustee required by Section 321(b) of the Act.
- ----
X 7. Copy of report of condition of the trustee at the close of business on
March 31, 1996, published pursuant to the requirements of its supervising
authority.
3
<PAGE> 5
- ---- 8. Copy of any order pursuant to which the foreign trustee is authorized to
act as sole trustee under indentures qualified or to be qualified under
the Act.
-- Not Applicable
- ---- 9. Consent to service of process required of foreign trustees pursuant to
Rule 10a-4 under the Act.
-- Not Applicable
- ---------------
* Previously filed with the Securities Exchange Commission on February 11,
1994 as an Exhibit to Form T-1 in connection with Registration Statement Number
22-73340 and ** previously filed with the Securities Exchange Commission on
March 6, 1996 with Registration Statement Number 333-1102 and incorporated
herein by reference
NOTE
The trustee disclaims responsibility for the accuracy or completeness of
information contained in this Statement of Eligibility and Qualification not
known to the trustee and not obtainable by it through reasonable investigation
and as to which information it has obtained from the obligor and has had to rely
or will obtain from the principal underwriters and will have to rely.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
trustee, First Union National Bank, a national banking association organized and
existing under the laws of the United States of America, has duly caused this
Statement of Eligibility and Qualification to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Philadelphia and
Commonwealth of Pennsylvania, on the 13th day of June, 1996.
FIRST UNION NATIONAL BANK
By: /s/ GEORGE J. RAYZIS
------------------------------------
George J. Rayzis
Vice President
4
<PAGE> 6
EXHIBIT 6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act
of 1939, and in connection with the proposed issue of Charming Shoppes Inc.,
Convertible Subordinated Notes Due 2006, First Union National Bank, hereby
consents that reports of examinations by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon request therefor.
FIRST UNION NATIONAL BANK
By: /s/ GEORGE J. RAYZIS
------------------------------------
George J. Rayzis
Vice President
Philadelphia, Pennsylvania
June 13, 1996
<PAGE> 7
EXHIBIT 7
REPORT OF CONDITION
Consolidating domestic and foreign subsidiaries of the First Union National
Bank of Elkton in the state of Maryland, at the close of business on March 31,
1996, published in response to call made by Comptroller of the Currency, under
title 12, United States Code, Section 161. Charter Number 33869 Comptroller of
the Currency Northeastern District.
STATEMENT OF RESOURCES AND LIABILITIES
<TABLE>
<CAPTION>
THOUSANDS OF DOLLARS
--------------------
<S> <C>
ASSETS
Cash and balance due from depository institutions:
Noninterest-bearing balances and currency and coin.......................................... 1,500,789
Interest-bearing balances................................................................... 39,698
Securities:
Held-to-maturity securities................................................................. 604,735
Available-for-sale securities............................................................... 3,849,255
Federal funds sold and securities purchased under agreements to resell in domestic offices of
the bank and of its Edge and Agreement subsidiaries, and in IBFs:
Federal funds sold.......................................................................... 1,168,459
Securities purchased under agreements to resell............................................. 559,446
Loans and lease financing receivables:
Loan and leases, net of unearned income....................................................... 20,787,224
LESS: Allowance for loan and lease losses..................................................... 454,712
LESS: Allocated transfer risk reserve......................................................... 0
Loans and leases, net of unearned income, allowance, and reserve.............................. 20,332,512
Trading assets................................................................................ 2,281
Premises and fixed assets (including capitalized leases)...................................... 382,256
Other real estate owned....................................................................... 61,921
Investment in unconsolidated subsidiaries and associated companies............................ 20,069
Customer's liability to this bank on acceptances outstanding.................................. 50,066
Intangible assets............................................................................. 766,874
Other assets.................................................................................. 857,653
Total assets.................................................................................. 30,196,014
LIABILITIES
Deposits:
In domestic offices......................................................................... 24,777,282
Noninterest-bearing....................................................................... 4,770,338
Interest-bearing.......................................................................... 20,006,944
In foreign offices, Edge and Agreement subsidiaries, and IBFs............................... 212,641
Noninterest-bearing....................................................................... 5,337
Interest-bearing.......................................................................... 207,304
Federal funds purchased and securities sold under agreements to repurchase in domestic offices
of the bank and of its Edge and Agreement subsidiaries, and IBFs:
Federal funds purchased..................................................................... 919,596
Securities sold under agreements to repurchase.............................................. 138,981
Demand notes issued to the U.S. Treasury...................................................... 85,924
Trading liabilities........................................................................... 0
Other borrowed money:
With original maturity of one year or less.................................................. 9,406
With original maturity of more than one year................................................ 11,802
Mortgage indebtedness and obligations under capitalized leases................................ 16,372
Bank's liability on acceptances executed and outstanding...................................... 50,388
Subordinated notes and debentures............................................................. 175,000
Other liabilities............................................................................. 856,772
Total liabilities............................................................................. 27,254,164
Limited-life preferred stock and related surplus.............................................. 0
EQUITY CAPITAL
Perpetual preferred stock and related surplus................................................. 160,540
Common Stock.................................................................................. 452,156
Surplus....................................................................................... 1,300,080
Undivided profits and capital reserves........................................................ 1,049,839
Net unrealized holding gains (losses) on available-for-sale securities........................ (20,765)
Cumulative foreign currency translation adjustments........................................... 0
Total equity capital.......................................................................... 2,941,850
Total liabilities, limited-life preferred stock and equity capital............................ 30,196,014
</TABLE>
