CHARMING SHOPPES INC, 424B1, 1996-07-17

CHARMING SHOPPES INC
424B1, 1996-07-17
WOMEN'S CLOTHING STORES

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<PAGE> 1

Rule 424(b)(1)
PROSPECTUS Registration No. 333-4137

$120,000,000

CHARMING SHOPPES, INC.

7 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2006
------------------------

The 7 1/2% 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
price of $7.46 per share (equivalent to a conversion rate of approximately
134.0483 shares per $1,000 principal amount of Notes), subject to adjustment in
certain circumstances. The Common Stock is quoted on the Nasdaq National Market
("Nasdaq") under the symbol "CHRS". On July 16, 1996, the last reported sales
price of the Common Stock on Nasdaq was $6 7/32 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 January 15 and July 15 of each year,
commencing January 15, 1997. The Notes will be redeemable at the Company's
option, in whole or in part, at any time on or after July 15, 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 June 1, 1996, as adjusted for this offering,
including application of the estimated net 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>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNT AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
- ---------------------------------------------------------------------------------------------------------
Per Note............................ 100.00% 3.00% 97.00%
- ---------------------------------------------------------------------------------------------------------
Total(4)............................ $120,000,000 $3,600,000 $116,400,000
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>

(1) Plus accrued interest, if any, from July 22, 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 $18,000,000 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 $138,000,000, $4,140,000 and $133,860,000, 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 July 22, 1996.

------------------------

LAZARD FRERES & CO. LLC BEAR, STEARNS & CO. INC.
------------------------
The date of this Prospectus is July 16, 1996.
<PAGE> 2

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> 3

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
$79,756,000 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 61% 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> 4

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> 5

$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 June 1, 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> 6

THE OFFERING

<TABLE>
<S> <C>
Securities Offered............ $120,000,000 aggregate principal amount of 7 1/2% Convertible
Subordinated Notes Due 2006.
Maturity Date................. July 15, 2006.
Interest Payment Dates........ January 15 and July 15 commencing January 15, 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 price of $7.46 per
share (equivalent to a conversion rate of approximately
134.0483 shares per $1,000 principal amount of Notes),
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 June 1,
1996, as adjusted for this offering, including the
application of the estimated net 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 July 15, 1999. Beginning on July 15, 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
$115,875,000. 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 June 1, 1996,
plus accrued interest to the anticipated date of payment of
approximately $73,800. The balance of such net proceeds will
be used for general corporate purposes. See "Use of
Proceeds".
</TABLE>

6
<PAGE> 7

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 $280,635
Total assets.......................................................................... 679,517 706,567
Long-term debt, including current portion............................................. 95,594 123,244
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
estimated 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> 8

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
providing for 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

8
<PAGE> 9

any time to 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> 10

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> 11

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 June 1,
1996, as adjusted for this offering, including application of the estimated net
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> 12

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.

12
<PAGE> 13

USE OF PROCEEDS

The net proceeds of this offering will be approximately $115,875,000
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 June 1,
1996, plus accrued interest to the anticipated date of payment of approximately
$73,800. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial 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 June 1, 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........ $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> 14

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 $ 104,611
====== ======
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................................................ -- 120,000
------ ------
Total long-term debt, excluding current portion....................... 35,623 122,514
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 $ 536,766
====== ======
</TABLE>

14
<PAGE> 15

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>
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
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 July 16, 1996).................. 8 1/4 6 1/8
</TABLE>

On July 16, 1996, the last reported sales price of the Common Stock on
Nasdaq was $6 7/32 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> 16

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> 17

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> 18

- ---------------
(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> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RECENT DEVELOPMENTS

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 (34.1) 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> 20

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> 21

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> 22

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 15.6% in the fourth quarter of Fiscal 1996 as compared to the
corresponding period of Fiscal 1995 and increased 8.1% 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> 23

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> 24

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 June 1, 1996
totaled in aggregate approximately $35,624,000, plus accrued interest to the
anticipated date of repayment of approximately $73,800.

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.

24
<PAGE> 25

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> 26

DESCRIPTION OF BUSINESS

GENERAL

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

NEW BUSINESS STRATEGY

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<PAGE> 27

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.

- 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

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<PAGE> 28

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".

RECENT RESTRUCTURING AND EXPENSE REDUCTION INITIATIVE

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 initiative 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

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<PAGE> 29

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.

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<PAGE> 30

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> 31

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 to inventory management, it is difficult to
sufficiently quantify the anticipated reduction of such expenses and borrowing
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> 32

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........................................... 103
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> 33

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> 34

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> 35

DESCRIPTION OF THE NOTES

GENERAL

The Notes will be issued pursuant to an Indenture dated as of July 22, 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 July 22, 1996, at the rate per annum set
forth on the cover page of this Prospectus and will mature on July 15, 2006. The
Notes will be limited to $120,000,000 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 January 15 and July
15 of each year (each an "Interest Payment Date"), commencing on January 15,
1997, to holders of record at the close of business on January 1 or July 1 (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 July 22,
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> 36

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

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<PAGE> 37

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 July 15, 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 July 15, of the years indicated:

<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---------------------------------------------------------------- ----------
<S> <C>
1999............................................................ 103.750 %
2000............................................................ 103.125
2001............................................................ 102.500
2002............................................................ 101.875
2003............................................................ 101.250
2004............................................................ 100.625
</TABLE>

and at July 15, 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.

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<PAGE> 38

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

38
<PAGE> 39

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> 40

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> 41

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 June 1, 1996, as adjusted for this offering, including application of
the estimated net 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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<PAGE> 42

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 January 15 and July 15 of each year to
the person in whose name such Note is registered at the close of business on the
preceding January 1 and July 1 (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

42
<PAGE> 43

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 interests, 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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<PAGE> 46

"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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<PAGE> 47

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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<PAGE> 48

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

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<PAGE> 50

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.

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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> 52

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................................................ 78,000,000
Bear, Stearns & Co. Inc................................................ 42,000,000
------------
Total........................................................ $120,000,000
============
</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 1.80% of
the principal amount of the Notes. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of 0.25% 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> 53

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> 54

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> 55

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> 56

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> 57

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> 58

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> 59

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> 60

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> 61

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> 62

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> 63

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> 64

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> 65

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> 66

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> 67

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> 68

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> 69

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.

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> 70

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> 71

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> 72

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> 73

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> 74

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> 75

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> 76

- ---------------------------------------------------------------
- ---------------------------------------------------------------

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............................... 13
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>

- ---------------------------------------------------------------
- ---------------------------------------------------------------

$120,000,000

CHARMING SHOPPES, INC.
7 1/2% CONVERTIBLE
SUBORDINATED NOTES
DUE 2006
----------------------

PROSPECTUS
----------------------
LAZARD FRERES & CO. LLC

BEAR, STEARNS & CO. INC.

JULY 16, 1996

- ---------------------------------------------------------------
- ---------------------------------------------------------------