5. Acquisitions and Dispositions

The Charming Shoppes Acquisition

In June 2012, the Company acquired Charming Shoppes, which owns and operates multiple retail brands through over 1,800 retail stores and e-commerce operations including: Lane Bryant; Catherines; Fashion Bug; and Figi’s, in an all cash transaction at $7.35 per share, for an aggregate purchase price of $882.1 million (excluding the assumption of debt and transaction costs) (collectively, the “Charming Shoppes Acquisition”). The acquisition was funded with $325 million from new borrowings including (a) a $300 million six-year, variable-rate term loan and (b) $25 million of borrowings under the Company’s existing revolving credit facility, which was amended in connection with the transaction. The remainder was funded through available cash and equivalents and the liquidation of substantially all of the Company’s investment portfolio.

The Company accounted for the Charming Shoppes Acquisition under the purchase method of accounting for business combinations. Accordingly, the cost to acquire such assets was allocated to the underlying net assets in proportion to estimates of their respective fair values. Any excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill. Given the close proximity of the closing date of the acquisition to the end of the Company’s fiscal year, the allocation of the purchase price to the underlying net assets is preliminary at this time. The Company does not expect to finalize its valuation of the net assets acquired until the Fall of 2012, particularly as it relates to the valuation of both of the Fashion Bug and Figi’s businesses.

The acquisition cost of $882.1 million was allocated to the acquired net assets on a preliminary basis based on their respective estimated fair values, as follows: cash and cash equivalents of $203.5 million; inventories of $194.6 million; net assets related to discontinued operations of $52.8 million; other current and non-current assets of $89.6 million; net current and non-current deferred tax assets of $98.4 million; property and equipment of $170.6 million; non-tax deductible goodwill of $358.9 million; intangible assets (consisting primarily of brands and trademarks) of $270.7 million; current liabilities of $196.9 million; long-term debt of $146.2 million; and other net liabilities of $213.9 million.

The values assigned to brand names and trademarks were derived using the relief-from-royalties method under the income valuation approach. This approach is used to estimate the cost savings that accrue for the owner of an intangible asset who would otherwise have to pay royalties or licensing fees on revenues earned through the use of the asset if they had not owned the rights to use the assets. The net after-tax royalty savings are calculated for each year in the remaining economic life of the intangible asset and discounted to present value.

The results of operations of Charming Shoppes have been consolidated in the Company’s results of operations commencing on June 14, 2012, the effective date of the Charming Shoppes Acquisition. Such post-acquisition results included in the Company’s consolidated statement of operations for Fiscal 2012 consist of the following:

	Fiscal Year Ended
	July 28, 2012
	(millions)
Net sales	$	156.1
Loss from continuing operations		(37.8	)
Loss from discontinued operations, net of taxes		(9.6	)
Net loss		(47.4	)

The above results relating to the Charming Shoppes Acquisition exclude $14.0 million of transaction costs, which were expensed as incurred by the Company and have been presented separately in the consolidated statement of operations for Fiscal 2012. However, the above results include a one-time, pretax charge of $14.0 million to settle certain pre-existing, equity awards held by employees of Charming Shoppes at the date of acquisition.

The following unaudited pro forma financial information is presented to supplement the historical financial information presented herein relating to the Charming Shoppes Acquisition and the related redemption of substantially all of the Charming Shoppes convertible notes, as more fully described in Note 14. This pro forma information has been prepared as if the Charming Shoppes acquisition and related redemption of its convertible notes had occurred as of the beginning of Fiscal 2011. The pro forma financial information is not indicative of the operating results that would have been obtained had the transactions actually occurred as of that date, nor is it necessarily indicative of the Company’s future operating results.

	Fiscal Year Ended
	July 28, 2012		July 30, 2011
	(millions, except per share data)
Pro forma net sales	$	4,535.5	$	4,239.1
Pro forma income from continuing operations	$	145.7	$	137.7
Pro forma net income from continuing operations per common share:
Basic	$	0.95	$	0.88
Diluted	$	0.91	$	0.85

The Tween Brands Merger

In November 2009, the Company acquired Tween Brands, Inc. (“Tween Brands”), which owned the operations of Justice, in a stock-for-stock merger (the “Tween Brands Merger”). The Company issued 23.4 million shares of common stock and $1.0 million in cash for all of the issued and outstanding shares of common stock of Tween Brands and all outstanding stock options of Tween Brands that were subsequently cancelled. The total acquisition cost (excluding the assumption of debt) was $252.2 million.

The Company accounted for the Tween Brands Merger as a business combination during the second quarter of Fiscal 2010. Accordingly, the acquisition cost (excluding the assumption of debt) of $252.2 million has been allocated to the net assets acquired based on their respective fair values as follows: inventory of $116.2 million; trade name intangible asset of $68.2 million; franchise rights and other intangible assets of $15.7 million; non-tax deductible goodwill of $99.0 million; debt of $162.9 million; and other net assets of $116.0 million. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. Transaction costs of $5.8 million were expensed as incurred during Fiscal 2010 and classified within SG&A expenses in the consolidated statements of operations.

The trade name and franchise rights intangible assets were valued using the relief-from-royalties method under the income valuation approach. This approach is used to estimate the cost savings that accrue for the owner of an intangible asset who would otherwise have to pay royalties or licensing fees on revenues earned through the use of the asset if they had not owned the rights to use the assets. The net after-tax royalty savings are calculated for each year in the remaining economic life of the intangible asset and discounted to present value.

Immediately after the consummation of the Tween Brands Merger, the Company repaid the bank debt and accrued interest of Tween Brands assumed in the Tween Brands Merger in the aggregate amount of $162.9 million.

The results of operations of Tween Brands have been consolidated in the Company’s results of operations commencing on November 25, 2009, the effective date of the Tween Brands Merger. Accordingly, the following unaudited pro forma financial information is presented to supplement the historical financial information presented herein for Fiscal 2010. This pro forma financial information has been prepared as if the Tween Brands Merger had occurred as of the beginning of Fiscal 2010. The pro forma financial information is not indicative of the operating results that would have been obtained had the transaction actually occurred as of that date, nor is it necessarily indicative of the Company’s future operating results.

	Fiscal Year Ended
	July 31,
	2010
	(millions, except per share data)
Pro forma net sales	$	2,697.1
Pro forma net income	$	143.1
Pro forma net income per common share:
Basic	$	1.88
Diluted	$	1.77

Sale of Investment

In June 2011, the Company sold a 65%-owned investment for a nominal amount of cash and certain contingent consideration. The contingent consideration gives the company the right to receive 65% of the proceeds realized by the owners of the company in excess of $1 million (and up to a maximum of $8 million) upon the occurrence of certain future realization events as defined in the underlying agreements, such as upon the sale of any interest in the company to a third party, a dividend or distribution by the company, or any other recapitalization or other similar event involving the equity of the company. Due to the significant uncertainty of realizing any of the contingent consideration, the Company did not recognize a receivable at July 30, 2011. During Fiscal 2012, the Company exchanged its contingent interest in the investee for an additional 15% common equity interest, which had nominal value. No gain or loss was recognized on that exchange nor was a value placed on the additional common equity interest. In July 2012, this previously owned investee filed for bankruptcy protection.

As a result of the Fiscal 2011 transaction, the Company recognized a $2.5 million pretax loss in Fiscal 2011, which has been classified within interest and other income, net, in the accompanying consolidated statements of operations. The sale of this investment did not have, nor is it expected to continue to have, a material effect on the Company’s consolidated financial position or results of operations.