-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SBZPSNxFzht4NcLDR9/xAiuanheslqUaBsmHtcGXRJgrAk+3FKgJjJRcJ0DUe4ZD r0H3xvQ1OzDZfWB8tWJKzg== 0000950144-97-004922.txt : 19970501 0000950144-97-004922.hdr.sgml : 19970501 ACCESSION NUMBER: 0000950144-97-004922 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970201 FILED AS OF DATE: 19970430 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHICOS FAS INC CENTRAL INDEX KEY: 0000897429 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 592389435 STATE OF INCORPORATION: FL FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21258 FILM NUMBER: 97592448 BUSINESS ADDRESS: STREET 1: 11215 METRO PARKWAY CITY: FT MYERS STATE: FL ZIP: 33912-1206 BUSINESS PHONE: 8134335505 MAIL ADDRESS: STREET 1: 11215 METRO PKY CITY: FT MYERS STATE: FL ZIP: 33912-1206 10-K 1 CHICO'S FAS, INC. FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996) FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997 (Also covers the transition period from January 1, 1996 through January 28, 1996 in accordance with Rule 13a-10(d)(1)) [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-21258 CHICO'S FAS, INC. -------------------------------------------------- (Exact name of registrant as specified in its charter) FLORIDA 59-2389435 -------------------------- --------------------- (State or other jurisdic- (IRS Employer Identi- tion of incorporation) fication No.) 11215 Metro Parkway, Ft. Myers, Florida 33912 - ----------------------------------------------- --------------- (Address of principal executive offices) (Zip code) (941) 277-6200 ------------------------------- (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class -------------- Common Stock, Par Value $.01 Per Share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant. Approximately $18,502,470 as of April 15, 1997 (based upon the closing sales price reported by NASDAQ/NMS and published in the Wall Street Journal on April 16, 1997) Indicate the number of shares outstanding of each of the registrant's classes of common equity, as of the latest practicable date: Common Stock, par value $.01 per share -- 7,884,118 shares as of April 15, 1997 Documents incorporated by reference: Part II Annual Report to Stockholders for the Fiscal Year Ended February 1, 1997. Part III Definitive Proxy Statement for the Company's Annual Meeting of Stockholders presently scheduled for June 17, 1997. 2 CHICO'S FAS, INC. ANNUAL REPORT ON FORM 10-K for the YEAR ENDED FEBRUARY 1, 1997 and for the FOUR WEEKS ENDED JANUARY 28, 1996 TABLE OF CONTENTS PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . 20 PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . 23 ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . 27 PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . . . . 27 ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . 27 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 27 PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . 28
3 PART I ITEM 1. BUSINESS. GENERAL Chico's is a specialty retailer of exclusively designed, private label casual clothing and related accessories. Virtually all of the clothing offered at Chico's stores is designed by the Company's in-house staff and bears the "CHICO'S" trademark. Each Chico's store offers collections of color coordinated tops, pants, shorts, skirts, jumpsuits, dresses, vests, jackets, outerwear, socks and accessories, including leather and fabric belts, scarves, earrings, necklaces and bracelets. Emphasizing casual comfort, Chico's clothing is principally natural fabrics (including 100% cotton, rayon, linen and silk), loose fitting and designed for easy care. Chico's believes that its target customers include women of all ages who seek style and attitude in their casual clothing, with a particular focus on 30 to 55 year old women with moderate and higher income levels. The Company has sought to employ several innovative approaches to retailing, including: offering Chico's exclusively designed private label clothing at moderate prices; continually introducing new merchandise and designs which complement other Chico's merchandise that its customers may have in their existing wardrobes; using a boutique store design and personalized service and customer assistance to enhance the shopping experience; following a limited markdown pricing philosophy in front-line Chico's stores; and utilizing Chico's Outlets and periodic warehouse sales at or near the Company's distribution center in Ft. Myers as inventory clearance vehicles to help maintain the integrity of the Company's pricing strategy. However, during the past few years, the Company has experienced some difficulty in continuing to implement these retailing approaches. Because of increased levels of promotional pricing being offered by other women's clothing retailers and a difficult retail environment for women's clothing, the Company's price points tended to be considered above the moderate level and the Company found it necessary to significantly increase the number and level of markdowns at its front-line stores. The Company is currently in the process of refocusing its efforts on a merchandising direction more like the approach taken by the Company in the early 1990's, with certain modifications designed to address perceived changes in the desires of its target customer. Although current management believes these refocusing efforts will take the Company in the right direction, there can be no assurance that these refocusing efforts will be successful or, if successful, that customers will respond favorably to these changes or how long it will be before any success in this connection is reflected in the Company's financial performance. Since the beginning of 1994, several significant changes have occurred with respect to the senior management of the Company. In November 1994, the Company's Board of Directors accepted the resignation of Jeffrey J. Zwick, the then President and Chief Executive Officer. At the same time, Barry Szumlanski assumed the position of interim President on a short term basis and Marvin J. Gralnick and Helene B. Gralnick, the founders of the Company, returned to the Company to head up and help revitalize merchandise design, marketing and image for the Company. In February 1995, Barry Szumlanski and his wife, Michal Szumlanski, Senior Vice President, announced their retirements from the day-to-day operations of the Company, while continuing on as consulting employees and Mr. Gralnick assumed the role of Chief Executive Officer and took over the position of interim President from Mr. Szumlanski. In July 1995, the Company hired Melissa Payner as a Senior Vice President and its General Merchandise Manager. In October 1995, Ms. Payner was promoted to Executive Vice President/General Merchandise Manager and in August 1996 she was promoted to the position of President. In March 1997, the Company and Ms. Payner signed a separation agreement and in connection therewith Ms. Payner resigned her position as President. Mr. Gralnick reassumed the President's position, while also continuing as the Chief Executive Officer. In December 1996, Charles J. 1 4 Kleman, the Company's Chief Financial Officer was promoted to Executive Vice President-Finance while retaining his title as Chief Financial Officer. In connection with the reallocation of responsibilities following Ms. Payner's departure, Mr. Kleman also took on the additional responsibility of overseeing merchandise buying, planning and related areas until the Company hires a senior merchandise manager. As of April 15, 1997, the Company's retail store system consisted of 136 stores (averaging approximately 1,300 net selling square feet each), of which 129 are front-line "Chico's" stores and 7 are "Chico's Outlet" stores. Of this total, 27 stores are located in Florida, 17 stores are located in California and the remaining 92 stores are located in 31 other states and the District of Columbia. Franchisees own and operate 9 of the 136 Chico's stores. Chico's intends to continue locating its front-line Company-owned stores primarily in established upscale, outdoor destination shopping areas and high-end enclosed malls located either in tourist areas or in or near mid-to-larger sized markets. The Company opened 13 new front-line Company-owned stores for the period from January 1, 1996 through February 1, 1997, (while during the same period acquiring one of its franchised stores and closing two Company-owned stores). The Company plans to open 8 to 12 new Company-owned stores in fiscal 1998 but also expects to close between 5 and 8 existing stores. BUSINESS STRATEGIES IMPLEMENTATION OF A REVISED MERCHANDISING PLAN. The Company has recently developed and is in the process of implementing a new merchandising plan which addresses operations over the near term as well as a longer term structure keyed to the ultimate identification of the appropriate senior manager for merchandising. The revised plan addresses each of the following areas of responsibility: the product development, sourcing/production and quality control activities; and the buying, planning and inventory management activities. Under the revised plan, Marvin Gralnick and Helene Gralnick are responsible for overall design and product concept and for supervision of and coordination with Karen Glass, who has been designated to serve as director of product development. The director of product development will manage product concept and design, including development of styles, sizing and samples, and will have primary responsibility for product sourcing, production and quality control. Charles Kleman, the Executive Vice President-Finance, has been given the additional responsibility, on an interim basis, to oversee and direct the coordination of the buying and planning activities. In an attempt to more effectively utilize its existing buying and planning staff, the Company has established more specific and distinct responsibilities for the members of the buying and planning team along with procedures designed to improve communications and coordination among the members of the entire merchandising team. The Company believes that this structure and these procedures should enable effective operation of the merchandising function at least over the short term. In the meantime, the Company will be carefully evaluating its longer term needs for senior management in the merchandising area. Although the Company anticipates that these evaluations will result in a decision ultimately to add senior management personnel in the merchandising area, the Company does not expect to begin any search until it is able to fine tune its merchandising operations and thus more clearly identify the specific needs. DISTINCTIVE IN-HOUSE DESIGNED CASUAL CLOTHING AND COORDINATED ACCESSORIES. The most important element of the Company's business strategies is the distinctive private label casual clothing and complementary accessories offered for sale at Chico's stores. Emphasizing casual comfort, Chico's clothing is principally natural fabrics (including 100% cotton, rayon, linen and silk), loose fitting and designed for easy care. Accessories, such as leather and fabric belts and jewelry, including earrings, necklaces and bracelets, are specifically purchased and designed to coordinate with the colors and patterns of Chico's clothing, enabling customers to easily enhance and individualize their wardrobe selections. 2 5 Virtually all of the clothing offered by Chico's is designed in-house, and the Company controls most aspects of the design process, including choices of pattern, construction, fabric, treatment and color. A majority of the accessory designs also are developed in-house or are modified at Chico's request by the manufacturer to complement specific items of clothing or support a look that is distinctively Chico's. Chico's private label clothing is designed through the coordinated efforts of the Company's planning and design departments. Style, pattern, color and fabric for individual items of the Company's private label clothing are developed based upon historical sales data, anticipated future sales and perceived current and future fashion trends that will appeal to Chico's target customer. The Company's design team develops these in-house designs and design modifications. By designing in-house and then contracting directly with manufacturers and providing some on-site quality control, the Company has been able to realize higher average gross profit margins than the industry while at the same time providing value to its customers. The distinctive nature of Chico's clothing is carried through in its sizing. In early 1992, Chico's modified its approach to sizing from principally a one-size-fits-all approach to one incorporating international type sizing, utilizing sizes 0 (petite), 1 (small), 2 (medium) and 3 (large), while retaining one-size-fits-all sizing for some items. Because of the casual loose-fitting nature of Chico's clothing, this sizing also allows Chico's to offer a wide selection of clothing without having to invest in a large number of different sizes within a single style. CERTAIN BUILDING BLOCKS OF THE COMPANY'S MERCHANDISING STRATEGY. In addition to the structural changes in the oversight of the merchandising function as described above, the Company continues to follow certain important elements of the merchandising strategy that it has sought to follow since the early 1990's. These important elements include the Company's focus on its target customer, the continual introduction of new merchandise, pricing policies, store design and merchandise presentation and quality assurance programs. Focus on the Target Customer. Based upon informally gathered information from customers, sales associates and store managers, the Company seeks to anticipate and respond to the perceived needs and preferences of its target customer. Chico's target customers are believed to include women of all ages who seek style and attitude in distinctive, casual clothing which represents good value, with a particular focus on 30 to 55 year old women in the moderate and higher income levels. Certain recent changes in design direction varied from the preferences of those women who historically shopped at Chico's. The new merchandising plan intends to again focus on the Company's historical target customer. Continual Introduction of New Merchandise. The Company seeks to continually introduce new merchandise and designs to its stores. The Company is continuing its efforts to reactivate the design philosophy for new merchandise whereby merchandise is evolutionary, rather than revolutionary. Although Chico's experienced some design and outfit coordination problems over the past few years which has resulted in a build up in inventory that was not received well at the front-line stores, Chico's intends to give greater focus in fiscal 1998 on trying to make certain that new merchandise items will generally complement the colors and styles of other previously offered Chico's merchandise. This approach is designed to allow Chico's customers to supplement the wardrobe purchases made today with the new merchandise that will arrive in Chico's stores in the future. The Company believes its target customer prefers this continuity in Chico's styles to frequent changes in style and design. 3 6 As part of the Company's strategy to continually introduce new merchandise, Chico's seeks to provide only a limited supply of each item of merchandise to each store and in most cases seeks to restock its stores with new styles and designs instead of providing additional pieces of existing styles and designs. This merchandising strategy is intended to foster a sense of urgency for Chico's customers by creating a limited period of time to buy new styles and designs. Slower selling items and the remaining pieces of better selling items still in a store when new merchandise arrives are usually removed from Chico's front-line stores and sent to its outlet stores or returned to the Company's distribution center to be held for replenishment at outlet stores. Pricing Policies. The Company's strategy is to offer its exclusively designed private label clothing and complementary accessories at moderate prices that are believed to be generally competitive with the prices charged for similar quality goods by other specialty apparel retailers and by better department stores. For example, tops, pants and jackets are offered at retail price points generally ranging from $14 to $88 per item and accessories are offered at retail price points generally ranging from $5 to $55 per item. Historically, the Company's philosophy was generally to avoid storewide price markdowns at its front-line stores and believes that in the past it utilized price markdowns and special promotions to a lesser degree than have its principal competitors. As a result of increased levels of promotional pricing by other women's clothing retailers, an overall difficult retail women's apparel market and less favorable customer response to Chico's styles and designs over the past few years, the Company had found it necessary to significantly increase the number and level of markdowns at its front line stores. In the future, the Company will seek to return to utilizing fewer markdowns at its front line stores than other retailers because it believes this approach helps maintain more consistent prices for Chico's clothing and accessories and helps establish a level of customer trust in Chico's prices. At the same time, competitive pressures in the marketplace can be expected to require the Company to employ markdowns at its front line stores to a somewhat greater extent than had been the case historically but still on a basis that is more limited than other retailers. The Company expects to continue to complement its pricing policies with its strategy to continually replace merchandise at its front-line stores and to transfer older merchandise to its outlet stores or the Company's distribution center. Also, because of the Company's build up in its inventory, the Company anticipates that a significant portion of the inventory in its warehouse will need to be sold at substantial markdowns from the original retail, in some cases below the Company's cost. Store Design and Merchandise Presentation. Chico's historical store design, interior layout and merchandise presentation tended to complement Chico's private label casual clothing and personalized service, helping to create a "boutique" atmosphere with an open and comfortable ambiance. Although some stores were changed over the past two years to present a cleaner look designed to make shopping at Chico's easier, both the older style Chico's stores and the newer style store generally utilize hardwood floors, simple wooden display modules, flat wooden whole body mannequins, wooden hanging racks and wooden display cases, checkout counters and dressing rooms. The Company is refocusing its store redesign program by sprucing up its stores but trying to retain more of the historical layout and atmosphere. Most store fixtures are manufactured by the Company in its own woodshop in Ft. Myers. To encourage sales of multiple wardrobe items, Chico's stores also use "color areas," which present coordinated colors or seasonal themes in different areas of the store. Rather than displaying clothing by type (for example, tops with tops, pants with pants, etc.), merchandise is grouped by color coordinated items of clothing and accessories. Such a grouping typically includes several different 4 7 coordinated tops, pants, shorts or other items of clothing as well as accessories such as belts, earrings and necklaces that could be used to create several different ensembles and looks. Sales associates are trained to assist customers in creating such ensembles. Management believes the color coordinated grouping of merchandise strengthens the style image of the merchandise and enhances the likelihood for multiple item purchases. Accessories accounted for approximately 11% of the Company's net sales in fiscal 1997, which is less than it has been historically. Efforts are being made through better coordination of accessories with clothing to improve the volume of accessory sales in fiscal 1998. Quality Assurance. Currently, virtually all of the clothing offered for sale at Chico's stores is manufactured abroad. Historically, a majority of the clothing had been manufactured in Turkey and the Company maintained a permanent office in Istanbul, Turkey to help provide on-site quality control over much of the Company's merchandise. During 1994 and 1995, management dramatically reduced the Company's dependence on Turkish made goods and therefore closed its office in Istanbul. The Company now has diversified its manufacturing sources to a number of different countries and has found it necessary to readdress quality control. Initially, there were challenges in the area of quality control but the Company has now developed a more focused system for inspection of clothing upon receipt in this country and has had some greater experience with vendors so as to be able to identify those who provide the level of quality Chico's demands. Also, Chico's has been more careful to utilize each vendor to manufacture the merchandise that the vendor has the most experience making. In 1996, the Company expanded the use of vendors in the far east but has found that the distance has presented significant challenges. The Company intends to narrow down the number of vendors it uses and to focus more on vendors in Mexico and Central America. PERSONALIZED SERVICE AND CUSTOMER ASSISTANCE. The Company considers personalized customer service one of the most important factors in determining its success. Historically, Chico's stores had maintained a reputation for personal attention to the customer's needs. Comments received from customers and our sales associates tend to indicate that Chico's should refocus on efforts designed to maintain this reputation. The Company intends through training efforts to make certain that Chico's sales associates offer assistance and advice on various aspects of their customers' fashion and wardrobe needs, including clothing and accessory style and color selection, coordination of complete outfits and suggestions on different ways in which to wear the Chico's clothing and accessories. As part of its strategy to reinforce the casual aspects of Chico's clothing, Chico's sales associates are to be trained to demonstrate to customers creative ways to wear Chico's clothing, such as by rolling up sleeves and pant legs and belting tops so that alterations may not be needed. Dressing rooms are not equipped with mirrors, encouraging customers to come out of the dressing rooms in Chico's clothes so that store personnel can provide such assistance. The Company has not found it necessary to offer alteration services. Chico's sales associates are encouraged to know their regular customers' preferences and to assist those customers in selecting merchandise best suited to their tastes and wardrobe needs. The Company strongly encourages its sales associates to wear Chico's clothing and accessories at its stores at all times and offers very substantial employee discounts. To better serve the Chico's customer, sales associates become familiar with new styles and designs of clothing and accessories by trying on new merchandise. Chico's employees are expected to keep individual stores open until the last customer in the store has been served. If an item is not available at a particular store, sales associates are encouraged to arrange for the item to be shipped directly to the customer from another Chico's store. Chico's frequent buyer program, known as the "Passport Club" has been designed to encourage repeat sales and customer loyalty. Features include discounts, special promotions, invitations to private sales and 5 8 personalized phone calls regarding new merchandise. In 1994, the Company decided to limit the number of new members and to evaluate ways to restructure the program. The Company is continuing to work in this direction. As of April 15, 1997, approximately 39,000 Chico's customers were enrolled in the Passport Club. Management intends to continue the reevaluation of this personalized program. HIGH-ENERGY, LOYAL EMPLOYEES. The Company believes that the dedication, high-energy level and experience of the members of its senior management team, support staff and store employees are key to its continued growth and success and help to encourage personalized attention to the needs of Chico's customers. In selecting its employees at all levels of responsibility, Chico's looks for quality individuals with high-energy levels who project a positive outlook. The Company has found that such persons perform most effectively for the Company and contribute to a fun and exciting shopping experience for Chico's customers. Sales associates are compensated with a base hourly wage but also have opportunities to earn substantial incentive compensation based on their individual sales. For the most part, these incentives are based upon the dollar amount of sales to individual customers, thereby encouraging sales of multiple items. In addition, the Company periodically sponsors sales-based contests for its Company-owned stores. Store managers receive base salaries and are eligible to earn various incentive bonuses tied to individual sales and storewide sales performance. Regional and district managers also have the opportunity to earn incentive compensation based upon the sales performance of stores in their regions or districts. The Company offers its employees other recognition programs and the opportunity to participate in its stock option and stock purchase programs. Management believes that all these programs and policies offer Chico's sales associates and other employees opportunities to earn total compensation at levels generally above the average in the retail industry for comparable positions. Increases in the number of Chico's Company-owned stores and Chico's emphasis where possible on a "promote from within" philosophy provide opportunities for qualified employees to advance to higher positions in the Company. ADDITIONAL COMPANY-OWNED STORES. Management believes that the ability to open additional Company-owned Chico's stores will be a factor in any future success of the Company. However, in an effort to focus on the difficulties experienced by the Company in 1994, the Company decided to reduce substantially its 1995 store opening program. In fiscal 1994, the Company opened 26 new Company-owned Chico's stores. The Company originally planned to open 28 to 32 new Company-owned stores in fiscal 1995. As a result of the change in focus, the Company opened only seven new stores in fiscal 1995 while during the same period closing six stores. In 1996, the Company began a ramp up to open additional stores at a faster pace, opening 13 new stores while during the same period acquiring one store from a franchisee but closing two stores. As Chico's again focuses on some of the merchandising challenges it faces, Chico's will again slow the pace of new store openings somewhat, with the expectation to open between eight and twelve new stores in fiscal 1998 while closing between five and eight stores. As of April 15, 1997, the Company has opened 3 of the new stores planned to be opened in fiscal 1998 and has signed leases for 5 new Chico's store locations. The Company also is currently engaged in negotiations for the leasing of additional sites. In general the Company intends to locate its new stores predominantly outside of Florida. In deciding whether to open a new store, the Company undertakes an extensive analysis which includes the following: identifying an appropriate geographic market; satisfying certain local demographic requirements; evaluating the location of the shopping area or mall and the site within the shopping area or mall; assessing proposed lease terms; and evaluating the sales volume necessary to achieve certain profitability criteria. Once the Company 6 9 takes occupancy, it usually takes from three to five weeks to open a store. After opening, Chico's front-line stores have typically generated positive cash flow within the first year of operation (after allocation of a portion of home office administrative expense based on sales and after recovery of the Company's out-of-pocket cash expenses in opening the new store). However, there can be no assurance that new Chico's stores will achieve operating results similar to those achieved in the past. The Company plans to grow by opening additional Company-owned stores and the Company does not currently intend to increase the number of franchisees. The Company intends to continue providing full support for its franchise network and anticipates that some of its existing franchisees may be able to meet the Company's criteria for opening additional stores in their respective limited territories. During fiscal 1997, the Company repurchased one of its franchise stores. STORE LOCATIONS Chico's stores are situated, for the most part, either in tourist areas or in or near mid-to-larger sized markets. The Company's front-line stores are located almost exclusively in upscale outdoor destination shopping areas, high-end enclosed shopping malls and, to a lesser degree, regional malls, which offer high traffic of Chico's target customers. The Company seeks to locate the Company-owned front-line stores where there are other upscale specialty stores and, as to its mall locations, where there are two or more better department stores as anchor tenants. Chico's Outlet stores are located in outlet centers. Chico's Company-owned, front-line stores average approximately 1,250 net selling square feet, while the Company-owned outlet stores average approximately 1,735 net selling square feet. However, in locations where the Company has a desire to establish a store but where the optimum store size is unavailable, the Company often will lease a front-line store with as few as 900 net selling square feet or as many as 2,000 net selling square feet. If the volume of business at one of these smaller stores is sufficient, and there is no ability to expand the existing store, the Company may choose to open additional stores nearby, operating two or three Chico's stores in the same general shopping area. At April 15, 1997, there were 136 Chico's stores, of which 120 were Company-owned front-line Chico's stores, 9 were franchised Chico's stores and 7 were Chico's Outlet stores. Chico's stores are located in the following jurisdictions: 7 10
COMPANY- COMPANY- OWNED CHICO'S OWNED OUTLET FRANCHISED STATE STORES STORES CHICO'S STORES TOTAL STORES ----- ------------- ------------ -------------- ------------ Florida . . . . . . . . . . . 24 2 1 27 California . . . . . . . . . 16 1 -- 17 Texas . . . . . . . . . . . . 8 -- -- 8 Illinois . . . . . . . . . . 5 1 -- 6 New Jersey . . . . . . . . . 6 -- -- 6 Ohio . . . . . . . . . . . . 5 -- -- 5 Pennsylvania . . . . . . . . 5 -- -- 5 Colorado . . . . . . . . . . 3 1 -- 4 Massachusetts . . . . . . . . 4 -- -- 4 Minnesota . . . . . . . . . . -- -- 4 4 New York . . . . . . . . . . 4 -- -- 4 Tennessee . . . . . . . . . . 3 1 -- 4 Michigan . . . . . . . . . . 2 -- 1 3 New Mexico . . . . . . . . . 3 -- -- 3 South Carolina . . . . . . . 3 -- -- 3 Virginia . . . . . . . . . . 3 -- -- 3 Connecticut . . . . . . . . . 3 -- -- 3 District of Columbia . . . . 2 -- -- 2 Georgia . . . . . . . . . . . 2 -- -- 2 Indiana . . . . . . . . . . . 1 -- 1 2 Kansas . . . . . . . . . . . 2 -- -- 2 Louisiana . . . . . . . . . . 2 -- -- 2 Maryland . . . . . . . . . . 2 -- -- 2 Missouri . . . . . . . . . . 2 -- -- 2 North Carolina . . . . . . . 2 -- -- 2 Rhode Island . . . . . . . . 2 -- -- 2 Washington . . . . . . . . . -- -- 2 2 Alabama . . . . . . . . . . . -- 1 -- 1 Arizona . . . . . . . . . . . 1 -- -- 1 Kentucky . . . . . . . . . . 1 -- -- 1 Nebraska . . . . . . . . . . 1 -- -- 1 Nevada . . . . . . . . . . . 1 -- -- 1 Vermont . . . . . . . . . . . 1 -- -- 1 Wyoming . . . . . . . . . . . 1 -- -- 1 --------- --------- ---------- ------- Total . . . . . . . 120 7 9 136 ========= ========= ========== ======
8 11 In a typical new front-line Chico's store, the Company's cost of leasehold improvements, fixtures, store equipment and beginning inventory ranges from $80,000 to $200,000 (after taking into account any landlord construction allowances and other concessions). Chico's utilizes teams of employees experienced in new store openings who are able to do final build-out and set up store interiors rapidly, including, where necessary, the flooring, furniture, fixturing, equipment and initial inventory displays. The use of in-house crews and the fact that Chico's manufactures most of the wood fixtures, display modules, mannequins and other interior furnishings allows the Company to open a new store generally within three to five weeks after taking occupancy. Management believes that, as a result, the Company opens its new stores more rapidly and at less cost than can many of its competitors. In an attempt to further streamline the process, in fiscal 1994 the Company set up an arrangement whereby the final design and initial build-out of the space is handled by third party architectural and contracting firms, with offices or affiliates throughout the country. Under such an arrangement, Chico's in-house crews are still responsible for the final stages of the build-out and for setting up the store interiors. The following table sets forth information concerning changes in the number of Chico's Company-owned and franchise stores during the past five fiscal years:
FEBRUARY 1, NUMBER OF COMPANY-OWNED STORES 1992 1993 1994 1995 1997 ** ---- ---- ---- ---- ---- Stores at beginning of year . . . 43 57 78 104 111 Opened* . . . . . . . . . . . . 13 21 26 8 13 Acquired from franchisees . . . 2 -- -- 5 1 Closed . . . . . . . . . . . . (1) -- -- (6) (2) ----- ---- --- ----- ---- Stores at end of period . . . . . 57 78 104 111 123 ----- ----- ----- ----- ---- NUMBER OF FRANCHISE STORES Stores at beginning of year . . . 19 18 16 17 12 Opened* . . . . . . . . . . . . 1 -- 1 -- -- Sold to the Company . . . . . . (2) -- -- (5) (1) Closed . . . . . . . . . . . . -- (2) -- -- (1) ---- ----- ---- ---- ---- Stores at end of period . . . . . 18 16 17 12 10 ----- ----- ----- ----- ----- NUMBER OF TOTAL STORES . . . . . . . . . 75 94 121 123 133 ===== ===== ===== ===== =====
* Does not include stores that opened as relocations of previously existing stores within the same general market area (approximately five miles) or substantial renovations of stores. ** Numbers of stores relate to a 13 month period which runs from January 1, 1996 through February 1, 1997. 9 12 OUTLET STORES The Company currently operates seven outlet stores under the name "Chico's Outlet." Chico's Outlet stores carry slower selling items removed from front-line stores, remaining pieces of better selling items replaced by new shipments of merchandise to front-line stores, returns of merchandise accepted from franchise stores under the Company's franchisee return policy and seconds of the Company's merchandise. Chico's Outlet stores act as a vehicle for marking down the prices on such merchandise while continuing to allow Chico's front-line stores to limit markdowns. Prices at Chico's Outlet stores generally range from 30% to 70% below regular retail prices at Chico's front-line stores. Although service is also important at Chico's Outlet stores, there is somewhat less emphasis in the outlet stores on personalized customer service. Sales from the Company's outlet stores represented approximately 9.2% of the Company's net sales by Company-owned stores during fiscal 1997. Chico's Outlet stores have not been intended to be profit centers. Chico's Outlet stores are generally larger than front-line stores, averaging approximately 1,735 net selling square feet. With the decrease in new store openings in 1995 and 1996, the Company did not open any new outlet stores in fiscal 1997 and does not anticipate opening more than one outlet store during the 1998 fiscal year. The Company is reevaluating the extent to which it should continue to rely on an increase in the number of outlet stores as the basis for clearing out excess merchandise. During fiscal 1997, the Company experimented with clearance sales at and near the Company's warehouse in Ft. Myers. These clearance sales had mixed results and generated collectively over $990,000 in total sales. Because of the mixed results of the special clearance sales, the Company is exploring various options for clearing such merchandise in the future, including similar warehouse sales and strategic bulk sales to liquidators rather than opening additional outlet stores at the same pace as in the past. FRANCHISE STORES Currently, there are 9 franchised Chico's stores (the Company repurchased one store after the end of fiscal 1997) operated by five owners, none of whom is affiliated with the Company. Each franchisee paid an initial franchise fee of between $5,000 and $75,000 per store and is not required to pay any continuing monthly royalty. Each franchisee has been provided an exclusive license at a specified location to operate a Chico's store and to utilize the Company's trademarks, service marks and other rights of the Company relating to the sale of Chico's merchandise. The term of the franchise is generally ten years, renewable for additional ten year periods if certain conditions pertaining to the renewal are met (including the payment of a renewal fee). Franchisees are required to operate their Chico's stores in compliance with the Company's methods, standards and specifications regarding such matters as store design, fixturing and furnishings, decor and signage, merchandise type and presentation, and customer service. The franchisee has full discretion to determine the prices to be charged to customers generally by changing or replacing any pre-ticketed price tags. Franchisees are required to purchase all Chico's brand clothing from Chico's and all accessories from Chico's or from suppliers approved by the Company. Most of the merchandise offered by Chico's franchisees at their stores is purchased from the Company at prices averaging between 50% and 57% of suggested retail prices. In certain situations, franchise stores may carry other brands of clothing or accessories if such merchandise is approved by the Company. In such cases, franchisees may be required to pay to the Company a monthly royalty equal to 5% of gross sales of any approved merchandise not purchased from Chico's. In fiscal 1997, the Company's net sales to franchisees was approximately $1.8 million, or 2.7% of total net sales. Some franchisees have entered into franchise territory development agreements with the Company, which grant to the franchisee the right to develop and own a specified number of Chico's stores within a specified period of time or which preclude the Company from opening Company or franchised stores without first giving the respective franchisees the right to open the proposed Chico's store within the respective limited 10 13 territories granted to such franchisees. As of April 15, 1997, the franchisee holding franchise rights in Minnesota had the right to open additional Chico's stores, and two other franchisees had the right to preclude the Company from opening a Company or franchised store in the respective territory without first giving the respective franchisee the right to open the store. With respect to the franchise rights granted in Minnesota, the Company granted an exclusive right to develop Chico's stores and subfranchise within the state of Minnesota. Certain of these franchisees, including the Minnesota franchisee, may technically have the ability to open an unlimited number of additional stores within their respective limited territories. However, the Company believes that economic, logistic and other practical considerations effectively limit the number of additional stores that these franchisees may open in the future. The Company does not believe that these territory and right of first refusal rights will significantly limit the Company's ability to expand. The Company intends to continue supporting its existing franchise network. However, the Company does not intend at this time to pursue any new franchises or to enter into any additional franchise territory development agreements. In the past, the Company has acquired certain franchise stores that have been offered for sale to the Company. During fiscal 1997 and thus far in fiscal 1998, the Company repurchased two of its franchise stores and will consider additional purchases of franchise stores that may be offered to the Company from time to time in the future. In addition, the Company may terminate franchises where performance or circumstances so justify. Management expects that Chico's franchise stores will play an increasingly less important role in the Company's future sales and profitability. STORE OPERATIONS Chico's stores typically employ a manager, two assistant managers, one to five sales associates who are either full time or part-time employees. During the peak selling seasons, stores generally hire additional sales associates. Store managers take an active part in selling at the stores and are expected to be on the sales floor at all times during business hours. Purchasing, merchandising, advertising, accounting, cash management and other store support functions are handled by the Company's corporate headquarters. The Company attempts to keep administrative tasks for the store managers to a minimum, thereby allowing the store managers more time to focus on store sales, personalized customer service and in-store and local community merchandising strategies including outreach programs. Chico's recognizes that over the past few years the Company has not spent an appropriate amount of time focusing on formalized training activities. This is one of several important areas that will need attention as the Company's refocuses its efforts and seeks to return to stronger profitability. The Company is actively working on establishing a more formalized training program that focuses attention on its sales associates. The Company currently supervises store operations through its Director of Stores, a National Sales Manager and District Sales Managers. As of April 15, 1997, the Company had a National Sales Manager and 13 District Sales Managers. The National Sales Manager provides assistance to the Director of Stores in supervision of the District Sales Managers. Each District Sales Manager supervises multiple store locations and currently reports to the Director of Stores. District Sales Managers have primary responsibility for assisting individual store managers in meeting established sales goals, and carrying out merchandise presentation, training and expense-control programs established by the home office. Management is continually reviewing its supervisory structure with the intent of improving the performance of individual stores and store managers. 11 14 MANAGEMENT INFORMATION SYSTEMS The Company's current management information systems are based on an IBM AS400 (Model 510) located at the home office in Ft. Myers, which provides a full range of retail, financial and merchandising information systems, including purchasing, inventory distribution and control, sales reporting, accounts payable, warehousing and merchandise management. All Chico's stores utilize point of sale cash register computers, which are polled nightly to collect store-level sales data and inventory receipt and transfer information for each item of merchandise, including information by item, style, color and size. Management evaluates this information, together with its weekly reports on merchandise shipments to the stores, to analyze profitability, formulate and implement company-wide merchandise pricing decisions, assist management in the scheduling and compensation of employees (including the determination of incentives earned) and, most importantly, to implement merchandising decisions regarding needs for additional merchandise, allocation of merchandise, future design and manufacturing needs and movement of merchandise from front-line stores to Chico's Outlet stores. In 1995, the Company converted to a new back-office software system for all of its operations including the implementation of new merchandise planning and control modules. The Company also upgraded its computer hardware in fiscal 1997 by moving to the new RISC architecture and implementing bar code scanning into its cash registers at the stores. The Company is committed to ongoing review and improvement of its information systems to enable the Company to obtain useful information on a timely basis and to maintain effective financial and operational controls. This review includes testing of new products and systems to assure that the Company is able to take advantage of technological developments. MERCHANDISE DISTRIBUTION SYSTEM New merchandise is generally received several times per month at the Company's distribution center in Ft. Myers, Florida. Most of the merchandise arrives in this country via air or sea at Miami, Florida, and is transported via truck to Ft. Myers. After arrival at the distribution center, merchandise is sorted and packaged for shipment to individual stores. Merchandise is generally pre-ticketed with price and all other tags at the time of manufacture. In fiscal 1997, the Company found it necessary to rely more heavily on air shipments in order to keep its stores supplied with merchandise, thus impacting the cost of obtaining merchandise and the gross profit margins. As the Company addresses is merchandising challenges and works towards implementing stronger lines of communication and controls, it is likely that air shipments may still need to be relied upon over the next several months. However, the plan is to improve the Company's scheduling and distribution systems so as to reduce the Company's need to rely on air transportation to obtain merchandise. The Company's distribution center is highly automated, thus generally permitting turnaround time between distribution center receipt of merchandise and arrival at Chico's stores to average approximately 24 to 48 hours for its Florida stores and two days to a week for its other stores. In an attempt to ensure a steady flow of new merchandise, the Company ships merchandise continuously to its stores. The Company uses common carriers, such as United Parcel Service, for most shipments to its stores. The capacity of the Company's distribution center should be sufficient, in the opinion of management, to service the Company's needs for at least five years of future growth. 12 15 MERCHANDISE DESIGN, PURCHASING AND SOURCES OF SUPPLY The Company's private label clothing is developed through the coordinated efforts of the Company's planning and design/development departments. Style, pattern, color and fabric for individual items of the Company's private label clothing are developed based upon historical sales data, anticipated future sales and perceived current and future fashion trends that will appeal to Chico's target customer. The Company's design/development department is headed up by Marvin and Helene Gralnick, the Company's founders. Recently, Charlie Kleman, the Company's Chief Financial Officer, has taken on the added responsibility, on an interim basis, of overseeing and coordinating the buying, planning and distribution of merchandise. The product development and production teams create the Company's in-house designs and design modifications. In addition to selecting distinctive patterns and colors, the Company's product development team is particularly attentive to the design and specification of clothing style, construction, trim and fabric treatment. The Company believes this attention to design detail assists in distinguishing Chico's clothing and strengthening the customer's perception of quality and value. Although the Company develops merchandise for specific seasons, the design and development efforts are a constant process which result in the continual introduction of new merchandise in the Company's front-line stores. This continual process supports the Company's merchandising and inventory strategy, and serves to reduce somewhat the Company's exposure to fashion risk. The Company has historically purchased most of its clothing and accessories from companies that manufacture such merchandise in foreign countries. The Company does business with all of its foreign vendors and importers in United States currency, generally on open account with its more established vendors and initially through letters of credit with newer vendors. Clothing manufacturers utilize the designs and specifications provided by the Company. The Company generally does not purchase and supply the raw materials for its clothing, leaving the responsibility for purchasing raw materials with the manufacturers. Currently, the Company contracts with approximately 40 to 50 different vendors. Over the past several years, there has been a significant shift of vendors from vendors in Turkey (who in fiscal 1993 accounted for over 50% of total purchases) to vendors in Guatemala, followed by a further shift from the vendors in Turkey and Guatemala to vendors in Hong Kong and to importers who import from vendors in Hong Kong, China and Peru. However, because of certain perceived higher sourcing costs that can be associated with the Company's vendors in the far east and certain other long term uncertainties presented by such vendor relationships, the Company intends to begin to redirect a portion of its sourcing activities towards new vendors in Mexico, Guatemala and other countries in the western hemisphere. In fiscal 1997, Hong Kong sources accounted for approximately 40% of the Company's purchases. In fiscal 1998, the Company expects sourcing from Hong Kong to be somewhat reduced, representing approximately 25-30% of overall purchases. It is not expected that China's takeover of Hong Kong will have any immediate significant impact on sourcing from Hong Kong but, over time, the Company may find greater challenges as a result. The Company intends to monitor this situation carefully and may find it necessary after fiscal 1998 to continue efforts to redirect sourcing away from Hong Kong vendors for these reasons. Purchases from vendors in Mexico and other countries in Central America are expected to represent as much as 25% of total purchases while vendors in Turkey can be expected to continue to provide approximately 20-25% of total purchases. Purchases from vendors in India and Indonesia are likely to grow from 5% to 15%. United States vendors were utilized more heavily in fiscal 1997 (approximately 18% of total purchases) but this is expected to fall back to approximately 5% in fiscal 1998. Historically, the belts supplied by a U.S. importer of Moroccan accessories accounted for approximately 10% of total purchases. However, in the last two fiscal 13 16 years, as the Company sought to change vendor focus, the belt supplier accounted for less than 5% of total purchases. From time to time, the Company has experienced certain difficulties with the quality and timeliness of delivery of merchandise manufactured overseas, principally merchandise from its Turkish and Guatemalan manufacturers. Although the Company has been sensitive to quality control and has taken certain steps to better control the quality of merchandise secured from foreign vendors, there can be no assurance that the Company will not experience problems in the future with matters such as quality or timeliness of delivery. If political instability or other factors in a foreign country in which merchandise is produced for the Company disrupt, curtail or otherwise impact overseas production, or curtail delivery of such merchandise to the United States, the Company's operations could be materially and adversely affected. The Company has no long-term or exclusive contracts with any manufacturer or supplier and competes for production facilities with other companies offering clothing and accessories utilizing similar manufacturing processes. Although the Company believes that its relationships with its existing vendors are good, there can be no assurance that these relationships can be maintained in the future. If there should be any significant disruption in the delivery of merchandise from one or more of its current key vendors, management believes there would likely be a material adverse impact on the Company's operations. Also, the Company is just developing relationships with several new vendors in Mexico, Guatemala and India. Although the Company has investigated the past performance of these vendors and has inspected factories and sample merchandise, there can be no assurance that the Company will not experience delays or other problems with these new sources of supply. New relationships often present a number of uncertainties, including payment terms, cost of manufacturing, adequacy of manufacturing capacity, quality control, timeliness of delivery and possible limitations imposed by trade restrictions. Although management believes it could establish satisfactory relationships with other new vendors if required to do so, any such further new relationships would involve similar uncertainties. IMPORTS AND IMPORT RESTRICTIONS Because most of Chico's clothing and accessories are manufactured outside of the United States, the Company's business is subject to the various risks of doing business abroad and to the imposition of United States customs duties. In the ordinary course of its business, the Company may from time to time be subject to claims by the United States Custom Service for tariffs, duties and other charges. Imports from Turkey, Guatemala, Morocco, Hong Kong, China and Peru currently all receive the preferential tariff treatment that is accorded goods from most favored nations ("MFN"). If the MFN status of any of these countries were to be lost and the merchandise purchased by the Company were then to enter the United States without the benefit of MFN treatment or subject to retaliatory tariffs, it would be subject to significantly higher duty rates. Increased duties, whether as a result of a change in MFN status or any overall change in foreign trade policy, could have a material adverse effect on the cost and supply of merchandise from these countries. Although Chico's expects MFN status to continue for the countries where its principal vendors are located, the Company cannot predict whether the Congress or the President will act to remove MFN status for any of the countries or impose an overall increase in duties on foreign made goods. In particular, the MFN status for China is currently subject to yearly review and its status as such has been the subject of some debate. Also, in July 1997, Hong Kong will change from its current status as a British colony to become the subject of Chinese sovereignty. Although for trade purposes the United States intends, even after such change, to continue to treat Hong Kong as a separate territory, to negotiate directly with Hong Kong and to continue its MFN trade status, there can be no assurance that Hong Kong's shift to Chinese sovereignty will not have an 14 17 impact on the Company's sourcing activities, particularly if the Company continues significant sourcing from Hong Kong. The import of the Company's clothing and some of its accessories is also subject to constraints imposed by bilateral textile agreements between the United States and a number of foreign jurisdictions. These agreements impose quotas that limit the amount of certain categories of clothing that can be imported from these countries into the United States. The bilateral agreements through which quotas are imposed have been negotiated under the framework established by the Arrangement Regarding International Trade, known as the "Multifiber Arrangement." Within the last two to three years, the member-countries of the International Trade Organization completed the Uruguay Round of trade negotiations of the General Agreement on Tariffs and Trade ("GATT") and the Agreement was approved by the United States Congress. This pact was implemented on January 1, 1995 and, as a result, the Multifiber Arrangement is being phased out over a period of ten years, thus eliminating many of the existing restrictions on the ability to import Chico's merchandise, including quotas. The GATT agreement could have an impact on the Company's sourcing strategy as the Multifiber Arrangement phases out. The Company cannot accurately assess at this time how the GATT agreement will affect its financial results and operations or whether there might be other arrangements added in the future which impose other types of restrictions on imports of apparel and related accessories. In recent years, the Company's imports from countries subject to the Multifiber Arrangement have all fallen within the applicable quota limits. There can be no assurance that, as long as the quotas remain in effect, the Company's vendors will be able to continue to secure sufficient quotas for shipments to Chico's or will continue to allocate to Chico's a sufficient portion of their respective quotas. The Omnibus Trade and Competitiveness Act of 1988 added a new provision to the Trade Act of 1974 dealing with intellectual property rights. This provision, which is commonly referred to as "Special 301" and which remains effective even following the approval of GATT, directed the United States Trade Representative (the "USTR") to designate those countries that deny adequate and effective intellectual property rights or fair and equitable market access to United States firms that rely on intellectual property. From the countries designated, the USTR is to identify as "priority" countries those where the lack of intellectual property rights protection is most egregious and has the greatest adverse impact on United States products. The USTR is to identify and investigate as priority foreign countries only those that have not entered into good faith negotiations or made significant progress in protecting intellectual property. Where such an investigation does not lead to a satisfactory resolution of such practices, through consultations or otherwise, the USTR is authorized to take retaliatory action, including the imposition of retaliatory tariffs and import restraints on goods from the priority foreign country. Under Special 301, the USTR has also created a two-tier "watch list" that requires the country so listed to make progress on intellectual property protection reform or risk designation as a priority foreign country. China has been designated as a priority foreign country. Although no new investigation has been initiated as a result of this designation, greater focus is being given to China's compliance with existing agreements concerning intellectual property that are in place between the United States and China. As a result, the USTR can decide at any time to impose trade sanctions on China if the USTR were to conclude that China is not satisfactorily implementing the terms of the existing agreements. Countries named on the first tier of the watch list, i.e., the priority watch list, are requested to make progress in certain areas by specific dates. Countries named to the second tier, i.e., the secondary watch list, 15 18 are asked to improve their intellectual property protection efforts. As of April 1, 1997, of the countries where the Company's existing or planned key vendors have manufacturing operations or suppliers, Turkey, India and Indonesia were on the priority watch list and Guatemala and Peru were on the secondary watch list. In addition, in July 1996, a special investigation under Special 301 was initiated with respect to India because of an alleged failure to provide patent protection for pharmaceuticals and agricultural chemical products. Upon completion of this investigation, retaliatory trade action could be taken. Under the Special 301 program, Turkey and Hong Kong have been slated for out of cycle reviews. In addition, the Clinton Administration has revived, at least through 1998, Super 301 (an even more powerful portion of Special 301). Super 301 requires the administration to identify and investigate annually foreign trade practices that do the most harm in blocking U.S. exports. This identification is intended to be followed by negotiations backed with the threat of sanctions. As of April 1, 1997, no countries have been cited under Super 301 but China was identified for special scrutiny under Super 301. In addition, in 1996, the USTR invoked World Trade Organization dispute settlement procedures with respect to practices in Turkey and India. Of countries where the Company's key vendors have manufacturing operations, Turkey, Guatemala and Morocco have enjoyed Designated Beneficiary Developing Country ("DBDC") status under the Generalized System of Preferences ("GSP"), a special status that is granted by the United States to developing nations. DBDC status allows certain products imported from those countries to enter the United States under a reduced rate of duty. In order to maintain that status, the countries are required to meet several criteria. In 1996, the Generalized System of Preferences was reinstated retroactively to July 1995 and now is scheduled to expire by its terms on May 31, 1997. Although the President's fiscal year 1998 budget request contains a commitment to extend the program, the likelihood of extension is uncertain because of the dispute between Congress and the President over the 1998 budget. Guatemala remains under investigation by a committee chaired by the USTR (the "Committee") as a result of suspected unfair labor practices. Guatemala's status as a DBDC could be revoked if the Committee, and subsequently the President of the United States, find that the conditions in Guatemala are below the standard set by the United States for DBDC status and that no significant attempt is being made to improve those conditions. Revocation would cause certain Guatemala products to be subject to substantially higher tariff rates and result in the disqualification of Guatemala from any preferential tariff treatment that may be accorded under the reenacted GSP and under the Caribbean Basin Initiative. The Company cannot predict what actions, if any, the Committee and/or the President will take in connection with Guatemala's DBDC status. The Company cannot predict whether any of the foreign countries in which its clothing and accessories are currently manufactured or any of the countries in which the Company's clothing and accessories may be manufactured in the future will be subject to these or other import restrictions by the United States Government, including the likelihood, type or effect of any trade retaliation. Trade restrictions, including increased tariffs or more restrictive quotas, or both, applicable to apparel items could affect the importation of apparel generally and, in that event, could increase the cost or reduce the supply of apparel available to the Company and adversely affect the Company's business, financial condition and results of operations. The Company's merchandise flow may also be adversely affected by political instability in any of the countries in which its goods are manufactured, significant fluctuation in the value of the U.S. dollar against applicable foreign currencies and restrictions on the transfer of funds. 16 19 ADVERTISING AND PROMOTION Chico's does not allocate significant resources to mass media advertising. Chico's prefers instead to attract customers through word-of-mouth advertising, Chico's general reputation and the visual appeal of its stores and window presentations of its merchandise. The Company also uses brochures and other merchandise image pieces mailed to customers and made available at Chico's stores. Chico's sales associates often make personal telephone calls to existing customers informing them about new merchandise. As an important part of its promotional program, Chico's places additional emphasis on what it refers to as its "outreach programs." Chico's outreach programs include, among other events, fashion shows, wardrobing parties and makeovers that are organized and hosted by Chico's store managers and sales associates. As part of these outreach programs, the Company also encourages Chico's managers and sales associates to become involved in community projects. The Company has found its outreach programs are effective in providing introductions to new customers. Outreach programs were not emphasized in fiscal 1997 as much as they had been in past years. The Company believes that these programs are effective marketing vehicles and intends to develop training programs to help its store level employees expand the use of these programs. COMPETITION The women's retail apparel business is highly competitive and has become even more competitive in the past several years. Chico's stores compete with a broad range of national and regional retail chains, including other women's apparel stores, department stores and specialty stores, as well as local retailers in the areas served by individual Chico's stores, all of which sell merchandise generally similar to that offered in Chico's stores. Of late, even discount department stores have begun to carry merchandise which is designed to compete for the consumers that historically have been the Company's target customer. Although management believes that there is limited direct competition for Chico's merchandise largely because of the distinctive nature of Chico's stores and merchandise, the specialty retailers that are believed to most directly compete with Chico's stores in many of the same local market areas are The Gap, The Limited and Banana Republic. The number of competitors and the level of competition facing Chico's stores varies by the specific local market area served by individual Chico's stores. The Company believes that the distinctive designs of Chico's casual clothing and accessories, their exclusive availability at Chico's stores, the Company's emphasis on personalized service and customer assistance, providing good value and the locations of its stores are the principal means by which the Company competes. Although the Company believes that it has been able in the past to compete effectively, during the past three fiscal years it did not compete as effectively as it had in the past as a result of problems with merchandise mix. In fiscal 1997, despite efforts to address these problems, the Company continued to experience problems with its merchandise mix and acceptance of merchandise by customers. Also, the Company's performance is impacted by the fact that many of the Company's competitors are significantly larger and have substantially greater financial, marketing and other resources and enjoy greater national, regional and local name recognition than does the Company. It should also be noted that while the Company believes it also competes effectively for favorable site locations and lease terms, competition is intense for prime locations within upscale shopping districts and high-end malls and women's apparel stores have tended to oversaturate these prime locations. 17 20 EMPLOYEES As of February 1, 1997, the Company employed 987 persons, 488 of whom were full-time employees and 499 of whom were part-time employees. The number of part-time employees fluctuates during peak selling periods. As of the above date, 878 (89%) of the Company's employees worked in Chico's or Chico's Outlet stores or in direct field supervision, 42 (4%) worked in the distribution center and woodshop and 67 (7%) worked in corporate headquarters and support functions. The Company has no collective bargaining agreements covering any of its employees, has never experienced any material labor disruption and is unaware of any efforts or plans to organize its employees. The Company contributes part of the cost of medical and life insurance coverage for eligible employees and also maintains a profit sharing plan, stock option plan and stock purchase plan. All employees also receive very substantial discounts on Company merchandise. The Company considers relations with its employees to be good. TRADEMARKS AND SERVICE MARKS The Company is the owner in the United States of the trademarks "CHICO'S" and "Wear It Out," each of which is registered with the United States Patent and Trademark Office, covering clothing. Each of the registrations has a term of 20 years (expiring in 2009 and 2016, respectively) and is renewable indefinitely if the mark is still in use at the time of renewal. In the opinion of management, the Company's rights in the marks are important to the Company's business. This is particularly the case for the "CHICO'S" mark because this mark is well-known by Chico's customers. Accordingly, the Company intends to maintain its marks and the related registrations. The Company is not aware of any claims of infringement or other challenges to the Company's right to use its marks in the United States. ITEM 2. PROPERTIES. STORES Chico's stores are located throughout the United States, with a significant concentration in Florida and in California. As a matter of policy, the Company prefers to lease its stores and all of the Chico's and Chico's Outlet stores currently operated by the Company are leased. At April 15, 1997, the average base rent for the Company's 127 stores was $33 per square foot. Lease terms typically range from three to ten years and approximately one-third contain one or more renewal options. Historically, the Company has exercised most of its lease renewal options. In excess of three-quarters of the leases have percentage rent clauses which require the payment of additional rent based on the store's net sales in excess of a certain threshold. The following table, which covers all of the 127 Company-owned stores existing as of April 15, 1997, sets forth (i) the number of leases that will expire each year if the Company does not exercise renewal options and (ii) the number of leases that will expire each year if the Company exercises all of its renewal options (assuming in each case the lease is not otherwise terminated by either party pursuant to any other provision thereof): 18 21
LEASES EXPIRING EACH LEASES EXPIRING EACH YEAR IF NO YEAR IF ALL FISCAL YEAR RENEWALS EXERCISED RENEWALS EXERCISED ----------- -------------------- -------------------- 1998 . . . . . . . . . . . . . . . . . . 28 17 1999 . . . . . . . . . . . . . . . . . . 8 3 2000 . . . . . . . . . . . . . . . . . . 10 7 2001-2009 . . . . . . . . . . . . . . . . 81 100
DISTRIBUTION CENTER, WOODSHOP AND HEADQUARTERS The Company's World Headquarters, which is located on approximately 27 acres in Ft. Myers, Florida, was completed and opened in September 1994 and consists of a distribution center, woodshop and corporate and administrative headquarters. The combined facilities comprise approximately 125,000 square feet, consisting of approximately 93,000 square feet for distribution and woodshop facilities and approximately 32,000 square feet for administrative and design offices. In the opinion of management these expanded facilities provide sufficient warehouse, office and woodshop capacity to service the Company's needs for at least five years of future growth. There remains sufficient land on the site to at least double the size of the facilities when and if necessary. The construction cost of the combined corporate headquarters, distribution center and woodshop facility was approximately $9.6 million, which amount includes the $1.3 million purchase price for the land. Further, the Company spent approximately $1.6 million for new distribution center equipment, software and furnishings. Currently, the Company's World Headquarters secures a $5.5 million mortgage loan which matures in 2003. The Company's previous storage facilities, located in Ft. Myers, Florida, continue to be leased by the Company. The current annual base rent for the storage facilities is approximately $58,000. The Company leases these storage facilities under a lease from certain of its stockholders and former stockholders. The lease on the storage facilities expires in 1998. As a result of the completion of the Company's World Headquarters, the Company no longer has a need for these facilities. In addition, the Company's former distribution center, located in Ft. Myers, Florida also had been leased by the Company through 1998 from certain of the Company's stockholders and former stockholders and also is no longer needed by the Company. In fiscal 1997, the Company identified a tenant for the former distribution center and an arrangement was established whereby the new tenant leased the facility from the owners directly at a rental rate below what the Company was obligated to pay under its lease. The Company replaced its obligations under the lease with an obligation to make up the difference between the rental paid by the new tenant and the rental rate under the Company's lease. This shortfall payment continues through the date the Company's lease was to have expired. In the fourth quarter of 1994, the Company recognized nonrecurring pre-tax charges against income in an amount (approximately $365,000) equal to the remaining lease payments for the previous distribution center and the storage facilities, net of amounts previously accrued. As payments are being made by the new tenant for the former distribution center, the Company has been able to recover portions of that charge. 19 22 ITEM 3. LEGAL PROCEEDINGS. Chico's is not a party to any legal proceedings, other than as set forth below and other than various claims and lawsuits arising in the normal course of the Company's business which the Company believes should not have a material adverse effect on its financial condition or results of operations. Bethlehem Construction Corporation v. Chico's FAS, Inc. and New York Surety Company, Case No. 95-3764 CA, Twentieth Judicial Circuit in and for Lee County, Florida. On or about March 30, 1995, a complaint was filed against the Company by Bethlehem Construction seeking payment of approximately $24,800 claimed to be due and owing to Bethlehem Construction for services provided in connection with the construction of the Company's main office and distribution center and seeking the imposition of a lien against the property. The Company answered the complaint asserting that such amounts were not payable based on certain affirmative defenses, including various breaches of contract by Bethlehem Construction. The Company has also brought several counterclaims against Bethlehem Construction asserting breaches by Bethlehem Construction of the construction agreement, as well as fraud and intentional misrepresentation on the part of Bethlehem Construction. The counterclaims, one of which has recently been amended and all of which have now survived motions to dismiss, seek substantial actual and punitive damages associated with various construction deficiencies and actions taken by Bethlehem Construction. Discovery is proceeding. The Company believes that Bethlehem Construction's claims in the complaint are without merit and is defending them vigorously. The Company also intends to vigorously pursue its counterclaims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. None. 20 23 ITEM A EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information regarding the Company's existing executive officers:
YEARS WITH NAME AGE COMPANY POSITIONS ---- --- ------- --------- Marvin J. Gralnick 62 13 Chief Executive Officer, President, Chairman of the Board and Director Helene B. Gralnick 49 13 Senior Vice President - Design and Concept and Director Charles J. Kleman 46 8 Executive Vice President-Finance, Chief Financial Officer, Secretary/ Treasurer and Director Scott A. Edmonds 39 3 Senior Vice President-Operations and Assistant Secretary
Marvin J. Gralnick, together with his wife, Helene B. Gralnick, founded Chico's in December 1983. He served the Company as its Chief Executive Officer until September 1, 1993, at which time Jeffrey J. Zwick succeeded Mr. Gralnick in this position. In connection with the November 7, 1994 resignation of Jeffrey J. Zwick as Chief Executive Officer, President and a director of the Company, Mr. Gralnick and Ms. Gralnick returned to the Company on a full time basis to head up merchandise design, marketing and image for the Company. In February 1995, Mr. Gralnick reassumed the role of Chief Executive Officer and in March 1997 reassumed the position of President following the departure of Melissa Payner. In addition, Mr. Gralnick continues to serve as Chairman of the Board and as a director. Mr. Gralnick served as President from the Company's founding until 1990 when he became Chairman of the Board and was given the official title of Chief Executive Officer. Mr. and Ms. Gralnick's vision and creative talents led the development and evolution of the Company's philosophy and the design and feel of Chico's merchandise and Chico's stores through September 1, 1993 and since November 1994 again are leading the Company in this regard. Mr. Gralnick also served as Chief Executive Officer and director of Chico's International, Inc. from 1988 until it was merged into the Company in 1992 and as Chief Executive Officer and director of Parrot Products, Inc. from 1990 until it was dissolved in 1992. Helene B. Gralnick was a co-founder of Chico's, together with her husband, Marvin J. Gralnick, and has served the Company in various senior executive capacities throughout its history. She was first elected Vice President/Secretary in 1983. Ms. Gralnick was elected as Senior Vice President-Merchandise Concept in 1992. In September 1993, Ms. Gralnick stepped down from all officer positions with the Company. In connection with the November 7, 1994 resignation of Jeffrey J. Zwick as Chief Executive Officer, President and a director of the Company, Ms. Gralnick, together with Mr. Gralnick, returned to the Company on a full time basis to head up merchandise design, marketing and image for the Company. In February 1995, Ms. Gralnick was elected as Senior Vice President - Design and Concept. In addition, she continues to serve as a director of the Company. Ms. Gralnick also served as a Vice President and director of Chico's International, Inc. from 1988 until it was merged into the Company in 1992 and as Vice President/Secretary and director of Parrot Products, Inc. from 1990 until it was dissolved in 1992. Charles J. Kleman has been employed by Chico's since January 1989, when he was hired as the Company's Controller. In 1991, he was elected as Vice President/Assistant Secretary. In 1992, Mr. Kleman was designated as the Company's Chief Financial Officer. On September 1, 1993, he was elected to the additional position of Secretary/Treasurer, served as Senior Vice President - Finance from January 1, 1996 21 24 through November 1996 and effective December 3, 1996, was promoted to the position of Executive Vice President - Finance. Prior to joining Chico's, Mr. Kleman was an independent accounting consultant in 1988, and from 1986 to 1988 Mr. Kleman was employed by Electronic Monitoring & Controls, Inc., a manufacturer and distributor of energy management systems, as its Vice President/Controller. Prior to 1986, Mr. Kleman was employed by various independent certified public accounting firms, spending over four years of that time with Arthur Andersen & Co. Mr. Kleman is responsible for accounting, financial reporting, management information systems and personnel administration and, on an interim basis, merchandise purchasing and planning. Mr. Kleman also served as Vice President/Assistant Secretary of Chico's International, Inc. from 1991 until it was merged into the Company in 1992 and as Vice President/Assistant Secretary of Parrot Products, Inc. from 1991 until it was dissolved in 1992. Scott A. Edmonds has been employed by Chico's since September 1993, when he was hired as Operations Manager. In February 1994, he was elected to the position of Vice President - Operations and effective January 1, 1996 he was promoted to the position of Senior Vice President - Operations. Mr. Edmonds is responsible for store development, leasing and maintenance, franchise operations, and management of the headquarters, woodshop, distribution center and field operations. From March 1985 until September 1993, he was President/General Manager of the Ft. Myers branch of Ferguson Enterprises, Inc. an electric and plumbing wholesaler. Marvin J. Gralnick and Helene B. Gralnick are husband and wife. None of the other executive officers or directors are related to one another. There are no arrangements or understandings pursuant to which any officer was elected to office. Executive officers are elected by and serve at the discretion of the Board of Directors. 22 25 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on NASDAQ National Market System. The high and low prices per share of the Company's Common Stock for each quarterly period since the Company's initial public offering is set forth in the Company's 1997 Annual Report to Stockholders and is incorporated herein by reference. On April 15, 1997, the last reported sale price of the Common Stock on the NASDAQ National Market System was $3.00 per share. Since the initial public offering, the Company has not paid any cash dividends except for $5,853,000 of dividends representing previously taxed undistributed S corporation earnings which dividends were declared prior to the Company's initial public offering and paid to persons who were stockholders prior to the offering. The Company does not intend to pay any cash dividends for the foreseeable future and intends to retain earnings, if any, for the future operation and expansion of the Company's business. Any determination to pay dividends in the future will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors. The Company's existing credit facilities contain restrictions on the payment of cash dividends on the Common Stock. Under the provisions of the credit facilities, dividends will be prohibited to the extent such aggregate dividends would cause the Company's tangible net worth to fall below the sum of $15.8 million plus 50% of aggregate net income after fiscal 1996. The approximate number of equity security holders of the Company is as follows:
Number of Record Holders Title of Class as of April 20, 1997 -------------- -------------------- Common Stock, par value $.01 per share 605
23 26 ITEM 6. SELECTED FINANCIAL DATA. Selected Financial Data at the dates and for the periods indicated should be read in conjunction with, and is qualified in its entirety by reference to, the financial statements and the notes thereto set forth elsewhere in this Annual Report on Form 10-K.
ONE MONTH PRO FORMA PERIOD FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED (UNAUDITED) -------------------------------------------------------------------------------------------- JANUARY 3, JANUARY 2, JANUARY 1, DECEMBER JANUARY 28, JANUARY 28, FEBRUARY 1, 1993 1994 1995 31, 1995 1996 (1) 1996 (1) 1997 (1) (53 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (4 WEEKS) (52 WEEKS) (53 WEEKS) -------------------------------------------------------------------------------------------- (in thousands, except per share and selected operating data) OPERATING STATEMENT DATA Net sales by company stores $28,974 $ 42,303 $55,282 $57,636 $ 3,619 $58,091 $62,318 Net sales to franchisees(2) 3,551 4,532 3,989 2,707 128 2,672 1,755 ------- -------- ------- ------- ------- ------- ------- Net sales 32,525 46,835 59,271 60,343 3,747 60,763 64,073 Cost of goods sold(3) 13,061 16,874 22,418 26,115 1,913 26,484 26,713 ------- -------- ------- ------- ------- ------- ------- Gross profit 19,464 29,961 36,853 34,228 1,834 34,279 37,360 General, administrative and store operating expenses 14,990 21,976 31,168 30,743 2,358 30,842 33,738 ------- -------- ------- ------- ------- ------- ------- Income (loss) from operations 4,474 7,985 5,685 3,485 (524) 3,437 3,622 Interest expense (income), net 47 (55) 119 621 39 620 404 ------- -------- ------- ------- ------- ------- ------- Income (loss) before taxes(4) 4,427 8,040 5,566 2,864 (563) 2,817 3,218 Provision for Income Taxes 134 1,950 2,275 1,160 (225) 1,141 1,287 ------- -------- ------- ------- ------- ------- ------- Net Income (Loss) $ 4,293 $ 6,090 $ 3,291 $ 1,704 $ (338) $ 1,676 $ 1,931 ======= ======= ======= ======= ======= Pro Forma Income Tax Provision (Unaudited)(4) 1,585 1,188 ------- -------- Pro Forma Net Income (Unaudited)(4) $ 2,708 $ 4,902 ======= ======== Net Income (Loss) Per Share (supplemental pro forma for 1992-1993)(4)(5)(6) $ .34 $ 61 $ .41 $ .22 $ (.04) $ .21 .24 ======= ======== ======= ======= ======= ======= ======= Weighted average shares outstanding (supplemental pro forma for 1992- 1993)(5)(6) 7,892 8,072 8,019 7,878 7,827 7,873 8,048 ======= ======== ======= ======= ======= ======= ======= SELECTED OPERATING DATA Company stores at period end(7) 57 78 104 111 111 111 123 Franchise stores at period end(7) 18 16 17 12 12 12 10 Total stores at period end(7) 75 94 121 123 123 123 133 Average net sales per company store (in thousands)(8) $ 572 $ 647 $ 613 $ 527 N/A $ 537 $ 523
24 27
Average net sales per net selling square foot at company stores(8) $ 437 $ 496 $ 478 $ 413 N/A $ 405 $ 396 Percentage increase (decrease) in comparable company store net sales (9) 16.5% 12.3% (7.3)% (10.4)% 1.4% (10.1)% (1.3)% -------------------------------------------------------------------------------------------- JANUARY 3, JANUARY 2, JANUARY 1, DECEMBER JANUARY 28, FEBRUARY 1, 1993 1994 1995 31, 1995 1996 1997 -------------------------------------------------------------------------------------------- BALANCE SHEET DATA Working capital $2,919 $ 4,771 $ 1,460 $ 4,536 5,419 6,585 Total assets 8,788 16,589 27,352 27,009 27,681 31,248 Long-term debt, and capital lease obligations, less current maturities 691 593 4,663 5,896 7,131 7,008 Stockholders' Equity 4,785 10,713 14,226 15,959 15,621 18,021
- ---------------------- (1) In December, the Company elected to change its fiscal year end, effective January 29, 1996, from a 52/53 week fiscal year, ending on the Sunday closest to December 31st to a 52/53 week fiscal year ending on the Saturday closest to January 31st. The selected financial data presents financial results for the short one month transition period in January 1996, for a pro forma fiscal year ended January 28, 1996 and the first new full fiscal year ended February 1, 1997. (2) Includes $75,000, $0, $5,000, $0 and $0 of franchisee fees in fiscal 1992, 1993, 1994, 1995 and 1997. (3) Cost of goods sold includes distribution and design costs, but does not include occupancy cost. (4) For all periods prior to the consummation of the Company's initial public offering on April 1, 1993, the Company was an S Corporation for federal and state income tax purposes and, accordingly, was not subject to corporate federal income taxes or corporate income taxes in Florida and certain other states. The pro forma and supplemental pro forma information has been computed as if the Company was subject to corporate federal and state income taxes for all periods presented, based on the tax laws in effect during the respective periods. (5) Pro forma net income per share for fiscal 1992 is $.38, calculated based on pro forma weighted average shares outstanding of 7,026,228. Pro forma net income per share for fiscal 1993 is $.63, calculated based on pro forma weighted average shares outstanding of 7,830,588. For the purpose of calculating pro forma net income per share, the weighted average number of shares outstanding has been adjusted to give effect to the common stock equivalents associated with outstanding stock options calculated pursuant to the treasury stock method. (6) Restated to give retroactive effect for 2 for 1 stock split in January 1994. In addition, for purposes of calculating supplemental pro forma net income per share, the weighted average number of shares outstanding has been adjusted to give effect to both (1) the common stock equivalents associated with outstanding stock options calculated pursuant to the treasury stock method, and (2) the 866,684 shares issued by the Company in the initial public offering (split-adjusted), the net proceeds of which were used to partially fund a $5,853,000 distribution to persons who were stockholders prior to the initial public offering. (7) For information concerning stores opened, acquired, sold and closed, see "Business -- Store Locations." (8) Average net sales per company store and average net sales per net selling square foot of company stores are based on net sales of stores that have been operated by the Company for the full year. For fiscal 1992 and 1997, average net sales per company store and average net sales per net selling square foot of company stores have been adjusted to exclude the effect of the fifty-third week. 25 28 (9) Comparable company store net sales data has been revised to reflect a change in the method of reporting which includes all stores that have been open and owned by the Company for 13 months or more. Previously, the Company included in the computation only stores that were open and operated by the Company as of the beginning of the preceding fiscal year. Two, five and one stores acquired by the Company from franchisees in fiscal 1992, 1995 and 1997, respectively, have not been included in the calculation unless they had been operated by the Company for at least 13 months as of the respective fiscal year end. Comparable company store net sales for fiscal 1992 and fiscal 1997 have been adjusted to exclude the effect of the fifty-third week. 26 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. A discussion and analysis of the financial condition and results of operations for the specified fiscal periods through February 1, 1997 is set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1997 Annual Report to Stockholders and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Financial statements and supplementary financial information is set forth under the heading "Financial Statements" in the financial information portion of the Company's 1997 Annual Report to Stockholders and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information about directors and nominees for director of the Company in the Company's 1997 Annual Meeting proxy statement is incorporated herein by reference. Information about executive officers of the Company is included in Item 1 of Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. Information about Executive Compensation in the Company's 1997 Annual Meeting proxy statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is included in the Company's 1997 Annual Meeting proxy statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is included in the Company's 1997 Annual Meeting proxy statement and is incorporated herein by reference. 27 30 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) (1) The following financial statements of Chico's FAS, Inc. and the report thereon of Arthur Andersen LLP dated March 6, 1997, which is included in the Company's Annual Report to Stockholders for the fiscal year ended February 1, 1997, are incorporated herein by reference. Report of Independent Certified Public Accountants. Statements of Income for the fiscal year ended February 1, 1997, for the period from January 1, 1996 through January 28, 1996 and for the fiscal years ended December 31, 1995 and January 1, 1995. Balance Sheets, February 1, 1997 and December 31, 1995. Statements of Stockholders' Equity for the fiscal year ended February 1, 1997, for the period from January 1, 1996 through January 28, 1996 and for the fiscal years ended December 31, 1995 and January 1, 1995. Statements of Cash Flows for the fiscal year ended February 1, 1997, for the period from January 1, 1996 through January 28, 1996 and for the fiscal years ended December 31, 1995 and January 1, 1995. Notes to Financial Statements. (2) The following Financial Statement Schedules are included herein: Schedules are not submitted because they are not applicable or not required or because the required information is included in the financial statements or the notes thereto. (3) The following exhibits are filed as part of this report (exhibits marked with an asterisk have been previously filed with the Commission as indicated and are incorporated herein by this reference): 2* Agreement and Plan of Merger Dated December 19, 1992, between the Company and Chico's International, Inc. (Filed as Exhibit 2 to the Company's Registration Statement on Form S-1 (File No. 33-58134) filed with the Commission on February 10, 1993, as amended) 3.1* Amended and Restated Articles of Incorporation (Filed as Exhibit 3.3 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed the Commission on May 18, 1993) 3.2* Agreement and Plan of Recapitalization dated February 3, 1993, by and among Marvin J. Gralnick, Helene B. Gralnick, Barry E. Szumlanski, Lynn Mann and Jeffrey Jack Zwick and Chico's FAS, Inc. (Filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 33-70620) filed with the Commission on October 21, 1993, as amended) 28 31 3.3* Amended and Restated By-laws (Filed as Exhibit 3.5 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed with the Commission on May 18, 1993) 4.1* Amended and Restated Articles of Incorporation (Filed as Exhibit 3.3 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed with the Commission on May 18, 1993) 4.2* Amended and Restated Bylaws (Filed as Exhibit 3.5 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed with the Commission on May 18, 1993) 4.3* Form of Common Stock Certificate (Filed as Exhibit 4.5 to the Company's Registration Statement on Form S-1 (File No. 33-58134) filed with the Commission on February 10, 1993, as amended) 10.1* Employment Agreement for Marvin J. Gralnick (Filed as Exhibit 10.1 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 10.2* Employment Agreement for Jeffrey J. Zwick (Filed as Exhibit 10.6.2 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed with the Commission on May 18, 1993) 10.3* Employment Agreement for Barry E. Szumlanski (Filed as Exhibit 10.6.3 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed with the Commission on May 18, 1993) 10.4* Employment Agreement for Helene B. Gralnick (Filed as Exhibit 10.1 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 10.5* Employment Agreement for Charles J. Kleman (Filed as Exhibit 10.6.5 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed with the Commission on May 18, 1993) 10.6* Employment Agreement for Michael Szumlanski (Filed as Exhibit 10.6.6 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed with the Commission on May 18, 1993) 10.7* First Amendment to Employment Agreement for Jeffrey J. Zwick (Filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1 (File No. 33-70620) as filed with the Commission on October 21, 1993, as amended) 10.8* First Amendment to Employment Agreement for Barry E. Szumlanski (Filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1 (File No. 33-70620) as filed with the Commission on October 21, 1993, as amended) 10.9* First Amendment to Employment Agreement for Michal A. Szumlanski. (Filed as Exhibit 10.11 to the Company's Form 10-K for the year ended January 2, 1994, as filed with the Commission on April 1, 1994) 10.10* Employment Agreement for Scott A. Edmonds (Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended July 2, 1995, as filed with the Commission on August 14, 1995) 10.11* Employment Agreement for Melissa Payner-Gregor (Filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended July 2, 1995, as filed with the Commission on August 14, 1995) 29 32 10.12* Supplement to Employment Agreement for Melissa Payner-Gregor. (Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 1996, as filed with the Commission on August 13, 1996) 10.13* Second Supplement to Employment Agreement for Melissa Payner- Gregor. (Filed as Exhibit 10.5 to the Company's Form 10-Q for the quarter ended June 30, 1996, as filed with the Commission on August 13, 1996) 10.14* Employment Agreement for Mori Cameron-MacKenzie (Filed as Exhibit 10.4 to the Company's Form 10-Q for the quarter ended October 1, 1995, as filed with the Commission on November 13, 1995) 10.15* 1992 Stock Option Plan (Filed as Exhibit 10.7 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.16* First Amendment to 1992 Stock Option Plan (Filed as Exhibit 10.13 to the Company's Form 10-K for the year ended January 2, 1994, as filed with the Commission on April 1, 1994) 10.17* 1993 Stock Option Plan (Filed as Exhibit 10.14 to the Company's Form 10-K for the year ended January 2, 1994, as filed with the Commission on April 1, 1994) 10.18* 1993 Employee Stock Purchase Plan (Filed as Exhibit 10.8 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed with the Commission on May 18, 1993) 10.19* Nonemployee Director's Stock Option Agreement by and between Chico's FAS, Inc., and Verna K. Gibson (Filed as Exhibit 10.14 to the Company's Registration Statement on Form S-1 (File No. 33-70620) as filed with the Commission on October 21, 1993, as amended) 10.20* Nonemployee Director's Stock Option Agreement by and between Chico's FAS Inc., and W. Keith Schilit (Filed as Exhibit 10.15 to the Company's Registration Statement on Form S-1 (File No. 33-70620) as filed with the Commission on October 21, 1993, as amended) 10.21* Form of Nonemployee Director's Stock Option Agreement by and between Chico's FAS, Inc. and Verna K. Gibson (Filed as Exhibit 10.51 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 10.22* Nonemployee Director's Stock Option Agreement by and between Chico's FAS, Inc. and W. Keith Schilit dated November 7, 1994 (Filed as Exhibit 10.52 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 10.23* Nonemployee Director's Stock Option Agreement by and between Chico's FAS, Inc., and Verna K. Gibson (Filed as Exhibit 10.6 to the Company's Form 10-Q for the quarter ended July 2, 1995, as filed with the Commission on August 14, 1995) 10.24* Nonemployee Director's Stock Option Agreement by and between Chico's FAS Inc., and W. Keith Schilit (Filed as Exhibit 10.7 to the Company's Form 10-Q for the quarter ended July 2, 1995, as filed with the Commission on August 14, 1995) 30 33 10.25* Nonemployee Director's Stock Option Agreement by and between Chico's FAS Inc., and W. Keith Schilit (Filed as Exhibit 10.8 to the Company's Form 10-Q for the quarter ended July 2, 1995, as filed with the Commission on August 14, 1995) 10.26* Nonemployee Director's Stock Option Agreement by and between Chico's FAS, Inc., and Verna K. Gibson (Filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended June 30, 1996, as filed with the Commission on August 13, 1996) 10.27* Nonemployee Director's Stock Option Agreement by and between Chico's FAS Inc., and W. Keith Schilit (Filed as Exhibit 10.4 to the Company's Form 10-Q for the quarter ended June 30, 1996, as filed with the Commission on August 13, 1996) 10.28* Stock Option Agreement by and between Chico's FAS Inc. and Melissa Payner-Gregor (Filed as Exhibit 10.5 to the Company's Form 10-Q for the quarter ended July 2, 1995, as filed with the Commission on August 14, 1995) 10.29* Stock Option Agreement by and between Chico's FAS Inc. and Melissa Payner-Gregor (Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended June 30, 1996, as filed with the Commission on August 13, 1996) 10.30* First Amendment to Stock Option Agreement by and between Chico's FAS Inc. and Melissa Payner-Gregor (Filed as Exhibit 10.6 to the Company's Form 10-Q for the quarter ended June 30, 1996, as filed with the Commission on August 13, 1996) 10.31* Indemnification Agreement with Lynn D. Mann (Filed as Exhibit 10.9 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed with the Commission on May 18, 1993) 10.32* Indemnification Agreement with Marvin J. Gralnick (Filed as Exhibit 10.9.1 to the Company's Form 10-Q for the quarter ended July 4, 1993, as filed with the Commission on August 13, 1993) 10.33* Indemnification Agreement with Helene B. Gralnick (Filed as Exhibit 10.9.2 to the Company's Form 10-Q for the quarter ended July 4, 1993, as filed with the Commission on August 13, 1993) 10.34* Indemnification Agreement with Jeffrey J. Zwick (Filed as Exhibit 10.9.3 to the Company's Form 10-Q for the quarter ended July 4, 1993, as filed with the Commission on August 13, 1993) 10.35* Indemnification Agreement with Barry E. Szumlanski (Filed as Exhibit 10.9.4 to the Company's Form 10-Q for the quarter ended July 4, 1993, as filed with the Commission on August 13, 1993) 10.36* Indemnification Agreement with Charles J. Kleman (Filed as Exhibit 10.9.5 to the Company's Form 10-Q for the quarter ended July 4, 1993, as filed with the Commission on August 13, 1993) 10.37* Indemnification Agreement with Michael Szumlanski (Filed as Exhibit 10.9.8 to the Company's Form 10-Q for the quarter ended July 4, 1993, as filed with the Commission on August 13, 1993) 10.38* Indemnification Agreement with W. Keith Schilit (Filed as Exhibit 10.9.7 to the Company's Form 10-Q for the quarter ended July 4, 1993, as filed with the Commission on August 13, 1993) 31 34 10.39* Indemnification Agreement with Verna K. Gibson (Filed as Exhibit 10.9.6 to the Company's Form 10-Q for the quarter ended July 4, 1993, as filed with the Commission on August 13, 1993) 10.40* Indemnification Agreement with Scott A. Edmonds (Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended July 2, 1995, as filed with the Commission on August 14, 1995) 10.41* Indemnification Agreement with Melissa Payner-Gregor (Filed as Exhibit 10.4 to the Company's Form 10-Q for the quarter ended July 2, 1995, as filed with the Commission on August 14, 1995) 10.42* S Corporation Tax Allocation and Indemnification Agreement (Filed as Exhibit 10.11 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed with the Commission on May 18, 1993) 10.43* Buy-Sell Agreement and addendums thereto (Filed as Exhibit 10.12 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.44* Sample Form of Franchise Agreement (Filed as Exhibit 10.13 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.45* Sample Form of Territory Development Agreement (Filed as Exhibit 10.14 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.46* Sample Form of Purchase Agreement (Filed as Exhibit 10.15 to the Company's Registration Statement on Form S-I (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.47* Agreement dated January 12, 1988 whereby Lynn D. Mann became a shareholder of the Company and amendment thereto (Filed as Exhibit 10.16 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.48* Asset Purchase Agreement dated January 21, 1990 by and between East Coast Clothing, Inc., Jeffrey J. Zwick and Beth Zwick and Chico's FAS, Inc. (Filed as Exhibit 10.17 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.49* Asset Purchase Agreement dated February 1, 1990 by and between Chico's America, Inc., Lynn Mann and Chico's FAS, Inc. (Filed as Exhibit 10.18 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.50* Lease Agreement dated February 1, 1988 by and between Lynn Mann, Marvin Gralnick and Barry Szumlanski and Chico's Folk Art Specialties, Inc. (Filed as Exhibit 10.19 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 32 35 10.51* Lease Agreement dated December 1, 1988 by and between Marvin Gralnick, Helene Gralnick, Lynn Mann and Szumlanski, and Chico's Folk Art Specialties, Inc. (Filed as Exhibit 10.20 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.52* Lease Termination and Settlement Agreement dated June 13, 1996 by and among: Marvin Gralnick, Helene Gralnick, Lynn Mann and Barry Szumlanski; Chico's FAS, Inc. and (Filed as Exhibit 10.8 to the Company's Form 10-Q for the quarter ended September 29, 1996, as filed with the Commission on November 12, 1996) 10.53* Lease Agreement dated September 9, 1991 between R&I Industrial Complex and Chico's FAS, Inc. (Filed as Exhibit 10.21 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.54* Lease Agreement dated April 1, 1992 between Dr. Richard Epes and Chico's FAS, Inc. (Filed as Exhibit 10.22 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.55* Periwinkle Place Lease Agreement dated June 30, 1992 between O.P.&F. Trust and Chico's FAS, Inc. (Filed as Exhibit 10.23 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.56* Amended and Restated Revolving Line of Credit and Reimbursement Agreement dated October 13, 1993 by and between Chico's FAS, Inc, and NationsBank of Florida, National Association (Filed as Exhibit 10.38 to the Company's Registration Statement on Form S-1 (File No. 33-70620) as filed with the Commission on October 21, 1993, as amended) 10.57* Consolidated Amendment to Loan Documents dated as of October 13, 1993, by and between Chico's FAS, Inc., and NationsBank of Florida, National Association (Filed as Exhibit 10.39 to the Company's Registration Statement on Form S-1 (File No. 33-70620) as filed with the Commission on October 21, 1993, as amended) 10.58* First Amendment to Amended and Restated Revolving Line of Credit and Reimbursement Agreement dated December 20, 1993 by and between Chico's FAS, Inc. and NationsBank of Florida, National Association (Filed as Exhibit 10.43 to the Company's Form 10-K for the year ended January 2, 1994, as filed with the Commission on April 1, 1994) 10.59* Second Amendment to Amended and Restated Revolving Line of Credit and Reimbursement Agreement dated June 14, 1994 by and between Chico's FAS, Inc., and NationsBank of Florida, National Association (Filed as Exhibit 10.48 to the Company's Form 10-Q for the quarter ended October 2, 1994, as filed with the Commission on November 15, 1994) 10.60* Third Amendment to Amended and Restated Revolving Line of Credit and Reimbursement Agreement dated December 9, 1994 by and between Chico's FAS, Inc., and NationsBank of Florida, National Association (Filed as Exhibit 10.49 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 33 36 10.61* Fourth Amendment to Amended and Restated Revolving Line of Credit and Reimbursement Agreement dated February 14, 1995 by and between Chico's FAS, Inc., and NationsBank of Florida, National Association (Filed as Exhibit 10.50 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 10.62* Second Amended and Restated Credit Agreement dated September 28, 1995 by and between Chico's FAS, Inc. and NationsBank of Florida, National Association (Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended October 1, 1995, as filed with the Commission on November 13, 1995) 10.63* Third Amended and Restated Credit Agreement by and between Chico's FAS, Inc. and NationsBank (South), N. A. (Filed as Exhibit 10.57 to the Company's Form 10-K for the year ended December 31, 1995, as filed with the Commission on April 1, 1996) 10.64* First Amendment to Third Amended and Restated Credit Agreement by and between Chico's FAS, Inc. and NationsBank (South), N. A. (Filed as Exhibit 10.7 to the Company's Form 10-Q for the quarter ended September 29, 1996, as filed with the Commission on November 12, 1996) 10.65* Loan Agreement dated January 4, 1996 by and between Chico's FAS, Inc. and Founders National Trust Bank (Filed as Exhibit 10.58 to the Company's Form 10-K for the year ended December 31, 1995, as filed with the Commission on April 1, 1996) 10.66* Promissory Note dated February 1, 1988 between Chico's Folk Art Specialties, Inc., and Lynn Mann (Filed as Exhibit 10.25 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.67* Clarification, Termination and Waiver Agreement dated February 10, 1993 by and among Chico's FAS, Inc. f/k/a Chico's Folk Art Specialties and Marvin Gralnick, Helene Gralnick, Barry Szumlanski, Lynn Mann and Jeffrey Jack Zwick (Filed as Exhibit 10.30 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.68* Clarification letter dated February 9, 1993 from Chico's FAS, Inc. to Chico's America, Inc (Filed as Exhibit 10.31 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.69* Amendment and Restatement of the Chico's FAS, Inc. Profit Sharing Plan (Filed as Exhibit 10.47 to the Company's Form 10-Q for the quarter ended April 3, 1994, 1994, as filed with the Commission on May 9, 1994) 10.70* Separation Agreement dated November 10, 1994 by and between Chico's FAS, Inc. and Jeffrey J. Zwick (Filed as Exhibit 10.55 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 10.71* Separation Agreement dated November 28, 1994 by and between Chico's FAS, Inc. and Heidi Thorner (Filed as Exhibit 10.56 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 34 37 10.72* Separation Agreement dated February 14, 1995 by and between Chico's FAS, Inc. and Barry E. Szumlanski (Filed as Exhibit 10.57 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 10.73* Separation Agreement dated February 14, 1995 by and between Chico's FAS, Inc. and Michal Szumlanski (Filed as Exhibit 10.58 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 10.74* Change in Employment Status Agreement dated March 10, 1995 by and between Chico's FAS, Inc. and Neil D. Brooks (Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended October 1, 1995, as filed with the Commission on November 13, 1995) 10.75* Separation Agreement dated August 15, 1995 by and between Chico's FAS, Inc. and Lori Brewer (Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended October 1, 1995, as filed with the Commission on November 13, 1995) 10.76 Separation Agreement dated as of March 24, 1997 by and between Chico's FAS, Inc. and Melissa Payner 10.77* Letter Agreement dated March 17, 1995 with Robert W. Baird & Co. (Filed as Exhibit 10.60 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 13 Annual Report to Stockholders 23 Consent to use of Report of Independent Certified Public Accountants 27.1 Financial Data Schedule (for SEC use only). 27.2 Financial Data Schedule (for SEC use only). (b) Reports on Form 8-K. During the fourth quarter of fiscal 1997, the Company filed the following report on Form 8-K: Form 8-K filed December 16, 1996, reporting under Item 8 "Change in Fiscal Year" the Company's change of fiscal year from a 52/53 week fiscal year, ending on the Sunday closest to December 31st to a 52/53 week fiscal year ending on the Saturday closest to January 31st. 35 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHICO'S FAS, INC. By: /s/ Marvin J. Gralnick April 30, 1997 ---------------------------------------------------------------- ------------------------------------ MARVIN J. GRALNICK, Chief Executive Officer Date and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Marvin J. Gralnick April 30, 1997 --------------------------------------------------------------- ------------------------------------ MARVIN J. GRALNICK, Chief Executive Officer, Date President, Director (principal executive officer) /s/ Charles J. Kleman April 30, 1997 --------------------------------------------------------------- ------------------------------------ CHARLES J. KLEMAN, Chief Financial Officer, Date Director (principal financial and accounting officer) /s/ Helene B. Gralnick April 30, 1997 --------------------------------------------------------------- ------------------------------------ HELENE B. GRALNICK, Senior Vice President - Date Design and Concept and Director --------------------------------------------------------------- ------------------------------------ VERNA K. GIBSON, Director Date --------------------------------------------------------------- ------------------------------------ W. KEITH SCHILIT, Director Date
36 39 EXHIBIT INDEX
No. Document Page No. - --- -------- -------- 10.76 Separation Agreement dated as of March 24, 1997 by and between Chico's FAS, Inc. and Melissa Payner 13 Annual Report to Stockholders 23 Consent to use of Report of Independent Certified Public Accountants 27.1 Financial Data Schedule (for SEC use only) 27.2 Financial Data Schedule (for SEC use only)
EX-10.76 2 SEPARATION AGREEMENT DATED AS OF MARCH 24 1997 1 EXHIBIT 10.76 SEPARATION AGREEMENT THIS SEPARATION AGREEMENT ("Agreement") is made and entered into as of the 24th day of March, 1997 by and between CHICO'S FAS, INC. ("Chico's") and MELISSA PAYNER (a/k/a MELISSA PAYNER-GREGOR) ("Payner"). BACKGROUND Payner has served as an officer and employee of Chico's since July 1995. Since August 1, 1996, she has been serving as President of Chico's. The parties have determined that the senior officers of Chico's have different views with respect to the proper direction of the company and that these differences are not likely to be harmonized. Accordingly, management of Chico's has determined that it desires to reach an accommodation and understanding with Payner regarding the discontinuation of her employment, including the relative rights and obligations under the agreements referred to below. Payner and Chico's are parties to the following agreements: (1) an Employment Agreement dated July 8, 1995, as amended by Supplement to Employment Agreement dated as of May 1, 1996 and by Second Supplement to Employment Agreement dated as of July 1, 1996 (collectively, the "Employment Agreement"); (2) a Stock Option Agreement dated July 24, 1995 (the "1995 Stock Option Agreement"); (3) a Stock Option Agreement dated May 1, 1996, as amended by First Amendment to Stock Option Agreement dated July 12, 1996 (collectively, the "1996 Stock Option Agreement"); and an Indemnification Agreement dated July 31, 1995 (the "Indemnification Agreement"). Payner and Chico's desire to finalize all rights and arrangements between them in connection with the discontinuation of Payner's employment at Chico's, including rights and obligations under the foregoing agreements. 1. Discontinuation of Employment and Termination of Employment Agreement. Effective as of March 24, 1997, the parties agree that (i) Payner's employment by Chico's as President is discontinued, (ii) the Employment Agreement is terminated and of no further force and effect, and (iii) except as otherwise required by applicable law or as provided for in this Agreement, Payner relinquishes any and all continuing rights and benefits she may have under the Employment Agreement or as President of Chico's. The close of business on March 24, 1997 shall be referred to as the "Effective Time" under this Agreement. 2 2. Payments to the Employee. Upon the execution of this Agreement, Chico's shall pay to Payner, as severance pay, an amount equal to $239,063.73, subject to any applicable federal and state employment taxes and other authorized withholdings, including without limitation social security and wage withholding. 3. COBRA Coverage; Premium Payment by Chico's. From the Effective Time and through the earlier of (a) the date Payner becomes employed by another business entity or (b) December 31, 1997 (the "COBRA Payment Termination Date"), Chico's will pay the premium cost of what is commonly referred to as COBRA coverage with respect to health and dental insurance coverage for Payner and her dependents. The cost for any COBRA coverage which may be available and may be desired by Payner after the COBRA Payment Termination Date shall be borne by Payner. 4. Reimbursements. Payner has advised Chico's that she has appropriate substantiation and can prepare appropriate expense reports for expenditures incurred prior to the Effective Time in connection with her employment by Chico's. If, on or before April 30, 1997 and in accordance with Chico's requirements and policies for expense substantiation and expense reports, Payner submits expense reports substantiating such expenditures, Chico's shall reimburse Payner for such expenditures on or before June 15, 1997. 5. Amendment to Stock Option Agreement and Related Matters. The parties hereto agree that, notwithstanding anything in Section 8 of the 1995 Stock Option Agreement that might be considered to be to the contrary, (i) no additional portion of the options issued under the 1995 Stock Option Agreement will vest as a result of this Agreement or the termination of employment occasioned hereby, (ii) 33 1/3% of the options thereunder will be considered vested and (iii) the period for exercise of such vested options shall extend for 90 days past the Effective Time, i.e. to June 24, 1997. The parties hereto acknowledge that no portion of the options issued under the 1996 Stock Option Agreement have vested as of the date of this Agreement, that no portion of such options will vest as a result of this Agreement and that no portion of the options thereunder will be considered vested. 2. 3 The parties hereto further acknowledge that as a result of the termination of the Employment Agreement, Chico's shall have no obligation to issue any of the additional stock options contemplated by the Supplements to the Employment Agreement, specifically those designated as the 1997 Grant, the 1998 Grant, the 1999 Grant and/or the 2000 Grant. 6. Return of Company Assets and Property. As promptly as possible following the execution of this Agreement, Payner will return to Chico's (1) all company credit cards and company calling cards in Payner's possession, (2) all keys to any Chico's facility and equipment in Payner's possession, (3) the cellular phone issued to Payner by Chico's, and (4) all documents, papers, information and software remaining in her possession that she obtained from Chico's, or that belong to Chico's, without retaining any copies thereof. 7. Removal of Personal Property from Chico's Offices. Chico's acknowledges that certain property belonging to Payner may remain physically located at the Chico's offices, including without limitation, certain office furniture, computer equipment and wall hangings. Chico's agrees to permit Payner, during normal business hours and upon reasonable notice to a senior officer of Chico's, to remove or arrange for the removal of such personal effects. 8. Transition Consultation Services. 8.1 From the date hereof, through and including June 24, 1997, and for no additional compensation other than provided for in Section 2 and 3 hereof, Payner shall continue as a consultant employee of Chico's and, as such, shall make herself available, through her legal counsel unless otherwise agreed by Payner, to provide such advice and assistance as Chico's may from time to time during such period reasonably request in order to effectuate a smooth transition of management associated with Payner's departure from Chico's; provided that such services shall not exceed, without the consent of Payner, three hours per month. 8.2 Chico's anticipates that the consultation services required by this Section 8 will be provided by telephone. 3. 4 9. Resignations. Effective on or before the Effective Time, Payner will resign from all positions she may hold with Chico's, including all positions as an officer. 10. Property Rights and Use or Disclosure of Confidential Information. Payner shall continue to be bound in all respects by the provisions of the Employment Agreement relating to Confidentiality as contained in Section 10 thereof and notwithstanding the termination of the Employment Agreement at the Effective Time, such Section 10 shall continue in force and effect as separately enforceable agreements as if such provisions were contained herein. Such continuing obligations shall be in addition to Payner's obligations arising under applicable law including without limitation the obligations relating to trade secrets arising under Chapter 688, Florida Statutes. As a result of the termination of the Employment Agreement, among other things, Payner is hereby relieved of the noncompetition restrictions in Section 11 of the Employment Agreement; provided that it is understood that the provisions of Section 11 of this Agreement shall nevertheless be applicable. 11. Nonsolicitation. For a period of two (2) years following the Effective Time, Payner agrees she will refrain from and will not, directly or indirectly, as an individual, partner, officer, director, stockholder, employee, advisor, independent contractor, joint venturer, consultant, agent, representative, salesman or otherwise solicit any of the employees of Chico's to terminate their employment with Chico's. 12. Further Statements. Payner shall not hereafter (i) make any public or private oral or written statements that would directly or through clear implication disparage or discredit Chico's, or Marvin J. Gralnick, Helene B. Gralnick, Charles J. Kleman or Scott A, Edmonds (the "Chico's Senior Officers"), or (ii) take any affirmative action which is intended, or would reasonably be expected, to directly or through clear implication harm Chico's or any of the Chico's Senior Officers or its or any of their respective reputations or which would reasonably be expected to lead to unwanted or unfavorable publicity concerning Chico's or any of the Chico's Senior Officers. Chico's shall not hereafter (i) make any public or private oral or written statements that would directly or through clear implication disparage or discredit Payner or (ii) take any affirmative action which is intended, or would reasonably be expected, to directly or through clear implication harm 4. 5 Payner or Payner's reputation or which would reasonably be expected to lead to unwanted or unfavorable publicity concerning Payner. By way of the joinder set forth at the end of this Agreement, each of Marvin J. Gralnick, Helene B. Gralnick, Charles J. Kleman and Scott A. Edmonds severally agree that he or she shall not hereafter (i) make any public or private oral or written statements that would directly or through clear implication disparage or discredit Payner or (ii) take any affirmative action which is intended, or would reasonably be expected, to directly or through clear implication harm Payner or Payner's reputation or which would reasonably be expected to lead to unwanted or unfavorable publicity concerning Payner. If any such person wishes to make a public statement concerning the matters addressed by this Agreement, such person shall prior thereto provide a copy of such statement to the other person to whom the public statement relates and such other person may provide comments thereon; provided however, that nothing herein shall be deemed to prohibit any person from making any disclosure which its counsel reasonably deems necessary in order to fulfill such person's disclosure obligations imposed by law. It is expected that Chico's will issue a press release with respect to the consummation of this Separation Agreement. Chico's agrees that, within a reasonable amount of time prior to issuing such press release, it shall provide a copy of such statement to Payner and Payner's counsel and provide Payner and Payner's counsel the opportunity to provide comments with respect thereto (it being understood that such comments must be provided to Chico's and its counsel on a timely basis under the circumstances) and that any such press release that is issued shall be one that has been agreed upon by Chico's and Payner; provided however, that nothing herein shall be deemed to prohibit Chico's from making any disclosure or issuing a press release which its counsel reasonably deems necessary, from a timing standpoint and/or a content standpoint, in order to fulfill Chico's disclosure obligations imposed by law. 13. Indemnification Agreement. The parties hereby acknowledge that notwithstanding any other provision of this Agreement and notwithstanding the discontinuation of Payner's employment, the Indemnification Agreement shall continue to remain in full force and effect in accordance with its terms. 14. Releases. 14.1. Except for the obligations of Chico's arising under this Agreement, Payner hereby releases and fully discharges Chico's, its stockholders, directors, officers, affiliates, agents, 5. 6 employees, successors and assigns and each of Chico's Senior Officers, jointly and severally, from any and all claims or actions that Payner may have against Chico's, or any of its stockholders, directors, officers, affiliates, agents, employees, successors or assigns or any of Chico's Senior Officers, by reason of any matter, cause, happening or thing occurring from the beginning of time up to the date of this Agreement and related to or occurring in connection with Payner's employment by Chico's or Payner's separation therefrom. This release is intended to be broadly construed to encompass all possible legal and equitable claims, and is intended to include, but not be limited in any way to, claims for breach of contract, wrongful discharge, breach of the implied covenant of good faith and fair dealing and race, age, sex, national origin, handicap or other form of discrimination under either the state or federal laws prohibiting the same. Payner warrants and represents that she understands and acknowledges the significance and consequences of this release and waiver, and that such release and waiver are freely and voluntarily given. 14.2. Except for the obligations of Payner arising under this Agreement and any matter involving gross negligence or willful misconduct, if any, on the part of Payner in her capacity as an employee, officer or director of Chico's which resulted or results in a material loss to Chico's, Chico's, for itself and on behalf of its affiliates and each of Chico's Senior Officers, hereby releases and fully discharges Payner, her successors and assigns, jointly and severally, from any and all claims or actions known to any of Chico's Senior Officers that Chico's or any of its affiliates or any of Chico's Senior Officers may have against Payner, her successors or assigns, by reason of any matter, cause, happening or thing occurring from the beginning of time up to the date of this Agreement related to or occurring in connection with Payner's employment by Chico's or Payner's separation therefrom. This release is intended to be broadly construed to encompass all possible legal and equitable claims, and is intended to include, but not be limited in any way to, claims for breach of contract and breach of the implied covenant of good faith and fair dealing. 15. Remedies. 15.1. In the event that Chico's materially fails to comply with any of its obligations arising under this Agreement and shall not have cured such failure within 10 days after receiving written notice from Payner detailing such failure (if such cure is possible), Payner may elect to seek to enforce the obligations of Chico's arising under this Agreement. 15.2 In the event that Payner materially fails to comply with any of her obligations arising under this Agreement and shall not have cured such failure within 10 days after receiving written notice from Chico's detailing such failure (if cure is possible), Chico's shall be relieved of any then unfulfilled obligations arising under this Agreement, in addition to Chico's having such rights and remedies under applicable law as may then exist. 6. 7 16. Miscellaneous Provisions. 16.1. The payments required and transfers to be made to Payner hereunder, and the continuing obligations of Chico's to Payner as provided herein, are in complete and full satisfaction of the liabilities, duties and obligations of Chico's and its affiliates to Payner arising out of or relating to her employment with Chico's and its affiliates. 16.2. Failure by Chico's at any time to require performance of any provision of this Agreement shall not affect its right to require full performance thereof at any time thereafter. No waiver or delay in enforcing the terms of this Agreement by Chico's shall be construed as a waiver of any subsequent breach or default of the same or similar nature or of any other nature. 16.3 If, within 10 days after demand to comply with the obligations of one of the parties to this Agreement served in writing on the other, compliance or reasonable assurance of compliance is not forthcoming, and the other party engages the services of an attorney to enforce rights under this Agreement, the prevailing party in any action shall be entitled to recover all reasonable costs and expenses (including reasonable attorneys' fees before and at trial and in appellate proceedings). 16.4 This Agreement shall be binding upon and inure to the benefit of the successors in interest and assigns of the parties. 16.5 The parties to this Agreement agree that jurisdiction and venue in any action brought pursuant to this Agreement to enforce its terms or otherwise with respect to the relationships between the parties shall properly lie in the Circuit Court of the Twentieth Judicial Circuit of the State of Florida in and for Lee County or in the United States District Court for the Middle District of Florida, Tampa Division. Such jurisdiction and venue are merely permissive; jurisdiction and venue shall also continue to lie in any court where jurisdiction and venue would otherwise be proper. The parties agree that they will not object that any action commenced in the foregoing jurisdictions is commenced in a forum non conveniens. The parties further agree that the mailing by certified or registered mail, return receipt requested, of any process required by any such court shall constitute valid and lawful service of process against them, without the necessity for service by any other means provided by statute or rule of court. 16.6 This Agreement may be executed in any number of counterparts, each of which shall be considered an original, but all of which together shall constitute one and the same instrument, and shall become effective when each of the parties have executed at least one of the counterparts even if all the parties have not executed the same counterpart. 16.7 This Agreement is made and entered into the State of Florida, and shall be governed by and construed in accordance with the laws of such State. 7. 8 16.8. This Agreement contains the entire agreement of Chico's and Payner with respect to the subject matter hereof, and supersedes all prior agreements or understandings, written, oral or otherwise, with respect to the subject matter hereof. 16.9. This Agreement may be amended only by written instrument signed by Chico's and Payner. IN WITNESS WHEREOF, Payner and Chico's have executed this Agreement, effective as of the date first above written. ATTEST: CHICO'S FAS, INC. /s/ Charles J. Kleman By: /s/ Marvin Gralnick - -------------------------- -------------------------------- Title: CEO ----------------------------- WITNESSES: /s/ /s/ Melissa Payner - -------------------------- ----------------------------------- Melissa Payner /s/ - -------------------------- 8. 9 JOINDER The undersigned, by execution hereof, do hereby join in the foregoing Separation Agreement dated as of March 24, 1997 by and between Chico's FAS, Inc. and Melissa Payner, but solely for the limited purpose of acknowledging the obligations hereunder of the undersigned individuals as specifically set forth in sections 12 and 14 of the foregoing Separation Agreement; in all other respects, the obligations to Payner under the foregoing Separation Agreement shall be solely those of Chico's. WITNESSES: /s/ /s/ Marvin Gralnick - ------------------------ ------------------------------ Marvin J. Gralnick /s/ - ------------------------ Date: 3/24/97 ------------------------- /s/ /s/ Helene Gralnick - ------------------------ ------------------------------ Helene B. Gralnick /s/ - ------------------------ Date: 3/25/97 ------------------------- /s/ /s/ Charles J. Kleman - ------------------------ ------------------------------ Charles J. Kleman /s/ - ------------------------ Date: 3/24/97 ------------------------- /s/ /s/ Scott Edmonds - ------------------------ ------------------------------ Scott A. Edmonds /s/ - ------------------------ Date: 3/24/97 ------------------------- 9. EX-13 3 ANNUAL REPORT TO SHAREHOLDERS 1 [GRAPHIC - PICTURE OF FEMALE MODEL WITH FLOWERS] CHICO'S(R) REAL CLOTHES FOR REAL PEOPLE 1997 ANNUAL REPORT 2 [GRAPHIC - FOUR PICTURES INCLUDING UNITED STATES FLAG AND THREE SEPARATE FEMALE MODELS] CHICO'S(R) REAL CLOTHES 3 To our shareholders, Fiscal 1997 was another challenging year for Chico's. We saw some success in our profit with net income of 24 cent(s) per share as compared to 21 cent(s) per share in the prior year. However, although we were profitable for the year, we experienced a fourth quarter of negative earnings. We are now taking steps to make improvements in the Company's performance. As I reported last year, in 1995 we had implemented a transition plan which included the hiring of a new executive Vice President/General Merchandise Manager. Melissa Payner, hired to fill this position, was promoted to President of the Company in August, 1996. However, in the latter portion of the fiscal year, our senior management group had a significant difference of views as to the strategic direction for the Company's future. Our inability to agree lead to a separation arrangement with Melissa, which was effective at the end of March, 1997. My goal and the goal of our management team is to make Chico's the force it once was in the marketplace. We realize Chico's has lost the image that made is distinct and special. Helene and I are heading up the product development group which is already making great strides. We are committed to giving our customers what they are asking for: casual, loose fitting, cotton, easy-to-care-for clothing at a great value. Charlie Kleman, our Chief Financial Officer, is directing our planning, distribution, and merchandising team until we complete our search for a senior merchandise manager. Once new merchandise is in our stores and the customer is responding favorably, we intend to commence the search for a senior merchandise manager to maintain this direction and lead the planning, distribution, and merchandising team. We are working toward reviving not only our product line, but also the Chico's spirit within our stores. We are planning to implement a training program to correspond with the image that the Company wants to project. I am committed to working with our field to see to it that this training program is up and running as soon as possible. In order to be consistent with the Chico's spirit and our product development, we are enhancing our store concept. We intend to put "character" back into our stores. We have already implemented some of these concepts in our Fifth Avenue, Naples store and our Bell Tower, Fort Myers store, both in Florida, and the look is being very well received. Back in 1992 and 1993, we had a concept that was exciting and unique. We have been through several changes in direction since that time, believing that the fashion world and the retail environment had changed and that we had to change to meet it. I look back at some of the special characteristics that have made us strong, such as our exclusively designed clothing, the continual introduction of new merchandise, our boutique store atmosphere and our personalized customer service. These qualities which distinguished Chico's from its competition and made it exciting can still work today. We will have some tremendous talent to assist us in our efforts through our Board of Directors. Verna Gibson, previously with The Limited and a board member since we became a public company, has always been a great source of guidance. Keith Schilit will not be continuing as a Board member, but I want to thank him for the guidance in financial and compensation matters he has provided. The Board has nominated two new independent directors for election at this, the 1997 annual meeting: Ross Roeder, with twenty years of extensive multi-unit retail experience with Fotomat Corp., Denny's Restaurants and Baskin Robbins and John Burden, former Chairman of Federated Stores, with 30 years of department store experience. I am excited about this new team and confident that it can only mean good things for Chico's in the future. On the other hand, because of all the restructuring that will be necessary in fiscal 1998, we believe it will be a difficult year. We expect the first half of the year to continue to be challenging, but are hopeful that the changes we are putting into place will yield more positive results in the second half of the year and into future years. We have started on the path I refer to as "Back to the Future." We intend to listen to our customers and respond to their needs. I have faith in our management team who are very capable, positive and unified in their vision for the future. Sincerely, /s/Marvin Gralnick ---------------------- Marvin Gralnick Chairman of the Board [GRAPHIC OF FEMALE MODEL WITH FLOWERS BEHIND SHAREHOLDER LETTER] 4 CHICO'S LOGO INDEX 5 Management's Discussion & Analysis 11 Stock Information 12 Financial Statements 29 Executive Officers/Directors 31 Store Listing
5 FINANCIAL HIGHLIGHTS
PRO FORMA ONE FISCAL YEAR FISCAL FISCAL YEAR ENDED MONTH ENDED YEAR ---------------------------------------- ENDED (UNAUDITED) ENDED 1992 1993 1994 1995 1/28/96(1) 1996(1) 1997(1) ---- ---- ---- ---- ---------- ----------- -------- (Dollars in thousands except per share data) STATEMENT OF INCOME: Net Sales $32,525 $46,835 $59,271 $60,343 $3,747 $60,763 $64,073 Income (loss) from Operations 4,474 7,985 5,685 3,485 (524) 3,437 3,622 Net Income (loss) 4,293 6,090 3,291 1,704 (338) 1,676 1,931 Pro Forma Net Income Earnings (loss) Per Share(2) $ .34 $ .61 $ .41 $ .22 $ (.04) $ .21 $ .24 OPERATING DATA: Total Assets $ 8,788 $16,589 $27,352 $27,009 N/A $27,681 $31,248 Long-Term Debt 691 593 4,663 5,896 N/A 7,131 7,008 Stockholders' Equity $ 4,785 $10,713 $14,226 $15,959 N/A $15,621 $18,021 Number of Stores (at end of period): Company-owned 57 78 104 111 N/A 111 123 Franchised 18 16 17 12 N/A 12 10 --- --- ---- ---- ------ ----- Total 75 94 121 123 N/A 123 133 --- --- ---- ---- ------ -----
(1) In December 1996, the Company elected to change its fiscal year end, effective January 29, 1996, from a 52/53 week fiscal year, ending on the Sunday closest to December 31st to a 52/53 week fiscal year ending on the Saturday closest to January 31st. The selected financial data presents financial results for the short one month transition period in January 1996, for a pro forma fiscal year ended January 28, 1996 and the first new full fiscal year ended February 1, 1997. (2) Represents supplemental pro forma net income per common equivalent share for fiscal periods 1992 -- 1993. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Since the Company opened its first store in 1983 principally selling folk art, its retail store system, now selling principally women's apparel, has grown to 133 stores as of February 1, 1997, of which 123 are Company-owned and 10 are franchised stores. Since fiscal 1989, the Company has de-emphasized the granting of new franchises as a strategy for growth and, at the same time, has been expanding its store base by opening Company-owned stores. Where possible and practical, the Company has also acquired stores from its franchisees. Since the beginning of fiscal 1993, the Company has acquired 6 stores from franchisees and opened 68 new Company-owned stores, 13 of which were opened in the fiscal year ended February 1, 1997, 8 of which were opened in the pro forma fiscal year ended January 28, 1996, 26 of which were opened in the fiscal year ended January 1, 1995 and 21 of which were opened in the fiscal year ended January 2, 1994. During this same time period, the Company closed 8 Company-owned stores and 3 franchised stores were closed. The Company plans to open eight to twelve new Company-owned stores in the fiscal year ending January 31, 1998. In addition, the Company is evaluating certain existing Company-owned store locations, including stores with leases coming up for renewal, and is considering the possibility of closing 5 to 8 Company-owned stores in the fiscal year ending January 31, 1998. RESULTS OF OPERATIONS The following table sets forth, for each of the respective periods indicated, certain operating statement data and the percentage of the Company's net sales represented by each line item presented. The Company elected, effective January 29, 1996, to change its fiscal year from a 52/53 week fiscal year, ending on the Sunday closest to December 31st, to a 52/53 week fiscal year ending on the Saturday closest to January 31st. To assist in a review of the Company's results of operations, the following table includes operating statement data for the short one month transition period in January 1996, for a pro forma fiscal year ended January 28, 1996 and for the first new full fiscal year ended February 1, 1997.
ONE MONTH PERIOD PRO FORMA FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED (UNAUDITED) ----------------------------------------- ------------------- --------------------- JANUARY 1, DECEMBER 31, JANUARY 28, JANUARY 28, 1995 1995 1996 1996 (52 WEEKS) % (52 WEEKS) % (4 WEEKS) % (52 WEEKS) % ---------- ----- ------------ ----- ----------- ----- ------------ ------ Net sales by company stores....... $55,282 93.3% $57,636 95.5% $3,619 96.6% $58,091 95.6% Net sales to franchisees.......... 3,989 6.7 2,707 4.5 128 3.4 2,672 4.4 ------- ----- ------- ----- ------ ----- ------- ----- Net sales....................... 59,271 100.0 60,343 100.0 3,747 100.0 60,763 100.0 Cost of goods sold................ 22,418 37.8 26,115 43.3 1,913 51.0 26,484 43.6 ------- ----- ------- ----- ------ ----- ------- ----- Gross profit.................... 36,853 62.2 34,228 56.7 1,834 49.0 34,279 56.4 General, administrative and store operating expenses.............. 31,168 52.6 30,743 50.9 2,358 63.0 30,842 50.7 ------- ----- ------- ----- ------ ----- ------- ----- Income (loss) from operations..... 5,685 9.6 3,485 5.8 (524) (14.0) 3,437 5.7 Interest expense, net............. 119 .2 621 1.1 39 1.0 620 1.0 ------- ----- ------- ----- ------ ----- ------- ----- Income (loss) before taxes........ 5,566 9.4 2,864 4.7 (563) (15.0) 2,817 4.7 Provision for (benefit from) income taxes.................... 2,275 3.8 1,160 1.9 (225) (6.0) 1,141 1.9 ------- ----- ------- ----- ------ ----- ------- ----- Net income (loss)................. $ 3,291 5.6% $ 1,704 2.8% $ (338) (9.0)% $ 1,676 2.8% ======= ===== ======= ===== ====== ===== ======= ===== FISCAL YEAR ENDED ------------------- FEBRUARY 1, 1997 (53 WEEKS) % ----------- ----- Net sales by company stores....... $62,318 97.3% Net sales to franchisees.......... 1,755 2.7 ------- ----- Net sales....................... 64,073 100.0 Cost of goods sold................ 26,713 41.7 ------- ----- Gross profit.................... 37,360 58.3 General, administrative and store operating expenses.............. 33,738 52.6 ------- ----- Income (loss) from operations..... 3,622 5.7 Interest expense, net............. 404 .7 ------- ----- Income (loss) before taxes........ 3,218 5.0 Provision for (benefit from) income taxes.................... 1,287 2.0 ------- ----- Net income (loss)................. $ 1,931 3.0% ======= =====
5 7 FIFTY-THREE WEEKS ENDED FEBRUARY 1, 1997 COMPARED TO PRO FORMA FIFTY-TWO WEEKS ENDED JANUARY 28, 1996 NET SALES. Net sales by Company owned stores for the fifty-three weeks ended February 1, 1997 increased by $4.2 million over net sales by Company-owned stores for the pro forma fifty-two weeks ended January 28, 1996. The increase was primarily the result of $3.9 million in additional sales provided (1) by the fourteen stores opened or acquired in the fiscal year ended February 1, 1997 (net of two stores closed during the fiscal year) prior to such stores being included in the Company's comparable store base and (2) by several extended clearance sales conducted at, or near, the Company's warehouse (approximately $992,000 of additional net sales). Approximately $1.0 million of the additional sales were attributable to the thirteen stores opened or acquired in the pro forma fiscal year ended January 28, 1996 (net of six stores closed during such period). These increases in net sales were offset in part by a comparable Company-owned store net sales decrease of $704,000. Net sales to franchisees for the fifty-three weeks ended February 1, 1997 decreased by approximately $917,000, or 34.4%, compared to net sales to franchisees for the pro forma fifty-two weeks ended January 28, 1996. This decrease in net sales to franchisees resulted in part from the acquisition by the Company of six franchised stores during the two fiscal years ended February 1, 1997, and the closing of one franchise in March 1996. Management believes the balance of this decrease in net sales to franchisees resulted in part from conservative buying positions established by the franchisees as the Company began delivering its new designs and styles in late March 1996, combined with increased returns of older merchandise in anticipation of a new, more restrictive return policy which became effective in July 1996. GROSS PROFIT. Gross profit for the fifty-three weeks ended February 1, 1997 was $37.4 million, or 58.3% of net sales, compared with $34.3 million, or 56.4% of net sales for the pro forma fifty-two weeks ended January 28, 1996. The increase in the gross profit percentage primarily resulted from improved gross margins related to the Company's new spring and holiday goods, and an increase in the Company's outlet gross margins due to a change in its merchandising strategies together with the effect of the decreased percentage of total sales attributable to franchisees which carry lower margins. The Company does not believe that the increased gross margins at the Company's outlets are likely to continue in fiscal 1998 at the same level as in fiscal 1997 because the Company intends to pursue a more aggressive strategy to maintain lower levels of inventories in the distribution center. GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General, administrative and store operating expenses increased to $33.7 million, or 52.6% of net sales, in the fifty-three weeks ended February 1, 1997 from $30.8 million, or 50.7% of net sales, in the pro forma fifty-two weeks ended January 28, 1996. The increase in general, administrative and store operating expenses, for the most part, was the result of increases in store operating expenses, including store compensation and occupancy costs associated with additional store openings. To a lesser degree, the increase in general, administrative and store operating expense was a result of increased marketing and promotion costs associated with mailings to existing and potential customers, combined with the Company's increased outreach efforts. In addition, the increase was also due to a nonrecurring cost of approximately $325,000 related to separation expenses associated with the former President of the Company. During the pro forma fiscal year ended January 28, 1996, general, administrative and store operating costs were negatively impacted by an approximate $235,000 nonrecurring cost related to the Company's refinancing of its outstanding indebtedness. The increase in these expenses as a percentage of net sales was principally a result of the increased marketing and promotion costs, combined with the decline in comparable Company-owned store net sales. INTEREST EXPENSE, NET. Interest expense, net, decreased to approximately $404,000 in the fifty-three weeks ended February 1, 1997 from approximately $620,000 in the pro forma fifty-two weeks ended January 28, 1996. This decrease was primarily a result of decreased interest rates due to the refinancing accomplished in January 1996. NET INCOME. As a result of the factors discussed above, net income reflects an increase of 15.1% to $1.9 million for the fifty-three weeks ended February 1, 1997 from net income of $1.7 million for the pro forma fifty-two weeks ended January 28, 1996. The income tax provision represented an effective rate of 40.0% for the fifty-three weeks ended February 1, 1997 while the 6 8 income tax provision for the pro forma fifty-two weeks ended January 28, 1996 represented an effective rate of 40.5%. The decrease in the effective rate is largely attributable to lower permanent book-to-tax differences in the current fiscal year. COMPARISON OF FIFTY-THREE WEEKS ENDED FEBRUARY 1, 1997 TO FISCAL 1995 As is evident from the table above, the results of operations for the pro forma fiscal year ended February 1, 1997 and the fiscal year ended December 31, 1995 are substantially the same, particularly as to the relative percentages of net sales for each line item. Accordingly, a discussion of a comparison of the fifty-three weeks ended February 1, 1997 to the fiscal year ended December 31, 1995 would be largely the same as the above discussion which compares the fifty-three weeks ended February 1, 1997 to the pro forma fifty-two weeks ended January 28, 1996. FOUR WEEKS ENDED JANUARY 28, 1996 The Company has historically cleared merchandise at marked down prices during the month of January. This practice, which the Company believes to be consistent with other apparel retailers, results in a four week period that is not representative of the full year results. Weekly sales during this four week period are generally lower due to substantially increased returns resulting from the Christmas selling season, combined with the deep markdowns required to clear merchandise and meet competition. For the one month period ended January 28, 1996, the gross profit percentage of 49.0% is substantially less than the Company experiences on a full quarter basis due to the focus on clearance of goods. Further, the general, administrative and store operating expense percentage of 62.9% for the one month period was also substantially higher than the Company experiences on a full quarter basis due to the reduced sales described above, combined with certain relatively fixed levels of expenses. As a result of the above, the losses shown for this month are generally consistent with past January results. FISCAL 1995 COMPARED TO FISCAL 1994 NET SALES. Net sales by Company-owned stores for the 52 weeks ended December 31, 1995 increased by $2.4 million, or 4.3%, over net sales by Company-owned stores for the comparable 52 weeks ended January 1, 1995. The increase was principally the result of $5.3 million in additional sales prior to being included in the Company's comparable store base from the 26 stores opened in 1994 (net of 6 stores closed in 1995), and $2.5 million in additional sales from the stores opened or acquired in 1995, which increases were offset in substantial part by a comparable Company-owned store net sales decrease of $5.4 million. Net sales to franchisees for the 52 weeks ended December 31, 1995 decreased by $1.3 million, or 32.1%, compared to net sales to franchisees for the 52 weeks ended January 1, 1995. Management believes this decrease in net sales to franchisees resulted in part from a less than desirable assortment, depth and inventory level of available merchandise and a general slump in the women's apparel industry and is in part attributable to the acquisition by the Company of 5 franchised stores during 1995. GROSS PROFIT. Gross profit for the 52 weeks ended December 31, 1995 was $34.2 million, or 56.7% of net sales, compared with $36.9 million, or 62.2% of net sales for the 52 weeks ended January 1, 1995. The decrease in the gross profit percentage primarily resulted from the Company's strategy implemented principally in the first quarter of 1995 to heavily discount, through sidewalk sales and other markdowns in its stores, the existing merchandise. The decrease in the gross profit margin is also attributable to the Company's strategy to reduce price points to be more competitive in the current women's apparel market, to increase promotions in response to market conditions and, to a lesser degree, to the inclusion in cost of goods sold of the increased costs of the Company's new corporate headquarters which opened in September 1994. Although the Company reduced its markdown strategy for the second and third quarters of 1995, it determined that market conditions warranted increased markdowns in the fourth quarter of 1995 and into the first quarter of 1996. GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General, administrative and store operating expenses decreased to $30.7 million, or 50.9% of net sales, in the 52 weeks ended December 31, 1995 from $31.2 million, or 52.6% of net sales, in the 52 weeks ended January 1, 1995. The decrease in general, administrative and store operating expenses, for the most part, was the result of staff and expense reductions in field management and at the Company's corporate headquarters. These staff and expense reductions were initiated by the Company in January 1995 as a response to the declining 7 9 Company-owned and franchise store sales trends. These reductions in expense levels were substantially offset by increases in store operating expenses, including store compensation and occupancy costs associated with additional store openings. To a lesser degree, the decrease in general, administrative and store operating expense was a result of an approximate $235,000 nonrecurring cost related to the Company's refinancing of its outstanding indebtedness. During 1994, general administrative and store operating costs were negatively impacted by an approximate $945,000 nonrecurring cost related to employee severance costs and a write-off of lease obligations. The decrease in these expenses as a percentage of net sales was principally a result of the cost reductions described above, offset by the decline in comparable Company-owned store net sales. INTEREST EXPENSE, NET. Interest expense, net, increased to approximately $621,000 in the 52 weeks ended December 31, 1995 from approximately $119,000 in the 52 weeks ended January 1, 1995. This increase was primarily a result of increased borrowing on the Company's credit line to fund current operations as the decline in comparable Company-owned store net sales negatively impacted cash flow from operations, and a result of borrowing under new credit facilities aggregating $4.5 million and funded during the second and third quarters of 1994. The $4.5 million of new credit facilities were put in place primarily to support the construction and equipping of the Company's combined corporate headquarters, distribution center and woodshop facility. NET INCOME. As a result of the factors discussed above, net income reflects a decrease of 48.2% to $1.7 million for the 52 weeks ended December 31, 1995 from net income of $3.3 million for the 52 weeks ended January 1, 1995. The income tax provision represented an effective rate of 40% for the 52 weeks ended December 31, 1995, while the income tax provision for the 52 weeks ended January 1, 1995 represented an effective rate of 40.9%. The decrease in the effective rate is largely attributable to lower permanent book-to-tax differences in 1995 versus 1994, offset by an increase in the overall state income tax rate. COMPARABLE COMPANY-OWNED STORE NET SALES Comparable company store net sales decreased by 1.3% for the fifty-three weeks ended February 1, 1997 (fiscal 1997) when compared to the comparable fifty-three weeks of the previous period. Comparable Company store net sales data is calculated based on the change in net sales of currently open Company-owned stores that have been operated as a Company store for at least thirteen months. The Company believes that the overall decrease in comparable company store net sales, which resulted from negative comparable store sales in the third and fourth quarter of the fiscal year ended February 1, 1997, were attributable to a less than desirable assortment, depth and inventory level of available merchandise. During fiscal 1997, the Company attempted to increase its usage of specialty fabrics, with less cotton as its core fabric and the Company sought to increase its customer base to include a younger customer. In the Company's opinion, this resulted in higher price points and merchandise outside the traditional Chico's look. The Company intends to return to a more traditional look including the increased use of cotton. In addition, in an effort to reduce inventory levels as of the end of the third quarter, the Company reduced fourth quarter receipts of merchandise through reduced levels of purchases. The reduced levels of merchandise received were aggravated by certain product cancellations during such periods. As a result, the Company believes it did not have a sufficient assortment of merchandise in its stores for the Christmas selling season. The following table sets forth for each of the four quarters of fiscal 1997, 1996 and 1995 (restated to reflect the change in year end), the percentage changes in comparable store net sales at Company-owned stores:
FISCAL QUARTERS ------------------------------------- 1ST 2ND 3RD 4TH FULL QTR QTR QTR QTR YEAR ----- ----- ----- ----- ----- Fiscal year ended 2/1/97: 2.9% 2.2% (0.3%) (10.6%) (1.3%) Fiscal year ended 1/28/96: (17.2%) (13.5%) (8.1%) 0.2% (10.1%) Fiscal year ended 1/29/95: 3.9% (1.8%) (14.0%) (15.9%) (7.4%)
LIQUIDITY AND CAPITAL RESOURCES The Company's primary ongoing capital requirements are for funding capital expenditures related to new store openings and merchandise inventory purchases. During the fifty-three weeks ended February 1, 1997 (fiscal 1997) and the fifty-two weeks ended December 31, 1995 (1995), the Company's primary source of working capital was 8 10 cash flow from operations of $3.2 million and $2.1 million, respectively. The increase in cash flow from operations was primarily due to an increase in accounts payable and accrued expenses in fiscal 1997 of $1.5 million principally related to large receipts of merchandise near the end of fiscal 1997 for which payment had not yet been made. This compares to a decrease in accounts payable and accrued expenses of approximately $1.5 million in 1995 due to payments of the final liabilities related to the Company's new combined corporate headquarters, distribution center and woodshop. This increase in cash flow from operations was offset by an increase in inventories of $1.7 million in fiscal 1997, as compared to an increase of approximately $140,000 in 1995. This increase in cash flow from operations was also due to an increase in cash flow of approximately $227,000 due to improved overall profitability of the Company. The Company had pursued a strategy over the past two years to expand and shift its vendor base to new vendors in Hong Kong, Turkey, Guatemala, Peru, India and the U.S. The shift in the vendor base was implemented by the Company for several reasons. First, management was concerned that the quality and timeliness of deliveries from its pre 1995 vendor base were not measuring up to the standards required for some of its new lines of merchandise. Second, management determined that it was important to make further efforts to reduce its reliance on a limited number of suppliers. However, because of certain perceived higher sourcing costs that can be associated with the Company's vendors in the far east and certain other long term uncertainties presented by such vendor relationships, the Company intends to begin to redirect a portion of its sourcing activities towards new vendors in Mexico, Guatemala and other countries in the western hemisphere. Although the Company has identified a number of new vendors in these countries, there can be no assurance that the Company will achieve its goal of reducing sourcing costs while at the same time maintaining quality and achieving timeliness of delivery. In addition, this plan to begin a shift to new vendors is expected to continue the increase in the Company's needs for documentary letters of credit. As of February 1, 1997, the Company had letter of credit facilities totaling $4 million ($1.3 million remaining available as of February 1, 1997). The Company's reliance on sourcing from foreign countries causes the Company to be exposed to certain unique business and political risks. Import restrictions, including tariffs and quotas and changes in such tariffs or quotas could affect the importation of apparel generally and, in that event, could increase the cost or reduce the supply of apparel available to the Company and have an adverse effect on the Company's business, financial condition and/or results of operations. The Company's merchandise flow could also be adversely affected by political instability in any of the countries in which its goods are manufactured, by significant fluctuations in the value of the U.S. dollar against applicable foreign currencies and by restrictions on the transfer of funds. The Company invested $2.9 million during fiscal 1997 for capital expenditures principally associated with the opening of thirteen new Company stores, the remodeling of 10 existing Company stores and with the costs of new fixtures for a Company-wide refixturing program to convert all Company stores from principally folded displays to principally hanging displays. This refixturing effort is essentially completed with capital expenditures of approximately $675,000. The Company initially intended to expand its store remodeling program in 1997 to include up to 30 additional stores for the first six months of fiscal 1997. This program has been put on hold until the Company can more appropriately evaluate the potential impact on sales at the stores that have already been remodeled. The Company also closed, during this period, the temporary store located in Florida that was used as a outlet and one store whose lease had expired which the Company elected not to renew. During the first quarter of fiscal 1997, one of the Company's former officers exercised 71,450 stock options at the price of $4.08. In addition, during fiscal 1997, several other employees exercised 7,212 options at various prices ranging from $5.50 to $8.75 and the Company sold 22,868 shares at prices of $3.83 and $5.42 under its Employee Stock Purchase Plan. The proceeds from these issuances of stock in fiscal 1997 amounted to approximately $469,000. In 1995 the proceeds from issuance of stock under its Employee Stock Purchase Plan amounted to approximately $29,000. During fiscal 1997 the Company borrowed approximately $29,000 under its available working capital credit lines, while in 1995, the Company repaid approximately $104,000. In addition, in fiscal 1997 the Company repaid approximately $403,000 of other indebtedness, while it repaid approximately $661,000 of other indebtedness in 1995. 9 11 During 1995, the Company invested $1.0 million for capital expenditures associated with the opening of eight new Company stores and remodeling of five stores. During this time frame, the Company also acquired the assets and franchise rights for five franchise locations in exchange for two year notes of approximately $324,000, net of receivables due to the Company. These transactions are not included in the statement of cash flows since they were noncash transactions. In January 1996, the Company obtained a seven year $5.6 million mortgage facility from a lender which mortgage was in addition to the Company's $6 million working capital line and letter of credit facility. The proceeds of the mortgage facility were used in part to repay the $3.9 million balance of certain term and note facilities that had been put in place in 1994 and were used in part to provide $1.6 million of cash to serve as collateral (along with inventories and accounts receivable) for both its line and letter of credit facilities. As part of this refinancing, the collateral deposits previously provided by certain shareholders to secure the letter of credit facility were no longer required. In the first quarter of 1995, the Company also received from a franchisee a thirty month note of approximately $274,000 in exchange for past due receivables to assist the franchisee through a transition period and in an effort to help support the operations of the franchisee's most recently opened franchised store. The note is current, with approximately $87,000 of principal remaining to be paid. The Company plans to open approximately 8-12 new stores in fiscal 1998. Previously the Company had indicated that it was considering testing the sale of folk art and other lifestyle accessories in one or more of its Company stores in fiscal 1997. The Company has decided that it will postpone this test until at least 1998 to allow it to concentrate on its new store opening programs and reorganizing and strengthening its management team. The Company believes that the liquidity needed for its planned new store growth and maintenance of proper inventory levels associated with this growth will be funded primarily from cash flow from operations and borrowings under its line of credit. The Company further believes that this liquidity will be sufficient, based on currently planned new store openings, to fund anticipated capital needs over the near-term, including scheduled debt repayments. If cash flow from operations should prove to be less than anticipated, or if there should arise a need for additional letter of credit capacity due to establishing new and expanded sources of supply, or if the Company were to increase the number of new Company stores planned to be opened in future periods, the Company might need to seek other sources of financing to conduct its operations or to pursue its expansion plans and there can be no assurance that such other sources of financing would be available. SEASONALITY AND INFLATION The Company has historically experienced, and expects to continue to experience, seasonal fluctuations in its sales and net income. Historically, a greater portion of the Company's sales have been realized during the period from approximately November 1st through March 31st, thus impacting the first and fourth quarters. Historically, sales generated during this period have had a significant impact on the Company's results of operations. Fewer of the Company's new stores have been opened in warm-weather tourist locations and, as a result, the difference in sales and net income during these quarters of the fiscal year has been reduced. Moreover, performance during the first quarter of fiscal 1997 and during the first quarter of fiscal 1998 has been negatively impacted by separate merchandise transitions needed to clear out the old merchandise and prepare for the arrival of new designs and styles. Even though the Company is not as dependent on the Christmas selling season as many other retailers are, sales in the months of November and December are still expected to continue to represent, in the future, a greater portion of the Company's sales. If for any reason the Company's sales during November and December do not represent increased sales activity as compared with the remainder of the year (as was the case in fiscal 1997), or if there is a decrease in availability of working capital in the months prior to November and December, the Company's profitability could be materially and adversely affected. The Company's quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of new store openings, the net sales contributed by new stores and store closings. Although the operations of the Company are influenced by general economic conditions, the Company does not believe that inflation has had a material effect on the results of operations during fiscal 1997 and 1995. 10 12 TRADING AND DIVIDEND INFORMATION The following table sets forth, for the periods indicated, the range of high and low closing sale prices for the Common Stock, as reported on the NASDAQ National Market System.
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997 HIGH LOW - ------------------------------------------ ---- --- First Quarter (January 29, 1996 - April 28, 1996)........... $ 7.00 $ 4.13 Second Quarter (April 29, 1996 - July 28, 1996)............. 11.75 6.50 Third Quarter ( July 29, 1996 - October 27, 1996)........... 9.00 6.00 Fourth Quarter (October 28, 1996 - February 1, 1997)........ 6.69 3.63
FOR THE PRO FORMA FISCAL YEAR ENDED JANUARY 28, 1996 - ---------------------------------------------------- First Quarter (January 30, 1995 - April 30, 1995)........... $ 8.13 $ 5.63 Second Quarter (May 1, 1995 - July 30, 1995)................ 5.75 4.15 Third Quarter ( July 31, 1995 - October 29, 1995)........... 6.38 4.25 Fourth Quarter (October 30, 1995 - January 28, 1996)........ 5.13 4.25
Since its initial public offering, the Company has not paid any cash dividends except for $5,853,000 of dividends representing previously taxed undistributed S corporation earnings which dividends were declared prior to the Company's initial public offering and paid to persons who were stockholders prior to the offering. The Company does not intend to pay any cash dividends for the foreseeable future and intends to retain earnings, if any, for the future operation and expansion of the Company's business. Any determination to pay dividends in the future will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors. The approximate number of equity security holders of the Company is as follows:
NUMBER OF RECORD HOLDERS TITLE OF CLASS AS OF APRIL 20, 1997 ------------------------ -------------------- Common Stock, par value $.01 per share...................... 605
11 13 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF CHICO'S FAS, INC.: We have audited the accompanying balance sheets of Chico's FAS, Inc. (a Florida corporation) as of February 1, 1997, and December 31, 1995, and the related statements of income, stockholders' equity and cash flows for the fiscal year ended February 1, 1997, for the period from January 1, 1996, through January 28, 1996, and for the fiscal years ended December 31, 1995, and January 1, 1995. 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 financial position of Chico's FAS, Inc. as of February 1, 1997, and December 31, 1995, and the results of its operations and its cash flows for the fiscal year ended February 1, 1997, for the period from January 1, 1996, through January 28, 1996, and for the fiscal years ended December 31, 1995, and January 1, 1995, in conformity with generally accepted accounting principles. /s/ Arthur Anderson LLP Arthur Andersen LLP Tampa, Florida, March 6, 1997 12 14 CHICO'S FAS, INC. BALANCE SHEETS
ASSETS FEBRUARY 1, DECEMBER 31, ------ 1997 1995 ----------- ------------ CURRENT ASSETS: Cash and cash equivalents................................. $ 832,176 $ 1,099,929 Receivables, less allowances of $105,000 and $115,000 for sales returns, respectively............................ 763,451 571,482 Inventories............................................... 7,845,362 6,775,374 Prepaid expenses.......................................... 473,444 376,987 Deferred taxes............................................ 1,290,000 867,000 ----------- ----------- Total current assets.............................. 11,204,433 9,690,772 CERTIFICATE OF DEPOSIT...................................... 1,600,000 -- PROPERTY AND EQUIPMENT, net................................. 17,236,952 16,219,968 DEFERRED TAXES.............................................. 552,000 540,000 OTHER ASSETS, net........................................... 654,673 558,540 ----------- ----------- $31,248,058 $27,009,280 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable.......................................... $ 3,301,990 $ 2,035,074 Accrued liabilities....................................... 2,461,026 2,467,231 Current portion of debt and lease obligations............. 456,602 652,264 ----------- ----------- Total current liabilities......................... 6,219,618 5,154,569 DEBT AND LEASE OBLIGATIONS, excluding current portion....... 7,007,842 5,895,761 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 25,000,000 shares authorized and 7,884,118 and 7,782,498 shares issued and outstanding, respectively.............................. 78,841 77,825 Additional paid-in capital................................ 7,555,708 7,087,636 Retained earnings......................................... 10,386,049 8,793,489 ----------- ----------- Total stockholders' equity........................ 18,020,598 15,958,950 ----------- ----------- $31,248,058 $27,009,280 =========== ===========
The accompanying notes are an integral part of these balance sheets. 13 15 CHICO'S FAS, INC. STATEMENTS OF INCOME
PERIOD FROM FISCAL YEAR JANUARY 1, 1996, FISCAL YEAR FISCAL YEAR ENDED THROUGH ENDED ENDED FEBRUARY 1, JANUARY 28, DECEMBER 31, JANUARY 1, 1997 1996 1995 1995 ----------- ---------------- ------------ ----------- NET SALES BY COMPANY STORES.......... $62,317,817 $3,619,519 $57,635,904 $55,282,084 NET SALES TO FRANCHISEES............. 1,754,788 127,614 2,707,284 3,989,364 ----------- --------------- ------------ ----------- Net sales.......................... 64,072,605 3,747,133 60,343,188 59,271,448 COST OF GOODS SOLD................... 26,712,475 1,912,512 26,115,326 22,418,443 ----------- --------------- ------------ ----------- Gross profit....................... 37,360,130 1,834,621 34,227,862 36,853,005 GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES................. 33,738,523 2,358,122 30,742,863 31,168,367 ----------- --------------- ------------ ----------- Income (loss) from operations...... 3,621,607 (523,501) 3,484,999 5,684,638 INTEREST EXPENSE, net................ 404,054 39,492 621,403 119,007 ----------- --------------- ------------ ----------- INCOME (LOSS) BEFORE INCOME TAXES.... 3,217,553 (562,993) 2,863,596 5,565,631 INCOME TAX PROVISION (BENEFIT)....... 1,287,000 (225,000) 1,160,000 2,275,000 ----------- --------------- ------------ ----------- Net income (loss).................. $ 1,930,553 $ (337,993) $ 1,703,596 $ 3,290,631 =========== =============== ============ =========== NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE............ $.24 ($.04) $.22 $.41 WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING...... 8,048,063 7,827,269 7,877,800 8,019,804
The accompanying notes are an integral part of these statements. 14 16 CHICO'S FAS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ------------------- ADDITIONAL PAR PAID-IN RETAINED SHARES VALUE CAPITAL EARNINGS TOTAL --------- ------- ---------- ----------- ----------- BALANCE, JANUARY 2, 1994................ 7,764,098 $77,641 $6,836,018 $ 3,799,262 $10,712,921 Issuance of common stock.............. 11,207 112 108,724 -- 108,836 Compensation contributed by stockholder........................ -- -- 113,647 -- 113,647 Net income for the fiscal year ended January 1, 1995.................... -- -- -- 3,290,631 3,290,631 --------- ------- ---------- ----------- ----------- BALANCE, JANUARY 1, 1995................ 7,775,305 77,753 7,058,389 7,089,893 14,226,035 Issuance of common stock.............. 7,193 72 29,247 -- 29,319 Net income for the fiscal year ended December 31, 1995.................. -- -- -- 1,703,596 1,703,596 --------- ------- ---------- ----------- ----------- BALANCE, DECEMBER 31, 1995.............. 7,782,498 77,825 7,087,636 8,793,489 15,958,950 Net loss for the period from January 1, 1996, through January 28, 1996............................... -- -- -- (337,993) (337,993) --------- ------- ---------- ----------- ----------- BALANCE, JANUARY 28, 1996............... 7,782,498 77,825 7,087,636 8,455,496 15,620,957 Issuance of common stock.............. 101,620 1,016 468,072 -- 469,088 Net income for the fiscal year ended February 1, 1997................... -- -- -- 1,930,553 1,930,553 --------- ------- ---------- ----------- ----------- BALANCE, FEBRUARY 1, 1997............... 7,884,118 $78,841 $7,555,708 $10,386,049 $18,020,598 ========= ======= ========== =========== ===========
The accompanying notes are an integral part of these statements. 15 17 CHICO'S FAS, INC. STATEMENTS OF CASH FLOWS
PERIOD FROM JANUARY 1, 1996, FISCAL YEAR ENDED THROUGH FISCAL YEAR ENDED FISCAL YEAR ENDED FEBRUARY 1, JANUARY 28, DECEMBER 31, JANUARY 1, 1997 1996 1995 1995 --------------- -------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).............. $ 1,930,553 $ (337,993) $ 1,703,596 $ 3,290,631 -------------- ------------- -------------- ------------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities -- Depreciation and amortization.............. 1,896,196 147,144 1,741,820 1,074,700 Deferred tax (benefit) provision................. (515,000) 80,000 303,000 (665,000) Loss from disposal of property and equipment.... 200,103 -- 88,846 29,320 Compensation contributed by stockholder............... -- -- -- 113,647 Deferred rent expense, net....................... (77,610) 2,365 (62,218) 1,037,336 Decrease (increase) in assets -- Receivables............... 113,063 (305,032) 18,659 (477,134) Inventories............... (1,724,081) 654,093 (139,681) 460,382 Prepaid expenses.......... (64,529) (31,928) (69,504) 743 Other assets.............. (65,991) 10,094 (47,422) 433 Increase (decrease) in liabilities -- Accounts payable.......... 1,266,986 (70) (1,238,356) 742,612 Accrued liabilities....... 222,091 (228,296) (222,688) 595,264 Accrued income taxes...... -- -- -- (417,830) -------------- ------------- -------------- ------------- Total adjustments...... 1,251,228 328,370 372,456 2,494,473 -------------- ------------- -------------- ------------- Net cash provided by (used in) operating activities........... 3,181,781 (9,623) 2,076,052 5,785,104 -------------- ------------- -------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of certificate of deposit..................... -- (1,600,000) -- -- Purchases of property and equipment................... (2,926,309) (8,529) (1,046,858) (11,457,673) -------------- ------------- -------------- ------------- Net cash used in investing activities........... (2,926,309) (1,608,529) (1,046,858) (11,457,673) -------------- ------------- -------------- -------------
16 18 CHICO'S FAS, INC. STATEMENTS OF CASH FLOWS (CONTINUED)
PERIOD FROM JANUARY 1, 1996, FISCAL YEAR ENDED THROUGH FISCAL YEAR ENDED FISCAL YEAR ENDED FEBRUARY 1, JANUARY 28, DECEMBER 31, JANUARY 1, 1997 1996 1995 1995 --------------- -------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net........... 469,088 -- 29,319 108,836 Net borrowings (payments) under line of credit agreement.... 29,103 (467,126) (103,895) 826,837 Principal payments on notes payable..................... (288,311) (3,875,639) (549,969) (187,879) Borrowings under notes payable..................... -- 5,587,500 -- 4,500,000 Principal payments on lease obligations................. (115,006) (9,455) (110,699) (104,748) Deferred finance costs......... (62,536) (172,691) -- -- -------------- ------------- -------------- ------------- Net cash provided by (used in) financing activities........... 32,338 1,062,589 (735,244) 5,143,046 -------------- ------------- -------------- ------------- Net increase (decrease) in cash and cash equivalents.......... 287,810 (555,563) 293,950 (529,523) -------------- ------------- -------------- ------------- CASH AND CASH EQUIVALENTS, beginning of period............ 544,366 1,099,929 805,979 1,335,502 -------------- ------------- -------------- ------------- CASH AND CASH EQUIVALENTS, end of period......................... $ 832,176 $ 544,366 $ 1,099,929 $ 805,979 ============== ============= ============== ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the fiscal years or period for interest.................. $ 571,038 $ 83,475 $ 594,384 $ 199,170 Income taxes................ $ 1,769,400 $ -- $ 947,546 $ 3,419,735
The accompanying notes are an integral part of these statements. 17 19 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS FEBRUARY 1, 1997 1. BUSINESS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: BUSINESS ORGANIZATION Chico's FAS, Inc. (the Company) is a specialty retailer of exclusively designed, private label casual clothing and related accessories. As of February 1, 1997, the Company's retail store system consisted of 133 stores located throughout the United States, 123 of which were owned and operated by the Company, and 10 of which were owned and operated by franchisees. FRANCHISE OPERATIONS A summary of the changes in the number of the Company's franchise stores as compared to total Company-owned stores is as follows as of February 1, 1997, and December 31, 1995, and for the fiscal years then ended:
FEBRUARY 1, DECEMBER 31, 1997 1995 ----------- ------------ Franchise stores closed..................................... 1 -- Franchise stores purchased from franchisees................. 1 5 Franchise stores in operation at fiscal year-end............ 10 12 Company-owned stores at fiscal year-end..................... 123 111
FISCAL YEAR In December 1996, management made the decision to change the Company's fiscal year-end from the Sunday closest to December 31 to the Saturday closest to January 31, continuing to result in a 52- or 53-week fiscal year. The change in year-end resulted in a four-week transition period from January 1, 1996, through January 28, 1996. Statements of income, shareholders' equity and cash flows for the transition period are included in the accompanying financial statements. The fiscal year ended February 1, 1997, contained 53 weeks, and the fiscal years ended December 31, 1995, and January 1, 1995, contained 52 weeks. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and investments with maturities of less than three months. INVENTORIES Inventories consist of finished clothing and accessories and are recorded at the lower of cost or market using the last-in, first-out (LIFO) method. If the lower of first-in, first-out cost or market method had been used, inventories would have been approximately $161,000 and $94,000 higher at February 1, 1997, and December 31, 1995, respectively, than those reported in the accompanying balance sheets. Purchasing, distribution and design costs are expensed as incurred and are included in the accompanying statements of income as cost of goods sold. 18 20 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Fixtures manufactured and leasehold improvements constructed by the Company are recorded at cost, which includes elements of raw materials, labor and overhead. Depreciation of property, plant and equipment is provided on a straight-line basis over the estimated useful lives of the assets. Assets acquired under capital lease obligations and leasehold improvements are amortized over the lesser of the useful lives of the assets or the lease terms. Maintenance and repairs of property and equipment are expensed as incurred, and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation or amortization are eliminated from the accounts, and any gain or loss is charged to operations. OTHER ASSETS Included in other assets are intangible assets which include legal and other costs of obtaining the Company's trademark and debt financing agreements, non-compete agreements related to franchise repurchases and franchise cancellation fees for stores that were acquired by the Company and are currently in operation as Company-owned stores. Trademark costs and non-compete agreements are being amortized on a straight-line basis over 10 and 5 years, respectively, debt financing costs are being amortized over the term of the respective debt agreement and franchise cancellation fees are being amortized over the remaining terms of the related facilities' leases. Intangible assets are net of accumulated amortization of approximately $368,000 and $354,000 at February 1, 1997 and December 31, 1995, respectively. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121), which addresses when and how impairments to the value of long-lived assets should be recognized. SFAS 121 is effective for fiscal years beginning after December 15, 1995, and was implemented by the Company in the fiscal year ended February 1, 1997. The implementation of SFAS 121 did not have a material effect on the financial statements. INCOME TAXES The Company is a corporation subject to federal and state income taxes. The provision for income taxes includes federal and state income taxes currently payable and deferred income taxes, which are provided for temporary differences between the recognition of income and expenses for financial and income tax reporting purposes. FAIR VALUE OF FINANCIAL INSTRUMENTS The book value of all financial instruments approximates their fair market value as of February 1, 1997. In the opinion of management, the aggregate fair market value of the Company based on the above is not a valid estimate of the market valuation of the Company as a whole. REVENUE RECOGNITION Net sales by company stores includes sales made to retail customers during the period, net of estimated customer returns. Net sales to franchisees includes merchandise shipped to franchisees, net of estimated returns. 19 21 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) STORE PRE-OPENING COSTS Operating costs (including store set-up, rent and training expenses) incurred prior to the opening of new stores are expensed as incurred and are included in general, administrative and store operating expenses in the accompanying statements of income. INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share is calculated using the treasury stock method under which net income is divided by the weighted average common and common equivalent shares outstanding during the year. Differences between primary and fully diluted net income per common and common equivalent share were not significant. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 establishes new standards for computing and presenting earnings per share (EPS). Specifically, SFAS 128 replaces the presentation of primary EPS with a presentation of basic EPS, requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997; earlier application is not permitted. Management has determined that the adoption of SFAS 128 will not have a material effect on its financial statements. 2. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following at February 1, 1997, and December 31, 1995:
ESTIMATED FEBRUARY 1, DECEMBER 31, USEFUL LIVES 1997 1995 -------------- ----------- ------------ Land........................................................ $ 1,100,167 $ 1,100,167 Land improvements........................................... 35 years 1,785,161 1,778,601 Building.................................................... 20 - 35 years 6,155,063 6,155,063 Equipment................................................... 2 - 10 years 3,908,268 3,523,689 Furniture and fixtures...................................... 3 - 10 years 3,299,829 2,416,833 Leasehold improvements...................................... 1 - 10 years 6,082,124 5,092,708 ----------- ----------- 22,330,612 20,067,061 Less-- Accumulated depreciation and amortization............ (5,093,660) (3,847,093) ----------- ----------- $17,236,952 $16,219,968 =========== ===========
Assets acquired under capital lease obligations with a cost of $487,548 and $356,950 are included in equipment at February 1, 1997, and December 31, 1995, respectively. The accumulated amortization related to these assets is $278,877 and $141,831 at February 1, 1997, and December 31, 1995, respectively. 3. ACCRUED LIABILITIES: Accrued liabilities consisted of the following at February 1, 1997, and December 31, 1995:
FEBRUARY 1, DECEMBER 31, 1997 1995 ----------- ------------ Accrued payroll, bonuses and severance costs................ $1,044,372 $ 911,424 Allowance for estimated merchandise returns................. 650,000 750,000 Other....................................................... 766,654 805,807 ---------- ---------- $2,461,026 $2,467,231 ========== ==========
20 22 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. INCOME TAXES: The income tax provision (benefit) consisted of the following:
PERIOD FROM JANUARY 1, 1996 FISCAL YEAR ENDED THROUGH FISCAL YEAR ENDED FISCAL YEAR ENDED FEBRUARY 1, JANUARY 28, DECEMBER 31, JANUARY 1, 1997 1996 1995 1995 ----------------- ---------------- ----------------- ----------------- Current: Federal.......................................... $1,434,000 $(242,000) $ 677,000 $2,450,000 State............................................ 368,000 (63,000) 180,000 490,000 Deferred: Federal.......................................... (404,000) 62,000 301,000 (497,000) State............................................ (111,000) 18,000 2,000 (168,000) -------------- -------------- -------------- -------------- Total income tax provision (benefit)........... $1,287,000 $(225,000) $1,160,000 $2,275,000 ============== ============== ============== ==============
The reconciliation of the income tax provision (benefit) based on the U.S. statutory federal income tax rate (34 percent) to the Company's income tax provision (benefit) is as follows:
PERIOD FROM JANUARY 1, 1996, FISCAL YEAR ENDED THROUGH FISCAL YEAR ENDED FISCAL YEAR ENDED FEBRUARY 1, JANUARY 28, DECEMBER 31, JANUARY 1, 1997 1996 1995 1995 ----------------- ---------------- ----------------- ----------------- Tax expense (benefit) at the statutory rate........ $1,094,000 $(191,000) $ 974,000 $1,892,000 State income tax expense (benefit), net of federal tax benefit...................................... 176,000 (31,000) 157,000 242,000 Other.............................................. 17,000 (3,000) 29,000 141,000 -------------- ------------- -------------- -------------- Total provision (benefit) for income taxes....... $1,287,000 $(225,000) $1,160,000 $2,275,000 ============== ============= ============== ==============
Deferred tax assets are recorded due to different carrying amounts for financial and income tax reporting purposes arising from cumulative temporary differences. These differences consisted of the following at February 1, 1997, and December 31, 1995:
FEBRUARY 1, DECEMBER 31, 1997 1995 ----------- ------------ Accruals.................................................... $1,206,000 $1,048,000 Inventories................................................. 718,000 505,000 Property and equipment...................................... (12,000) 24,000 Net operating loss carryforward............................. 200,000 -- ----------- ----------- 2,112,000 1,577,000 Less -- Valuation allowance................................. (270,000) (170,000) ----------- ----------- $1,842,000 $1,407,000 =========== ===========
During the fiscal year ended February 1, 1997, the Company increased the valuation allowance for deferred tax assets by $100,000 to reserve for a portion of the deferred tax asset relating to the net operating loss for the tax reporting period from December 30, 1996, through February 1, 1997. The tax effect of the approximately $514,000 net operating loss for tax reporting purposes can be carried forward ratably for the six subsequent fiscal years following the fiscal year ended February 1, 1997. 21 23 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. DEBT AND LEASE OBLIGATIONS: Debt and lease obligations consisted of the following at February 1, 1997, and December 31, 1995:
FEBRUARY 1, DECEMBER 31, 1997 1995 ----------- ------------ Line of credit (the Line), variable borrowing capability of up to $6 million, depending on inventory levels and the amount of outstanding commercial letters of credit (Note 7), interest payable at prime (8.25 percent at February 1, 1997) plus 1 percent, secured by substantially all of the Company's assets other than land, land improvements and building, maturing in May 1998............................ $ 284,919 $ 722,942 Notes payable to a bank (the Notes Payable at December 31, 1995, and the Mortgage Note at February 1, 1997), interest payable at prime (8.25 percent at February 1, 1997) plus .5 percent, secured by a first priority mortgage on land, land improvements, building, certain equipment and a certificate of deposit.................................... 5,509,500 3,856,566 Notes payable to former franchisees, paid in full during fiscal year ended February 1, 1997........................ -- 229,384 Obligations under capital leases, imputed interest rate of 5.9 percent, secured by equipment with a carrying value of $270,998, varying monthly payments of principal and interest, maturing September 1999......................... 255,550 249,413 Deferred rent............................................... 1,414,475 1,489,720 ---------- ----------- Total debt and lease obligations....................... 7,464,444 6,548,025 Less -- Current portion................................ (456,602) (652,264) ---------- ----------- $7,007,842 $5,895,761 ========== ===========
On January 4, 1996, the Notes Payable were refinanced with a $5,587,500 mortgage note payable (the Mortgage Note), bearing interest at the Bank's prime rate plus .5 percent. The Mortgage Note is payable in 84 monthly installments of $6,000, plus accrued interest, through January 2003, at which time the remaining principal balance is due. A portion of the proceeds from the Mortgage Note was used to establish a $1,600,000 certificate of deposit securing the Mortgage Note, the Line and commercial letters of credit issued by the Company. As of February 1, 1997, the Line and Mortgage Note contained certain covenants requiring, among other things, approval of acquisitions of businesses and maintenance of specified tangible net worth, working capital, debt to equity and debt service coverage ratios. At February 1, 1997, the Company was in compliance with respect to all covenants under these agreements. Deferred rent represents the difference between actual operating lease obligations due and operating lease expense, which is recorded by the Company on a straight-line basis over the terms of its leases. 22 24 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Maturities of the Line and the Mortgage Note were as follows at February 1, 1997:
FISCAL YEAR ENDING AMOUNT ----------- ---------- 1998........................................................ $ 72,000 1999........................................................ 356,919 2000........................................................ 72,000 2001........................................................ 72,000 2002........................................................ 72,000 Thereafter.................................................. 5,149,500 ---------- $5,794,419 ==========
Future minimum lease payments under capital lease obligations, together with the present value of the future minimum lease payments, were as follows at February 1, 1997:
FISCAL YEAR ENDING AMOUNT ----------- -------- 1998........................................................ $ 93,878 1999........................................................ 85,224 2000........................................................ 99,278 -------- Total minimum lease payments................................ 278,380 Less-Interest imputed at 5.9 percent........................ (22,830) -------- Present value of capital lease obligations.................. $255,550 ========
During the fiscal year ended February 1, 1997, the period from January 1, 1996, through January 28, 1996, and for fiscal years ended December 31, 1995, and January 1, 1995, capital lease obligations of $130,598, $0, $23,200 and $333,750, respectively were incurred when the Company entered into leases for new equipment. In addition, existing capital lease obligations were refinanced to the terms shown above during the fiscal year ended February 1, 1997. During the fiscal year ended December 31, 1995, the Company acquired the assets of five franchised stores. Acquired assets, recorded at fair value, consisted of $79,796 in inventory, $196,000 in furniture, fixtures and leasehold improvements, $115,000 in franchise cancellation fees and $129,000 for a covenant not to compete which were included in other assets in the accompanying balance sheets. Accounts receivable of $330,581 from franchisees were forgiven, $323,798 in notes payable to franchisees were issued, and the Company incurred a loss of $97,584 related to the writedown of franchise inventory, which was included in general, administrative and store operating expenses. The remaining inventory writedown loss of $37,000 was accrued in prior years. Also, during the fiscal year ended December 31, 1995, a franchisee converted accounts receivable of approximately $273,800 into a note receivable, payable in $10,000 monthly installments of principal and interest through October 1997. The long-term portion of the note receivable was included in other assets and the current portion of the note receivable was included in receivables in the accompanying balance sheets. 6. RELATED PARTY TRANSACTIONS: All officers have entered into agreements with the Company which provide for base salaries, annual bonuses or consulting fees, and certain severance benefits in the event that their employment is terminated by the Company "without cause" or by such officer or director following a "change of control." 23 25 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) In January 1997, the Company and the former president and general merchandise manager reached agreement in concept that she would be resigning from the Company. In March 1997, a separation agreement was signed under which she received a consulting salary, severance compensation and certain benefits through December 31, 1997. Approximately $325,000 relating to the separation was accrued and is included in accrued liabilities in the accompanying balance sheet as of February 1, 1997. The separation agreement also provides that all of her granted, unvested options are forfeited, and with respect to those options currently exercisable, the period for exercise shall expire on June 24, 1997. In 1994, a separation agreement was signed, in connection with the resignation of the former president, under which he continued to receive his annual base salary, certain benefits and taxes through December 31, 1995, totaling approximately $274,000. This amount was paid in full as of December 31, 1995. Contemporaneously with the execution of the separation agreement, the former president sold 344,384 shares of common stock in the Company to a significant stockholder at a price above the market value on the closing date of the sale. The difference between the market value of the Company's common stock on the closing date of the transaction and the purchase price on this date was recorded by the Company as compensation expense and was reflected as an increase in additional paid-in capital. In fiscal 1990, the Company agreed to make contingent payments to a former stockholder based on a percentage of gross sales (as defined) in excess of the gross sales base for four franchise stores purchased from him for each year through March 31, 1995. The amount of contingent payments expensed during the fiscal years ended January 1, 1995, and December 31, 1995, pursuant to this agreement was $27,359 and $41,850, respectively. The Company leased distribution center and storage facilities from certain stockholders and former stockholders of the Company (see Note 7). 7. COMMITMENTS AND CONTINGENCIES: The Company leases retail store space and various office equipment under operating leases expiring in various years through 2006. Certain of the leases provide that the Company may cancel the lease if the Company's retail sales at that location fall below an established level, while certain leases provide for additional rent payments to be made when sales exceed a base amount. Certain operating leases provide for renewal options for periods from three to five years at their fair rental value at the time of renewal. In the normal course of business, operating leases are generally renewed or replaced by other leases. Minimum future rental payments under noncancelable operating leases (exclusive of common area maintenance charges and/or contingent rental payments based on sales) at February 1, 1997, were as follows:
FISCAL YEAR ENDING AMOUNT - ------------------ ----------- 1998........................................................ $ 6,586,396 1999........................................................ 5,563,469 2000........................................................ 4,853,969 2001........................................................ 4,580,029 2001........................................................ 4,182,598 Thereafter.................................................. 7,874,354 ----------- $33,640,815 ===========
For the fiscal year ended February 1, 1997, for the period from January 1, 1996, through January 28, 1996, and for the fiscal years ended December 31, 1995, and January 1, 1995, total rent expense under the Company's operating leases was $8,624,193, $674,651, $7,934,824 and $6,424,162, respectively, including common area maintenance charges of $1,252,635, $95,663, $1,128,054 and $821,072, other 24 26 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) rental charges of $1,296,100, $100,241, $1,145,643 and $900,704, and contingent rental expense of $81,674, $6,900, $128,243 and $263,459 based on sales, respectively. The Company leased its former distribution center and storage facilities from certain stockholders and former stockholders of the Company (see Note 6). The leases were classified as operating leases and provided for minimum annual rentals of approximately $216,000, with original lease terms through 1998. The remaining obligations under these leases were accrued during fiscal year 1994 when the Company's operations were moved to its new corporate headquarters and distribution center. Total rent expense for these facilities was $676,311 for the fiscal year ended January 1, 1995. During the fiscal year ended February 1, 1997, the Company replaced its obligations under the lease with an obligation to make up the difference between rental payments of a new tenant and the Company's lease terms. At February 1, 1997, the Company had $2,733,430 in commercial letters of credit outstanding which have arisen in the normal course of business due to foreign purchase commitments. The commercial letters of credit are secured by the same assets as the Line (see Note 5). The Company is involved in claims and actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the financial position of the Company. 8. STOCK OPTION PLANS AND CAPITAL STOCK TRANSACTIONS: 1992 STOCK OPTION PLAN During fiscal year 1992, the Company adopted a stock option plan (the 1992 plan) which reserved 548,800 shares of common stock for future issuance under the 1992 plan to eligible employees of the Company. The per share exercise price of each stock option is not less than the fair market value of the stock on the date of grant or, in the case of an employee owning more than 10 percent of the outstanding stock of the Company and to the extent incentive stock options as opposed to nonqualified stock options are issued, the price is not less than 110 percent of such fair market value. Also, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable for the first time by an employee in any calendar year may not exceed $100,000. As of February 1, 1997, 388,360 nonqualified options were outstanding and 75,256 had been exercised under the 1992 plan. 1993 STOCK OPTION PLAN During fiscal year 1993, the Company adopted a stock option plan (the 1993 plan) which reserved 680,000 shares of common stock for future issuance under the 1993 plan to eligible employees of the Company. The terms of the 1993 plan are the same as the 1992 plan. As of February 1, 1997, 290,846 nonqualified options were outstanding and 3,946 had been exercised under the 1993 plan. OTHER STOCK OPTIONS Since 1993, two directors and an officer of the Company have been granted a total of 292,000 nonqualified options at exercise prices ranging from $5.13 to $8.75. As of February 1, 1997, none of these options had been exercised. 25 27 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) AGGREGATE STOCK OPTION ACTIVITY As of February 1, 1997, 971,206 nonqualified options were outstanding at a weighted average exercise price of $5.97 per share, and 470,392 remained available for future grants. Of the options outstanding, 534,789 options were immediately exercisable. The Company recognized no compensation expense for these options. Stock option activity for the fiscal year ended February 1, 1997, the period from January 1, 1996, through January 28, 1996, and for fiscal years ended December 31, 1995, and January 1, 1995, was as follows:
PERIOD FROM JANUARY 1, 1996, FISCAL YEAR ENDED THROUGH FISCAL YEAR ENDED FISCAL YEAR ENDED FEBRUARY 1, 1997 JANUARY 28,1995 DECEMBER 31, 1995 JANUARY 1, 1995 --------------------- --------------------- --------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED- NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE OF EXERCISE OF EXERCISE OF EXERCISE OF EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE --------- --------- --------- --------- --------- --------- --------- --------- Outstanding, beginning of year or period..... 825,850 $5.74 821,799 $5.78 607,166 $6.45 557,400 $6.41 Granted............... 319,200 6.97 10,100 4.29 293,100 5.31 119,650 8.75 Exercised............. (78,752) 4.33 -- -- -- -- (450) 7.00 Canceled or expired... (95,092) 8.85 (6,049) 7.67 (78,467) 9.26 (69,434) 10.09 -------- -------- -------- -------- -------- -------- -------- -------- Outstanding, end of year or period............. 971,206 $5.97 825,850 $5.74 821,799 $5.78 607,166 $6.45 -------- -------- -------- -------- Options vested at year- end or period-end..... 534,789 $5.59 507,827 $5.57 510,083 $5.40 410,139 $4.90
The following table summarizes information about stock options at February 1, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------- -------------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE RANGES OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE - ---------------------------- ----------- ------------ --------- ----------- --------- $4.08-$7.00 867,975 7.8 $5.49 445,391 $ 4.67 $8.38-$12.00 103,231 6.7 9.98 89,398 10.17 ------- --- ----- ------- ------ 971,206 7.7 $5.97 534,789 $ 5.59 ======= === ===== ======= ======
CAPITAL STOCK TRANSACTIONS The Board of Directors adopted a noncompensatory employee stock purchase plan (ESPP), which became effective upon the consummation of the Company's initial public offering on April 1, 1993, and was amended on December 18, 1993, covering an aggregate of 210,000 shares of common stock. Under the ESPP, all employees are given the right to purchase up to 600 shares of the common stock of the Company two times a year at a price equal to 85 percent of the value of the stock immediately prior to the beginning of each exercise period. For the fiscal year ended February 1, 1997, for the period from January 1, 1996, through January 28, 1996, and for the fiscal years ended December 31, 1995, and January 1, 1995, 22,868, 0, 7,193 and 10,757 shares, respectively, were purchased under the ESPP. The Company recognized no compensation expense for the issuance of these shares. 26 28 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), under which no compensation expense has been recognized. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which was effective for fiscal years beginning after December 15, 1995. SFAS 123 allows companies to continue following the accounting guidance of APB 25, but requires pro forma disclosure of net income and earnings per share for the effects on compensation expense had the accounting guidance of SFAS 123 been adopted. The pro forma disclosures are required only for options granted in fiscal years that begin after December 15, 1994. The Company adopted SFAS 123 for disclosure purposes in 1996. For SFAS 123 purposes, the fair value of each option granted has been estimated as of the grant date using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 6.2 percent, expected life of seven years, no expected dividends, and expected volatility of 75 percent. The weighted average fair value of options granted during the fiscal year ended February 1, 1997, for the period from January 1, 1996, through January 28, 1996, and for fiscal year ended December 31, 1995, was $5.21, $3.17 and $3.96, respectively. Options granted under the 1992 and 1993 Stock Option Plans vest ratably over three years. All other options were either immediately exercisable or vested ratably over three years. The term of all options granted is ten years. Had compensation expense been determined consistent with SFAS 123, utilizing the assumptions detailed above, the Company's net income (loss) and net income (loss) per common and common equivalent shares outstanding would have been changed to the following pro forma amounts for the fiscal year ended February 1, 1997, the period from January 1, 1996, through January 28, 1996, and for fiscal year ended December 31, 1995:
PERIOD FROM JANUARY 1, FISCAL YEAR 1996 FISCAL YEAR ENDED THROUGH ENDED FEBRUARY 1, JANUARY 28, DECEMBER 31, 1997 1996 1995 ----------- ----------- ------------ Net income (loss): As reported............................................... $1,930,553 $(337,993) $1,703,596 Pro forma................................................. 1,539,000 (357,000) 1,563,000 Net income (loss) per common and common equivalent share: As reported............................................... $ .24 $ (.04) $ .22 Pro forma................................................. .19 (.05) .20
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 2, 1995, the resulting pro forma compensation expense may not be representative of that to be expected in future years. 9. PROFIT SHARING PLAN: In fiscal year 1992, the Company adopted a profit sharing plan (the Plan) covering substantially all employees. Employees' rights to Company-contributed benefits vest over two to six years of service, as specified in the Plan. The Company intends to make a contribution, to be paid in the year ending January 31, 1998, in recognition of services performed by employees in the fiscal year ended February 1, 1997, in an amount not to exceed $225,000, which was included in accrued liabilities in the accompanying balance sheet as of February 1, 1997. For the fiscal years ended February 1, 1997, December 31, 1995, and January 1, 1995, the profit sharing expense was $185,000, $50,000 and $225,000, respectively. No contributions were made or accrued for relating to the period from January 1, 1996, through January 28, 1996. 27 29 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. QUARTERLY RESULTS OF OPERATIONS (RESTATED AND UNAUDITED): - --------------------------------------------------------------------------------
NET INCOME (LOSS) PER NET GROSS INCOME COMMON AND COMMON SALES PROFIT (LOSS) EQUIVALENT SHARE ----------- ----------- ----------- --------------------- Restated fiscal year ended January 29, 1995: First quarter.................. $15,994,707 $10,522,636 $ 2,106,005 $ .26 Second quarter................. 15,006,203 9,535,443 1,196,935 .15 Third quarter.................. 14,980,212 9,163,130 799,931 .10 Fourth quarter................. 13,272,233 7,361,460 (1,080,571) (.14) Restated fiscal year ended January 28, 1996: First quarter.................. $16,296,974 $ 8,799,773 $ 620,898 $ .08 Second quarter................. 15,436,821 9,184,838 722,539 .09 Third quarter.................. 14,812,600 8,523,099 470,214 .06 Fourth quarter................. 14,216,858 7,771,900 (137,368) (.02) Restated fiscal year ended February 1, 1997: First quarter.................. $17,302,552 $ 9,862,647 $ 1,080,368 $ .13 Second quarter................. 16,073,289 10,080,421 940,998 .11 Third quarter.................. 15,727,262 9,368,363 655,964 .08 Fourth quarter................. 14,969,502 8,048,699 (746,777) (.09)
28 30 REPORT ON FORM 10-K A copy of the company's annual report to the Securities and Exchange Commission on Form 10-K will be sent to any shareholder without charge upon written request to Investor Relations at the current address below: Chico's FAS, Inc. 11215 Metro Parkway Fort Myers, Florida 33912 --------------------- Transfer Agent and Registrar: ChaseMellon Shareholder Services, L.L.C. 85 Challenger Road Overpeck Centre Ridgefield Park, New Jersey 07660 Legal Counsel: Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis Tampa, Florida Independent Certified Public Accountants: Arthur Andersen LLP Tampa, Florida CHICO'S ANNUAL SHAREHOLDERS' MEETING Tuesday, June 17, 1997, at 2:00 p.m. Chico's World Headquarters 11215 Metro Parkway Fort Myers, Florida 33912 - -------------------------------------------------------------------------------- CHICO'S FAS, INC. EXECUTIVE OFFICERS MARVIN J. GRALNICK Chief Executive Officer President HELENE GRALNICK Senior Vice President -- Design and Concept CHARLES J. KLEMAN Chief Financial Officer Executive Vice President -- Finance Secretary/Treasurer SCOTT A. EDMONDS Senior Vice President -- Operations Assistant Secretary DIRECTORS MARVIN J. GRALNICK Chairman of the Board HELENE GRALNICK Senior Vice President -- Design and Concept CHARLES J. KLEMAN Chief Financial Officer Executive Vice President -- Finance Secretary/Treasurer VERNA K. GIBSON Partner Retail Options Inc. W. KEITH SCHILIT Business Consultant 29 31 [GRAPHIC SETTING FORTH STORE LOCATIONS] 32 [GRAPHIC - FOUR PICTURES INCLUDING THREE SEPARATE FEMALE MODELS AND FLOWERS] GET REAL REAL PEOPLE 33 [GRAPHIC - THREE PICTURES OF FEMALE MODELS] CHICO'S(R) REAL CLOTHES FOR REAL PEOPLE CHICO'S WORLD HEADQUARTERS 11215 METRO PARKWAY FORT MYERS, FL 33912 PHONE: (941) 277-6200 - FAX: (941) 277-5237 EX-23 4 CONSENT TO USE REPORT OF INDEPENDENT CERTIFIED 1 EXHIBIT 23 ARTHUR ANDERSEN LLP CONSENT TO USE OF REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the incorporation of our report, and to all references to our firm incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements (File No. 33-60524, File No. 33-63822 and File No. 33-83840). /s/ Arthur Andersen LLP --------------------------- ARTHUR ANDERSEN LLP Tampa, Florida, April 29, 1997 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED FINANCIAL STATEMENTS OF CHICO'S FAS, INC. FOR THE FIFTY-THREE WEEKS ENDED FEBRUARY 1, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR FEB-01-1997 JAN-29-1996 FEB-01-1997 832,176 0 763,451 0 7,845,362 11,204,433 22,330,612 5,093,660 31,248,058 6,219,618 7,007,842 0 0 78,841 17,941,757 31,248,058 64,072,605 64,072,605 26,712,475 26,712,475 33,738,523 0 404,054 3,217,553 1,287,000 1,930,553 0 0 0 1,930,553 .24 .24
EX-27.2 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED STATEMENT OF INCOME FOR THE PERIOD FROM JANUARY 1, 1996 THROUGH JANUARY 28, 1996 OF CHICO'S FAS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1-MO JAN-28-1997 JAN-01-1996 JAN-28-1996 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3,747,133 3,747,133 1,912,512 1,912,512 2,358,122 0 39,492 (562,993) (225,000) (337,993) 0 0 0 (337,993) (.04) (.04) Not applicable because this Financial Data Schedule only relates to the filing of a Statement of Income for the period from January 1, 1996 through January 28, 1996.
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