-----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, KzlpuSx09G2ig4wEavIKEY+/zuSgVHnqTAGtVsxgzMUGe7TAXYG2ZLZJ9WGlIbbo YLLQhjBtxqE2Fln20Q7DIA== 0000950168-00-001085.txt : 20000426 0000950168-00-001085.hdr.sgml : 20000426 ACCESSION NUMBER: 0000950168-00-001085 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000425 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: 0130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21258 FILM NUMBER: 608162 BUSINESS ADDRESS: STREET 1: 11215 METRO PKWY 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 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 FOR THE FISCAL YEAR ENDED JANUARY 29, 2000 ( ) 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 jurisdiction (IRS Employer Identification No.) of incorporation) 11215 METRO PARKWAY, FORT 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 fliers 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 $290,388,993 as of March 31, 2000 (based upon the closing sales price reported by NASDAQ/NMS and published in the Wall Street Journal on April 3, 2000). 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 - 17,128,936 shares as of March 31, 2000. Documents incorporated by reference: Part II Annual Report to Stockholders for the Fiscal Year Ended January 29, 2000. Part III Definitive Proxy Statement for the Company's Annual Meeting of Stockholders presently scheduled for June 13, 2000. CHICO'S FAS, INC. ANNUAL REPORT ON FORM 10-K for the YEAR ENDED January 29, 2000 TABLE OF CONTENTS
PART I...................................................................................................... 1 Item 1. Business.............................................................................. 1 Item 2. Properties............................................................................ 16 Item 3. Legal Proceedings..................................................................... 17 Item 4. Submission of Matters to a Vote of Security-Holders................................... 17 PART II..................................................................................................... 19 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 19 Item 6. Selected Financial Data............................................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................. 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 22 Item 8. Financial Statements and Supplementary Data........................................... 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 22 PART III.................................................................................................... 22 Item 10. Directors and Executive Officers of the Registrant.................................... 22 Item 11. Executive Compensation................................................................ 22 Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 22 Item 13. Certain Relationships and Related Transactions........................................ 22 PART IV..................................................................................................... 23 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 23
PART I ------ ITEM 1. BUSINESS GENERAL Chico's FAS, Inc., (Chico's or the Company), directly and through its wholly owned subsidiaries (which became operational in February 1999), Chico's Distribution, Inc., Chico's Concept, Inc., and Chico's Media, Inc., is a specialty retailer of exclusively designed, private label casual to dressy clothing, complementary accessories and other non-clothing gift items. Virtually all of the clothing offered at Chico's stores is designed by the Company's in-house product development team and bears the "CHICO'S" trademark. Each Chico's store offers separates, as well as collections, of color-coordinated tops, pants, shorts, skirts, jumpers, dresses, vests, jackets, outerwear and accessories, including belts, scarves, earrings, necklaces and bracelets. Emphasizing casual yet stylish comfort, Chico's clothing is made from natural fabric (including 100% cotton, rayon, linen and silk) blends and newer sophisticated synthetics. The styling is relaxed, figure-flattering and designed for easy care. During the past several fiscal years, the Company has successfully introduced certain synthetic fabrics which provide a more versatile look, yet which still offer the relaxed fit and easy care characteristics. Chico's believes that its target customer includes women of all ages who seek style, attitude and comfort in their casual clothing, with a particular focus on 35 to 60 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 that provides a relaxed fit 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; and utilizing Chico's Outlets to help maintain the integrity of the Company's pricing strategy. During the past few years the Company has developed a markdown strategy which is more in line with traditional retail clearance methods and timing. Rather than focusing on taking most markdowns in outlets or through warehouse sales, the Company has been taking its first, second, and in some cases, later markdowns in front-line stores. Also during the past few fiscal years, the Company has been testing the sale of non-clothing products, such as footwear, which complements the clothing products and such as aroma-therapy candles, body care products, watches, and other products which are designed by the Company as gift items. All of these new items are intended to promote the Chico's brand name in areas beyond clothing. Because of the additional space required to accommodate the non-clothing items and its current markdown strategy, the Company is actively pursuing larger spaces for its new stores. Rather than targeting a 1,400 net selling square foot store, the Company now believes the ideal store size is nearer 1,800-2,200 net selling square feet. Although the Company will still open stores within the 1,200-1,500 net selling square foot range, it is actively pursuing 1,800-2,200 net selling square foot stores. As of March 31, 2000, the Company's retail store system consisted of 204 stores (averaging approximately 1,458 net selling square feet), of which 187 are Company-owned front-line "Chico's" stores, 10 are franchised front-line "Chico's" stores and 7 are "Chico's Outlet" stores. Of this total, 34 stores are located in Florida, 29 stores are located in California, 16 stores are located in Texas and the remaining 125 stores are located in 34 other states and the District of Columbia. 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 40 new Company-owned front-line and no new outlet stores in the fiscal year ended January 29, 2000 (fiscal 2000), while during the same period it closed three Company-owned front-line stores. In addition, a franchisee opened one new front-line franchise store in fiscal 2000. The Company plans to open a minimum of 45 new Company-owned stores in the fiscal year ended February 3, 2001 (fiscal 2001), but also expects to close between one and three existing stores in fiscal 2001. The Company is in the process of developing and exploring additional opportunities for offering clothing and accessories to its customers and for enhancing its revenues and income utilizing approaches to retailing which are complementary to its core business. During fiscal 2001, the Company intends to add ordering capability to its 1 existing mailers program and also to make Chico's products available for purchase over the Internet. Each of these opportunities will require the additional expenditure of capital and will involve additional risks and uncertainties. There can be no assurance that any such opportunity will be implemented on the planned timetable or will prove to be successful. BUSINESS STRATEGIES 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 made from natural fabric (including cotton, rayon, linen and silk) blends and sophisticated synthetics. The fit is relaxed and designed for easy care. Accessories, such as 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. 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 product 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 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. Chico's incorporates international type sizing, utilizing sizes 0 (extra small), 1 (small), 2 (medium), and 3 (large). During fiscal 2000 the Company tested a size 4 (extra large) with little success and it does not plan to offer sizes above a size 3 at this time. As in the past, the Company frequently offers one-size-fits-all sizing for some items. Because of the stylish, yet relaxed 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. 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, its pricing policies, the store design, merchandise presentation, customer service and its quality assurance programs. FOCUS ON THE TARGET CUSTOMER. Based upon informally gathered information from customers, sales associates and store managers, as well as studies done internally through its customer databases, 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 35 to 60 year old women in the moderate and higher income levels. Although the Company had experienced changes in design direction in 1994 and 1996 that caused it to vary from the preferences of those women who historically shopped at Chico's, the current merchandising plan intends to continually focus the entire product development team on the Company's historical target customer. As part of this focus, the Company reestablished its frequent shopper club ("Passport Club") in early 1999 so that it could monitor spending habits based on known 2 demographics. The Company is still gathering data and using this data to direct its marketing efforts. See the "Customer Loyalty" section on page 4 for more details on the "Passport Club". CONTINUAL INTRODUCTION OF NEW MERCHANDISE. The Company seeks to keep its stores fresh by continually introducing 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. Chico's intends to continue its focus 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. 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, after the initial shipment is redistributed to all stores, with new styles and designs instead of continually providing additional quantity of existing styles and designs (except for certain core items). 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 frequently consolidated in certain front-line stores and, then marked down and/or sent to its outlet stores. If the style becomes out-of-place due to seasonality, color, etc., it may be subjected to additional markdowns or returned to the Company's distribution center to be held for replenishment at outlet stores or for liquidation. 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 upscale department stores. For example, tops, pants and jackets are offered at retail price points generally ranging from $20 to $130 per item and accessories are offered at retail price points generally ranging from $10 to $50 per item. Historically, the Company's philosophy was generally to avoid store-wide price markdowns at its front-line stores and the Company believes that in the past it utilized price markdowns and special promotions to a lesser degree than have its principal competitors. Since fiscal 1998, the Company has shifted its strategy for markdowns and clearance of slower moving merchandise. Rather than placing the emphasis on clearing most of the goods at outlet stores or local warehouse sales, the Company is making more extensive use of its front line stores to clear slower selling merchandise through chain-wide markdowns of these items and by initiating such markdowns at an earlier date in the product life cycle. The Company believes this strategy reduces the need to rely on its outlet stores as a principal means of clearing slower selling merchandise. 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 for liquidation, although the Company intends on continuing markdowns in its front-line stores to provide more immediate clearance of goods. STORE DESIGN AND MERCHANDISE PRESENTATION. Chico's historical store design, interior layout and merchandise presentation tends to complement Chico's private label casual clothing and personalized service, helping to create a "boutique" atmosphere with an open and comfortable ambiance. A typical store has a warm feel with lots of woodwork including hardwood or natural concrete floors, antiques and brushed aluminum or wood fixtures. However, each store is somewhat different as the interior decor is chosen carefully to complement the setting including both its location and the building itself. These individual touches are balanced against a certain amount of standardization. Merchandise is generally presented on wooden fixtures with coordinating colors and outfits shown together rather than being grouped by tops, bottoms, etc. To encourage sales of multiple wardrobe items, Chico's stores also may use "color areas," which present coordinated colors or seasonal themes in different areas of the store. Rather than displaying clothing 3 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 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 that appeal to various lifestyles. 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 and other non-apparel items accounted for approximately 13% of the Company's net sales in fiscal 2000, compared to a range of 11% to 13% over the previous three fiscal years. Continuing efforts are being made to improve the volume of accessory and other non-apparel item sales in fiscal 2001 through better coordination of accessories with clothing and continual testing of non-apparel branded items. QUALITY ASSURANCE. Currently, most of the clothing offered for sale at Chico's stores is manufactured abroad. The Company has diversified its manufacturing sources to a number of different countries but continually finds it necessary to address quality control. 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 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. The Company has in more recent years been expanding its use of domestic vendors, where possible, and it intends on continually exploring opportunities with vendors closer to its headquarters. PERSONALIZED SERVICE AND CUSTOMER ASSISTANCE. The Company has always considered personalized customer service one of the most important factors in determining its success. 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 Chico's clothing and accessories. As part of its strategy to reinforce the casual aspects of Chico's clothing, Chico's sales associates are trained to demonstrate to customers creative ways to wear Chico's clothing. 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 in its stores at all times and to complement this it offers substantial employee discounts. To better serve the Chico's customer, sales associates are encouraged to become familiar with new styles and designs of clothing and accessories by trying on new merchandise. Chico's takes pride in empowering its employees to make decisions that best service the customer. This healthy sense of empowerment enables Chico's employees to exceed customers' expectations. In addition, many of the Company's store managers and sales associates were themselves Chico's customers prior to joining the Company and can therefore easily identify with customers. 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. CUSTOMER LOYALTY. Chico's frequent buyer program, established in the early 90's and known as the "Passport Club", was designed to encourage repeat sales and customer loyalty. Features of the club include discounts, special promotions, invitations to private sales and personalized phone calls regarding new merchandise. In late 1994, the Company decided to limit the number of new members and to evaluate ways to restructure the program. During fiscal 1998 and fiscal 1999, the Company established a new database of customers that shop at Chico's using credit cards (approximately 77% of sales in fiscal 2000). In fiscal 1999, the Company performed an independent study of its existing Passport members (approximately 20,000 members were still active from this club 4 which included over 40,000 members at its peak) and store managers to determine the most important features of the Club and to help assess feasibility of relaunching the Club. Based on this study and the past experiences of the Company with the Passport Club, the Company relaunched the Passport Club in mid-February of 1999 by mailing approximately 300,000 invitations to customers whose names were maintained in its credit card, guest book and Passport databases. The invitations included a temporary enrollment card and simply required a purchase by the customer to activate their preassigned temporary Passport Club membership number ("temporary member"). Once the customer spends $500, she becomes a permanent member of the club and entitled to a 5% discount on future purchases. Since the relaunch in early 1999, the Company has been very successful in increasing its database of "temporary" and "permanent" Passport members. As of March 31, 2000, the Company had over 110,000 permanent Passport members and over 350,000 "temporary" members which now account for approximately 45-49% and 25-31% of overall sales, respectively. Prior to the relaunch of the Passport Club, the permanent members accounted for approximately 10% of overall sales and the Company was unable to effectively track "temporary" members sales. The Company believes that permanent Passport members shop more frequently and spend more on the average transaction than non-permanent Passport members. With the more sophisticated database hardware and software the Company has acquired to manage the SKU-level data being recorded for the temporary (until she spends $500) and permanent Passport Club members, the Company believes it is better able to more sharply focus its marketing, design and merchandising efforts to better address and define the desires of its target customer. 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. District managers also have the opportunity to earn incentive compensation based upon the sales performance of stores in their districts, as well as the Company's overall sales performance. The Company offers its employees other recognition programs and the opportunity to participate in its stock option, stock purchase and 401(k) 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. Chico's emphasis where possible on a "promote from within" philosophy, combined with increases in the number of new Company-owned stores, provides 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 the future success of the Company. After slowing the opening pace of new company stores in fiscal 1997, the Company opened a total of 14 new Company-owned stores, acquired one store from a franchise and closed six Company-owned stores in fiscal 1998. During fiscal 1999, the Company opened 22 5 new company stores and one new franchised store while closing two outlet stores. During fiscal 2000, the Company opened 40 new company stores and one new franchised store while closing three front-line stores. As of March 31, 2000, the Company has opened three of the 45 new Company-owned stores planned to be opened in fiscal 2001, a franchisee has opened one new franchised store, and the Company has signed leases for several 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 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) and have typically had a nine month to eighteen month payback of all initial capital costs. 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 one of its existing franchisees may be able to further meet the Company's criteria for opening additional stores in its limited territory. This franchisee opened one new franchised store in fiscal 1999, one in fiscal 2000 and one in fiscal 2001. 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 mid-to-high end department stores as anchor tenants. Chico's Outlet stores are located in outlet centers. Chico's Company-owned, front-line stores average approximately 1,426 net selling square feet, while the Company-owned outlet stores average approximately 2,287 net selling square feet. In fiscal 1999 and fiscal 2000, the Company began a strategy of opening somewhat larger stores than it has opened in the past. Currently, the Company is seeking to open front-line stores with approximately 1,800-2,200 net selling square feet to accommodate its new markdown strategy and the expanded offerings of its current products. 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 1,200 net selling square feet or as many as 3,000 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 March 31, 2000, there were 204 Chico's stores, of which 187 were Company-owned front-line Chico's stores, ten were franchised Chico's stores and seven were Chico's Outlet stores. Chico's stores are located in the following jurisdictions: 6
COMPANY- COMPANY OWNED FRANCHISED OWNED OUTLET STORES STORES TOTAL STORES -------------------- -------------------- -------------------- --------------------- Florida 31 2 1 34 California 28 1 -- 29 Texas 16 -- -- 16 New Jersey 10 -- -- 10 Illinois 8 1 -- 9 Ohio 8 -- -- 8 Connecticut 7 -- -- 7 Minnesota -- -- 7 7 Virginia 7 -- -- 7 New York 6 -- -- 6 Michigan 4 -- 1 5 Pennsylvania 5 -- -- 5 South Carolina 5 -- -- 5 Georgia 4 -- -- 4 Maryland 4 -- -- 4 Massachusetts 4 -- -- 4 North Carolina 4 -- -- 4 Tennessee 3 1 -- 4 Washington 4 -- -- 4 Colorado 2 1 -- 3 Louisiana 3 -- -- 3 New Mexico 3 -- -- 3 Alabama 1 1 -- 2 Arizona 2 -- -- 2 District of Columbia 2 -- -- 2 Indiana 1 -- 1 2 Missouri 2 -- -- 2 Rhode Island 2 -- -- 2 Utah 2 -- -- 2 Kansas 1 -- -- 1 Kentucky 1 -- -- 1 Nebraska 1 -- -- 1 Nevada 1 -- -- 1 Oklahoma 1 -- -- 1 Oregon 1 -- -- 1 Vermont 1 -- -- 1 Wisconsin 1 -- -- 1 Wyoming 1 -- -- 1 ========================================================================================================== TOTAL 187 7 10 204 ==========================================================================================================
In a typical new front-line Chico's store, the Company's cost of leasehold improvements, fixtures, store equipment and beginning inventory ranges from $150,000 to $425,000 (after taking into account landlord construction allowances and other concessions). Chico's utilizes teams of employees experienced in new store openings who are able to supervise 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 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 many of its competitors. The Company has an arrangement whereby the final design and initial build-out of the space is handled by third-party architectural and contracting firms, with 7 offices or affiliates throughout the country. Under this arrangement, Chico's in-house crews are still responsible for approving 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:
FEB.1 NUMBER OF COMPANY-OWNED STORES 1995 1997** FY 1998 FY 1999 FY 2000 ------------------------------ ---- ------ ------- ------- ------- Stores at beginning of year 104 111 123 132 154 Opened* 8 13 14 22 40 Acquired from franchisees 5 1 1 2 -- Closed (6) (2) (6) (2) (3) ------------ ----------- ----------- ----------- --------- Stores at end of period 111 123 132 154 191 ------------ ----------- ----------- ----------- --------- NUMBER OF FRANCHISE STORES: Stores at beginning of year 17 12 10 9 8 Opened* -- -- -- 1 1 Sold to Company (5) (1) (1) (2) -- Closed -- (1) -- -- -- ------------ ----------- ----------- ----------- --------- Stores at end of period 12 10 9 8 9 ------------ ----------- ----------- ----------- --------- NUMBER OF TOTAL STORES: 123 133 141 162 200 ============ =========== =========== =========== =========
* 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. OUTLET STORES As of April 3, 2000, the Company operated seven outlet stores under the name "Chico's." 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 maintain a somewhat limited markdown policy. 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 4.1% of the Company's net sales by Company-owned stores during fiscal 2000. 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 2,287 net selling square feet. The Company opened no new outlet stores in fiscal 2000 and only one outlet store in fiscal 1999, closed two outlet stores in fiscal 1999 and does not anticipate opening more than one or two outlet stores during fiscal 2001. 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. In fiscal 1999 and fiscal 1998, the Company sold inventory with a cost of $500,000 to liquidators and during fiscal 1998 and fiscal 1997, the Company also conducted clearance sales near the Company's warehouse in Ft. Myers. These clearance sales generated approximately $690,000 and $1.4 million total sales in fiscal 1998 and fiscal 1997, respectively. The 8 Company did not operate a separate clearance sale in fiscal 2000 or fiscal 1999, but rather is clearing such goods through an expanded outlet store in Miromar, Florida. The Company is exploring various other options for clearing such merchandise in the future, including selling such items through its Internet site. FRANCHISE STORES Currently, there are ten franchised Chico's stores operated by four owners, none of whom is otherwise 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. Currently, the merchandise offered by Chico's franchisees at their stores is purchased from the Company at prices equal to 48%-50% 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 2000, the Company's net sales to franchisees was approximately $2.5 million, or 1.6 % 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 franchisees the right to open the proposed Chico's store within the respective limited territories granted to such franchisees. As of March 31, 2000, the franchisee holding franchise rights in Minnesota has the right to open additional Chico's stores, and one other franchisee has the right to preclude the Company from opening a Company or franchised store in the respective territory without first giving the 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 2000, the Company did not repurchase any of its franchise stores although it 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. Beginning in February 2000, the Company is effectively offering franchisees an additional 2%-6% increase in their discount rate if they agree to modify their purchase agreements and reduce returns of merchandise to the Company. The Company believes this may reduce franchise sales and the gross margins related to these sales, but it should also reduce returns of older merchandise which the Company must liquidate at lower margins. The Company does not believe the change will have a material impact on its net income. 9 STORE OPERATIONS Chico's stores typically employ a manager, two assistant managers, and numerous 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. During fiscal 1999, the Company established a formalized training program that was intended to reinforce and enhance the personalized customer service offered by all associates as well as increase their merchandise knowledge. The comprehensive training program includes a Fashion Information Training (F.I.T.) module and a Most Amazing Personal Services (M.A.P.S.) module which the Company believes has already begun to help assure sales associates better understand the Chico's product and improve the level of service provided to our customers. The Company currently supervises store operations through its Vice President-Director of Stores, a National Sales Manager, three Regional Sales Managers, seventeen District Sales Managers and six Area Sales Managers. The National Sales Manager provides assistance to the Director of Stores in supervision of the Regional Sales Managers, while the Regional Sales Managers have direct supervision responsibility of the District and Area Sales Managers. Each District and Area Sales Manager supervises multiple store locations. Area Sales Managers are in training for District Sales Manager status and generally supervise less stores in a smaller territory. District and Area Sales Managers have primary responsibility for assisting individual store managers in meeting established sales goals, and carrying out merchandise presentation, staffing, training and expense-control programs established by headquarters. Management is continually reviewing its supervisory structure with the intent of improving the performance of individual stores and store managers. MANAGEMENT INFORMATION SYSTEMS The Company's current management information systems are based on an IBM AS400 and numerous Windows NT networks located at the home office in Ft. Myers, which provide a full range of retail, financial and merchandising information systems, including purchasing, inventory distribution and control, sales reporting, accounting, warehousing and merchandise management using Island Pacific, STS Marketworks and JDA's Arthur software products. 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. During fiscal 2001, the Company intends to replace its in-house developed cash register systems with a cash register using the CRS Retail Systems software which is also used by many other retailers. It is anticipated this new register will improve customer service, reporting and overall functionality. The Company anticipates it will have several stores testing the new cash register systems in the second quarter of fiscal 2001, with a roll out to the rest of the Company-owned stores over the next twelve months. 10 In fiscal 2001, the Company will be installing JDA's Arthur software system to help merchandise allocation and it will also be installing the Mozart system from Commercial Ware for Internet and mail order fulfillment systems. In fiscal 1999, the Company acquired sophisticated database marketing software from STS Systems, Inc. to keep track of its Passport Club purchases and to assist in analyzing merchandise selling within certain customer demographics. This system became fully operational in fiscal 2000. The Company is committed to an 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 New merchandise is generally received several times per week 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 2000 and 1999, 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 its 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. However, the plan is to improve the Company's scheduling and distribution systems so as to reduce the need to rely on air transportation to obtain merchandise. The Company's distribution center is 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 and Burlington Air, for most shipments to its stores. The Company has available and has allocated sufficient space in its headquarters facility and is acquiring the necessary systems to permit fulfillment of mail order and Internet sales directly from its distribution center. 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 two years of future growth. The Company is currently in its initial review stage of facilities planning to properly address distribution needs after two years. MERCHANDISE DESIGN AND PRODUCT DEVELOPMENT The Company's private label clothing is developed through the coordinated efforts of the Company's planning, creative and product 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 creative and product development departments report to Marvin and Helene Gralnick, the Company's founders, and are headed up by Karen M. Glass, Vice President-Product Development and Design and Janet C. Ydavoy, Director of Production, Sourcing and Quality Control. Patricia A. Murphy, the Company's Vice President-General Merchandise Manager, has the responsibility of overseeing and coordinating the buying, planning, quality control and distribution of merchandise. 11 The creative and product development teams create the Company's in-house designs and design modifications. In addition to selecting distinctive patterns and colors, the Company's product development teams are 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 product 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 except for the "cut and sew" operations described below. The Company does business with all of its foreign vendors and importers in United States currency, often supported through letters of credit, particularly for newer vendors. Clothing manufacturers utilize the designs and specifications provided by the Company through its CAD programs. The Company generally does not purchase and supply the raw materials for it's clothing, leaving the responsibility for purchasing raw materials with the manufacturers. However, beginning in fiscal 1998, the Company has been buying specialized cloth and providing the cloth to domestic "cut and sew" manufacturers in the United States who are engaged by the Company to make the specified designs and styles. The Company anticipates it is likely to continue this practice in the future. Currently, the Company contracts with approximately 25 to 30 apparel vendors, 20 to 40 accessory vendors, several fabric suppliers and several "cut and sew" vendors. Over the past several years, there has been a significant shift from vendors in Turkey and Guatemala to 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 continue to redirect a portion of its sourcing activities towards new vendors in the United States, Mexico and possibly other areas. In fiscal 2000, United States sources (including the cost of fabric and "cut and sew" vendors) accounted for approximately 44% of the Company's purchases, Hong Kong/China sources accounted for approximately 26% of the Company's purchases, Turkey sources accounted for approximately 11% of overall purchases, and India accounted for approximately 8% of overall purchases, while Indonesia, Japan, Mexico and Peru sources, in the aggregate, amounted to under 9% of overall purchases. In fiscal 2001, the Company expects sourcing from Hong Kong/China to remain at a similar percentage. Purchases from vendors in Mexico and other countries in Central America are expected to increase to 10-12% of total purchases, while vendors in Turkey can be expected to continue to provide approximately 10-15% of total purchases. Purchases from vendors in India are likely to grow above their current amounts. United States vendors were utilized more heavily in fiscal 2000 and it is expected this may grow again in fiscal 2001. From time to time, the Company has experienced certain difficulties with the quality and timeliness of delivery of merchandise manufactured overseas. 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, economic instability, natural disasters 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 12 be a material adverse impact on the Company's operations. Also, the Company is in the process of developing relationships with several new vendors in India, and other countries. 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 Although Chico's has shifted a significant portion of its manufacturing of clothing to United States manufacturers, a majority of Chico's clothing and accessories are still manufactured outside of the United States. As a result, the Company's business remains 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, Hong Kong, China and Peru currently all receive the preferential tariff treatment that is accorded goods from countries qualifying for normal trade relations status ("NTR"), formerly known as most favored nation status. If the NTR 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 NTR 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 NTR 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 NTR status to continue for the countries where its principal vendors are located, the Company cannot predict whether the US Government will act to remove NTR status for any of the countries or impose an overall increase in duties on foreign made goods. In particular, the NTR status for China is currently subject to a yearly review and its status as such has been the subject of some debate. Although the President supports renewal of China's NTR status (and has even supported legislation that would make it permanent rather than subject to yearly renewal), recent questions concerning China's misappropriation of military proprietary information could very well result in an increased pressure to not renew China's NTR status. Also, in July 1997, Hong Kong changed from its former status as a British colony to become the subject of Chinese sovereignty. Although for trade purposes the United States has continued to treat Hong Kong as a separate territory, and it has continued to negotiate directly with Hong Kong while at the same time it has continued its NTR trade status, there can be no assurance that Hong Kong's shift to Chinese sovereignty will not have an 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." In 1994, the member-countries of the International Trade Organization completed the Uruguay Round of trade negotiations of the General Agreement on Tariffs and Trade and the Agreement was approved by the United States Congress. This pact, as it applies to textiles, which is now known as the WTO Agreement on Textiles and Clothing (the "ATC"), 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 Company's ability to import Chico's merchandise, including quotas. The ATC 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 ATC 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. 13 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 the ATC, 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. 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, are asked to improve their intellectual property protection efforts. As of April 3, 2000, of the countries where the Company's existing or planned key vendors have manufacturing operations or suppliers, none was a priority foreign country. Turkey, India, Peru and Indonesia were on the priority watch list and Mexico was on the secondary watch list. In addition, the Clinton Administration has revived 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 3, 2000, none of the countries where the Company's existing or planned key vendors have manufacturing operations has been cited under Super 301. China continues to be monitored under a related provision of the Trade Act of 1974, section 306. The United States Trade Representative will be in a position to impose sanctions if China fails to adequately enforce existing bilateral agreements concerning intellectual property rights. Of countries where the Company's existing or planned key vendors have manufacturing operations, Turkey, India, Indonesia and Peru 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. The GSP expired by its terms on June 30, 1999. Although the USTR has expressed support for extension of the GSP program and a bill extending the GSP program through 2004 has been introduced in Congress, the likelihood of this extension is uncertain. As introduced, the bill extending the GSP would make the extension retroactive to June 30, 1999. 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 14 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. ADVERTISING AND PROMOTION Chico's historically has not allocated significant resources to mass media advertising other than direct mail. Chico's has preferred instead to attract customers through its direct mail programs (which began in fiscal 1998), word-of-mouth advertising, its general reputation, its relaunched Passport Club and the visual appeal of its stores and window presentations of its merchandise. Chico's sales associates promote this often by making personal telephone calls to existing customers informing them about new merchandise. Over the past several years and particularly in fiscal 1999 and 2000, the Company increased its use of brochures and other merchandise image pieces mailed to customers and made available at Chico's stores. In addition, in the fourth quarter of fiscal 2000, the Company began a national magazine advertising campaign in approximately eight magazines. The Company intends on continuing to use and expand its national magazine advertising and its use of direct mail through its Passport customers, as well as, identifying "prospect" customers. During fiscal 2000, the Company expanded its efforts in this area and the cost associated with this marketing increased to $3.5 million dollars from $1.7 million in fiscal 1999. 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 and wardrobing parties 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. The Company believes that these programs are effective marketing vehicles and it has developed programs to help its store level employees use 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. 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 retailers that are believed to most directly compete with Chico's stores in many of the same local market areas are the mid-to-high end department stores including Nordstrom's, Dillards, Neiman-Marcus and Saks Fifth Avenue and specialty stores which include The Gap, Talbots, The Limited and Banana Republic as well as local boutique retailers in the areas served by individual Chico's stores. 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 which provide good value, their exclusive availability at Chico's stores, the Company's emphasis on personalized service and customer assistance, and the locations of its stores are the principal means by which the Company competes. 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 15 upscale shopping districts and high-end malls, and women's apparel stores have tended to over saturate these prime locations. EMPLOYEES As of January 29, 2000, the Company employed approximately 1,835 persons, approximately 48% of whom were full-time employees and approximately 52% of whom were part-time employees. The number of part-time employees fluctuates during peak selling periods. As of the above date, 90% of the Company's employees worked in Chico's stores, Chico's Outlet stores and in direct field supervision, 3% worked in the distribution center and 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 401K, stock option plan and stock purchase plan. All employees also receive 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", "Passport" and "MAPS", each of which is registered with the United States Patent and Trademark Office. Each of the registrations has a term of 10 years (expiring in 2009, 2010 and 2009, respectively) and is renewable indefinitely if the mark is still in use at the time of renewal. The Company has also applied for trademarks in the United States on its "Goddess" collections, and in Canada for all of its marks. 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" and "Passport" marks because these marks are 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, California and the northeast United States. 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. Lease terms typically range from three to ten years and approximately 40% contain one or more renewal options. Historically, the Company has exercised most of its lease renewal options. Almost 80% 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 194 Company-owned stores existing as of March 31, 2000, 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): 16
LEASES EXPIRING EACH YEAR LEASES EXPIRING EACH YEAR FISCAL YEAR IF NO RENEWALS EXERCISED IF ALL RENEWALS EXERCISED ------------------------------------- -------------------------------------- ------------------------------------- 2001................ 11 8 2002................ 24 10 2003................ 22 13 2004 AND AFTER...... 137 163 DISTRIBUTION CENTER 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, and corporate and administrative headquarters. The combined facilities comprise approximately 115,000 square feet, consisting of approximately 85,000 square feet for distribution and approximately 35,000 square feet for administrative and design offices. In December 1999 the Company closed its woodshop, outsourced the fixture production and reallocated the space for distribution activities. The construction cost of the combined corporate headquarters, distribution center and woodshop facility was approximately $9.6 million, which includes the $1.3 million purchase price for the land. Further, the Company spent approximately $1.6 million for distribution center equipment, software and furnishings. Currently, the Company's World Headquarters secures a $5.2 million mortgage loan which matures in 2003. In the opinion of management, the existing headquarters facility should provide sufficient warehouse capacity to service the Company's needs for its basic retail operations for at least two years of future growth. Regarding the corporate and administrative offices, the Company has engaged a general contractor and has begun construction on a 32,000 square foot addition to its existing corporate and administrative offices. It is anticipated that the additional office facilities will be completed in early 2001 at a cost of approximately $5 million. ITEM 3. LEGAL PROCEEDINGS. Chico's is not a party to any legal proceedings, 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS None. 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 65 16 Chief Executive Officer, President, Chairman of the Board and Director Helene B. Gralnick 52 16 Senior Vice President-Design and Concept and Director
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Charles J. Kleman 49 11 Executive Vice President-Finance, Chief Financial Officer, Secretary/Treasurer and Director Scott A. Edmonds 42 6 Chief Operating Officer and Assistant Secretary Mori C. MacKenzie 49 4 Vice President-Director of Stores Patricia A. Murphy 56 2 Vice President-General Merchandise Manager Karen M. Glass 44 7 Vice President-Product Development and Design
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 re-assumed the role of Chief Executive Officer and in March 1997 re-assumed 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 have been leading the Company in this regard. 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. 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 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, investor relations and overall management of the distribution center. 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. In February 2000, Mr. Edmonds was promoted to Chief Operating Officer. Mr. Edmonds is responsible for human resources, store development and operations, store leasing and maintenance, franchise operations, and management of the general headquarters activities. 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. 18 Mori C. MacKenzie has been with the Company since October 1995, when she was hired as the Director of Stores. In June 1999, she was elected Vice President-Director of Stores. Ms. MacKenzie is responsible for store and field operations management, hiring and training. From January 1995 until October 1995, Ms. MacKenzie was the Vice President of Store Operations for Canadians Corporation. From August 1994 until December 1994, she was the Vice President of Store Development for Goody's Family Clothing. From April 1992 until August 1994, Ms. MacKenzie was the Vice President of Stores for United Retail Group ("URG") and from August 1991 until August 1992 she was employed by Conston Corporation, a predecessor of URG. In addition, Ms. MacKenzie was Vice President-Stores for Park Lane from November 1987 until July 1991, and was Regional Director of Stores for the Limited, Inc. from June 1976 until October 1987. Patricia A. Murphy has been with the Company since September 1997, when she was hired as the Senior Merchant. In April 1998, she was promoted to the position of General Merchandise Manager, and in June 1999, she was elected Vice President-General Merchandise Manager. Ms. Murphy is principally responsible for the buying, planning and distribution activities associated with procurement of merchandise. From February 1987 until September 1997, Ms. Murphy was Vice President of Merchandising and Director of Fashion for Doncaster and from October 1985 until February 1987 was Merchandiser and National Sales Manager for Caribou Sportswear. From 1981 until 1985, she held various positions including Divisional Merchandise Manager and Director of Fashion Coordination for Lane Bryant, a division of the Limited. Karen M. Glass has been with the Company since January 1993 when she was hired as the Manager of Quality Control in the Company's Istanbul, Turkey office which was closed in 1995. In 1995, she moved to the United States and was promoted to Director of Production. In June 1999, she was elected Vice President-Product Development and Design. From 1979-1991, she was involved in design and production of sportswear lines for several New York and Ohio-based companies in the sportswear industry. 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. PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the Nasdaq National Market System. The high and low prices per share, as adjusted for the stock split payable on January 14, 2000, of the Company's Common Stock for each quarterly period since the Company's initial public offering are set forth in the Company's 2000 Annual Report to Stockholders and are incorporated herein by reference. On March 31, 2000, the last reported sale price of the Common Stock on the Nasdaq National Market System was $16 61/64 per share. 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 $16 million plus 50% of aggregate net income after fiscal 1999. 19 The approximate number of equity security holders of the Company is as follows: Number of Record Holders Title of Class as of March 31, 2000 -------------- -------------------- Common Stock, par value $.01 per share 417 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 referenced elsewhere and incorporated in this Annual Report on Form 10-K.
PRO FORMA ONE MONTH FISCAL YEAR FISCAL YEAR PERIOD ENDED ENDED ENDED (UNAUDITED) -------------- -------------- ---------------- ------------- DECEMBER 31, JANUARY 28, JANUARY 28, FEBRUARY 1, 1995 1996 (1) 1996 (1) 1997 (1) (52 WEEKS) (4 WEEKS) (52 WEEKS) (53 WEEKS) ------------------------------------------------------------- (In thousands, except per share and selected operating) OPERATING STATEMENT DATA: Net sales by company stores $ 57,636 $ 3,619 $ 58,091 $ 62,318 Net sales to franchisees (2) 2,707 128 2,672 1,755 --------- --------- --------- --------- Net sales 60,343 3,747 60,763 64,073 Cost of goods sold (3) 26,115 1,913 26,484 26,713 --------- --------- --------- --------- Gross profit 34,228 1,834 34,279 37,360 General, administrative and store operating expenses 30,743 2,358 30,842 33,738 --------- --------- --------- --------- Income (loss) from operations 3,485 (524) 3,437 3,622 Interest income (expense), net (621) (39) (620) (404) --------- --------- --------- --------- Income (loss) before taxes 2,864 (563) 2,817 3,218 Provision for income taxes 1,160 (225) 1,141 1,287 --------- --------- --------- --------- Net income (loss) $ 1,704 $ (338) $ 1,676 $ 1,931 ========= ========= ========= ========= Basic net income (loss) per share (4) $ .11 $ (.02) $ .11 $ .12 ========= ========= ========= ========= Diluted net income (loss) per share (4) $ .11 $ (.02) $ .10 $ .12 ========= ========= ========= ========= Weighted average shares outstanding-diluted (4) 15,676 15,554 15,672 15,952 ========= ========= ========= ========= FISCAL YEAR ENDED -------------- --------------- ------------ JANUARY 31, JANUARY 30, JANUARY 29, 1998 1999 2000 (52 WEEKS) (52 WEEKS) (52 WEEKS) ------------------------------------------- (In thousands, except per share and selected operating) OPERATING STATEMENT DATA: Net sales by company stores $ 73,597 $104,981 $152,473 Net sales to franchisees (2) 1,742 1,761 2,529 --------- --------- --------- Net sales 75,339 106,742 155,002 Cost of goods sold (3) 33,240 44,197 64,950 --------- --------- --------- Gross profit 42,099 62,545 90,052 General, administrative and store operating expenses 37,185 47,411 65,246 --------- --------- --------- Income (loss) from operations 4,914 15,134 24,806 Interest income (expense), net (372) (151) 177 -------- -------- --------- Income (loss) before taxes 4,542 14,983 24,983 Provision for income taxes 1,772 5,844 9,494 --------- --------- --------- Net income (loss) $ 2,770 $ 9,139 $ 15,489 ========= ========= ========= Basic net income (loss) per share (4) $ .18 $ .56 $ .91 ========== ========== ========= Diluted net income (loss) per share (4) $ .17 $ .54 $ .88 ========= ========== ========= Weighted average shares 16,066 17,060 17,681 outstanding-diluted (4) ========= ========= =========
20
PRO FORMA ONE MONTH FISCAL YEAR FISCAL YEAR PERIOD ENDED ENDED ENDED (UNAUDITED) ------------- -------------- ------------- ------------- DECEMBER 31, JANUARY 28, JANUARY 28, FEBRUARY 1, 1995 1996 (1) 1996 (1) 1997 (1) (52 WEEKS) (4 WEEKS) (52 WEEKS) (53 WEEKS) ------------- -------------- ------------- ------------- SELECTED OPERATING DATA: Company stores at period end (5) 111 111 111 123 Franchise stores at period end (5) 12 12 12 10 --------- --------- --------- --------- Total stores at period end (5) 123 123 123 133 ======== ======== ======== ======== Average net sales per net selling store (in thousands) (6) $ 527 N/A $ 537 $ 523 Average net sales per net selling square foot at company stores (6) $ 413 N/A $ 405 $ 396 Percentage increase (decrease) in comparable company store net sales (10.4)% 1.4% (10.1)% (1.3)% BALANCE SHEET DATA (at year end): Total assets $ 27,009 N/A $ 27,681 $31,248 Stockholders' Equity 15,959 N/A 15,621 18,021 Debt and lease obligations, less current maturities 5,896 N/A 7,131 7,008 Working capital $4,536 N/A $5,419 $6,585 FISCAL YEAR ENDED -------------- ------------- ------------ JANUARY 31, JANUARY 30, JANUARY 29, 1998 1999 2000 (52 WEEKS) (52 WEEKS) (52 WEEKS) -------------- ------------- ------------ SELECTED OPERATING DATA: Company stores at period end (5) 132 154 191 Franchise stores at period end (5) 9 8 9 ---------- ---------- ---------- Total stores at period end (5) 141 162 200 ======== ======== ======== Average net sales per net selling store (in thousands) (6) $ 578 $ 745 $ 904 Average net sales per net selling square foot at company stores (6) $ 449 $ 574 $ 675 Percentage increase (decrease) in comparable company store net sales 10.7% 30.3% 23.3% BALANCE SHEET DATA (at year end): Total assets $34,472 $49,000 $70,316 Stockholders' Equity 21,456 34,303 52,641 Debt and lease obligations, less current maturities 6,703 6,713 6,839 Working capital $ 8,970 $19,852 $26,389
(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, among other periods, the short one month transition period in January 1996, and for a pro forma fiscal year ending January 28, 1996. (2) Includes franchisee fees of under $10,000 in certain fiscal years. (3) Cost of goods sold includes distribution and design costs, but does not include occupancy cost. (4) Restated to give retroactive effect for the 2 for 1 stock split payable in January 2000. (5) For information concerning stores opened, acquired, sold and closed, see "Business - Store Locations." (6) 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 1997, average net sales per Company store and average net sales per selling square foot of Company stores have been adjusted to exclude the effect of the fifty-third week. 21 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 January 29, 2000 is set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2000 Annual Report to Stockholders and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required by this Item is set forth under the heading "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in the Company's 2000 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 2000 Annual Report to Stockholders and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOURE. 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 2000 Annual Meeting proxy statement is incorporated herein by reference. Information about executive officers of the Company is included in Item A. of Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. Information about executive compensation in the Company's 2000 Annual Meeting proxy statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT. The information required by this Item is included in the Company's 2000 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 2000 Annual Meeting proxy statement and is incorporated herein by reference. 22 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 February 25, 2000, which is included in the Company's Annual Report to Stockholders for the fiscal year ended January 29, 2000, are incorporated herein by reference. - Report of Independent Certified Public Accountants. - Statements of Income for the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998. - Balance Sheets, January 29, 2000 and January 30, 1999. - Statements of Stockholder's Equity for the fiscal years ended January 29, 2000, January 30, 1999, and January 31, 1998. - Statements of Cash Flows for the fiscal years ended January 29, 2000, January 30, 1999, and January 31, 1998. - 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) 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) 23 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 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) 10.3* Employment Agreement for Charles J. Kleman (Filed as Exhibit 10.6.5 to the Company's Form10-Q for the quarter ended April 4, 1993, as filed with the Commission on May 18, 1993) 10.4* 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) 10.5* Employment Agreement for Mori C. 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) 10.6* 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) 10.7* 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) 10.8* 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) 10.9* First Amendment to 1993 Stock Option Plan (Filed as Exhibit 10.9 to the Company's Form 10-K for the year ended January 30, 1999, as filed with the Commission on April 28, 1999) 10.10* 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) 10.11* 1993 Employee Stock Purchase Plan, as amended and restated October 9, 1998 (Filed as Exhibit 10.11 to the Company's Form 10-K for the year ended January 30, 1999, as filed with the Commission on April 28, 1999) 10.12 Third Amendment to Chico's FAS, Inc. 1993 Employee Stock Purchase Plan 10.13 Fourth Amendment to Chico's FAS, Inc. 1993 Employee Stock Purchase Plan 10.14* 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) 10.15* 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) 10.16* 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) 10.17* 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) 24 10.18* 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) 10.19* 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) 10.20* 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) 10.21* 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) 10.22* 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) 10.23* 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) 10.24* 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) 10.25* 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) 10.26* 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) 10.27* 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) 10.28* 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) 10.29* 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) 10.30* 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) 10.31* 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, 25 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) 10.32* 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) 10.33* 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) 10.34* 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) 10.35* Second Amendment to Third Amended and Restated Credit Agreement by and between Chico's FAS, Inc. and NationsBank (South), N. A. (Filed as Exhibit 10.49 to the Company's Form 10-K for the year ended January 31, 1998, as filed with the Commission on April 27, 1998) 10.36* Third Amendment to Third Amended and Restated Credit Agreement dated December 8, 1998 by and between Chico's FAS, Inc. and NationsBank (South), N.A. (Filed as Exhibit 10.35 to the Company's Form 10-K for the year ended January 30, 1999, as filed with the Commission on April 28, 1999) 10.37* 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) 10.38* Amendment to Loan Agreement dated December 8, 1998 by and between Chico's FAS, Inc. and NationsBank (South), N.A. (Filed as Exhibit 10.37 to the Company's Form 10-K for the year ended January 30, 1999, as filed with the Commission on April 28, 1999) 10.39* 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, as filed with the Commission on May 9, 1994) 10.40* Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and Verna K. Gibson dated May 13, 1997 (Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended August 2, 1997, as filed with the Commission on September 5, 1997) 10.41* Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and Ross E. Roeder dated June 17, 1997 (Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended August 2, 1997, as filed with the Commission on September 5, 1997) 10.42* Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and John W. Burden dated June 17, 1997 (Filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended August 2, 1997, as filed with the Commission on September 5, 1997) 10.43* Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and Verna K. Gibson dated June 17. 1997 (Filed as Exhibit 10.4 to the Company's Form 10-Q for the quarter ended August 2, 1997, as filed with the Commission on September 5, 1997) 26 10.44* Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and Ross E. Roeder dated February 10, 1998 (Filed as Exhibit 10.60 to the Company's Form 10-K for the year ended January 31, 1998, as filed with the Commission on April 27, 1998) 10.45* Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and John W. Burden dated February 10, 1998 (Filed as Exhibit 10.61 to the Company's Form 10-K for the year ended January 31, 1998, as filed with the Commission on April 27, 1998) 10.46* Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and Verna K. Gibson dated February 10, 1998 (Filed as Exhibit 10.62 to the Company's Form 10-K for the year ended January 31, 1998, as filed with the Commission on April 27, 1998) 10.47* Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and Ross E. Roeder dated June 9, 1998 (Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended August 1, 1998, as filed with the Commission on September 2, 1998) 10.48* Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and John W. Burden dated June 9, 1998 (Filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended August 1, 1998, as filed with the Commission on September 2, 1998) 10.49* Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and Verna K. Gibson dated June 9, 1998 (Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended August 1, 1998, as filed with the Commission on September 2, 1998) 10.50* Non-Employee Directors Stock Option Plan (Filed as Exhibit 10.49 to the Company's Form 10-K for the year ended January 30, 1999, as filed with the Commission on April 28, 1999) 10.51 First Amendment to Chico's FAS, Inc. Non-Employee Directors Stock Option Plan 13 Annual Report to Stockholders 22 Subsidiaries of Company 23 Consent to use of Report of Independent Certified Public Accountants 27 Financial Data Schedule (b) Reports on Form 8-K The company did not file any reports on Form 8-K during the fifty-two weeks ended January 29, 2000. 27 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 25, 2000 ---------------------- ----------------- 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 25, 2000 ---------------------- ----------------- MARVIN J. GRALNICK, Chief Executive Officer, Date President, Director (principal executive officer) /s/ Charles J. Kleman April 25, 2000 ------------------------------------------------------------------ ----------------- CHARLES J. KLEMAN, Chief Financial Officer, Date Director (principal financial and accounting officer) /s/ Helene B. Gralnick April 25, 2000 ------------------------------------------------------------------ ----------------- HELENE B. GRALNICK, Senior Vice President - Date Design and Concept and Director /s/ Verna K. Gibson April 25, 2000 ------------------------------------------------------------------ ----------------- VERNA K. GIBSON, Director Date /s/ John W. Burden April 25, 2000 ------------------------------------------------------------------ ----------------- JOHN W. BURDEN, Director Date /s/ Ross E. Roeder April 25, 2000 ------------------------------------------------------------------ ----------------- ROSS E. ROEDER, Director Date
28 EX-10.12 2 THIRD AMENDMENT TO CHICO'S FAS, INC. THIRD AMENDMENT TO CHICO'S FAS, INC. 1993 EMPLOYEE STOCK PURCHASE PLAN WHEREAS, CHICO'S FAS, INC. (the "Company") has previously adopted the Chico's FAS, Inc. 1993 Employee Stock Purchase Plan, a First Amendment thereto and a Second Amendment thereto (collectively, the "Plan"); and WHEREAS, pursuant to Section 8.4 of the Plan, the Company's Board of Directors have retained the right to amend the Plan in certain respects without the approval of the stockholders of the Company; and WHEREAS, the Company's Board of Directors deems it advisable and in the best interests of the Company and its stockholders to amend the Plan and has determined that the amendment does not require the approval of the stockholders of this Company. NOW, THEREFORE, BE IT RESOLVED, that the Plan is hereby amended as follows, effective upon the payment and distribution by the Company of the 2 for 1 stock split of its common stock approved and adopted by the Board of Directors on December 14, 1999: 1. Section 5.3 (b) of the Plan is hereby amended in its entirety to read as follows: (b) In each offering, an Eligible Employee shall be entitled to subscribe for a total number of shares of Common Stock equal to one share for each One Hundred Twenty-Five Dollars ($125.00) of Compensation paid to him for the calendar year immediately preceding the year in which the offering occurs. However, no Eligible Employee shall be entitled to subscribe in any offering to more than eight hundred (800) shares or (for those Eligible Employees who are entitled to purchase at least ten (10) shares) fewer than ten (10) shares. Notwithstanding the provisions of Section 8.1, no stock adjustment referred to therein shall operate to change from ten (10) the minimum number of shares required to be subscribed for by an Eligible Employee in any offering in order for such Eligible Employee to participate in such offering. EX-10.13 3 FOURTH AMENDMENT TO CHICO'S FAS, INC. FOURTH AMENDMENT TO CHICO'S FAS, INC. 1993 EMPLOYEE STOCK PURCHASE PLAN WHEREAS, CHICO'S FAS, INC. (the "Company") has previously adopted the Chico's FAS, Inc. 1993 Employee Stock Purchase Plan, a First Amendment thereto, a Second Amendment thereto and a Third Amendment thereto (collectively, the "Plan"); and WHEREAS, pursuant to Section 8.4 of the Plan, the Company's Board of Directors has retained the right to amend the Plan in certain respects without the approval of the stockholders of the Company; and WHEREAS, the Company's Board of Directors deems it advisable and in the best interests of the Company and its stockholders to amend the Plan to modify the definition of Fair Market Value and to eliminate the provisions relating to payroll deductions and has determined that the amendments do not require the approval of the stockholders of this Company. NOW, THEREFORE, BE IT RESOLVED, that the Plan is hereby amended as follows: 1. Section 2.1 of the Plan is hereby amended in its entirety to read as follows: 2.1 Reserved 2. Section 2.9 of the Plan is hereby amended in its entirety to read as follows: 2.9 "Fair Market Value" of the shares of Common Stock shall mean the closing price, on the date in question (or, if no shares are traded on such day, on the next preceding day on which shares were traded), of the Common Stock on the principal securities exchange in the United States on which such stock is listed, or if such stock is not listed on a securities exchange in the United States, the closing price on such day in the over-the- counter market as reported by the National Association of Security Dealers Automated Quotation System (Nasdaq), or Nasdaq's successor, or if not reported on Nasdaq, the fair market value of such stock as determined by the Committee in good faith and based on all relevant factors. 3. Article 7 of the Plan is hereby deleted in its entirety and amended to read as follows: ARTICLE 7 Reserved EX-10.51 4 FIRST AMENDMENT TO CHICO'S FAS, INC. FIRST AMENDMENT TO CHICO'S FAS, INC. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN This First Amendment to the Chico's FAS, Inc. Non-Employee Directors' Stock Option Plan, which effectively eliminates the ability to set the option price at below fair market value, eliminates discretionary option grants from the Plan, and requires stockholder approval of certain plan amendments, is hereby adopted, the 20th day of August, 1999, but effective retroactive to the date of initial adoption of the Non-Employee Directors' Stock Option Plan (i.e. October 9, 1998), as follows: 1. Section 2.4 of the Plan is hereby amended in its entirety to read as follows: 2.4 [Reserved] 2. Section 3.4 of the Plan is hereby amended in its entirety to read as follows: 3.4 AMENDMENT OF THE PLAN; TERMINATION. The Board may, insofar as permitted by law, from time to time, with respect to any shares of Common Stock at the time not subject to Options, suspend, discontinue or terminate the Plan or revise or amend it in any respect whatsoever, except that, without approval of the stockholders of the Company, no such revision or amendment shall change the number of shares subject to the Plan, change the designation of the class of persons eligible to receive Options, decrease the price at which Options may be granted, otherwise materially increase the benefits accruing to non-employee directors under the Plan, or remove the administration of the Plan from the Committee. The foregoing prohibitions shall not be affected by adjustments in shares and purchase price made in accordance with the provisions of Section 3.1. EX-13 5 ANNUAL REPORT [CHICO'S LOGO) FINANCIAL HIGHLIGHTS
ONE PRO FORMA MONTH FISCAL YEAR FISCAL YEAR PERIOD ENDED FISCAL YEAR ENDED ENDED ENDING (UNAUDITED) ------------------------------------------------------ DECEMBER 31, JANUARY 28, JANUARY 28, FEBRUARY 1, JANUARY 31, JANUARY 30, JANUARY 29, 1995 1996 (1) 1996 (1) 1997 (1) 1998 1999, 2000 (52 WEEKS) (4 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) -------------- ------------- ------------ ------------- ------------- ------------- ------------ (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Net Sales .................... $ 60,343 $ 3,747 $ 60,763 $ 64,763 $ 75,339 $ 106,742 $ 155,002 Income (loss) from Operations .................. 3,485 (524) 3,437 3,622 4,914 15,134 24,806 Net Income (loss) ............ 1,704 (338) 1,676 1,931 2,770 9,139 15,489 Basic Earnings (loss) Per Share (2) ................... 0.11 (0.02) 0.11 0.12 0.18 0.56 0.91 Diluted Earnings (loss) Per Share (2) ............... 0.11 (0.02) 0.10 0.12 0.17 0.54 0.88 OPERATING DATA : Total Assets ................. $ 27,009 $ 27,681 $ 31,248 $ 34,472 $ 49,000 $ 70,316 Long-Term Debt ............... 5,896 7,231 7,008 6,703 6,713 6,839 Stockholder's Equity ......... 15,959 15,621 18,021 21,456 34,303 52,641 # of Stores (at end of period): Company-owned ............... 111 111 123 132 154 191 Franchised .................. 12 12 10 9 8 9 --------- --------- --------- --------- --------- ---------- ---------- TOTAL ......................... 123 123 133 141 162 200 ========= ========= ========= ========= ========= ========== ==========
(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, among other periods, the short one month transition period in January 1996 and a pro forma fiscal year ended January 28, 1996. (2) Restated to give retroactive effect for the 2 for 1 stock split payable in January 2000. INDEX 7 Management's Discussion & Analysis 14 Stock Information 15 Financial Statements 31 Executive Officers/Directors 32 Store Listing
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 200 stores as of January 29, 2000 (fiscal 2000), of which 191 are Company-owned stores and nine 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 1995, the Company has acquired nine stores from franchisees and opened 97 new Company-owned stores, and one franchisee has opened two new franchised stores in this period. Of these new Company-owned stores, 40 were opened in fiscal 2000, 22 were opened in fiscal 1999, 14 were opened in fiscal 1998, 13 were opened in fiscal 1997 and 8 were opened in the pro forma fiscal year ended January 28, 1996. During this same time period, the Company closed nine Company-owned stores and one franchised store also closed. The Company plans to open a minimum of 45 new Company-owned stores in the fiscal year ending February 3, 2001 (fiscal 2001). 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 between one and three existing Company-owned stores in fiscal 2001. 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.
FISCAL YEAR ENDED (000'S) ------------------------------------------------------------------------- JANUARY 31, JANUARY 30, JANUARY 29, 1998 1999 2000 (52 WEEKS) % (52 WEEKS) % (52 WEEKS) % ------------- ---------- ------------- ---------- ------------ ---------- Net sales by company stores ............... $73,597 97.7% $104,981 98.4% $152,474 98.4% Net sales to franchisees .................. 1,742 2.3 1,761 1.6 2,528 1.6 ------- ----- -------- ----- -------- ----- Net sales ................................ 75,339 100.0 106,742 100.0 155,002 100.0 Cost of goods sold ........................ 33,240 44.1 44,197 41.4 64,950 41.9 ------- ----- -------- ----- -------- ----- Gross profit ............................. 42,099 55.9 62,545 58.6 90,052 58.1 General, administrative and store operating expenses ................................. 37,185 49.4 47,411 44.4 65,246 42.1 ------- ----- -------- ----- -------- ----- Income from operations ................... 4,914 6.5 15,134 14.2 24,806 16.0 Interest expense, net ..................... 372 .5 151 .2 177 .1 ------- ----- -------- ----- -------- ----- Income before taxes ...................... 4,542 6.0 14,983 14.0 24,983 16.1 Provision for income taxes ................ 1,772 2.3 5,844 5.4 9,494 6.1 ------- ----- -------- ----- -------- ----- Net income ............................... $ 2,770 3.7% $ 9,139 8.6% $ 15,489 10.0% ======= ===== ======== ===== ======== =====
FIFTY-TWO WEEKS ENDED JANUARY 29, 2000 COMPARED TO THE FIFTY-TWO WEEKS ENDED JANUARY 30, 1999 NET SALES. Net sales by Company-owned stores for the fifty-two weeks ended January 29, 2000 (fiscal 2000) increased by $47.5 million, or 45.2%, over net sales by Company-owned stores for the comparable fifty-two weeks ended January 30, 1999 (fiscal 1999). The increase was the result of a comparable Company store net sales increase of $23.7 million and $23.8 million additional sales from 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) the new (or reacquired) stores not yet included in the Company's comparable store base, net of sales of $2.3 million from five stores closed in fiscal 1999 and fiscal 2000 and exclusive of special liquidation sales. Net sales to franchisees for fiscal 2000 increased by approximately $768,000 or 43.6% compared to net sales to franchisees for fiscal 1999. The increase in net sales to franchisees primarily reflects increased sales to franchisees due to the opening of two additional franchised locations (one each in fiscal 1999 and fiscal 2000) by an existing franchisee and by a net increase in purchases by the other franchised stores. GROSS PROFIT. Gross profit for fiscal 2000 was $90.1 million, or 58.1% of net sales, compared with $62.5 million, or 58.6% of net sales, for fiscal 1999. The decrease in the gross profit percentage primarily resulted from additional promotional activities and entitlement to discounts including those associated with expanding the Company's frequent shopper club (the "Passport Club") which was relaunched in the first quarter of this year. To a lesser degree, the decrease was the result of the mix of product which generally included a lower average initial mark-up. GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General, administrative and store operating expenses increased to $65.2 million, or 42.1% of net sales, in fiscal 2000 from $47.4 million, or 44.4% of net sales, in fiscal 1999. The increase in general, administrative and store operating expenses was, for the most part, the result of increases in store operating expenses, including store compensation, occupancy and other costs associated with additional store openings. The decrease in these expenses as a percentage of net sales was principally due to direct store and non-store general and administrative costs, which decreased as a percentage of net sales due to leverage associated with the 23.3% comparable Company store net sales increase. This decrease was partially offset by a .7% increase in marketing and promotion costs. INTEREST INCOME, NET. The Company had net interest income during fiscal 2000 of approximately $177,000 versus net interest expense of approximately $151,000 in the prior period. The improvement to net interest income from net interest expense was primarily a result of increased interest earnings during fiscal 2000 resulting from the Company's increased overall cash position, as well as improved yields related to its investments in marketable securities. NET INCOME. As a result of the factors discussed above, net income reflects an increase of 69.5% to $15.5 million in fiscal 2000 from net income of $9.1 million in the prior period. The income tax provision represented an effective rate of 38.0% for the current period and 39.0% in the prior period. The decrease in the income tax rate is attributable to a decrease in the effective state income tax rate associated with certain restructurings of the Company's operations, net of a Federal income tax rate increase due to higher earnings. FIFTY-TWO WEEKS ENDED JANUARY 30, 1999 COMPARED TO THE FIFTY-TWO WEEKS ENDED JANUARY 31, 1998. NET SALES. Net sales by Company-owned stores for the fifty-two weeks ended January 30, 1999 (fiscal 1999) increased by $31.3 million, or 42.6%, over net sales by Company-owned stores for the comparable fifty-two weeks ended January 31, 1998 (fiscal 1998). The increase was the result of a 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) comparable Company store net sales increase of $21.1 million and $10.2 million additional sales from the new (or reacquired) stores not yet included in the Company's comparable store base (net of sales of $1.0 million from seven stores closed in fiscal 1998 and fiscal 1999). Net sales to franchisees for fiscal 1999 increased by approximately $18,000, or 1.0% compared to net sales to franchisees for fiscal 1998. The increase in net sales to franchisees primarily reflects increased sales to franchisees due to the opening of one additional franchised location by an existing franchisee and increased purchases by existing franchisees, net of reduced sales attributable to the re-acquisition of three franchised stores in fiscal 1998 and fiscal 1999. GROSS PROFIT. Gross profit for fiscal 1999 was $62.5 million, or 58.6% of net sales, compared with $42.1 million, or 55.9% of net sales, for fiscal 1998. The increase in the gross profit percentage primarily resulted from merchandise planning and distribution costs which decreased by 1% of net sales as a result of leverage associated with the Company's 30.3% comparable Company store net sales increase for fiscal 1999, and higher margins in its front-line stores as a result of fewer and less aggressive markdowns believed to be attributable to the Company's refocusing of its product development departments as described more fully below under the heading "Comparable Company-Owned Store Net Sales." To a lesser degree, this increase in the gross profit percentage was due to decreased shipping costs to the Company's stores because of a change in common carriers, offset by an increase in inventory reserves for merchandise intended for liquidation. GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General, administrative and store operating expenses increased to $47.4 million, or 44.4% of net sales, in fiscal 1999 from $37.2 million, or 49.4% of net sales, in fiscal 1998. The increase in general, administrative and store operating expenses was, for the most part, the result of increases in store operating expenses, including store compensation, occupancy and other costs associated with additional store openings. The decrease in these expenses as a percentage of net sales was principally due to leverage in direct store costs, including store compensation, associated with the Company's 30.3% comparable Company store sales increase for fiscal 1999, net of an effective increase in general and administrative costs attributable to the fact that administrative costs in fiscal 1998 had reflected the benefit of certain business interruption insurance proceeds related to the temporary closing of one of the Company's stores. INTEREST EXPENSE, NET. Net interest expense decreased to approximately $151,000 in fiscal 1999 from approximately $372,000 in fiscal 1998. This decrease was primarily a result of increased interest earnings during fiscal 1999 resulting from the Company's increased cash position. NET INCOME. As a result of the factors discussed above, net income reflects an increase of 237% to $9.1 million in fiscal 1999 from net income of $2.8 million in fiscal 1998. The income tax provision represented an effective rate of 39% for both the current and prior periods. COMPARABLE COMPANY-OWNED STORE NET SALES Comparable Company-owned store net sales increased by 23.3% for the fifty-two weeks ended January 29, 2000 when compared to the comparable fifty-two weeks of the previous period. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparable Company-owned 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 increase in comparable Company-owned store net sales resulted from a refocusing of the Company's product development; merchandise planning and buying departments on Chico's target customer. The Company also believes that the look, fit, timing of receipts and pricing policy (including markdowns) of the Company's product were in line with the refocusing effort and that the increase in comparable store sales was fueled by the launch in February of 1999 of a new and modified "Passport Club" program. This new "Passport Club" program allows the Company to track customer sales at the SKU level through the use of newly licensed software, allows for mailings to separate niches of customers and offers discounts and other benefits for increased frequent shopping. The launch of the "Passport Club" resulted in increased direct mailings and a larger database of existing customers for such mailings. To a lesser degree, the Company believes the increase was due to increased store-level training efforts associated with the Company's training programs, continuing sales associated with several styles of clothing produced from a group of fabrics newly introduced by the Company beginning in the fourth quarter of fiscal 1998, and the increases were further fueled by a limited national magazine advertising program done for the first time in the fourth quarter of fiscal 2000. Clothing, which utilizes the newly introduced group of fabrics, represented approximately 27% of net apparel sales in fiscal 2000, compared to approximately 21% of net apparel sales in 1999. The "Passport Club", which had approximately 25,000 members accounting for approximately 10% of sales in February 1999, has over 100,000 members which currently account for 45-49% of sales. The club offers a 5% discount on all future purchases after the customer has spent an aggregate of $500 at Chico's. In addition, the Company has over 300,000 "temporary" members who have signed up to join the club, but have not yet spent the required $500 to become a permanent member. The temporary members account for over 30% of sales and do not yet qualify for the 5% discount. The Company offers the substantial discount because it believes the Passport members shop more frequently and spend more on each transaction than do the non-passport members. The Company further believes the Passport Club, combined with national magazine advertising, is adding significant incremental sales to its stores, promoting its brand name and developing a loyal customer base. The following table sets forth for each of the four quarters of fiscal 2000, 1999 and 1998, the percentage change in comparable store net sales at Company-owned stores from the previous period:
FISCAL QUARTERS -------------------------------------------------------------- FULL YEAR 1ST QTR 2ND QTR 3RD QTR 4TH QTR ----------- ----------- --------- --------- ---------- Fiscal year ended 1/29/00 23.3% 22.6% 17.2% 26.9% 26.5% Fiscal year ended 1/30/99 30.3% 31.7% 23.0% 28.5% 30.4% Fiscal year ended 1/31/98 10.7% (1.1)% 13.3% 12.0% 20.1%
10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES The Company's primary ongoing capital requirements are for funding capital expenditures to new store openings and merchandise inventory purchases. In addition, over the next twelve months, the Company anticipates experiencing the need for capital to address expansions of its office and design facility at its headquarters facilities, the chain-wide roll out of new point-of-sale devices beginning in the second quarter of fiscal 2001 and the development of infrastructure, including internal call and fulfillment centers, to support the Company's planned expansion into catalog and Internet sales. During the current fiscal year (fiscal 2000) and the prior fiscal year (fiscal 1999), the Company's primary source of working capital was cash flow from operations of $16.0 million and $12.3 million, respectively. The increase in cash flow from operations of $3.7 million was primarily due to an increase of $6.4 million in net income, and an increase of $1.3 million in the growth rate of accounts payable and accrued liabilities, offset by an increase in inventories of $4.7 million in the current fiscal year, versus an inventory increase of approximately $580,000 in the prior fiscal year. The increase in accounts payable and inventories is associated with increased fabric purchases (which generally have an extended payment due date) and other required increased inventory purchase activities to support the Company's significant sales increases. The Company invested $15.2 million in the current fiscal year for capital expenditures primarily associated with the opening of 40 new Company stores, and the remodeling/relocating/expansion of numerous existing stores. Since the Company is now seeking stores in the 1,800-2,000 net selling square foot range (versus 1,458 average net selling square foot currently) and the Company is incorporating more sophisticated store fronts and fixtures, its average cost of leasehold improvements and fixtures for new stores has generally increased. It is anticipated these higher costs for initial stores will continue as the Company refines its newer store presentation. During the prior fiscal year, the Company invested $5.0 million for capital expenditures associated with the opening of 24 new (or reacquired) Company stores, and the remodeling of several existing stores. During the current fiscal year, the Company invested $14.0 million in high quality tax free municipal bonds in an effort to improve the after-tax interest earnings from its increased cash and marketable securities position. Also during the current fiscal year, the Company terminated its interest rate swap agreement at a cost of approximately $8,000. The swap agreement had effectively fixed its mortgage loan rate at 9%. The mortgage note, financed with a bank, bears interest at prime plus .5%. During fiscal 2000, four of the Company's officers and two of its directors exercised 176,996 stock options at prices ranging from $1.63 to $4.63 and several employees and former employees exercised 96,350 options at prices ranging from $1.63 to $6.00. Also during the current period, the Company sold 69,158 shares of common stock under its employee stock purchase plan at prices of $10.71 and $13.28. The proceeds from these issuances of stock, together with the tax benefit recognized by the Company from the exercise of the stock options, amounted to approximately $2.9 million. All per share amounts and price have been restated to give retroactive effect for the 2 for 1 stock split in January 2000. As more fully described in "Item 1-Business" beginning on page 13 of the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 2000, the Company is subject to ongoing 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) risks associated with imports. 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 plans to open approximately 45 new stores in fiscal 2001, four of which were open as of March 31, 2000. The Company is also in the initial building stage for a 32,000 square foot expansion of the office and design facilities at its headquarters site, is preparing to rollout new point-of-sale devices in all of its stores, is building out its call center and fulfillment facilities to assist in catalog and Internet sales and is also continuing with various other plans for implementing catalog and Internet sales activities. The Company believes that the liquidity needed for its planned new store growth, continuing remodel program, maintenance of proper inventory levels associated with this growth and expansion of its office and design facilities and establishment of catalog and Internet sales activities will be funded primarily from cash flow from operations and its strong existing cash balances. 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. Given the Company's strong cash and marketable securities balances, the Company does not believe that it would need to seek other sources of financing to conduct its operations or pursue its expansion plans even if cash flow from operations should prove to be less than anticipated or even 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. SEASONALITY AND INFLATION 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 the current or prior periods. The Company does not consider its business to be seasonal. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS This annual report may contain forward-looking statements which reflect the current views of the Company with respect to certain events that could have an effect on the Company's future financial performance. These statements include the words "expects", "believes", and similar expressions. These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from historical results or those currently anticipated. These potential risks and uncertainties include ability to secure customer acceptance of Chico's styles, propriety of inventory mix and sizing, quality of merchandise received from vendors, timeliness of vendor production and deliveries, increased competition, extent of the market demand by women for private label clothing and related accessories, adequacy and perception of customer service, ability to coordinate product development along with buying and planning, rate of new store openings, 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) performance of management information systems, ability to hire, train, energize and retain qualified sales associates and other employees, availability of quality store sites, ability to hire and retain qualified managerial employees, ability to effectively and efficiently establish and operate catalog and Internet sales activities and other risks. In addition, there are potential risks and uncertainties that are peculiar to the Company's heavy reliance on sourcing from foreign vendors including the impact of work stoppages, transportation delays and other interruptions, political instability, foreign currency fluctuations, imposition of and changes in tariffs and import and export controls such as import quotas, changes in governmental policies in or towards such foreign countries and other similar factors. YEAR 2000 The year 2000 issue results from computer programs and electronic circuitry that do not differentiate between the year 1900 and the year 2000 because they are written using two, rather than four, digit dates to define the applicable year. If not corrected, many computer applications and date-sensitive devices could have failed or produced erroneous results when processing dates after December 31, 1999. The year 2000 issue had some impact on virtually all companies and organizations including Chico's. Chico's did not experience any significant systems or other year 2000 problems and there has been no material change in total costs. Further, Chico's does not anticipate any additional costs and does not anticipate the need to further address the year 2000 issue. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The market risk of the Company's financial instruments as of January 29, 2000 has not significantly changed since January 30, 1999 with the exception of the termination of the interest rate swap agreement associated with the Company's mortgage loan. The Company is exposed to market risk from changes in interest rates on its indebtedness. The Company's exposure to interest rate risk relates in part to its revolving line of credit with its bank; however, as of January 29, 2000, the Company did not have any outstanding balance on its line of credit and, given its strong liquidity position, does not expect to utilize its line of credit in the foreseeable future except for its continuing use of the letter of credit facility portion thereof. As a consequence of the swap termination, the Company's exposure to interest rate risk also relates to its $5.2 million mortgage loan indebtedness which bears a variable interest rate based upon changes in the prime rate. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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.
HIGH(1) LOW(1) ----------- ----------- For the Fiscal Year Ended January 29, 2000 Fourth Quarter (October 31, 1999 -- January 29, 2000) $ 22.38 $ 13.69 Third Quarter (August 1, 1999 -- October 30, 1999) 17.50 9.34 Second Quarter (May 2, 1999 -- July 31, 1999) 14.88 10.56 First Quarter (January 31, 1999 -- May 1, 1999) 16.31 8.81 For the Fiscal Year Ended January 30, 1999 Fourth Quarter (November 1, 1998 -- January 30, 1999) $ 14.00 $ 7.75 Third Quarter (August 2, 1998 -- October 31, 1998) 8.82 5.00 Second Quarter (May 3, 1998 -- August 1, 1998) 9.00 4.69 First Quarter (February 1, 1998 -- May 2, 1998) 5.00 3.19
(1) Adjusted for the 2 for 1 stock split distributed on January 14, 2000 to stockholders of record on December 27, 1999. 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 March 31, 2000 - -------------------------------------------------------- --------------------- Common Stock, par value $.01 per share ......... 417
14 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TO CHICO'S FAS, INC. AND SUBSIDIARIES: We have audited the accompanying consolidated balance sheets of Chico's FAS, Inc. (a Florida corporation) and subsidiaries as of January 29, 2000, and January 30, 1999, and the related consolidated statements of income, stockholders' equity and cash flows for the fiscal years ended January 29, 2000, January 30, 1999, and January 31, 1998. 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 auditing standards generally accepted in the United States. 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. and subsidiaries as of January 29, 2000, and January 30, 1999, and the results of their operations and their cash flows for the fiscal years ended January 29, 2000, January 30, 1999, and January 31, 1998, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Tampa, Florida, February 25, 2000 15 CHICO'S FAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JANUARY 29, JANUARY 30, 2000 1999 ---------------- --------------- ASSETS CURRENT ASSETS: Cash and cash equivalents ............................................. $ 3,980,930 $ 14,484,776 Marketable securities ................................................. 13,995,527 -- Receivables, less allowances of $93,000 and $90,000 for sales returns, respectively ......................................................... 1,706,661 1,149,078 Inventories ........................................................... 14,834,800 10,105,153 Prepaid expenses ...................................................... 668,695 510,885 Deferred taxes ........................................................ 2,038,000 1,586,000 ------------ ------------ Total current assets ................................................ 37,224,613 27,835,892 PROPERTY AND EQUIPMENT, net ............................................ 31,344,997 19,665,261 DEFERRED TAXES ......................................................... 1,106,000 812,000 OTHER ASSETS, net ...................................................... 640,211 686,923 ------------ ------------ $ 70,315,821 $ 49,000,076 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ...................................................... $ 5,982,684 $ 3,995,123 Accrued liabilities ................................................... 4,593,104 3,679,355 Current portion of debt and lease obligations ......................... 260,111 309,520 ------------ ------------ Total current liabilities ........................................... 10,835,899 7,983,998 DEBT AND LEASE OBLIGATIONS, excluding current portion .................. 6,839,180 6,713,045 ------------ ------------ Total liabilities ................................................... 17,675,079 14,697,043 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.01 par value; 50,000,000 shares authorized and 17,128,536 and 16,786,032 shares issued and outstanding, respectively 171,285 167,860 Additional paid-in capital ............................................ 14,709,238 11,840,000 Retained earnings ..................................................... 37,784,553 22,295,173 Accumulated other comprehensive loss .................................. (24,334) -- ------------ ------------ Total stockholders' equity .......................................... 52,640,742 34,303,033 ------------ ------------ $ 70,315,821 $ 49,000,076 ============ ============
The accompanying notes are an integral part of these consolidated balance sheets. 16 CHICO'S FAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 ----------------- --------------- --------------- NET SALES BY COMPANY STORES ....................... $ 152,473,637 $104,981,219 $ 73,596,969 NET SALES TO FRANCHISEES .......................... 2,528,644 1,760,374 1,742,183 ------------- ------------ ------------ Net sales ....................................... 155,002,281 106,741,593 75,339,152 COST OF GOODS SOLD ................................ 64,949,930 44,196,426 33,240,162 ------------- ------------ ------------ Gross profit .................................... 90,052,351 62,545,167 42,098,990 GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES .......................................... 65,246,577 47,411,057 37,184,671 ------------- ------------ ------------ Income from operations .......................... 24,805,774 15,134,110 4,914,319 INTEREST INCOME (EXPENSE), net .................... 177,606 (151,002) (372,303) ------------- ------------ ------------ Income before income taxes ...................... 24,983,380 14,983,108 4,542,016 INCOME TAX PROVISION .............................. 9,494,000 5,844,000 1,772,000 ------------- ------------ ------------ Net income ...................................... $ 15,489,380 $ 9,139,108 $ 2,770,016 ============= ============ ============ PER SHARE DATA: NET INCOME PER COMMON SHARE [0096] BASIC ......... $ .91 $ .56 $ .18 NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE -- DILUTED .................... $ .88 $ .54 $ .17 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -- BASIC ........................... 16,942,233 16,335,518 15,824,252 WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING -- DILUTED .................. 17,681,038 17,059,792 16,065,742
The accompanying notes are an integral part of these consolidated statements. 17 CHICO'S FAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ACCUMULATED ------------------------- ADDITIONAL OTHER PAR PAID-IN RETAINED COMPREHENSIVE SHARES VALUE CAPITAL EARNINGS LOSS TOTAL ------------ ------------ -------------- --------------- -------------- --------------- BALANCE, February 1, 1997 .......... 15,768,236 $ 157,682 $ 7,476,867 $ 10,386,049 $ -- $ 18,020,598 Net income for the fiscal year ended January 31, 1998 ........... -- -- -- 2,770,016 -- 2,770,016 Issuance of common stock .......... 254,398 2,544 508,727 -- -- 511,271 Tax benefit of stock options exercised ....................... -- -- 154,000 -- -- 154,000 ---------- --------- ----------- ------------ ---------- ------------ BALANCE, JANUARY 31, 1998 .......... 16,022,634 160,226 8,139,594 13,156,065 -- 21,455,885 Net income for the fiscal year ended January 30, 1999 .......... -- -- -- 9,139,108 -- 9,139,108 Issuance of common stock .......... 763,398 7,634 2,205,406 -- -- 2,213,040 Tax benefit of stock options exercised ....................... -- -- 1,495,000 -- -- 1,495,000 ---------- --------- ----------- ------------ ---------- ------------ BALANCE, JANUARY 30, 1999 .......... 16,786,032 167,860 11,840,000 22,295,173 -- 34,303,033 Net income for the fiscal year ended January 29, 2000 .......... -- -- -- 15,489,380 -- 15,489,380 Unrealized loss on marketable securities, net ................. -- -- -- -- (24,334) (24,334) Comprehensive income ............ 15,465,046 Issuance of common stock .......... 342,504 3,425 1,745,238 -- -- 1,748,663 Tax benefit of stock options exercised ....................... -- -- 1,124,000 -- -- 1,124,000 ---------- --------- ----------- ------------ ---------- ------------ BALANCE, JANUARY 29, 2000 .......... 17,128,536 $ 171,285 $14,709,238 $ 37,784,553 $ (24,334) $ 52,640,742 ========== ========= =========== ============ ========== ============
The accompanying notes are an integral part of these consolidated statements. 18 CHICO'S FAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 -------------------- ------------------- ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income .............................................. $ 15,489,380 $ 9,139,108 $ 2,770,016 ------------- ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization ...................................... 3,307,539 2,407,799 2,114,146 Deferred tax (benefit) provision ....................... (746,000) (588,000) 32,000 Deferred rent expense, net ............................. 238,498 216,978 129,712 Loss from disposal of property and equipment ........... 354,498 195,027 317,206 (Increase) decrease in assets -- Receivables ........... (557,583) (254,183) (131,444) Inventories ............................................ (4,729,647) (579,681) (1,680,110) Prepaid expenses ....................................... (157,810) 156,260 (193,700) Other assets ........................................... (125,270) (46,418) (40,180) Increase in liabilities -- Accounts payable ............. 1,987,561 474,858 218,275 Accrued liabilities .................................... 913,749 1,138,980 79,349 ------------- ------------ ------------ Total adjustments ..................................... 485,535 3,121,620 845,254 ------------- ------------ ------------ Net cash provided by operating activities ............. 15,974,915 12,260,728 3,615,270 ------------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Redemption of certificate of deposit .................... -- 1,000,000 600,000 Purchase of marketable securities ....................... (14,019,861) -- -- Purchases of property and equipment ..................... (15,169,791) (5,045,809) (2,010,618) Proceeds from sale of property and equipment ............ -- -- 34,500 ------------- ------------ ------------ Net cash used in investing activities .................. (29,189,652) (4,045,809) (1,376,118) ------------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net ............. 2,872,663 3,708,040 665,271 Net payments under line of credit agreement ............. -- -- (284,919) Principal payments on debt .............................. (72,000) (72,000) (265,872) Principal payments on capital lease obligations ......... (89,772) (77,404) (88,374) Deferred finance costs .................................. -- (232,695) (153,518) ------------- ------------ ------------ Net cash provided by (used in) financing activities 2,710,891 3,325,941 (127,412) ------------- ------------ ------------ Net (decrease) increase in cash and cash equivalents .......................................... (10,503,846) 11,540,860 2,111,740 CASH AND CASH EQUIVALENTS, Beginning of period ..................................... 14,484,776 2,943,916 832,176 ------------- ------------ ------------ CASH AND CASH EQUIVALENTS, End of period ........................................... $ 3,980,930 $ 14,484,776 $ 2,943,916 ============= ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest .................................. $ 566,205 $ 611,238 $ 609,956 Income taxes ............................................ $ 9,409,705 $ 4,873,065 $ 1,757,259
The accompanying notes are an integral part of these consolidated statements. 19 CHICO'S FAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 29, 2000 1. BUSINESS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: BUSINESS ORGANIZATION The accompanying consolidated financial statements include the accounts of Chico's FAS, Inc., a Florida corporation, and its wholly-owned subsidiaries, Chico's Distribution, Inc., Chico's Concept, Inc. and Chico's Media, Inc. (collectively, the Company). The subsidiaries were formed in February 1999. The Company operates in one business segment as a specialty retailer of exclusively designed, private label casual clothing and related accessories. As of January 29, 2000, the Company's retail store system consisted of 200 stores located throughout the United States, 191 of which were owned and operated by the Company, and nine 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 as of January 29, 2000, and January 30, 1999, and for the fiscal years then ended is as follows:
FISCAL YEAR ENDED FISCAL YEAR ENDED JANUARY 29, JANUARY 30, 2000 1999 -------------------- ------------------ Franchise stores opened .................................. 1 1 Franchise stores purchased from franchisees .............. -- 2 Franchise stores in operation at fiscal year-end ......... 9 8 Company-owned stores at fiscal year-end .................. 191 154
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 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 includes cash on hand and in banks with original maturities of three months or less. 20 MARKETABLE SECURITIES Marketable securities are classified as available-for-sale securities, as defined by Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115), and are carried at fair value, with the unrealized holding gains and losses, net of income taxes, reflected as a separate component of stockholders' equity until realized. For the purposes of computing realized and unrealized gains and losses, cost is identified on a specific identification basis. INVENTORIES Raw material inventories of approximately $2,117,000 and $639,000 as of January 29, 2000, and January 30, 1999, respectively, are recorded at the lower of cost, using the first-in, first-out (FIFO) method, or market. All other inventories consist of finished clothing and accessories and are recorded at the lower of cost, using the last-in, first-out (LIFO) method, or market. If the lower of FIFO or market method had been used, inventories would have been approximately $586,000 and $360,000 higher at January 29, 2000, and January 30, 1999, respectively, than those reported in the accompanying consolidated balance sheets. Purchasing, distribution and design costs are expensed as incurred, and are included in the accompanying consolidated statements of income as cost of goods sold. PROPERTY AND EQUIPMENT Property and equipment is 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 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 depreciated 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, territory rights 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 ten and five 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, net of accumulated amortization, are approximately $249,000 and $421,000 as of January 29, 2000, and January 30, 1999, respectively. 21 ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, including identifiable intangibles, are reviewed periodically for impairment if events or changes in circumstances indicate that the carrying amount should be addressed. The Company has determined that there has been no impairment in the carrying value of long-lived assets, as of January 29, 2000. INCOME TAXES The Company follows the liability method, which establishes deferred tax assets and liabilities for the temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. Net deferred tax assets, whose realization is dependent on taxable earnings of future years, are recognized when a greater than 50 percent probability exists that the tax benefits will actually be realized sometime in the future. FAIR VALUE OF FINANCIAL INSTRUMENTS The book value of all financial instruments approximates their fair market value as of January 29, 2000. 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 sold to franchisees, net of estimated returns. 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 consolidated statements of income. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE During the fiscal year ended January 31, 1998, the Company adopted SFAS 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. Basic EPS is based upon the weighted average number of common shares outstanding and diluted EPS is based upon the weighted average number of common shares outstanding plus the dilutive common equivalent shares outstanding during the period. As a result of Chico's FAS, Inc.'s two-for-one common stock split (the Stock Split), effective in January 2000, the Company has retroactively restated prior years' EPS (see Note 9). 22 The following is a reconciliation of the denominators of the basic and diluted EPS computations shown on the face of the accompanying consolidated statements of income as restated for the Stock Split:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 -------------------- ------------------- ------------------ Weighted average common shares outstanding - basic ..... 16,942,233 16,335,518 15,824,252 Dilutive effect of options outstanding ................. 738,805 724,274 241,490 ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding -- diluted ......................... 17,681,038 17,059,792 16,065,742 ========== ========== ==========
The following options were outstanding as of the end of the fiscal years but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 -------------------- ---------------------- ------------------- Number of options 11,459 4,000 836,408 Exercise price $ 16.63 $ 11.53-$13.13 $2.75 - $6.00 Expiration date October 25, 2009 December 21, 2008 - March 31, 2003 - January 6, 2009 Sept. 21, 2007
2. MARKETABLE SECURITIES: Marketable securities classified as available-for-sale consisted of the following as of January 29, 2000:
MUNICIPAL BONDS --------------- Cost .................... $ 14,019,861 Fair value .............. 13,995,527 Unrealized loss ......... $ 24,334
No realized gains or losses were recognized on sales of the Company's marketable securities during the fiscal year ended January 29, 2000. At January 29, 2000, approximately 39 percent of the Company's marketable securities mature within one year and substantially all of the remainder within three years. 3. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
ESTIMATED JANUARY 29, JANUARY 30, 0 USEFUL LIVES 2000 1999 ---------------- ---------------- -------------- Land ..................................................... $ 1,039,904 $ 1,039,904 Land improvements ........................................ 35 years 1,790,761 1,785,161 Building ................................................. 20 - 35 years 6,321,714 6,273,250 Equipment ................................................ 2 - 10 years 5,633,770 4,213,678 Furniture and fixtures ................................... 3 - 10 years 7,057,023 4,268,966 Leasehold improvements ................................... 1 - 10 years 19,373,988 10,086,055 ------------ ------------ 41,217,160 27,667,014 Less-- Accumulated depreciation and amortization ......... (9,872,163) (8,001,753) ------------ ------------ $ 31,344,997 $ 19,665,261 ============ ============
23 Assets acquired under capital lease obligations with a cost of approximately $488,000 and accumulated depreciation of approximately $456,000 are included in equipment as of January 30, 1999. The Company disposed of these assets during the fiscal year ended January 29, 2000. 4. ACCRUED LIABILITIES: Accrued liabilities consisted of the following:
JANUARY 29, JANUARY 30, 2000 1999 -------------- -------------- Accrued payroll, bonuses and severance costs ......... $ 2,002,931 $ 1,759,928 Allowance for estimated merchandise returns .......... 1,698,000 1,065,000 Other ................................................ 892,173 854,427 ----------- ----------- $ 4,593,104 $ 3,679,355 =========== ===========
5. INCOME TAXES: The Company's total income tax provision consisted of the following:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 -------------------- ------------------- ------------------ Current: Federal ............................ $ 9,176,000 $ 5,080,000 $ 1,378,000 State .............................. 1,064,000 1,352,000 362,000 Deferred: Federal ............................ (635,000) (462,000) 24,000 State .............................. (111,000) (126,000) 8,000 ----------- ----------- ----------- Total income tax provision ......... $ 9,494,000 $ 5,844,000 $ 1,772,000 =========== =========== ===========
The reconciliation of the income tax provision based on the U.S. statutory federal income tax rate (35 percent) to the Company's income tax provision is as follows:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 -------------------- ------------------- ------------------ Tax expense at the statutory rate ............................ $ 8,744,000 $ 5,094,000 $ 1,544,000 State income tax expense, net of federal tax benefit ......... 633,000 769,000 225,000 Other ........................................................ 117,000 (19,000) 3,000 ----------- ----------- ----------- Total income tax provision ................................... $ 9,494,000 $ 5,844,000 $ 1,772,000 =========== =========== ===========
24 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 as of January 29, 2000, and January 30, 1999:
JANUARY 29, JANUARY 30, 2000 1999 -------------- -------------- Accruals and allowances ................. $ 1,866,000 $ 1,480,000 Inventories ............................. 940,000 828,000 Property and equipment .................. 423,000 243,000 Net operating loss carryforward ......... 85,000 117,000 ----------- ----------- 3,314,000 2,668,000 Less -- Valuation allowance ............. (170,000) (270,000) ----------- ----------- $ 3,144,000 $ 2,398,000 =========== ===========
Approximately $449,000 of a net operating loss (NOL) for tax reporting purposes can be carried forward ratably for the six subsequent fiscal years following the fiscal year ended February 1, 1997. The remaining NOL carryforward was approximately $224,000 as of January 29, 2000. A valuation allowance of $100,000 was reversed during the fiscal year ended January 29, 2000, partly due to the utilization of a portion of the NOL carryforwards. 6. DEBT AND LEASE OBLIGATIONS: Debt and lease obligations consisted of the following:
JANUARY 29, JANUARY 30, 2000 1999 -------------- --------------- 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 8), interest payable at prime (8.5%percent as of January 29, 2000), secured by substantially all of the Company's assets other than land, land improvements and building, maturing in May 2000 ............................................. $ -- $ -- Mortgage note secured by a first priority mortgage on land, land improvements, building and certain equipment ............................... 5,293,500 5,365,500 Obligations under capital leases, imputed interest rate of 5.9 percent, secured by equipment, varying monthly payments of principal and interest, matured September 1999 ........................................... -- 89,772 Deferred rent ............................................................... 1,805,791 1,567,293 ----------- ----------- Total debt and capital lease obligations .................................... 7,099,291 7,022,565 Less -- Current portion ..................................................... (260,111) (309,520) ----------- ----------- $ 6,839,180 $ 6,713,045
The mortgage note (the Mortgage Note) was financed with a bank, 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. On October 14, 1997, an interest rate swap (the Swap) with a notional principal amount of approximately $5,462,000 was effectuated, whereby the interest at the bank's prime rate plus .5 percent was exchanged for a fixed rate of 9 percent of the outstanding principal of the Mortgage Note. The Company incurred no additional costs associated with the Swap during the fiscal year ended January 30, 1999. The Company bought out the Swap during the fiscal year ended January 29, 2000, for approximately $8,000, which is included in general, administrative and store operating expenses in the accompanying consolidated statements of income. 25 As of January 31, 1998, a $1,000,000 certificate of deposit (the CD) was held at the bank to secure the Line. During the fiscal year ended January 30, 1999, the bank waived the CD requirement and the CD was redeemed. Management intends to refinance the Line during the fiscal year ended February 3, 2001. The Line and the Mortgage Note contain 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. As of January 29, 2000, the Company was in compliance with 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. Maturities of the Mortgage Note are as follows as of January 29, 2000:
FISCAL YEAR ENDING AMOUNT - -------------------- -------------- 2001 ............. $ 72,000 2002 ............. 72,000 2003 ............. 5,149,500 ----------- $ 5,293,500 ===========
7. RELATED PARTY TRANSACTIONS: Certain officers have entered into agreements with the Company which provide for base salaries, annual bonuses and certain severance benefits in the event that their employment is terminated by the Company "without cause" or following a "change of control" of the Company. 8. COMMITMENTS AND CONTINGENCIES: The Company leases retail store space and various office equipment under operating leases expiring in various years through 2012. 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 noncancellable operating leases (including leases with certain minimum sales cancellation clauses described below and exclusive of common area maintenance charges and/or contingent rental payments based on sales) as of January 29, 2000, were as follows:
FISCAL YEAR ENDING AMOUNT - ------------------------ --------------- 2001 ................. $ 11,676,248 2002 ................. 10,745,821 2003 ................. 9,567,695 2004 ................. 8,417,435 2005 ................. 6,701,853 Thereafter ........... 17,717,227 ------------ $ 64,826,279 ============
26 A majority of the Company's store operating leases contain cancellation clauses that allow the leases to be terminated at the Company's discretion, if certain minimum sales levels are not met within the first few years of the lease term. The Company has not historically exercised many of these cancellation clauses and, therefore, has included the full lease terms of such leases in the above table. For the fiscal years ended January 29, 2000, January 30, 1999, and January 31, 1998, total rent expense under the Company's operating leases was $14,842,529, $11,332,480 and $9,728,207, respectively, including common area maintenance charges of $1,826,986, $1,480,176 and $1,328,466, other rental charges of $1,927,743, $1,637,276 and $1,469,512, and contingent rental expense of $1,084,362, $425,859 and $140,523, based on sales, respectively. At January 29, 2000, the Company had approximately $4,260,000 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 6). 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. 9. 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 1,097,600 shares (restated) 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. Options granted under the terms of the 1992 Plan generally vest evenly over three years and have a 10-year term. As of January 29, 2000, approximately 397,000 nonqualified options were outstanding and approximately 697,000 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 1,360,000 shares (restated) of common stock for future issuance under the 1993 Plan to eligible employees of the Company. During the fiscal year ended January 29, 2000, the Board of Directors amended the Plan to increase the aggregate number of shares available for purchase by 1,000,000. The terms of the 1993 Plan are essentially the same as the 1992 Plan. As of January 29, 2000, approximately 1,106,000 nonqualified options were outstanding and 398,000 had been exercised under the 1993 Plan. OTHER STOCK OPTIONS In October 1998, the Board of Directors (the Board) approved a stock option plan (the Independent Directors' Plan) which reserved 300,000 shares (restated) of common stock for future issuance to eligible independent directors of the Company. Options granted under the terms of the Independent 27 Directors' Plan vest after six months and have a 10-year term. As of January 29, 2000, 60,000 shares had been granted under the Independent Directors' Plan. Since 1993 and prior to adoption of the Independent Directors' Plan, four independent directors of the Company had been granted a total of 394,000 nonqualified options (restated) through individual grants at exercise prices ranging from $1.63 to $13.56. As of January 29, 2000, 212,000 of these individual grant nonqualified options were outstanding and 242,000 had been exercised. AGGREGATE STOCK OPTION ACTIVITY As of January 29, 2000, 1,715,958 nonqualified options (restated) were outstanding at a weighted average exercise price of $5.14 per share, and 1,098,182 remained available for future grants. Of the options outstanding, 1,023,677 options were exercisable. The Company recognized no compensation expense for these options. Stock option activity for the fiscal years ended January 29, 2000, January 30, 1999, and January 31, 1998, was as follows:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998 ------------------------- ------------------------- ------------------------ WEIGHTED- WEIGHTED- WEIGHTED- NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE OF EXERCISE OF EXERCISE OF EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------------- ----------- ------------- ----------- ------------- ---------- Outstanding, beginning of period ......... 1,605,306 $ 3.02 1,955,554 $ 2.57 1,942,412 $ 2.99 Granted ................................. 397,000 12.27 391,500 4.50 709,400 1.68 Exercised ............................... (273,346) 3.21 (693,848) 2.64 (211,862) 2.08 Canceled or expired ..................... (13,002) 2.37 (47,900) 2.46 (484,396) 3.21 --------- -------- --------- -------- --------- -------- Outstanding, end of period ............... 1,715,958 $ 5.14 1,605,306 $ 3.02 1,955,554 $ 2.57 ========= ======== ========= ======== ========= ======== Options exercisable, end of period ................................. 1,023,677 $ 3.54 865,386 $ 3.05 1,075,274 $ 2.92
The following table summarizes information about stock options as of January 29, 2000:
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 - ----------------------- ------------- -------------- ----------- ------------- ---------- $1.63 - $4.00 937,526 6.17 $ 2.17 759,054 $ 2.30 $4.01 - $9.99 377,432 6.82 4.91 203,920 5.15 $10.00 - $16.63 401,000 9.35 12.27 61,333 13.54 1,715,958 8.08 $ 5.14 1,023,677 $ 3.54
EMPLOYEE STOCK PURCHASE PLAN The Board 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 as amended, that covers an aggregate of 420,000 shares (restated) of common stock. Under the ESPP, all employees are given the right to purchase up to 800 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 years ended January 29, 2000, January 30, 1999, and 28 January 31, 1998, 69,158, 69,550 and 42,536, respectively, were purchased under the ESPP. The Company recognized no compensation expense for the issuance of these shares. COMMON STOCK SPLIT On December 14, 1999, the Board declared a two-for-one stock split of the Company's common stock, payable in the form of a stock dividend on January 14, 2000, to shareholders of record as of the close of business on December 27, 1999. Common stock and additional paid-in-capital have been restated for all periods presented to reflect the Stock Split. Par value remains unchanged at $.01. All references to the number of common shares and per share amounts elsewhere in the consolidated financial statements and notes thereto have been restated as appropriate to reflect the effect of the Stock Split for all periods presented. SFAS NO. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" The Company accounts for its stock-based compensation plans under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), under which no compensation expense has been recognized. The FASB later issued SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 allows companies to continue following the accounting guidance of APB 25, but requires pro forma disclosure of net income and EPS 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. 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 for the fiscal year ended January 29, 2000, and 6.3 percent for the fiscal years ended January 30, 1999, and January 31, 1998, expected life of seven years, no expected dividends, and expected volatility of 67 percent for the fiscal year ended January 29, 2000, and 75 percent for the fiscal years ended January 30, 1999, and January 31, 1998. The weighted average fair value of options granted during the fiscal years ended January 29, 2000, January 30, 1999, and January 31, 1998, was $12.27, $9.05, and $3.16, respectively. Options granted under the 1992 Plan and 1993 Plan vest ratably over three years. All other options were either exercisable after six months or vested ratably over three years. The term of all options granted is 10 years. Had compensation expense been determined consistent with SFAS 123, utilizing the assumptions detailed above, the Company's net income and net income per common and common equivalent shares outstanding would have been changed to the following pro forma amounts for the fiscal years ended January 29, 2000, January 30, 1999, and January 31, 1998:
FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 ----------------- ---------------- ---------------- Net income: As reported ................................................ $ 15,489,380 $ 9,139,108 $ 2,770,016 Pro forma .................................................. 14,451,495 8,443,686 2,218,609 Net income per common share -- Basic: As reported ................................................ $ .91 $ .56 $ .18 Pro forma .................................................. .85 .52 .14 Net income per common and common equivalent share -- Diluted: As reported ................................................ $ .88 $ .54 $ .17 Pro forma .................................................. .77 .49 .14
29 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. 10. PROFIT SHARING PLAN: The Company has a defined contribution 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. Effective as of January 1, 1999, the Company amended the Plan to incorporate a 401(k) savings plan feature (the 401(k)) into the Plan. Under the 401(k), employees may contribute up to 20 percent of their annual compensation, subject to certain statutory limitations. The Company matches employee contributions at 33 1/3 percent up to 6 percent of the employees' contributions. The Company contributions to the 401(k) vest ratably over two to six years of service, as specified in the Plan. For the fiscal years ended January 29, 2000, January 30, 1999, and January 31, 1998, the Company's costs under the Plan were approximately $276,000, $487,000 and $280,000, respectively. 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
NET INCOME (LOSS) PER NET GROSS INCOME NET INCOME (LOSS) PER COMMON AND COMMON SALES PROFIT (LOSS) COMMON SHARE -- BASIC EQUIVALENT SHARE -- DILUTED --------------- --------------- -------------- ----------------------- ---------------------------- Fiscal year ended January 31, 1998: First quarter .......... $ 18,719,797 $ 10,603,437 $ 1,002,456 $ .06 $ .06 Second quarter ......... 20,080,574 10,918,044 967,556 .06 .06 Third quarter .......... 18,923,374 10,884,187 955,532 .06 .06 Fourth quarter ......... 17,615,407 9,693,322 (155,528) ( .01) ( .01) Fiscal year ended January 30, 1999: First quarter .......... $ 25,895,908 $ 15,126,755 $ 2,328,505 $ .15 $ .14 Second quarter ......... 27,358,542 16,346,471 2,713,082 .17 .16 Third quarter .......... 26,754,149 15,713,456 2,371,442 .15 .14 Fourth quarter ......... 26,732,994 15,358,485 1,726,079 .10 .10 Fiscal year ended January 29, 2000: First quarter .......... $ 36,424,981 $ 21,524,358 $ 4,216,453 $ .25 $ .24 Second quarter ......... 36,771,293 21,276,944 3,946,666 .23 .22 Third quarter .......... 40,008,995 23,408,317 4,078,309 .24 .23 Fourth quarter ......... 41,797,012 23,842,732 3,247,952 .19 .18
30 REPORTS ON FORM 10-K A copy of the Company's annual report to the Securities and Exchange Commission Form 10-K will be sent to any shareholder without charge upon written request to Investor Relations at the current mailing address or website address below: Chico's FAS, Inc. 11215 Metro Parkway Fort Myers, Florida 33912 Website: www.chicos.com *** Transfer Agent and Registrar: The Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 Legal Counsel: Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis Tampa, Florida 33602 Independent Certified Public Accountants: Arthur Andersen LLP Tampa, Florida 33602 Investor Relations: The Investor Relations Company One Northbrook Place Northbrook, IL 60062 *** Annual Shareholders' Meeting: Tuesday, June 13, 2000 at 2:00 p.m. `Tween Waters Inn Captiva, Florida - -------------------------------------------------------------------------------- [CHICO'S FAS, INC. LOGO] EXECUTIVE OFFICERS *** Marvin J. Gralnick Chief Executive Officer President Helen B. Gralnick Senior Vice President -- Design & Concept Charles J. Kleman Chief Financial Officer Executive Vice President -- Finance Secretary/Treasurer Scott A. Edmonds Chief Operating Officer Assistant Secretary Patricia A. Murphy Vice President -- General Merchandise Manager Mori C. MacKenzie Vice President -- Director of Stores Karen M. Glass Vice President -- Product Development and Design DIRECTORS *** Marvin J. Gralnick Chairman of the Board Helen B. Gralnick Senior Vice President -- Design & Concept Charles J. Kleman Chief Financial Officer Executive Vice President -- Finance Secretary/Treasurer Verna K. Gibson Partner-Retail Options, Inc. Ross E. Roeder Chairman and Chief Executive Officer -- Smart & Final, Inc. John W. Burden Retailing Consultant 31 EX-22 6 EXHIBIT 22 EXHIBIT 22 Subsidiaries of the Registrant ------------------------------ Chico's Distribution, Inc., a Florida corporation Chico's Concept, Inc., a Florida corporation Chico's Media, Inc., a Florida corporation EX-23 7 EXHIBIT 23 [GRAPHIC] ARTHUR ANDERSEN 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 included in or made a part of this Form 10-K, into the Company's previously filed Registration Statements (File Nos. 33-60524, 33-63822, 33-83840, 333-51297, 333-69643, 333-69645 and 333-86253). /s/ ARTHUR ANDERSEN LLP Tampa, Florida, April 24, 2000 EX-27 8 EXHIBIT 27
5 12-MOS JAN-29-2000 JAN-29-2000 3,980,930 13,995,527 1,706,661 0 14,834,800 37,224,613 41,217,160 (9,872,163) 70,315,821 10,835,899 6,839,180 0 0 171,285 52,469,457 70,315,821 155,002,281 155,002,281 64,949,930 64,949,930 65,246,577 0 (177,606) 24,983,380 9,494,000 15,489,380 0 0 0 15,489,380 0.91 0.88
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