-----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, LLJyPwrjsBB8y8U4cT4DHc++ivmHVY7r6Y5pbM3h2y08BPlSRPRgJTodxBAywgMe f74uk1VrasqPZMN8LeIWKA== 0000950144-98-005166.txt : 19980428 0000950144-98-005166.hdr.sgml : 19980428 ACCESSION NUMBER: 0000950144-98-005166 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980427 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHICOS FAS INC CENTRAL INDEX KEY: 0000897429 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 592389435 STATE OF INCORPORATION: FL FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-21258 FILM NUMBER: 98601702 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-K405 1 CHICOS FORM 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-21258 CHICO'S FAS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) FLORIDA 59-2389435 ------------------------- --------------------- (State or other jurisdic- (IRS Employer Identi- tion of incorporation) fication No.) 11215 Metro Parkway, Ft. Myers, Florida 33912 ---------------------------------------- ---------- (Address of principal executive offices) (Zip code) (941) 277-6200 ------------------------------- (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class -------------- Common Stock, Par Value $.01 Per Share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant. Approximately $70,610,897 as of April 1, 1998 (based upon the closing sales price reported by NASDAQ/NMS and published in the Wall Street Journal on April 2, 1998) 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 -- 8,012,584 shares as of April 1, 1998 Documents incorporated by reference: Part II Annual Report to Stockholders for the Fiscal Year Ended January 31, 1998 Part III Definitive Proxy Statement for the Company's Annual Meeting of Stockholders presently scheduled for June 9, 1998. 2 CHICO'S FAS, INC. ANNUAL REPORT ON FORM 10-K for the YEAR ENDED JANUARY 31, 1998 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.................................................................................................. 20 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............. 20 Item 6. Selected Financial Data............................................................ 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 23 Item 8. Financial Statements and Supplementary Data........................................ 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................................................................... 23 PART III................................................................................................. 23 Item 10. Directors and Executive Officers of the Registrant................................. 23 Item 11. Executive Compensation............................................................. 23 Item 12. Security Ownership of Certain Beneficial Owners and Management..................... 23 Item 13. Certain Relationships and Related Transactions..................................... 23 PART IV.................................................................................................. 24 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................... 24
3 PART I ITEM 1. BUSINESS. GENERAL Chico's is a specialty retailer of exclusively designed, private label casual clothing and related accessories. Virtually all of the clothing offered at Chico's stores is designed by the Company's in-house staff and bears the "CHICO'S" trademark. Each Chico's store offers collections of color coordinated tops, pants, shorts, skirts, jumpsuits, dresses, vests, jackets, outerwear, socks and accessories, including leather and fabric belts, scarves, earrings, necklaces and bracelets. Emphasizing casual comfort, Chico's clothing is principally natural fabrics (including 100% cotton, rayon, linen and silk), loose fitting and designed for easy care. Chico's believes that its target customer includes women of all ages who seek style and attitude 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 offers a casual 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 and periodic warehouse sales at or near the Company's distribution center in Ft. Myers as inventory clearance vehicles to help maintain the integrity of the Company's pricing strategy. However, during the past few years, the Company has experienced some difficulty in continuing to implement all of these retailing approaches. Because of increased levels of promotional pricing being offered by other women's clothing retailers and a deviation from the Company's traditional approach to the look and fit of the clothing, the Company's price points tended to be considered above the moderate level for the value being offered and the Company found it necessary to significantly increase the number and level of markdowns at its stores. The Company is continuing the process, which began in early 1997, of refocusing its efforts on a merchandising direction more like the approach taken by the Company in the early 1990's, with certain modifications designed to address perceived changes in the desires of its target customer, including offering items for sale at markdown prices during traditional retail clearance periods and offering certain synthetic fabrics which provide a somewhat dressier look. Although current management believes these refocusing efforts have taken the Company in the right direction, there can be no assurance that these refocusing efforts will continue to be successful or, that customers will continue to respond favorably to these changes. In March 1997, as part of these refocusing efforts, the Company and Melissa Payner, President since August 1996, signed a separation agreement and in connection therewith Ms. Payner resigned her position as President. Mr. Gralnick reassumed the President's position, while also continuing as the Chief Executive Officer. In December 1996, Charles J. Kleman, the Company's Chief Financial Officer was promoted to Executive Vice President-Finance while retaining his title as Chief Financial Officer. In connection with the reallocation of responsibilities following Ms. Payner's departure, Mr. Kleman also took on the additional responsibility of overseeing merchandise buying, planning and related areas until the Company hired a Senior Merchant in September 1997. As of April 1, 1998, the Company's retail store system consisted of 141 stores (averaging approximately 1,300 net selling square feet each), of which 133 are front-line "Chico's" stores and 8 are "Chico's Outlet" stores. Of this total, 29 stores are located in Florida, 16 stores are located in California, 9 stores are located in Texas and the remaining 87 stores are located in 31 other states and the District of Columbia. Franchisees own and operate 7 of the 141 Chico's stores. Chico's intends to continue locating its front-line Company-owned stores primarily in established upscale, outdoor destination shopping areas and high-end enclosed malls located either in tourist areas or in or near mid-to-larger sized markets. The 1 4 Company opened 13 new front-line and one new outlet store (Company-owned) in the fiscal year ended January 31, 1998 (fiscal 1998) ,while during the same period acquiring one of its franchised stores and closing six Company-owned stores. The Company plans to open 16 to 20 new Company-owned stores in the fiscal year ended January 30, 1999 (fiscal 1999), but also expects to close between 2 and 6 existing stores. In addition, the Company has recently repurchased (in fiscal 1999) two franchised stores from one franchisee. BUSINESS STRATEGIES IMPLEMENTATION OF A REVISED MERCHANDISING PLAN. The Company has recently developed and is in the process of implementing a new merchandising plan which addresses operations over the near term as well as a longer term structure keyed to the ultimate identification of the appropriate senior management for merchandising, product development and quality control. The plan addresses each of the following areas of responsibility: product development, sourcing/production and quality control activities; and buying, planning and inventory management activities. Under the new merchandising plan, Marvin Gralnick and Helene Gralnick are responsible for overall design and product concept and for supervision of and coordination with Patricia Murphy, Senior Merchant, and Karen Glass, Director of Product Development. The Director of Product Development manages product concept and design, including development of styles, sizes and samples. Ms. Murphy, who has been Senior Merchant since she began with the Company in September 1997, is principally responsible for the buying, planning and distribution activities associated with procurement of merchandise. Ms. Murphy has also been given primary responsibility for production and quality control and she will work with Ms. Glass to help improve product sourcing. In an attempt to more effectively utilize its existing buying and planning staff, the Company has established more specific and distinct responsibilities for the members of the buying and planning team along with procedures designed to improve communications and coordination among the members of the entire merchandising team. The Company believes that this structure and these procedures should enable effective operation of the merchandising function at least over the short term. In the meantime, the Company will be carefully evaluating its longer term needs for additional management in the merchandising area. 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 predominantly natural fabrics (including cotton, rayon, linen and silk) , loose fitting and designed for easy care. Accessories, such as leather and fabric belts and jewelry, including earrings, necklaces and bracelets, are specifically purchased and designed to coordinate with the colors and patterns of Chico's clothing, enabling customers to easily enhance and individualize their wardrobe selections. Virtually all of the clothing offered by Chico's is designed in-house, and the Company controls most aspects of the design process, including choices of pattern, construction, fabric, treatment and color. A majority of the accessory designs also are developed in-house or are modified at Chico's request by the manufacturer to complement specific items of clothing or support a look that is distinctively Chico's. Chico's private label clothing is designed through the coordinated efforts of the Company's planning and design departments. Style, pattern, color and fabric for individual items of the Company's private label clothing are developed based upon historical sales data, anticipated future sales and perceived current and future fashion trends that will appeal to Chico's target customer. The Company's design team develops these in-house designs and design modifications. By designing in-house and then contracting directly with manufacturers and providing some on-site quality control, the 2 5 Company has been able to realize higher average gross profit margins than the industry while at the same time providing value to its customers. The distinctive nature of Chico's clothing is carried through in its sizing. In early 1992, Chico's modified its approach to sizing from principally a one-size-fits-all approach to one that principally incorporates international type sizing, utilizing sizes 0 (extra small), 1 (small), 2 (medium) and 3 (large), while retaining one-size-fits-all sizing for some items. Because of the casual loose-fitting nature of Chico's clothing, this sizing also allows Chico's to offer a wide selection of clothing without having to invest in a large number of different sizes within a single style. CERTAIN BUILDING BLOCKS OF THE COMPANY'S MERCHANDISING STRATEGY. In addition to the structural changes in the oversight of the merchandising function as described above, the Company continues to follow certain important elements of the merchandising strategy that it has sought to follow since the early 1990's. These important elements include the Company's focus on its target customer, the continual introduction of new merchandise, its pricing policies, the store design and merchandise presentation 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 provided by an outside database service, 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 has experienced changes in design direction that caused it to vary from the preferences of those women who historically shopped at Chico's, the new merchandising plan intends to continually focus the entire product development team on the Company's historical target customer. Continual Introduction of New Merchandise. The Company seeks to continually introduce new merchandise and designs to its stores. The Company is continuing its efforts to reactivate the design philosophy for new merchandise whereby merchandise is evolutionary, rather than revolutionary. Although Chico's experienced some design and outfit coordination problems over the past few years which resulted in a build up in inventory that was not received well at the front-line stores, Chico's intends to give greater focus again in fiscal 1999 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 pieces 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 3 6 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 $15 to $128 per item and accessories are offered at retail price points generally ranging from $9 to $50 per item. Historically, the Company's philosophy was generally to avoid storewide 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. During fiscal 1998, the Company 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, 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 new strategy will reduce the need to rely on its outlet stores and warehouse sales 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 increasing 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. Although some stores were changed over the past several years to present a cleaner look designed to make shopping at Chico's easier, the Company has since developed a store design which returns to a "boutique" look but in an updated store environment. Both the older styles of Chico's stores and the newer style store generally utilize hardwood and occasionally concrete floors, simple wooden display modules, flat wooden whole body mannequins, wooden hanging racks and wooden display cases, checkout counters and dressing rooms. The Company is refocusing its store design program by sprucing up its stores while at the same time trying to retain more of the historical layout and atmosphere. Most store fixtures, except for certain antiques, are manufactured by the Company in its own woodshop in Ft. Myers. To encourage sales of multiple wardrobe items, Chico's stores also use "color areas," which present coordinated colors or seasonal themes in different areas of the store. Rather than displaying clothing by type (for example, tops with tops, pants with pants, etc.), merchandise is grouped by color coordinated items of clothing and accessories. Such a grouping typically includes several different 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 accounted for approximately 13% of the Company's net sales in fiscal 1998, which is less than it has been historically. Continuing efforts are being made through better coordination of accessories with clothing to improve the volume of accessory sales in fiscal 1999. 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 4 7 that the vendor has the most experience making. The Company has recently been expanding its use of domestic vendors, when possible, and it intends on continually exploring 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 the Chico's clothing and accessories. As part of its strategy to reinforce the casual aspects of Chico's clothing, Chico's sales associates are 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 at its stores at all times and to compliment 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 employees are expected to keep individual stores open until the last customer in the store has been served. If an item is not available at a particular store, sales associates are encouraged to arrange for the item to be shipped directly to the customer from another Chico's store. Chico's frequent buyer program, known as the "Passport Club" has been designed to encourage repeat sales and customer loyalty. Features of the club include discounts, special promotions, invitations to private sales and personalized phone calls regarding new merchandise. In 1994, the Company decided to limit the number of new members and to evaluate ways to restructure the program. During fiscal 1996 and fiscal 1997, the Company established a new database of customers that shop at Chico's using credit cards (approximately 84% of sales). Both of these databases have helped focus marketing and targeted customer efforts. The Company is continuing to work with both programs and anticipates it will be establishing a new, revitalized "Passport Club" to replace the old program by late fiscal 1999. As of April 1, 1998, approximately 19,000 Chico's customers were actively enrolled in the Passport Club, and approximately 150,000 were being tracked in the credit card database. Management intends to continue the reevaluation of these programs. 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 5 8 storewide sales performance. District managers also have the opportunity to earn incentive compensation based upon the sales performance of stores in their districts. The Company offers its employees other recognition programs and the opportunity to participate in its stock option and stock purchase programs. Management believes that all these programs and policies offer Chico's sales associates and other employees opportunities to earn total compensation at levels generally above the average in the retail industry for comparable positions. Increases in the number of Chico's Company-owned stores and Chico's emphasis where possible on a "promote from within" philosophy provide opportunities for qualified employees to advance to higher positions in the Company. ADDITIONAL COMPANY-OWNED STORES. Management believes that the ability to open additional Company-owned Chico's stores will be a factor in the future success of the Company. However, in an effort to focus on the difficulties experienced by the Company in 1994, the Company decided to reduce substantially its 1995 store opening program. The Company opened 26 new Company-owned Chico's stores in fiscal 1994, and opened seven new stores in fiscal 1995 while during the same period closing six stores. In fiscal 1997, the Company began to open additional stores at a faster pace, opening 13 new stores while during the same period acquiring one store from a franchisee but closing two stores. In fiscal 1998, the Company opened a total of 14 new Company-owned stores, acquired one store from a franchise and closed six Company-owned stores. During fiscal 1999, Chico's plans to open between 16 and 20 new stores while closing between two and six stores. As of April 1, 1998, the Company has not yet opened any of the new stores planned to be opened in fiscal 1999, but it 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). However, there can be no assurance that new Chico's stores will achieve operating results similar to those achieved in the past. The Company plans to grow by opening additional Company-owned stores and the Company does not currently intend to increase the number of franchisees. The Company intends to continue providing full support for its franchise network and anticipates that some of its existing franchisees may be able to meet the Company's criteria for opening additional stores in their respective limited territories. During fiscal 1998 and thus far in fiscal 1999, the Company repurchased three of its franchise stores. STORE LOCATIONS Chico's stores are situated, for the most part, either in tourist areas or in, or near, mid-to-larger sized markets. The Company's front-line stores are located almost exclusively in upscale outdoor destination shopping areas, high-end enclosed shopping malls and, to a lesser degree, regional malls, which offer high traffic of Chico's target customers. The Company seeks to locate the Company-owned front-line stores where there are other upscale specialty stores and, as to its mall locations, where there are two or more better department stores as anchor tenants. Chico's Outlet stores are located in outlet centers. 6 9 Chico's Company-owned, front-line stores average approximately 1,250 net selling square feet, while the Company-owned outlet stores average approximately 1,735 net selling square feet. However, in locations where the Company has a desire to establish a store but where the optimum store size is unavailable, the Company often will lease a front-line store with as few as 900 net selling square feet or as many as 2,000 net selling square feet. If the volume of business at one of these smaller stores is sufficient, and there is no ability to expand the existing store, the Company may choose to open additional stores nearby, operating two or three Chico's stores in the same general shopping area. At April 1, 1998, there were 141 Chico's stores, of which 126 were Company-owned front-line Chico's stores, 7 were franchised Chico's stores and 8 were Chico's Outlet stores. Chico's stores are located in the following jurisdictions: (See table on page 7)
COMPANY- COMPANY- OWNED CHICO'S OWNED OUTLET FRANCHISED STATE STORES STORES CHICO'S STORES TOTAL STORES - ----- ------------- ------------ -------------- ------------ Florida ............ 26 2 1 29 California ......... 15 1 -- 16 Texas .............. 9 -- -- 9 Ohio ............... 7 -- -- 7 Illinois ........... 5 1 -- 6 New Jersey ......... 5 -- -- 5 Pennsylvania ....... 5 -- -- 5 Massachusetts ...... 4 -- -- 4 Minnesota .......... -- -- 4 4 New York ........... 4 -- -- 4 Tennessee .......... 3 1 -- 4 Colorado ........... 2 1 -- 3 Connecticut ........ 3 -- -- 3 Maryland ........... 3 -- -- 3 Michigan ........... 2 -- 1 3 New Mexico ......... 3 -- -- 3 South Carolina ..... 3 -- -- 3 Virginia ........... 3 -- -- 3 Alabama ............ 1 1 -- 2 Arizona ............ 1 1 -- 2 District of Columbia 2 -- -- 2 Indiana ............ 1 -- 1 2 Kansas ............. 2 -- -- 2 Louisiana .......... 2 -- -- 2 Missouri ........... 2 -- -- 2 North Carolina ..... 2 -- -- 2 Rhode Island ....... 2 -- -- 2 Washington ......... 2 -- -- 2 Georgia ............ 1 -- -- 1 Kentucky ........... 1 -- -- 1 Nebraska ........... 1 -- -- 1 Nevada ............. 1 -- -- 1 Oregon ............. 1 -- -- 1 Vermont ............ 1 -- -- 1 Wyoming ............ 1 -- -- 1 --- --- --- --- Total ..... 126 8 7 141 === === === ===
7 10 In a typical new front-line Chico's store, the Company's cost of leasehold improvements, fixtures, store equipment and beginning inventory ranges from $80,000 to $200,000 (after taking into account landlord construction allowances and other concessions). Chico's utilizes teams of employees experienced in new store openings who are able to do final build-out and set up store interiors rapidly, including, where necessary, the flooring, furniture, fixturing, equipment and initial inventory displays. The use of in-house crews and the fact that Chico's manufactures most of the wood fixtures, display modules, mannequins and other interior furnishings allows the Company to open a new store generally within three to five weeks after taking occupancy. Management believes that, as a result, the Company opens its new stores more rapidly and at less cost than many of its competitors. In an attempt to further streamline the process, in 1994 the Company set up an arrangement whereby the final design and initial build-out of the space is handled by third party architectural and contracting firms, with offices or affiliates throughout the country. Under such an arrangement, Chico's in-house crews are still responsible for the final stages of the build-out and for setting up the store interiors. The following table sets forth information concerning changes in the number of Chico's Company-owned and franchise stores during the past five fiscal years:
FEBRUARY FY NUMBER OF COMPANY-OWNED STORES 1993 1994 1995 1, 1997 ** 1998 ---- ---- ---- ---------- ---- Stores at beginning of year 57 78 104 111 123 Opened* ................. 21 26 8 13 14 Acquired from franchisees -- -- 5 1 1 Closed .................. -- -- (6) (2) (6) --- --- ---- ---- ---- Stores at end of period ... 78 104 111 123 132 --- --- ---- ---- ---- NUMBER OF FRANCHISE STORES Stores at beginning of year 18 16 17 12 10 Opened* ................. -- 1 -- -- -- Sold to the Company ..... -- -- (5) (1) (1) Closed .................. (2) -- -- (1) -- --- --- ---- ---- ---- Stores at end of period ... 16 17 12 10 9 --- --- ---- ---- ---- NUMBER OF TOTAL STORES ............... 94 121 123 133 141 === === ==== ==== ====
* 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. 8 11 OUTLET STORES As of April 1, 1998, the Company operated eight outlet stores under the name "Chico's Outlet"and one Chico's temporary "warehouse sale" store in Fort Myers. 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. The "warehouse sale" store, which is generally only open during the Florida tourist season, provides further liquidation for styles which require lower prices than at the Chico's Outlets. Sales from the Company's outlet stores represented approximately 7.1% of the Company's net sales by Company-owned stores during fiscal 1998. Chico's Outlet stores have not been intended to be profit centers. Chico's Outlet stores are generally larger than front-line stores, averaging approximately 1,735 net selling square feet. The Company did not open any new outlet stores in fiscal 1997, opened only one outlet store in fiscal 1998, and does not anticipate opening more than one or two outlet stores during fiscal 1999. The Company is reevaluating the extent to which it should continue to rely on an increase in the number of outlet stores as the basis for clearing out excess merchandise. During fiscal 1998 and fiscal 1997, the Company conducted clearance sales at and 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 Company is exploring various other options for clearing such merchandise in the future, including increasing front-line markdowns, similar warehouse sales, an outlet store in Puerto Rico and strategic bulk sales to liquidators. FRANCHISE STORES Currently, there are 7 franchised Chico's stores operated by four owners, none of whom is affiliated with the Company. Each franchisee paid an initial franchise fee of between $5,000 and $75,000 per store and is not required to pay any continuing monthly royalty. Each franchisee has been provided an exclusive license at a specified location to operate a Chico's store and to utilize the Company's trademarks, service marks and other rights of the Company relating to the sale of Chico's merchandise. The term of the franchise is generally ten years, renewable for additional ten year periods if certain conditions pertaining to the renewal are met (including the payment of a renewal fee). Franchisees are required to operate their Chico's stores in compliance with the Company's methods, standards and specifications regarding such matters as store design, fixturing and furnishings, decor and signage, merchandise type and presentation, and customer service. The franchisee has full discretion to determine the prices to be charged to customers generally by changing or replacing any pre-ticketed price tags. Franchisees are required to purchase all Chico's brand clothing from Chico's and all accessories from Chico's or from suppliers approved by the Company. Most of the merchandise offered by Chico's franchisees at their stores is purchased from the Company at prices 9 12 averaging between 50% and 57% of suggested retail prices. In certain situations, franchise stores may carry other brands of clothing or accessories if such merchandise is approved by the Company. In such cases, franchisees may be required to pay to the Company a monthly royalty equal to 5% of gross sales of any approved merchandise not purchased from Chico's. In fiscal 1998, the Company's net sales to franchisees was approximately $1.7 million, or 2.3% of total net sales. Some franchisees have entered into franchise territory development agreements with the Company, which grant to the franchisee the right to develop and own a specified number of Chico's stores within a specified period of time or which preclude the Company from opening Company or franchised stores without first giving the respective franchisees the right to open the proposed Chico's store within the respective limited territories granted to such franchisees. As of April 1, 1998, 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 respective franchisee the right to open the store. With respect to the franchise rights granted in Minnesota, the Company granted an exclusive right to develop Chico's stores and subfranchise within the state of Minnesota. Certain of these franchisees, including the Minnesota franchisee, may technically have the ability to open an unlimited number of additional stores within their respective limited territories. However, the Company believes that economic, logistic and other practical considerations effectively limit the number of additional stores that these franchisees may open in the future. The Company does not believe that these territory and right of first refusal rights will significantly limit the Company's ability to expand. The Company intends to continue supporting its existing franchise network. However, the Company does not intend at this time to pursue any new franchises or to enter into any additional franchise territory development agreements. In the past, the Company has acquired certain franchise stores that have been offered for sale to the Company. During fiscal 1998 and thus far in fiscal 1999, the Company repurchased three of its franchise stores and will consider additional purchases of franchise stores that may be offered to the Company from time to time in the future. In addition, the Company may terminate franchises where performance or circumstances so justify. Management expects that Chico's franchise stores will play an increasingly less important role in the Company's future sales and profitability. STORE OPERATIONS Chico's stores typically employ a manager, two assistant managers, and one to five sales associates who are either full-time or part-time employees. During the peak selling seasons, stores generally hire additional sales associates. Store managers take an active part in selling at the stores and are expected to be on the sales floor at all times during business hours. Purchasing, merchandising, advertising, accounting, cash management and other store support functions are handled by the Company's corporate headquarters. The Company attempts to keep administrative tasks for the store managers to a minimum, thereby allowing the store managers more time to focus on store sales, personalized customer service and in-store and local community merchandising strategies including outreach programs. Chico's recognizes that over the past few years the Company has not spent an appropriate amount of time focusing on formalized training activities. This is one of several important areas that is to receive attention as the Company's refocuses its efforts and seeks to return to stronger profitability. The Company is actively working on establishing a more formalized training program that focuses attention on its sales associates and, during the last quarter of fiscal 1998, the Company implemented phase I of its comprehensive training program, which focused on Fashion Information Training (F.I.T.) for the sales associates. It is anticipated that phase II, which includes a sales module entitled Most Amazing Personal Services (M.A.P.S.) and which is intended to eventually cover all sales associates, will begin sometime during the first six months of fiscal 1999. 10 13 The Company currently supervises store operations through its Director of Stores, a National Sales Manager and District Sales Managers. As of April 1, 1998, the Company had a National Sales Manager and 13 District Sales Managers. The National Sales Manager provides assistance to the Director of Stores in supervision of the District Sales Managers. Each District Sales Manager supervises multiple store locations and currently reports to the Director of Stores. District Sales Managers have primary responsibility for assisting individual store managers in meeting established sales goals, and carrying out merchandise presentation, training and expense-control programs established by the home office. Management is continually reviewing its supervisory structure with the intent of improving the performance of individual stores and store managers. MANAGEMENT INFORMATION SYSTEMS The Company's current management information systems are based on an IBM AS400 (Model 510) located at the home office in Ft. Myers, which provides a full range of retail, financial and merchandising information systems, including purchasing, inventory distribution and control, sales reporting, accounts payable, warehousing and merchandise management. All Chico's stores utilize point of sale cash register computers, which are polled nightly to collect store-level sales data and inventory receipt and transfer information for each item of merchandise, including information by item, style, color and size. Management evaluates this information, together with its weekly reports on merchandise shipments to the stores, to analyze profitability, formulate and implement company-wide merchandise pricing decisions, assist management in the scheduling and compensation of employees (including the determination of incentives earned) and, most importantly, to implement merchandising decisions regarding needs for additional merchandise, allocation of merchandise, future design and manufacturing needs and movement of merchandise from front-line stores to Chico's Outlet stores. In 1995, the Company converted to a new back-office software system for all of its operations including the implementation of new merchandise planning and control modules. In fiscal 1998, the Company implemented a PC based software package that is linked to the AS400 and provides additional reporting capabilities on merchandise. The Company also upgraded its computer hardware in fiscal 1997 by moving to the new RISC architecture and implementing bar code scanning for its cash registers at the stores. 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. The company has assessed the year 2000 readiness of its systems and has determined that the costs and uncertainties that may be associated with addressing the year 2000 issues for its systems are not expected to have a material impact on its business operations or its financial condition. MERCHANDISE DISTRIBUTION SYSTEM New merchandise is generally received several times per month at the Company's distribution center in Ft. Myers, Florida. Most of the merchandise arrives in this country via air or sea at Miami, Florida, and is transported via truck to Ft. Myers. After arrival at the distribution center, merchandise is sorted and packaged for shipment to individual stores. Merchandise is generally pre-ticketed with price and all other tags at the time of manufacture. In fiscal 1998, 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 11 14 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, for most shipments to its stores. The capacity of the Company's distribution center should be sufficient, in the opinion of management, to service the Company's needs for at least five years of future growth. MERCHANDISE DESIGN, PURCHASING AND SOURCES OF SUPPLY The Company's private label clothing is developed through the coordinated efforts of the Company's planning and design/development departments. Style, pattern, color and fabric for individual items of the Company's private label clothing are developed based upon historical sales data, anticipated future sales and perceived current and future fashion trends that will appeal to Chico's target customer. The Company's design/development department is headed up by Marvin and Helene Gralnick, the Company's founders. Recently, the Company hired a new senior merchant who has taken on the responsibility of overseeing and coordinating the buying, planning, quality control and distribution of merchandise. The product development and production teams create the Company's in-house designs and design modifications. In addition to selecting distinctive patterns and colors, the Company's product development team is particularly attentive to the design and specification of clothing style, construction, trim and fabric treatment. The Company believes this attention to design detail assists in distinguishing Chico's clothing and strengthening the customer's perception of quality and value. Although the Company develops merchandise for specific seasons, the design and development efforts are a constant process which result in the continual introduction of new merchandise in the Company's front-line stores. This continual process supports the Company's merchandising and inventory strategy, and serves to reduce somewhat the Company's exposure to fashion risk. The Company has historically purchased most of its clothing and accessories from companies that manufacture such merchandise in foreign countries. The Company does business with all of its foreign vendors and importers in United States currency, generally supported through letters of credit. 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 its clothing, leaving the responsibility for purchasing raw materials with the manufacturers. Recently, the Company has been buying specialized cloth and employing domestic "cut and sew" manufacturers to make the specified designs and styles. The Company anticipates it will continue this practice in the future. Currently, the Company contracts with approximately 30 to 50 apparel vendors and 20 to 30 accessory vendors. Over the past several years, there has been a significant shift from vendors in Turkey (who in 1993 accounted for over 50% of total purchases) to vendors in Guatemala, followed by a further shift from the vendors in Turkey and Guatemala to vendors in Hong Kong and to importers who import from vendors in Hong Kong, China and Peru. However, because of certain perceived higher sourcing costs that can be associated with the Company's vendors in the far east and certain other long term uncertainties presented by such vendor relationships, the Company intends to begin to redirect a portion of its sourcing activities towards new vendors in the United States and possibly other areas. 12 15 In fiscal 1998, Hong Kong sources accounted for approximately 32% of the Company's purchases, and Turkey accounted for approximately 23% of overall purchases, while the United States and India amounted to between 10% to 20% of overall purchases. In fiscal 1999, the Company expects sourcing from Hong Kong to remain at a similar percentage. It is not expected that China's take over of Hong Kong has or will have, any immediate significant impact on sourcing from Hong Kong but, over time the Company may find greater challenges as a result. The Company intends to monitor this situation. Purchases from vendors in Mexico and other countries in Central America are expected to remain under 10% of total purchases, while vendors in Turkey can be expected to continue to provide approximately 20-25% of total purchases. Purchases from vendors in India and Indonesia are likely to grow above their current amounts. United States vendors were utilized more heavily in fiscal 1998 and it is expected this will grow slightly in fiscal 1999. 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, the Asian financial crisis or other factors in a foreign country in which merchandise is produced for the Company disrupt, curtail or otherwise impact overseas production, or curtail delivery of such merchandise to the United States, the Company's operations could be materially and adversely affected. The Company has no long-term or exclusive contracts with any manufacturer or supplier and competes for production facilities with other companies offering clothing and accessories utilizing similar manufacturing processes. Although the Company believes that its relationships with its existing vendors are good, there can be no assurance that these relationships can be maintained in the future. If there should be any significant disruption in the delivery of merchandise from one or more of its current key vendors, management believes there would likely be a material adverse impact on the Company's operations. Also, the Company is just developing relationships with several new vendors in Mexico, 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 Because most of Chico's clothing and accessories are manufactured outside of the United States, the Company's business is subject to the various risks of doing business abroad and to the imposition of United States customs duties. In the ordinary course of its business, the Company may from time to time be subject to claims by the United States Custom Service for tariffs, duties and other charges. Imports from Turkey, Guatemala, Hong Kong, China and Peru currently all receive the preferential tariff treatment that is accorded goods from most favored nations ("MFN"). If the MFN status of any of these countries were to be lost and the merchandise purchased by the Company were then to enter the United States without the benefit of MFN treatment or subject to retaliatory tariffs, it would be subject to significantly higher duty rates. Increased duties, whether as a result of a change in MFN status or any overall change in foreign trade policy, could have a material adverse effect on the cost and supply of merchandise from these countries. Although Chico's expects MFN status to continue for the countries where its principal vendors are located, the Company cannot predict whether the US Government will act to remove MFN status for any of the countries or impose an overall increase in duties on foreign made goods. In particular, the MFN status for China is currently subject to a yearly review and its status as such has been the subject of 13 16 some debate. 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 MFN 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 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. 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. China has been designated as a priority foreign country. Although no new investigation has been initiated as a result of this designation, greater focus is being given to China's compliance with existing agreements concerning intellectual property that are in place between the United States and China. As a 14 17 result, the USTR can decide at any time to impose trade sanctions on China if the USTR were to conclude that China is not satisfactorily implementing the terms of the existing agreements. Countries named on the first tier of the watch list, i.e., the priority watch list, are requested to make progress in certain areas by specific dates. Countries named to the second tier, i.e., the secondary watch list, are asked to improve their intellectual property protection efforts. As of April 1, 1998, of the countries where the Company's existing or planned key vendors have manufacturing operations or suppliers, Turkey, India and Indonesia were on the priority watch list and Hong Kong, Guatemala and Peru were on the secondary watch list. In addition, the Clinton Administration has revived, at least through 1998, Super 301 (an even more powerful portion of Special 301). Super 301 requires the administration to identify and investigate annually foreign trade practices that do the most harm in blocking U.S. exports. This identification is intended to be followed by negotiations backed with the threat of sanctions. As of April 1, 1998, no countries have been cited under Super 301 but China was identified for special scrutiny under Super 301. Of countries where the Company's key vendors have manufacturing operations, Turkey and Guatemala have enjoyed Designated Beneficiary Developing Country ("DBDC") status under the Generalized System of Preferences ("GSP"), a special status that is granted by the United States to developing nations. DBDC status allows certain products imported from those countries to enter the United States under a reduced rate of duty. In order to maintain that status, the countries are required to meet several criteria. In 1997, the GSP was reinstated retroactively to June 1997 and now is scheduled to expire by its terms on June 30, 1998. Although the President's fiscal year 1999 budget request contains a commitment to extend the program through 2001, the likelihood of this extension is uncertain. The Company cannot predict whether any of the foreign countries in which its clothing and accessories are currently manufactured or any of the countries in which the Company's clothing and accessories may be manufactured in the future will be subject to these or other import restrictions by the United States Government, including the likelihood, type or effect of any trade retaliation. Trade restrictions, including increased tariffs or more restrictive quotas, or both, applicable to apparel items could affect the importation of apparel generally and, in that event, could increase the cost or reduce the supply of apparel available to the Company and adversely affect the Company's business, financial condition and results of operations. The Company's merchandise flow may also be adversely affected by political instability in any of the countries in which its goods are manufactured, significant fluctuation in the value of the U.S. dollar against applicable foreign currencies and restrictions on the transfer of funds. ADVERTISING AND PROMOTION Chico's does not allocate significant resources to mass media advertising. Chico's prefers instead to attract customers through word-of-mouth advertising, its general reputation and the visual appeal of its stores and window presentations of its merchandise. Chico's sales associates promote this by often making personal telephone calls to existing customers informing them about new merchandise. In addition, the Company has increased its use of brochures and other merchandise image pieces mailed to customers and made available at Chico's stores. The Company intends on continuing using and expanding its use of direct mail to its Passport and credit card database customers, as well as, certain "prospect" customers. During fiscal 1998, the Company expanded its efforts in this area and the costs associated with this marketing increased to $1.4 million dollars from $.9 million in fiscal 1997. 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 15 18 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 specialty retailers that are believed to most directly compete with Chico's stores in many of the same local market areas are The Gap, The Limited and Banana Republic. The number of competitors and the level of competition facing Chico's stores varies by the specific local market area served by individual Chico's stores. The Company believes that the distinctive designs of Chico's casual clothing and accessories 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. Although the Company believes that it has been able in the past to compete effectively, during the past three fiscal years it did not compete as effectively as it had in the past as a result of problems with merchandise mix. Also, the Company's performance is impacted by the fact that many of the Company's competitors are significantly larger and have substantially greater financial, marketing and other resources and enjoy greater national, regional and local name recognition than does the Company. It should also be noted that while the Company believes it also competes effectively for favorable site locations and lease terms, competition is intense for prime locations within upscale shopping districts and high-end malls and women's apparel stores have tended to oversaturate these prime locations. EMPLOYEES As of January 31, 1998, the Company employed approximately 1,100 persons, approximately 600 of whom were full-time employees and approximately 500 of whom were part-time employees. The number of part-time employees fluctuates during peak selling periods. As of the above date, 89% of the Company's employees worked in Chico's, Chico's Outlet stores and in direct field supervision, 4% worked in the distribution center and woodshop 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 profit sharing plan, 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" and "Wear It Out," each of which is registered with the United States Patent and Trademark Office covering clothing. Each of the registrations has a term of 20 years (expiring in 2009 and 2016, respectively) and is renewable 16 19 indefinitely if the mark is still in use at the time of renewal. In the opinion of management, the Company's rights in the marks are important to the Company's business. This is particularly the case for the "CHICO'S" mark because this mark is well-known by Chico's customers. Accordingly, the Company intends to maintain its marks and the related registrations. The Company is not aware of any claims of infringement or other challenges to the Company's right to use its marks in the United States. ITEM 2. PROPERTIES. STORES Chico's stores are located throughout the United States, with a significant concentration in Florida and in California. As a matter of policy, the Company prefers to lease its stores and all of the Chico's and Chico's Outlet stores currently operated by the Company are leased. At April 1, 1998, the average base rent for the Company's 134 company-owned stores was approximately $32 per square foot. Lease terms typically range from three to ten years and approximately 27% contain one or more renewal options. Historically, the Company has exercised most of its lease renewal options. In excess of 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 134 Company-owned stores existing as of April 1, 1998, 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):
LEASES EXPIRING EACH LEASES EXPIRING EACH YEAR IF NO YEAR IF ALL FISCAL YEAR RENEWALS EXERCISED RENEWALS EXERCISED - ----------- -------------------- ------------------- 1999........................................................... 20 16 2000........................................................... 8 2 2001........................................................... 12 7 2002-2012...................................................... 94 109
DISTRIBUTION CENTER, WOODSHOP AND HEADQUARTERS The Company's World Headquarters, which is located on approximately 27 acres in Ft. Myers, Florida, was completed and opened in September 1994 and consists of a distribution center, woodshop and corporate and administrative headquarters. The combined facilities comprise approximately 125,000 square feet, consisting of approximately 93,000 square feet for distribution and woodshop facilities and approximately 32,000 square feet for administrative and design offices. In the opinion of management these expanded facilities provide sufficient warehouse, office and woodshop capacity to service the Company's needs for at least five years of future growth. There remains sufficient land on the site to at least double the size of the facilities when and if necessary. The construction cost of the combined corporate headquarters, distribution center and woodshop facility was approximately $9.6 million, which includes the $1.3 million purchase price for the land. Further, the Company spent approximately $1.6 million for new distribution center equipment, software and furnishings. Currently, the Company's World Headquarters secures a $5.4 million mortgage loan which matures in 2003. 17 20 The Company's previous storage facilities, located in Ft. Myers, Florida, continue to be leased by the Company under a lease that expires in November 1998. The annual base rent for the storage facilities is approximately $60,000. The Company leases these storage facilities under a lease from certain of its stockholders and former stockholders. As a result of the completion of the Company's World Headquarters, the Company no longer has a need for these facilities. In addition, the Company's former distribution center, located in Ft. Myers, Florida also had been leased by the Company through fiscal 1998 from certain of the Company's stockholders and former stockholders and also is no longer needed by the Company. This lease expired in January 1998. In the fourth quarter of 1994, the Company recognized nonrecurring pre-tax charges against income in an amount (approximately $365,000) equal to the remaining lease payments for the previous distribution center and the storage facilities, net of amounts previously accrued. As payments were made by a new tenant for the former distribution center, the Company was able to recover portions of that charge. 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 63 14 Chief Executive Officer, President, Chairman of the Board and Director Helene B. Gralnick 50 14 Senior Vice President - Design and Concept and Director Charles J. Kleman 47 9 Executive Vice President-Finance, Chief Financial Officer, Secretary/ Treasurer and Director Scott A. Edmonds 40 4 Senior Vice President-Operations and Assistant Secretary
Marvin J. Gralnick, together with his wife, Helene B. Gralnick, founded Chico's in December 1983. He served the Company as its Chief Executive Officer until September 1, 1993, at which time Jeffrey J. Zwick succeeded Mr. Gralnick in this position. In connection with the November 7, 1994 resignation of Jeffrey J. Zwick as Chief Executive Officer, President and a director of the Company, Mr. Gralnick and Ms. Gralnick returned to the Company on a full time basis to head up merchandise design, marketing and image for the Company. In February 1995, Mr. Gralnick reassumed the role of Chief Executive Officer and in March 1997 reassumed the position of President following the departure of Melissa Payner. In addition, Mr. Gralnick continues to serve as Chairman of the Board and as a director. Mr. Gralnick served as President from the Company's founding until 1990 when he became Chairman of the Board and was given the official title of Chief Executive Officer. Mr. and Ms. Gralnick's vision and creative talents led the development and evolution of the Company's philosophy and the design and feel of Chico's merchandise and Chico's stores through September 1, 1993 and since November 1994 again are leading the Company in this regard. 18 21 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. Mr. Edmonds is responsible for human resources, store development and operations, leasing and maintenance, franchise operations, and management of the headquarters and woodshop. From March 1985 until September 1993, he was President/General Manager of the Ft. Myers branch of Ferguson Enterprises, Inc. an electric and plumbing wholesaler. Marvin J. Gralnick and Helene B. Gralnick are husband and wife. None of the other executive officers or directors are related to one another. There are no arrangements or understandings pursuant to which any officer was elected to office. Executive officers are elected by and serve at the discretion of the Board of Directors. 19 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on NASDAQ National Market System. The high and low prices per share of the Company's Common Stock for each quarterly period since the Company's initial public offering is set forth in the Company's 1998 Annual Report to Stockholders and is incorporated herein by reference. On April 1, 1998, the last reported sale price of the Common Stock on the NASDAQ National Market System was 813/16 per share. Since the initial public offering, the Company has not paid any cash dividends except for $5,853,000 of dividends representing previously taxed undistributed S corporation earnings which dividends were declared prior to the Company's initial public offering and paid to persons who were stockholders prior to the offering. The Company does not intend to pay any cash dividends for the foreseeable future and intends to retain earnings, if any, for the future operation and expansion of the Company's business. Any determination to pay dividends in the future will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors. The Company's existing credit facilities contain restrictions on the payment of cash dividends on the Common Stock. Under the provisions of the credit facilities, dividends will be prohibited to the extent such aggregate dividends would cause the Company's tangible net worth to fall below the sum of $16 million plus 50% of aggregate net income after fiscal 1999. The approximate number of equity security holders of the Company is as follows:
Number of Record Holders Title of Class as of April 1, 1998 -------------- ------------------- Common Stock, par value $.01 per share 569
20 23 ITEM 6. SELECTED FINANCIAL DATA. Selected Financial Data at the dates and for the periods indicated should be read in conjunction with, and is qualified in its entirety by reference to the financial statements and the notes thereto set forth elsewhere in this Annual Report on Form 10-K.
PRO FORMA ONE MONTH FISCAL YEAR PERIOD ENDED FISCAL YEAR ENDED ENDED (UNAUDITED) FISCAL YEAR ENDED ----------------------------------------------------------------------------------------- JANUARY 2, JANUARY 1, DECEMBER JANUARY 28, JANUARY 28, FEBRUARY 1, JANUARY 31, 1994 1995 31, 1995 1996 (1) 1996 (1) 1997 (1) 1998 (52 WEEKS) (52 WEEKS) (52 WEEKS) (4 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS) ----------------------------------------------------------------------------------------- (in thousands, except per share and selected operating data) OPERATING STATEMENT DATA Net sales by company stores $42,303 $55,282 $57,636 $3,619 $58,091 $62,318 $73,597 Net sales to franchisees(2) 4,532 3,989 2,707 128 2,672 1,755 1,742 ------- ------- ------- ------ ------- ------- ------- Net sales 46,835 59,271 60,343 3,747 60,763 64,073 75,339 Cost of goods sold(3) 16,874 22,418 26,115 1,913 26,484 26,713 33,240 ------- ------- ------- ------ ------- ------- ------- Gross profit 29,961 36,853 34,228 1,834 34,279 37,360 42,099 General, administrative and store operating expenses 21,976 31,168 30,743 2,358 30,842 33,738 37,185 ------- ------- ------- ------ ------- ------- ------- Income (loss) from operations 7,985 5,685 3,485 (524) 3,437 3,622 4,914 Interest expense (income), net (55) 119 621 39 620 404 372 ------- ------- ------- ------ ------- ------- ------- Income (loss) before taxes(4) 8,040 5,566 2,864 (563) 2,817 3,218 4,542 Provision for income taxes (4) 3,138 2,275 1,160 (225) 1,141 1,287 1,772 ------- ------- ------- ------ ------- ------- ------- Net income (loss)(4) $ 4,902 $ 3,291 $ 1,704 $ (338) $ 1,676 $ 1,931 $ 2,770 ======= ======= ------- ====== ======= ======= ======= Basic net income (loss) per share(4)(5) $ .63 $ .42 $ .22 $ (.04) $ .22 $ .25 $ .35 ======= ======= ======= ====== ======= ======= ======= Diluted net income (loss) per share(4)(5) $ .62 $ .42 $ .22 $ (.04) $ .21 $ .24 $ .34 ======= ======= ======= ====== ======= ======= ======= Weighted average shares outstanding (supplemental pro forma for 1993)(5) 7,924 7,922 7,838 7,777 7,836 7,976 8,033 ======= ======= ======= ====== ======= ======= ======= SELECTED OPERATING DATA Company stores at period end(6) 78 104 111 111 111 123 132 Franchise stores at period end (6) 16 17 12 12 12 10 9 ------- ------- ------- ------ ------- ------- ------- Total stores at period end(6) 94 121 123 123 123 133 141 Average net sales per company store (in thousands)(7) $ 647 $ 613 $ 527 N/A $ 537 $ 523 $ 578
21 24
PRO FORMA ONE MONTH FISCAL YEAR PERIOD ENDED FISCAL YEAR ENDED ENDED (UNAUDITED) FISCAL YEAR ENDED ------------------------------------------------------------------------------------------- JANUARY 2, JANUARY 1, DECEMBER JANUARY 28, JANUARY 28, FEBRUARY 1, JANUARY 31, 1994 1995 31, 1995 1996 (1) 1996 (1) 1997 (1) 1998 (52 WEEKS) (52 WEEKS) (52 WEEKS) (4 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS) ------------------------------------------------------------------------------------------- (in thousands, except per share and selected operating data) Average net sales per net selling square foot at company stores(7) $ 496 $ 478 $ 413 N/A $ 405 $ 396 $ 449 Percentage increase (decrease) in comparable company store net sales 12.3% (7.3)% (10.4)% 1.4% (10.1%) (1.3)% 10.7% BALANCE SHEET DATA (at Year End): Working capital $ 4,771 $ 1,460 $ 4,536 $ 5,419 $ 6,585 $ 8,970 Total assets 16,589 27,352 27,009 27,681 31,248 34,472 Debt and lease obligations, less current maturities 593 4,663 5,896 7,131 7,008 6,703 Stockholders' Equity $10,713 $14,226 $15,959 $15,621 $18,021 $21,456
(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 ended January 28, 1996. (2) Includes $0, $5,000, $0, $0 and $0 of franchisee fees in fiscal 1993, 1994, 1995, 1997 and 1998. (3) Cost of goods sold includes distribution and design costs, but does not include occupancy cost. (4) For all periods prior to the consummation of the Company's initial public offering on April 1, 1993, the Company was an S Corporation for federal and state income tax purposes and, accordingly, was not subject to corporate federal income taxes or corporate income taxes in Florida and certain other states. The pro forma and supplemental pro forma information has been computed as if the Company was subject to corporate federal and state income taxes for all periods presented, based on the tax laws in effect during the respective periods. (5) Restated to give retroactive effect for 2 for 1 stock split in January 1994. In addition, for purposes of calculating supplemental pro forma net income per share, the weighted average number of shares outstanding has been adjusted to give effect to both (1) the common stock equivalents associated with outstanding stock options calculated pursuant to the treasury stock method, and (2) the 866,684 shares issued by the Company in the initial public offering (split-adjusted), the net proceeds of which were used to partially fund a $5,853,000 distribution to persons who were stockholders prior to the initial public offering. (6) For information concerning stores opened, acquired, sold and closed, see "Business -- Store Locations." (7) 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 net selling square foot of company stores have been adjusted to exclude the effect of the fifty-third week. 22 25 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 31, 1998 is set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1998 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 1998 Annual Report to Stockholders and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information about directors and nominees for director of the Company in the Company's 1998 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 1998 Annual Meeting proxy statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is included in the Company's 1998 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 1998 Annual Meeting proxy statement and is incorporated herein by reference. 23 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) (1) The following financial statements of Chico's FAS, Inc. and the report thereon of Arthur Andersen LLP dated March 3, 1998, which is included in the Company's Annual Report to Stockholders for the fiscal year ended January 31, 1998, are incorporated herein by reference. Report of Independent Certified Public Accountants. Statements of Income for the fiscal years ended January 31, 1998 and February 1, 1997, for the period from January 1, 1996 through January 28, 1996 and for the fiscal year ended December 31, 1995. Balance Sheets, January 31, 1998 and February 1, 1997. Statements of Stockholders' Equity for the fiscal years ended January 31, 1998 and February 1, 1997, for the period from January 1, 1996 through January 28, 1996 and for the fiscal year ended December 31, 1995. Statements of Cash Flows for the fiscal years ended January 31, 1998 and February 1, 1997, for the period from January 1, 1996 through January 28, 1996 and for the fiscal year ended December 31, 1995. Notes to Financial Statements. (2) The following Financial Statement Schedules are included herein: Schedules are not submitted because they are not applicable or not required or because the required information is included in the financial statements or the notes thereto. (3) The following exhibits are filed as part of this report (exhibits marked with an asterisk have been previously filed with the Commission as indicated and are incorporated herein by this reference): 2* Agreement and Plan of Merger Dated December 19, 1992, between the Company and Chico's International, Inc. (Filed as Exhibit 2 to the Company's Registration Statement on Form S-1 (File No. 33-58134) filed with the Commission on February 10, 1993, as amended) 3.1* Amended and Restated Articles of Incorporation (Filed as Exhibit 3.3 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed the Commission on May 18, 1993) 3.2* Agreement and Plan of Recapitalization dated February 3, 1993, by and among Marvin J. Gralnick, Helene B. Gralnick, Barry E. Szumlanski, Lynn Mann and Jeffrey Jack Zwick and Chico's FAS, Inc. (Filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 33-70620) filed with the Commission on October 21, 1993, as amended) 3.3* Amended and Restated By-laws (Filed as Exhibit 3.5 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed with the Commission on May 18, 1993) 4.1* Amended and Restated Articles of Incorporation (Filed as Exhibit 3.3 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed with the Commission on May 18, 1993) 4.2* Amended and Restated Bylaws (Filed as Exhibit 3.5 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed with the Commission on May 18, 1993) 4.3* Form of Common Stock Certificate (Filed as Exhibit 4.5 to the Company's Registration Statement on Form S-1 (File No. 33-58134) filed with the Commission on February 10, 1993, as amended) 10.1* Employment Agreement for Marvin J. Gralnick (Filed as Exhibit 10.1 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 24 27 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 Form 10-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 Melissa Payner-Gregor (Filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended July 2, 1995, as filed with the Commission on August 14, 1995) 10.6* Supplement to Employment Agreement for Melissa Payner-Gregor. (Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 1996, as filed with the Commission on August 13, 1996) 10.7* Second Supplement to Employment Agreement for Melissa Payner-Gregor. (Filed as Exhibit 10.5 to the Company's Form 10-Q for the quarter ended June 30, 1996, as filed with the Commission on August 13, 1996) 10.8* Employment Agreement for Mori Cameron-MacKenzie (Filed as Exhibit 10.4 to the Company's Form 10-Q for the quarter ended October 1, 1995, as filed with the Commission on November 13, 1995) 10.9* 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) 10.10* 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) 10.11* 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) 10.12* 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) 10.13* 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) 10.14* Nonemployee Director's Stock Option Agreement by and between Chico's FAS Inc., and W. Keith Schilit (Filed as Exhibit 10.15 to the Company's Registration Statement on Form S-1 (File No. 33-70620) as filed with the Commission on October 21, 1993, as amended) 10.15* 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 W. Keith Schilit dated November 7, 1994 (Filed as Exhibit 10.52 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 10.17* 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) 10.18* Nonemployee Director's Stock Option Agreement by and between Chico's FAS Inc., and W. Keith Schilit (Filed as Exhibit 10.7 to the Company's Form 10-Q for the quarter ended July 2, 1995, as filed with the Commission on August 14, 1995) 25 28 10.19* Nonemployee Director's Stock Option Agreement by and between Chico's FAS Inc., and W. Keith Schilit (Filed as Exhibit 10.8 to the Company's Form 10-Q for the quarter ended July 2, 1995, as filed with the Commission on August 14, 1995) 10.20* Nonemployee Director's Stock Option Agreement by and between Chico's FAS, Inc., and Verna K. Gibson (Filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended June 30, 1996, as filed with the Commission on August 13, 1996) 10.21* Nonemployee Director's Stock Option Agreement by and between Chico's FAS Inc., and W. Keith Schilit (Filed as Exhibit 10.4 to the Company's Form 10-Q for the quarter ended June 30, 1996, as filed with the Commission on August 13, 1996) 10.22* Indemnification Agreement with Lynn D. Mann (Filed as Exhibit 10.9 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed with the Commission on May 18, 1993) 10.23* 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) 10.24* 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) 10.25* Indemnification Agreement with Jeffrey J. Zwick (Filed as Exhibit 10.9.3 to the Company's Form 10-Q for the quarter ended July 4, 1993, as filed with the Commission on August 13, 1993) 10.26* Indemnification Agreement with Barry E. Szumlanski (Filed as Exhibit 10.9.4 to the Company's Form 10-Q for the quarter ended July 4, 1993, as filed with the Commission on August 13, 1993) 10.27* 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) 10.28* Indemnification Agreement with Michal Szumlanski (Filed as Exhibit 10.9.8 to the Company's Form 10-Q for the quarter ended July 4, 1993, as filed with the Commission on August 13, 1993) 10.29* Indemnification Agreement with W. Keith Schilit (Filed as Exhibit 10.9.7 to the Company's Form 10-Q for the quarter ended July 4, 1993, as filed with the Commission on August 13, 1993) 10.30* 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) 10.31* 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) 10.32* Indemnification Agreement with Melissa Payner-Gregor (Filed as Exhibit 10.4 to the Company's Form 10-Q for the quarter ended July 2, 1995, as filed with the Commission on August 14, 1995) 10.33* S Corporation Tax Allocation and Indemnification Agreement (Filed as Exhibit 10.11 to the Company's Form 10-Q for the quarter ended April 4, 1993, as filed with the Commission on May 18, 1993) 10.34* 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) 10.35* 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) 10.36* 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) 26 29 10.37* Lease Agreement dated February 1, 1988 by and between Lynn Mann, Marvin Gralnick and Barry Szumlanski and Chico's Folk Art Specialties, Inc. (Filed as Exhibit 10.19 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.38* Lease Agreement dated December 1, 1988 by and between Marvin Gralnick, Helene Gralnick, Lynn Mann and Barry Szumlanski, and Chico's Folk Art Specialties, Inc. (Filed as Exhibit 10.20 to the Company's Registration Statement on Form S-1 (File No. 33-58134) as filed with the Commission on February 10, 1993, as amended) 10.39* Lease Termination and Settlement Agreement dated June 13, 1996 by and among: Marvin Gralnick, Helene Gralnick, Lynn Mann and Barry Szumlanski; Chico's FAS, Inc. and (Filed as Exhibit 10.8 to the Company's Form 10-Q for the quarter ended September 29, 1996, as filed with the Commission on November 12, 1996) 10.40* 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) 10.41* 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) 10.42* 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) 10.43* 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) 10.44* 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) 10.45* Fourth Amendment to Amended and Restated Revolving Line of Credit and Reimbursement Agreement dated February 14, 1995 by and between Chico's FAS, Inc., and NationsBank of Florida National Association (Filed as Exhibit 10.50 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 10.46* 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) 10.47* 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) 10.48* 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) 10.49 Second Amendment to Third Amended and Restated Credit Agreement by and between Chico's FAS, Inc. and NationsBank (South), N. A. 27 30 10.50* 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) 10.51* Amendment and Restatement of the Chico's FAS, Inc. Profit Sharing Plan (Filed as Exhibit 10.47 to the Company's Form 10-Q for the quarter ended April 3, 1994, 1994, as filed with the Commission on May 9, 1994) 10.52* Separation Agreement dated November 10, 1994 by and between Chico's FAS, Inc. and Jeffrey J. Zwick (Filed as Exhibit 10.55 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 10.53* Separation Agreement dated February 14, 1995 by and between Chico's FAS, Inc. and Barry E. Szumlanski (Filed as Exhibit 10.57 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 10.54* Separation Agreement dated February 14, 1995 by and between Chico's FAS, Inc. and Michal Szumlanski (Filed as Exhibit 10.58 to the Company's Form 10-K for the year ended January 1, 1995, as filed with the Commission on April 1, 1995) 10.55* Separation Agreement dated as of March 24, 1997 by and between Chico's FAS, Inc. and Melissa Payner (Filed as Exhibit 10.76 to the Company's Form 10-K for the year ended February 1, 1997, as filed with the commission on April 30, 1997) 10.56* Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and Verna 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) 10.57* Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and Ross 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) 10.58* Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and John 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) 10.59* Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and Verna 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) 10.60 Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and Ross Roeder dated February 10, 1998 10.61 Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and John Burden dated February 10, 1998 10.62 Nonemployee Stock Option Agreement by and between Chico's FAS, Inc. and Verna Gibson dated February 10, 1998 13 Annual Report to Stockholders 23 Consent to use of Report of Independent Certified Public Accountants 27 Financial Data Schedule (for SEC use only). (b) Reports on Form 8-K. The company did not file any reports on Form 8-K during the fifty-two weeks ended January 31, 1998. 28 31 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 21, 1998 ------------------------------------------------- ---------------- 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 21, 1998 - ------------------------------------------------------ ---------------- MARVIN J. GRALNICK, Chief Executive Officer, Date President, Director (principal executive officer) /s/ Charles J. Kleman April 21, 1998 - ------------------------------------------------------ ---------------- CHARLES J. KLEMAN, Chief Financial Officer, Date Director (principal financial and accounting officer) /s/ Helene B. Gralnick April 21, 1998 - ------------------------------------------------------ ---------------- HELENE B. GRALNICK, Senior Vice President - Date Design and Concept and Director /s/ Verna K. Gibson April 21, 1998 - ------------------------------------------------------ ---------------- VERNA K. GIBSON, Director Date /s/ John W. Burden April 21, 1998 - ------------------------------------------------------ ---------------- JOHN W. BURDEN, Director Date /s/ Ross E. Roeder April 21, 1998 - ------------------------------------------------------ ---------------- ROSS E. ROEDER, Director Date
29 EX-10.49 2 2ND AMENDMENT TO 3RD AMENDED & RESTATED CREDIT AGM 1 EXHIBIT 10.49 SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT THIS SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT (the "Second Amendment") is dated as of December 7, 1997, between CHICO'S FAS, INC., a Florida corporation (the "Borrower"), and NATIONSBANK, N.A., a national banking association (successor by merger to NCNB National Bank of Florida and NationsBank of Florida, N.A. and NationsBank, N.A. (South)) (the "Bank"). BACKGROUND Borrower and Bank executed a Third Amended and Restated Credit Agreement dated December 30, 1995 and a First Amendment thereto dated September 15, 1996 (collectively, the "Agreement"). Pursuant to the provisions of the Agreement, Bank established a $2,000,000.00 renewal working capital line of credit (the "Renewal First Working Capital Line") and a $4,000,000.00 renewal documentary letter of credit facility (the "Letter of Credit Line"). Borrower has now requested the: (1) renewal of the Renewal First Working Capital Line, and (2) renewal of the Letter of Credit Line. Bank has agreed to the request of Borrower on the terms and conditions of this Amendment. TERMS NOW, THEREFORE, in consideration of the foregoing and the promises contained herein, the parties agree as follows: 1. DEFINED TERMS. Any capitalized terms used but not defined herein shall have the meanings set forth in the Agreement. 2. RENEWAL FIRST WORKING CAPITAL LINE. Subject to the terms and conditions of the Agreement, as amended by this Amendment, the Renewal First Working Capital Line is hereby renewed in the maximum principal amount of $2,000,000.00. The Renewal First Working Capital Line will expire on May 31, 1999, at which time all indebtedness thereunder will be due and payable in full. Interest shall be payable monthly in arrears. The Renewal First Working Capital Line will be evidenced by a $2,000,000.00 renewal promissory note of Borrower in form and substance satisfactory to Bank (the "Renewal First Working Capital Line Note"). 3. RENEWAL LETTER OF CREDIT LINE. Subject to the terms and conditions of the Agreement, as amended by this Amendment, the Letter of Credit Line is hereby renewed in the maximum principal amount of $4,000,000.00 (the "Renewal Letter of Credit Line"). The Renewal Letter of Credit Line will expire on May 31, 1999, at which time all indebtedness thereunder will be due and payable in full. Interest shall be payable monthly in arrears. The Renewal Letter of Credit Line shall be evidenced by a $4,000,000.00 renewal promissory note of Borrower in form and substance satisfactory to Bank (the "Renewal Letter of Credit Line Note"). Bank will not make any Advances of funds to Borrower under the Renewal Letter of Credit Line unless the Renewal First Working Capital Line is fully funded. Subject to the foregoing, the Bank agrees to make Advances of funds to Borrower under the Renewal Letter of Credit Line upon receipt of written request therefor from Borrower, upon and subject to the terms and conditions set forth herein and in the Agreement, so long as (a) the Renewal First Working Capital Line 2 is fully funded, (b) there has occurred no Default or Event of Default, and (c) the sum of all outstanding unpaid Advances does not exceed the Borrowing Base. 4. AFFIRMATION OF COLLATERAL DOCUMENTS. Payment of the Renewal First Working Capital Line Note and the Renewal Letter of Credit Line Note shall be and is hereby secured by all Collateral described in Article III of the Agreement. Borrower ratifies and confirms the provisions of the Agreement and the Security Agreement with respect to the Collateral and agrees to execute or otherwise provide to Bank any and all modifications, financing statements, and other agreements or consents reasonably required by Bank now or in the future in connection therewith. Borrower will execute or otherwise provide to Bank any and all modifications, financing statements, and other agreements or consents required by Bank now or in the future in connection therewith. 5. AMENDED PROVISIONS. Subject to the conditions set forth in paragraph 7 hereof, the Agreement shall be and hereby is further amended, effective as of the date hereof, as follows: (a) The definition of "Certificate of Deposit" in Section 1.1 of the Agreement is hereby replaced with the following definition: "Certificate of Deposit" means the Certificate of Deposit from time to time issued or to be issued to Borrower by Bank, and pledged by Borrower to Bank as collateral, together with all proceeds and replacements thereof, the principal amount of which shall be reduced to $1,000,000.00 in January, 1998. (b) The definition of "Consolidated Tangible Net Worth" in Section 1.1 of the Agreement is hereby replaced with the following definition: "Consolidated Net Worth" means the depreciated book value amount of all assets of the Borrower and its Subsidiaries, with no adjustment from and after December 31, 1988 due to revaluation, depreciation, reserves or otherwise, and after elimination of any intercompany transactions, less: (i) treasury stock; (ii) advances to employees, officers, directors, stock-holders or affiliates of the Borrower or any Subsidiary of the Borrower in excess of aggregate advances of $50,000.00; and (iii) Consolidated Total Liabilities minus Subordinated Debt. (c) The definition of "Pledge" in Section 1.1 of the Agreement is hereby replaced with the following definition: "Pledge" means the collateral Assignment of Certificate of Deposit, pursuant to which Borrower has pledged or will pledge to Bank the Certificate of Deposit, as has been executed or will be executed by Borrower in favor of Bank. 2 3 (d) The definition of "Termination Date" in Section 1.1 of the Agreement is hereby replaced with the following definition: "Termination Date" means May 31, 1999, with respect to the indebtedness evidenced by the Renewal First Working Capital Line Note and the Renewal Letter of Credit Line Note. (e) The definition of "Applicable Margin" is hereby added to Section 1.1 of the Agreement, as follows: "Applicable Margin" means the following per annum percentages applicable in the following situations:
Applicability Applicable Margin ------------- ----------------- (i) If the Consolidated Debt Coverage 0% Ratio is greater than or equal to 1.75, and the Current Ratio is equal to or greater than 1.75 (ii) If the Consolidated Debt Coverage 0.50% Ratio is greater than or equal to 1.30 but is less than 1.75, and the Current Ratio is less than 1.75 (iii) If the Consolidated Debt Coverage 1.00% Ratio is less than 1.30
The Applicable Margin payable by the Borrower shall be subject to reduction or increase, as applicable and as set forth in the table above, on a quarterly basis according to the performance of the Borrower as tested by the relevant ratios. (f) The definition of "Current Ratio" is hereby added to Section 1.1 of the Agreement, as follows: "Current Ratio" means the ratio of Consolidated Current Assets to Consolidated Current Liabilities. (g) Each reference to "Letter of Credit Line" shall be deemed to refer to the Renewal Letter of Credit Line, wherever such reference appears in the Agreement. Each reference to "Letter of Credit Line Note" shall be deemed to refer to the Renewal Letter of Credit Line Note, wherever such reference appears in the Agreement. (h) Section 3.3 of the Agreement is hereby replaced with the following: 3 4 3.3 Certificate of Deposit. The full and timely payment of the Liabilities (with the exception of (i) the Amended and Restated Mortgage, Security Agreement and assignment of Rents and Leases dated as of January 4, 1996, by Borrower and originally delivered to Founders National Trust Bank and currently held by Bank, as amended from time to time, (ii) the related Loan Agreement dated as of January 4, 1996, as amended from time to time, and (iii) the related $5,587,500 Amended, Renewal and Consolidated Replacement Promissory Note Agreements, as amended, replaced and/or renewed from time to time), whether now existing or hereafter arising, will be secured by the Certificate of Deposit as pledged or to be pledged to Bank pursuant to the Pledge, which will grant to Bank a continuing first lien in the property described therein. (i) Effectively retroactively to September 14, 1996, the number "$3,000.000.00" in Section 4.1(e) is replaced with the number "$4,000,000.00" (j) Section 6.16 of the Agreement is hereby replaced with the following: 6.16 Liabilities to Net Worth. Maintain a ratio of Consolidated Total Liabilities to Consolidated Net Worth of not greater than 1.00 to 1.00 at the end of each fiscal quarter. (k) Section 6.18 of the Agreement is hereby replaced with the following: 6.18 Consolidated Net Worth. (a) As of January 31, 1998, maintain a Consolidated Net Worth of at least $16,000,000.00. (b) At the end of each fiscal year thereafter, maintain a Consolidated Net Worth at least equal to the sum of: (i) the required Consolidated Net Worth for the immediately preceding fiscal year end plus (ii) fifty percent (50%) of Borrower's net income for the current fiscal year. (c) At the end of each fiscal quarter, maintain a Consolidated Net Worth at least equal to the required Consolidated Net Worth for the immediately preceding fiscal year end. 6. EXPENSES. Without limiting the provisions of the Agreement, Borrower covenants and agrees to pay all costs and expenses of Bank in connection with the closing of the transactions evidenced hereby, including, but not limited to, Bank's reasonable attorneys' fees, recording or filing costs or expenses, intangible taxes, documentary stamps, surtax and other revenue fees, and similar items. 7. LOAN AGREEMENT, RATIFICATION, NO NOVATION. The Renewal First Working Capital Line Note and the Renewal Letter of Credit Line Note each shall be deemed issued pursuant to and shall be subject to the terms of the Agreement, as amended hereby, except as may be expressly modified or supplemented hereby or by the terms of such notes, together with this Amendment, shall each be deemed to be a "Loan Document" for the purposes of the Agreement and hereof. Except as expressly modified or supplemented hereby, the Loan Documents and all agreements, instruments, and documents executed or delivered pursuant thereto have remained and shall remain at all times in full force and effect in accordance with their respective terms, and have not been novated by the provisions of this Amendment. 4 5 8. REPRESENTATIONS AND WARRANTIES. To induce Bank to enter into this Amendment and to perform the transactions described herein, Borrower hereby represents and warrants to Bank that Borrower has re-examined the Agreement and on and as of the date hereof: (a) The representations and warranties made by the Borrower in Article V of the Agreement (except that the financial statements referred to in Section 5.03 shall be those most recently furnished to the Bank pursuant to Section 6.01) are correct and complete as of the date of this Amendment, except to the extent written waivers have been provided by the Bank; (b) There has been no material adverse change in the condition, financial or otherwise, of the Borrower since the date of the most recent financial reports of the Borrower received by the Bank under Section 6.01 thereof, other than changes in the ordinary course of business; and (c) No event has occurred and no condition exists that, upon the consummation of the transaction contemplated hereby, constitutes a default or an Event of Default on the part of the Borrower under the Agreement or any Note, either immediately or with the lapse of time or the giving of notice, or both. 9. CONDITIONS PRECEDENT. The obligation of the Bank to continue to make the Loans from and after the date of this Amendment and to continue to issue Letters of Credit under the Agreement are subject to the conditions precedent set forth in the Agreement and the additional conditions precedent that the Bank shall have received, on the date of this Amendment in form and substance satisfactory to the Bank, the following: (a) Executed originals of each of the Loan Documents, together with all schedules and exhibits thereto in form and substance satisfactory to the Bank (it being understood that the Loan Documents shall also include this Amendment, the Renewal First Working Capital Line Note and the Renewal Letter of Credit Line Note); (b) Favorable written opinion of counsel to the Borrower dated the date of this Amendment, addressed to the Bank and satisfactory to Holland & Knight LLP, counsel to the Bank; (c) Resolutions of the board of directors of the Borrower certified by its secretary or assistant secretary as of the date of this Amendment, approving and adopting the Loan Documents to be executed by the Borrower in connection with this Amendment; (d) All fees payable by the Borrower on the date of this Amendment to Bank; and (e) Such other documents, instruments, certificates, and opinions as the Bank may reasonably request on or before the date of this Amendment in connection with the consummation of the transactions contemplated hereby. 10. NO WAIVER BY BANK. The execution of this Amendment and the new Loan Documents shall not constitute a waiver of any default or Event of Default in the Agreement or any other Loan Document existing on the date hereof, nor shall it eliminate any right which Bank may otherwise have to accelerate the indebtedness subject to the Agreement by virtue of any default or Event of Default. 11. RELIANCE UPON, SURVIVAL OF, AND MATERIALITY OF REPRESENTATIONS AND WARRANTIES, AGREEMENTS, AND COVENANTS. All representations and warranties, agreements, and covenants made by 5 6 Borrower herein are material and shall be deemed to have been relied upon by Bank, notwithstanding any investigation heretofore or hereafter made by Bank, shall survive the execution and delivery of this Amendment, and shall continue in full force and effect so long as any indebtedness is owed by Borrower to Bank. 12. COOPERATION, FURTHER ASSURANCES. Borrower agrees to cooperate with Bank so that the interests of Bank are protected and the intent of the Loan Documents and this Amendment can be effectuated. Borrower agrees to execute whatever further documents and to provide whatever further assurances Bank may reasonably request or deem necessary to effectuate the terms of the Renewal First Working Capital Line, the Renewal Letter of Credit Line, and this Amendment. 13. ESTOPPEL AND RELEASE. Borrower hereby acknowledges and agrees that, as of the date hereof, there exists no right of offset, defense, counterclaim, claim, or objection in favor of such party as against Bank with respect to any of the Loan Documents, any collateral therefor, or any other aspect of the transactions contemplated by the Agreement or the Loan Documents. In connection with the foregoing, Borrower hereby releases and discharges Bank, its subsidiaries, affiliates, directors, officers, employees, attorneys, agents, successors, and assigns from any and all rights, claims, demands, actions, causes of action, suits, proceedings, agreements, contracts, judgments, damages, debts, duties, liabilities, or obligations of any kind or character, including without limitation such claims and defenses as fraud, mistake, and usury, whether in law or in equity, known or unknown, choate or inchoate, which it has had, now has, or hereafter may have, arising under or in any manner relating to, whether directly or indirectly, the Loan Documents, any collateral therefor or guaranties thereof, or any other aspect of the transactions contemplated thereby, from the beginning of time until the date hereof. 14. COURSE OF DEALING; AMENDMENT; SUPPLEMENTAL AGREEMENTS. No course of dealing between the parties hereto shall be effective to amend, modify, or change any provision of this Amendment or the other Loan Documents. This Amendment, the Agreement and the other Loan Documents may not be amended, modified, or changed in any respect except by an agreement in writing signed by the party against whom such change is to be enforced. The parties hereto may, subject to the provisions of this Section, from time to time, enter into written agreements supplemental hereto for the purpose of adding any provision to this Amendment or the other Loan Documents or changing in any manner the rights and obligations of the parties hereunder. Any such supplemental agreement in writing shall be binding upon the parties thereto. 15. HEADINGS. The titles and headings preceding the text of the paragraphs of this Amendment have been inserted solely for convenience of reference and shall neither constitute a part of this Amendment nor affect its meaning, interpretation, or effect. 6 7 IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first above written. WITNESSES: CHICO'S FAS, INC., a Florida corporation /s/ ------------------------------ By:/s/ Charles J. Kleman --------------------------------- /s/ Charles J. Kleman, ------------------------------ Executive Vice President-Finance NATIONSBANK, N.A., a national banking association By: /s/ Karen O. Hanlon ---------------------------------- Karen O. Hanlon, Assistant Vice President 7 EX-10.60 3 NON-EMPLOYEE DIRECTORS STOCK OPTION 1 EXHIBIT 10.60 NONEMPLOYEE DIRECTOR'S STOCK OPTION AGREEMENT THIS AGREEMENT is made this 14th day of April, 1998 but is effective as of the 10th day of February, 1998, between CHICO'S FAS, Inc., a Florida corporation ("Chico's") and Ross E. Roeder, a nonemployee member of Chico's Board of Directors (the "Director"). W I T N E S S E T H WHEREAS, the Director is now a member of Chico's Board of Directors and Chico's desires to have the Director remain in its service and desires to encourage stock ownership by the Director and to increase the Director's proprietary interest in Chico's success; and as an inducement thereto has determined to grant to the Director the option herein provided for, to the end that the Director may thereby be assisted in obtaining an interest, or an increased interest, as the case may be, in the stock ownership of Chico's. NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. Grant. Chico's hereby grants to the Director an option (the "Option") to purchase 10,000 shares of Chico's common stock, par value $.01 per share ("Common Stock") at $6.50 per share, both as adjusted pursuant to Section 10 hereof. 2. Exercise. The Option may be exercised at any time during the period hereinafter permitted by presentation at the principal offices of Chico's in Ft. Myers, Florida of (a) written notice to Chico's advising Chico's of the election of the Director to purchase the shares of Common Stock covered by this Option and (b) payment of the aggregate option price therefor. 3. Period of Exercise. The Option is exercisable in whole or from time to time in part during the period from August 10, 1998 through February 10, 2008, except as provided in Section 8 hereof. 4. Vesting Schedule. The Optionee's rights under the Option shall vest 100% on August 10, 1998. 5. Requirements of Law. Chico's shall not be required to sell or issue any shares under the Option if the issuance of such shares shall constitute a violation of any provisions of any law or regulation of any governmental authority. Specifically, in connection with the Securities Act of 1933 (the "Act"), upon exercise of the Option, unless a registration statement under the Act is in effect with respect to the shares of Common Stock covered by the Option, Chico's shall not be required to issue such shares unless Chico's has received evidence reasonably satisfactory to the effect that the Director is acquiring such shares for investment and not with a view to the distribution thereof, and unless the certificate 2 issued representing the shares of Common Stock bears the following legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 AS AMENDED AND APPLICABLE STATE SECURITIES LAWS." Any reasonable determination in this connection by Chico's shall be final, binding and conclusive. At such time as a registration statement under the Act is in effect with respect to the shares of Common Stock represented by certificates bearing the above legend or at such time as, in the opinion of counsel for Chico's, such legend is no longer required solely for compliance with applicable securities laws, then the holders of such certificates shall be entitled to exchange such certificates for certificates representing a like number of shares but without such legend. Chico's may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Act. Chico's shall not be obligated to take any other affirmative action in order to cause the exercise of the Option or the issuance of shares pursuant thereto to comply with any law or regulation of any governmental authority. 6. Method of Payment. Payment shall be made: (a) in United States dollars by certified check, or bank draft or (b) by tendering to Chico's Common Stock shares owned by the person exercising the Option and having a fair market value equal to the cash exercise price applicable to such Option, such fair market value to be 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 as reported on the Composite Tape, or if not reported thereon, then such price as reported in the trading reports of 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 mean between the dealer closing "bid" and "ask" prices on 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 Board in good faith and based on all relevant factors, or 2. 3 (c) by a combination of United States dollars and Common Stock shares as aforesaid. 7. Transferability of Option. The Option shall not be transferable by the Director otherwise than by will or the laws of descent and distribution, and shall be exercisable during his lifetime only by him. 8. Termination of Service, Death, Disability and Change in Control. Except as may be otherwise expressly provided in this Agreement, the Option herein granted shall terminate and all rights to exercise hereunder shall terminate (a) immediately in the event of the Director's discontinuance of service on Chico's Board of Directors as a result of his or her removal for cause and (b) seven (7) months after the date of the Director's discontinuance of service on Chico's Board of Directors for any other reason, other than death, disability or retirement. In the event of the death, disability or retirement of the Director while a member of the Board of Directors and before the date of expiration of the Option, the Option shall terminate and all rights to exercise hereunder shall terminate on the earlier of such date of expiration or one year following the date of such death, disability or retirement. After the death of the Director, his executors or administrators, or any person or persons to whom the Option may be transferred by will or by the laws of descent and distribution, shall have the right, at any time prior to such termination, to exercise the Option pursuant to the terms of this Agreement. If there shall occur a change in control of Chico's while any shares of Common Stock remain subject to this Option, then the Option shall become immediately exercisable without regard to Section 2 hereof and such exercisability shall terminate only pursuant to Section 2 hereof without regard to the other provisions of this Section 8. For purposes of this Agreement, a "change in control" of Chico's shall mean a change in control of a nature that would be required to reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1931 (the "Exchange Act") as in effect on the date hereof; provided, that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act and other than the persons who are directors on the date of this Agreement) is or becomes the beneficial owner, directly or indirectly, of securities of Chico's representing 20% or more of the combined voting power of Chico's then outstanding securities or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of Chico's cease for any reason to constitute at least a majority thereof. 3. 4 9. No Rights as Stockholder. The Director shall have no rights as a stockholder with respect to shares covered by the Option until the date of issuance of a stock certificate for such shares; no adjustment for dividends, or otherwise, except as provided in Section 10, shall be made if the record date therefor is prior to the date of exercise of such option. 10. Stock Adjustments. (a) In the event of any increase or decrease in the number of issued shares of Common Stock resulting from a stock split or other division or consolidation of shares or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of such shares effected without any receipt of consideration by Chico's, then, in any such event, the number of shares of Common Stock covered by the Option, and the purchase price per share of Common Stock covered by the Option shall be proportionately and appropriately adjusted for any such increase or decrease. (b) Subject to any required action by the stockholders, if any change occurs in the shares of Common Stock by reason of any recapitalization, reorganization, merger, consolidation, split-up, combination or exchange of shares, or of any similar change affecting the shares of Common Stock, then, in any such event, the number and type of shares covered by the Option, and the purchase price per share of Common Stock covered by the Option, shall be proportionately and appropriately adjusted for any such change. A dissolution or liquidation of Chico's shall cause each outstanding Option to terminate. (c) In the event of a change in the Common Stock as presently constituted that is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any change shall be deemed to be shares of Common Stock within the meaning of this Agreement. (d) To the extent that the foregoing adjustments relate to stock or securities of Chico's, such adjustments shall be made by, and in the discretion of, the Board, whose determination in that respect shall be final, binding and conclusive. (e) Except as hereinabove expressly provided in this Section 10, the Director shall have no rights by reason of any division or consolidation of shares of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, merger or consolidation, or spin-off of assets or stock of another corporation; and any issuance by Chico's of shares of stock of any class, securities 4. 5 convertible into shares of stock of any class, or warrants or options for shares of stock of any class shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to the Option. (f) The grant of this Option shall not affect in any way the right or power of Chico's to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate, or to dissolve, to liquidate, to sell, or to transfer all or any part of its business or assets. 11. Withholding. It shall be a condition to the obligation of Chico's to issue Common Stock shares upon exercise of an Option, that the Director (or any beneficiary or person entitled to act under Section 8 above) pay to Chico's, upon its demand, such amount as may be requested by Chico's for the purpose of satisfying any liability to withhold federal, state, local or foreign income or other taxes. If the amount requested is not paid, Chico's may refuse to issue Common Stock shares. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CHICO'S FAS, INC. By: /s/ Marvin J. Gralnick ------------------------------------------ Marvin J. Gralnick, President /s/ Ross E. Roeder ------------------------------------------ Ross E. Roeder, Director 5. EX-10.61 4 NON EMPLOYEE DIRECTORS STOCK OPTION 1 EXHIBIT 10.61 NONEMPLOYEE DIRECTOR'S STOCK OPTION AGREEMENT THIS AGREEMENT is made this 14th day of April, 1998 but is effective as of the 10th day of February, 1998, between CHICO'S FAS, Inc., a Florida corporation ("Chico's") and John W. Burden, a nonemployee member of Chico's Board of Directors (the "Director"). W I T N E S S E T H WHEREAS, the Director is now a member of Chico's Board of Directors and Chico's desires to have the Director remain in its service and desires to encourage stock ownership by the Director and to increase the Director's proprietary interest in Chico's success; and as an inducement thereto has determined to grant to the Director the option herein provided for, to the end that the Director may thereby be assisted in obtaining an interest, or an increased interest, as the case may be, in the stock ownership of Chico's. NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. Grant. Chico's hereby grants to the Director an option (the "Option") to purchase 10,000 shares of Chico's common stock, par value $.01 per share ("Common Stock") at $6.50 per share, both as adjusted pursuant to Section 10 hereof. 2. Exercise. The Option may be exercised at any time during the period hereinafter permitted by presentation at the principal offices of Chico's in Ft. Myers, Florida of (a) written notice to Chico's advising Chico's of the election of the Director to purchase the shares of Common Stock covered by this Option and (b) payment of the aggregate option price therefor. 3. Period of Exercise. The Option is exercisable in whole or from time to time in part during the period from August 10, 1998 through February 10, 2008, except as provided in Section 8 hereof. 4. Vesting Schedule. The Optionee's rights under the Option shall vest 100% on August 10, 1998. 5. Requirements of Law. Chico's shall not be required to sell or issue any shares under the Option if the issuance of such shares shall constitute a violation of any provisions of any law or regulation of any governmental authority. Specifically, in connection with the Securities Act of 1933 (the "Act"), upon exercise of the Option, unless a registration statement under the Act is in effect with respect to the shares of Common Stock covered by the Option, Chico's shall not be required to issue such shares unless Chico's has received evidence reasonably satisfactory to the effect that the Director is acquiring such shares for investment and not with a view to the distribution thereof, and unless the certificate 2 issued representing the shares of Common Stock bears the following legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 AS AMENDED AND APPLICABLE STATE SECURITIES LAWS." Any reasonable determination in this connection by Chico's shall be final, binding and conclusive. At such time as a registration statement under the Act is in effect with respect to the shares of Common Stock represented by certificates bearing the above legend or at such time as, in the opinion of counsel for Chico's, such legend is no longer required solely for compliance with applicable securities laws, then the holders of such certificates shall be entitled to exchange such certificates for certificates representing a like number of shares but without such legend. Chico's may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Act. Chico's shall not be obligated to take any other affirmative action in order to cause the exercise of the Option or the issuance of shares pursuant thereto to comply with any law or regulation of any governmental authority. 6. Method of Payment. Payment shall be made: (a) in United States dollars by certified check, or bank draft or (b) by tendering to Chico's Common Stock shares owned by the person exercising the Option and having a fair market value equal to the cash exercise price applicable to such Option, such fair market value to be 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 as reported on the Composite Tape, or if not reported thereon, then such price as reported in the trading reports of 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 mean between the dealer closing "bid" and "ask" prices on 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 Board in good faith and based on all relevant factors, or 2. 3 (c) by a combination of United States dollars and Common Stock shares as aforesaid. 7. Transferability of Option. The Option shall not be transferable by the Director otherwise than by will or the laws of descent and distribution, and shall be exercisable during his lifetime only by him. 8. Termination of Service, Death, Disability and Change in Control. Except as may be otherwise expressly provided in this Agreement, the Option herein granted shall terminate and all rights to exercise hereunder shall terminate (a) immediately in the event of the Director's discontinuance of service on Chico's Board of Directors as a result of his or her removal for cause and (b) seven (7) months after the date of the Director's discontinuance of service on Chico's Board of Directors for any other reason, other than death, disability or retirement. In the event of the death, disability or retirement of the Director while a member of the Board of Directors and before the date of expiration of the Option, the Option shall terminate and all rights to exercise hereunder shall terminate on the earlier of such date of expiration or one year following the date of such death, disability or retirement. After the death of the Director, his executors or administrators, or any person or persons to whom the Option may be transferred by will or by the laws of descent and distribution, shall have the right, at any time prior to such termination, to exercise the Option pursuant to the terms of this Agreement. If there shall occur a change in control of Chico's while any shares of Common Stock remain subject to this Option, then the Option shall become immediately exercisable without regard to Section 2 hereof and such exercisability shall terminate only pursuant to Section 2 hereof without regard to the other provisions of this Section 8. For purposes of this Agreement, a "change in control" of Chico's shall mean a change in control of a nature that would be required to reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1931 (the "Exchange Act") as in effect on the date hereof; provided, that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act and other than the persons who are directors on the date of this Agreement) is or becomes the beneficial owner, directly or indirectly, of securities of Chico's representing 20% or more of the combined voting power of Chico's then outstanding securities or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of Chico's cease for any reason to constitute at least a majority thereof. 3. 4 9. No Rights as Stockholder. The Director shall have no rights as a stockholder with respect to shares covered by the Option until the date of issuance of a stock certificate for such shares; no adjustment for dividends, or otherwise, except as provided in Section 10, shall be made if the record date therefor is prior to the date of exercise of such option. 10. Stock Adjustments. (a) In the event of any increase or decrease in the number of issued shares of Common Stock resulting from a stock split or other division or consolidation of shares or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of such shares effected without any receipt of consideration by Chico's, then, in any such event, the number of shares of Common Stock covered by the Option, and the purchase price per share of Common Stock covered by the Option shall be proportionately and appropriately adjusted for any such increase or decrease. (b) Subject to any required action by the stockholders, if any change occurs in the shares of Common Stock by reason of any recapitalization, reorganization, merger, consolidation, split-up, combination or exchange of shares, or of any similar change affecting the shares of Common Stock, then, in any such event, the number and type of shares covered by the Option, and the purchase price per share of Common Stock covered by the Option, shall be proportionately and appropriately adjusted for any such change. A dissolution or liquidation of Chico's shall cause each outstanding Option to terminate. (c) In the event of a change in the Common Stock as presently constituted that is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any change shall be deemed to be shares of Common Stock within the meaning of this Agreement. (d) To the extent that the foregoing adjustments relate to stock or securities of Chico's, such adjustments shall be made by, and in the discretion of, the Board, whose determination in that respect shall be final, binding and conclusive. (e) Except as hereinabove expressly provided in this Section 10, the Director shall have no rights by reason of any division or consolidation of shares of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, merger or consolidation, or spin-off of assets or stock of another corporation; and any issuance by Chico's of shares of stock of any class, securities 4. 5 convertible into shares of stock of any class, or warrants or options for shares of stock of any class shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to the Option. (f) The grant of this Option shall not affect in any way the right or power of Chico's to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate, or to dissolve, to liquidate, to sell, or to transfer all or any part of its business or assets. 11. Withholding. It shall be a condition to the obligation of Chico's to issue Common Stock shares upon exercise of an Option, that the Director (or any beneficiary or person entitled to act under Section 8 above) pay to Chico's, upon its demand, such amount as may be requested by Chico's for the purpose of satisfying any liability to withhold federal, state, local or foreign income or other taxes. If the amount requested is not paid, Chico's may refuse to issue Common Stock shares. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CHICO'S FAS, INC. By: /s/ Marvin J. Gralnick ------------------------------------------ Marvin J. Gralnick, President /s/ John W. Burden ------------------------------------------ John W. Burden, Director 5. EX-10.62 5 NON EMPLOYEE DIRECTORS STOCK OPTION PLAN 1 EXHIBIT 10.62 NONEMPLOYEE DIRECTOR'S STOCK OPTION AGREEMENT THIS AGREEMENT is made this 14th day of April, 1998 but is effective as of the 10th day of February, 1998, between CHICO'S FAS, Inc., a Florida corporation ("Chico's") and Verna K. Gibson, a nonemployee member of Chico's Board of Directors (the "Director"). W I T N E S S E T H WHEREAS, the Director is now a member of Chico's Board of Directors and Chico's desires to have the Director remain in its service and desires to encourage stock ownership by the Director and to increase the Director's proprietary interest in Chico's success; and as an inducement thereto has determined to grant to the Director the option herein provided for, to the end that the Director may thereby be assisted in obtaining an interest, or an increased interest, as the case may be, in the stock ownership of Chico's. NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. Grant. Chico's hereby grants to the Director an option (the "Option") to purchase 25,000 shares of Chico's common stock, par value $.01 per share ("Common Stock") at $6.50 per share, both as adjusted pursuant to Section 10 hereof. 2. Exercise. The Option may be exercised at any time during the period hereinafter permitted by presentation at the principal offices of Chico's in Ft. Myers, Florida of (a) written notice to Chico's advising Chico's of the election of the Director to purchase the shares of Common Stock covered by this Option and (b) payment of the aggregate option price therefor. 3. Period of Exercise. The Option is exercisable in whole or from time to time in part during the period from August 10, 1998 through February 10, 2008, except as provided in Section 8 hereof. 4. Vesting Schedule. The Optionee's rights under the Option shall vest 100% on August 10, 1998. 5. Requirements of Law. Chico's shall not be required to sell or issue any shares under the Option if the issuance of such shares shall constitute a violation of any provisions of any law or regulation of any governmental authority. Specifically, in connection with the Securities Act of 1933 (the "Act"), upon exercise of the Option, unless a registration statement under the Act is in effect with respect to the shares of Common Stock covered by the Option, Chico's shall not be required to issue such shares unless Chico's has received evidence reasonably satisfactory to the effect that the Director is acquiring such shares for investment and not with a view to the distribution thereof, and unless the certificate 2 issued representing the shares of Common Stock bears the following legend: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 AS AMENDED AND APPLICABLE STATE SECURITIES LAWS." Any reasonable determination in this connection by Chico's shall be final, binding and conclusive. At such time as a registration statement under the Act is in effect with respect to the shares of Common Stock represented by certificates bearing the above legend or at such time as, in the opinion of counsel for Chico's, such legend is no longer required solely for compliance with applicable securities laws, then the holders of such certificates shall be entitled to exchange such certificates for certificates representing a like number of shares but without such legend. Chico's may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Act. Chico's shall not be obligated to take any other affirmative action in order to cause the exercise of the Option or the issuance of shares pursuant thereto to comply with any law or regulation of any governmental authority. 6. Method of Payment. Payment shall be made: (a) in United States dollars by certified check, or bank draft or (b) by tendering to Chico's Common Stock shares owned by the person exercising the Option and having a fair market value equal to the cash exercise price applicable to such Option, such fair market value to be 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 as reported on the Composite Tape, or if not reported thereon, then such price as reported in the trading reports of 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 mean between the dealer closing "bid" and "ask" prices on 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 Board in good faith and based on all relevant factors, or 2. 3 (c) by a combination of United States dollars and Common Stock shares as aforesaid. 7. Transferability of Option. The Option shall not be transferable by the Director otherwise than by will or the laws of descent and distribution, and shall be exercisable during his lifetime only by him. 8. Termination of Service, Death, Disability and Change in Control. Except as may be otherwise expressly provided in this Agreement, the Option herein granted shall terminate and all rights to exercise hereunder shall terminate (a) immediately in the event of the Director's discontinuance of service on Chico's Board of Directors as a result of his or her removal for cause and (b) seven (7) months after the date of the Director's discontinuance of service on Chico's Board of Directors for any other reason, other than death, disability or retirement. In the event of the death, disability or retirement of the Director while a member of the Board of Directors and before the date of expiration of the Option, the Option shall terminate and all rights to exercise hereunder shall terminate on the earlier of such date of expiration or one year following the date of such death, disability or retirement. After the death of the Director, his executors or administrators, or any person or persons to whom the Option may be transferred by will or by the laws of descent and distribution, shall have the right, at any time prior to such termination, to exercise the Option pursuant to the terms of this Agreement. If there shall occur a change in control of Chico's while any shares of Common Stock remain subject to this Option, then the Option shall become immediately exercisable without regard to Section 2 hereof and such exercisability shall terminate only pursuant to Section 2 hereof without regard to the other provisions of this Section 8. For purposes of this Agreement, a "change in control" of Chico's shall mean a change in control of a nature that would be required to reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1931 (the "Exchange Act") as in effect on the date hereof; provided, that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Section 13(d) and 14(d)(2) of the Exchange Act and other than the persons who are directors on the date of this Agreement) is or becomes the beneficial owner, directly or indirectly, of securities of Chico's representing 20% or more of the combined voting power of Chico's then outstanding securities or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of Chico's cease for any reason to constitute at least a majority thereof. 3. 4 9. No Rights as Stockholder. The Director shall have no rights as a stockholder with respect to shares covered by the Option until the date of issuance of a stock certificate for such shares; no adjustment for dividends, or otherwise, except as provided in Section 10, shall be made if the record date therefor is prior to the date of exercise of such option. 10. Stock Adjustments. (a) In the event of any increase or decrease in the number of issued shares of Common Stock resulting from a stock split or other division or consolidation of shares or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of such shares effected without any receipt of consideration by Chico's, then, in any such event, the number of shares of Common Stock covered by the Option, and the purchase price per share of Common Stock covered by the Option shall be proportionately and appropriately adjusted for any such increase or decrease. (b) Subject to any required action by the stockholders, if any change occurs in the shares of Common Stock by reason of any recapitalization, reorganization, merger, consolidation, split-up, combination or exchange of shares, or of any similar change affecting the shares of Common Stock, then, in any such event, the number and type of shares covered by the Option, and the purchase price per share of Common Stock covered by the Option, shall be proportionately and appropriately adjusted for any such change. A dissolution or liquidation of Chico's shall cause each outstanding Option to terminate. (c) In the event of a change in the Common Stock as presently constituted that is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any change shall be deemed to be shares of Common Stock within the meaning of this Agreement. (d) To the extent that the foregoing adjustments relate to stock or securities of Chico's, such adjustments shall be made by, and in the discretion of, the Board, whose determination in that respect shall be final, binding and conclusive. (e) Except as hereinabove expressly provided in this Section 10, the Director shall have no rights by reason of any division or consolidation of shares of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, merger or consolidation, or spin-off of assets or stock of another corporation; and any issuance by Chico's of shares of stock of any class, securities 4. 5 convertible into shares of stock of any class, or warrants or options for shares of stock of any class shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to the Option. (f) The grant of this Option shall not affect in any way the right or power of Chico's to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate, or to dissolve, to liquidate, to sell, or to transfer all or any part of its business or assets. 11. Withholding. It shall be a condition to the obligation of Chico's to issue Common Stock shares upon exercise of an Option, that the Director (or any beneficiary or person entitled to act under Section 8 above) pay to Chico's, upon its demand, such amount as may be requested by Chico's for the purpose of satisfying any liability to withhold federal, state, local or foreign income or other taxes. If the amount requested is not paid, Chico's may refuse to issue Common Stock shares. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CHICO'S FAS, INC. By: /s/ Marvin J. Gralnick ------------------------------------------ Marvin J. Gralnick, President /s/ Verna K. Gibson ------------------------------------------ Verna K. Gibson, Director 5. EX-13 6 ANNUAL REPORT 1 EXHIBIT 13 [GRAPHIC -- PICTURE OF FEMALE MODEL LEANING AGAINST TRUCK] CHICO'S(R) 1998 ANNUAL REPORT 2 [MODEL POSING ON BEACH] 3 To our shareholders, Fiscal 1998 was a successful turn around year for Chico's. We are on the road to realizing our goal of making Chico's a prominent and leading retail force in the casual women's apparel marketplace. Although our stores only average 1300 selling square feet, we are excited that, in fiscal 1998 four of our stores topped the million-dollar sales mark with Scottsdale, Arizona exceeding one and one-half million dollars in sales. We now have more than 141 stores, including seven franchise stores and eight outlets. Every Chico's has its own character with the size, layout and unique furnishings contributing to each store's personality. In fiscal 1998, we opened 14 new stores and remodeled 25. This year we plan to open 16 to 20 new Chico's stores and will continue to remodel and update existing stores. We had positive comparable store sales for the last eleven months of the fiscal year with eight of those showing double-digit increases. Our net income increased as well to 35 cents per share versus 24 cents per share in the prior year. Our success this year can be attributed to increased product knowledge, better merchandise presentation in our stores, an improved style mix combined with better distribution methods, increased holiday sales, a more focused marketing effort, and the opening of successful new stores in prime locations. These achievements are made possible because of our enthusiastic employees nationwide. Our product development team is more focused and has been responsible for raising our standards in design, quality and promptness of delivery. We have purchased new software to make our design process more effective and we are continuously introducing new fabrics and styles. Chico's customers appreciate the casually sophisticated, comfortable styling and easy care fabrics of our clothing. A winning combination is created with our unique products, boutique store settings and attentive store teams. Our great customer service starts with product knowledge. In the fall, as part of our new training program, we initiated Fashion Information Training (F.I.T.) store notebooks which contain drawings, descriptions, fabric content, care instruction, sizing and pricing of the clothing we will sell in coming months. Because we pride ourselves on unique customer service, sales training is also of the utmost importance. In the spring of 1998, our district sales managers will begin training with our Most Amazing Personal Service (M.A.P.S.) sales module. They in turn, will train store managers who will train their teams. This sales training will address the history and values of Chico's, product experience and selling techniques. In December, Chico's women everywhere raved about the Traveler's Dress, the first item in our immensely popular Traveler's Collection. Our February 1998 mailer highlights this collection of six easy pieces which can be worn in different combinations. In the future, we will be introducing new colors, weaves, textures and designs in this fabulous fabric (the Traveler's Collection) that is wrinkle free, easy to care for, and looks great on every body style. Since our best months are generally in the Spring, while other retailers peak in December, our 1997 holiday season presented us with a challenge. In addition to dressier holiday clothing, we offered gift items such as angel pins on cards, candles and brass ornaments. Chico's celebrated a Mexican holiday season by decorating our stores with festive banners, candle and ornament trees and menorahs. Our customers bought these ornaments and the displays as well as our clothing. Although we have made progress in our holiday season performance, our goal for the future is to improve upon these results. Our bimonthly direct mail marketing results have been extremely positive. Every mailer is designed in house much like our clothing. We continue to feature current and former employees as models, bringing reality into our photography. Our mailer results have been improved by targeting our best customers and prospecting in markets in which we want to expand. Our marketing success, combined with wide customer acceptance, has been continuously increasing our customer base. With the addition of Pat Murphy, our senior merchant, we have rounded out Chico's management team. This team, along with our dedicated employees and our experienced board of directors, should enable us to achieve our goal of being a prominent and leading retail force in the casual women's apparel marketplace. Sales are brisk, morale is high and our potential seems limitless. Happy trails and great sales, /s/ Marvin Gralnick Marvin Gralnick Chairman of the Board 4 [CHICOS LOGO] REAL CLOTHES FOR REAL PEOPLE FINANCIAL HIGHLIGHTS
PRO FORMA ONE FISCAL YEAR FISCAL YEAR ENDED MONTH ENDED FISCAL YEAR ENDED --------------------------- ENDED (UNAUDITED) ----------------- 1993 1994 1995 1/28/96(1) 1996(1) 1997(1) 1998 ------- ------- ------- ---------- ----------- ------- ------- (Dollars in thousands except per share data) STATEMENT OF INCOME DATA: Net Sales $46,835 $59,271 $60,343 $3,747 $60,763 $64,073 $75,339 Income (loss) from Operations 7,985 5,685 3,485 (524) 3,437 3,622 4,914 Net Income (loss)(2) 4,902 3,291 1,704 (338) 1,676 1,931 2,770 Basic Earnings (loss) Per Share .63 .42 .22 (.04) .22 .25 .35 Diluted Earnings (loss) Per Share .61 .41 .22 (.04) .21 .24 .34 OPERATING DATA: Total Assets 16,589 27,352 27,009 27,681 31,248 34,472 Long-Term Debt 593 4,663 5,896 7,231 7,008 6,703 Stockholders' Equity $10,713 $14,226 $15,959 $15,621 $18,021 $21,456 Number of Stores (at end of period): Company-owned 78 104 111 111 123 132 Franchised 16 17 12 12 10 9 --- ---- ---- ------ ---- ---- Total 94 121 123 123 133 141 --- ---- ---- ------ ---- ----
(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) Represents unaudited supplemental pro forma net income for fiscal period 1993. ------------------------------------------------------------------------------ INDEX 4 Management's Discussion & Analysis 9 Stock Information 10 Financial Statements 26 Executive Officers/Directors 27 Store Listing
5 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 141 stores as of January 31, 1998 (fiscal 1998), of which 132 are Company-owned and 9 are franchised stores (two were acquired by the Company in March 1998). Since fiscal 1989, the Company has de-emphasized the granting of new franchises as a strategy for growth and, at the same time, has been expanding its store base by opening Company-owned stores. Where possible and practical, the Company has also acquired stores from its franchisees. Since the beginning of fiscal 1993, the Company has acquired 7 stores from franchisees (excluding the two acquired subsequent to January 31, 1998) and opened 82 new Company-owned stores, 14 of which were opened in fiscal 1998, 13 of which were opened in fiscal 1997, 8 of which were opened in the pro forma fiscal year ended January 28, 1996, 26 of which were opened in the fiscal year ended January 1, 1995 and 21 of which were opened in the fiscal year ended January 2, 1994. During this same time period, the Company closed 14 Company-owned stores and 3 franchised stores were closed. The Company plans to open 16 to 20 new Company-owned stores in the fiscal year ending January 30, 1999 (fiscal 1999). 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 2 and 6 existing Company-owned stores in fiscal 1999. RESULTS OF OPERATIONS The following table sets forth, for each of the respective periods indicated, certain operating statement data and the percentage of the Company's net sales represented by each line item presented. The Company elected, effective January 29, 1996, to change its fiscal year from a 52/53 week fiscal year ending on the Sunday closest to December 31st, to a 52/53 week fiscal year ending on the Saturday closest to January 31st. To assist in a review of the Company's results of operations, the following table includes operating statement data for the short one month transition period in January 1996, for a pro forma fiscal year ended January 28, 1996 and the first two new full fiscal years ended in 1997 and 1998.
ONE MONTH PERIOD PRO FORMA FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED (UNAUDITED) FISCAL YEAR ENDED -------------------- ------------------- --------------------- ------------------- DECEMBER 31, JANUARY 28, JANUARY 28, FEBRUARY 1, 1995 1996 1996 1997 (52 WEEKS) % (4 WEEKS) % (52 WEEKS) % (53 WEEKS) % ------------ ----- ----------- ----- ------------ ------ ----------- ----- Net sales by company stores.... $57,636 95.5% $3,619 96.6% $58,091 95.6% $62,318 97.3% Net sales to franchisees....... 2,707 4.5 128 3.4 2,672 4.4 1,755 2.7 ------- ----- ------ ----- ------- ----- ------- ----- Net sales.................... 60,343 100.0 3,747 100.0 60,763 100.0 64,073 100.0 Cost of goods sold............. 26,115 43.3 1,913 51.0 26,484 43.6 26,713 41.7 ------- ----- ------ ----- ------- ----- ------- ----- Gross profit................. 34,228 56.7 1,834 49.0 34,279 56.4 37,360 58.3 General, administrative and store operating expenses..... 30,743 50.9 2,358 63.0 30,842 50.7 33,738 52.6 ------- ----- ------ ----- ------- ----- ------- ----- Income (loss) from operations................... 3,485 5.8 (524) (14.0) 3,437 5.7 3,622 5.7 Interest expense, net.......... 621 1.1 39 1.0 620 1.0 404 .7 ------- ----- ------ ----- ------- ----- ------- ----- Income (loss) before taxes..... 2,864 4.7 (563) (15.0) 2,817 4.7 3,218 5.0 Provision for (benefit from) income taxes................. 1,160 1.9 (225) (6.0) 1,141 1.9 1,287 2.0 ------- ----- ------ ----- ------- ----- ------- ----- Net Income (loss).............. $ 1,704 2.8% $ (338) (9.0)% $ 1,676 2.8% $ 1,931 3.0% ======= ===== ====== ===== ======= ===== ======= ===== FISCAL YEAR ENDED ------------------- JANUARY 31, 1998 (52 WEEKS) % ----------- ----- Net sales by company stores.... $73,597 97.7% Net sales to franchisees....... 1,742 2.3 ------- ----- Net sales.................... 75,339 100.0 Cost of goods sold............. 33,240 44.1 ------- ----- Gross profit................. 42,099 55.9 General, administrative and store operating expenses..... 37,185 49.4 ------- ----- Income (loss) from operations................... 4,914 6.5 Interest expense, net.......... 372 .5 ------- ----- Income (loss) before taxes..... 4,542 6.0 Provision for (benefit from) income taxes................. 1,772 2.3 ------- ----- Net Income (loss).............. $ 2,770 3.7% ======= =====
4 6 FIFTY-TWO WEEKS ENDED JANUARY 31, 1998 COMPARED TO FIFTY-THREE WEEKS ENDED FEBRUARY 1, 1997 NET SALES. Net sales by Company-owned stores for the fifty-two weeks ended January 31, 1998 (fiscal 1998) increased by $11.3 million, or 17.6%, over net sales by Company-owned stores for the fifty-three weeks ended February 1,1997 (fiscal 1997). The increase was the result of $4.7 million additional sales from the new (or reacquired) stores not yet included in the Company's comparable store base (net of sales of $1.1 million from eight stores closed in fiscal 1997 and fiscal 1998), a comparable Company-owned store net sales increase of $6.1 million, and approximately $464,000 in additional sales resulting from the liquidation of inventory through an independent liquidator. Net sales to franchisees for fiscal 1998 decreased by approximately $13,000, or .7% compared to net sales to franchisees for fiscal 1997. The Company believes that the decrease in net sales to franchisees was primarily caused by the reacquisition of two franchises in fiscal 1998 and fiscal 1997, and a decrease in the purchases from the Company's largest franchise, offset by a decrease in the volume of returned merchandise under the Company's new return policy implemented in mid 1996. GROSS PROFIT. Gross profit for fiscal 1998 was $42.1 million, or 55.9% of net sales, compared with $37.4 million, or 58.3% of net sales for fiscal 1997. The decrease in the gross profit percentage primarily resulted from a revised merchandising strategy as the Company reduced price points to more effectively meet competitive price points and increased sales promotions and other markdowns at both front line and outlet stores in an effort to reduce the Company's levels of inventories, particularly older inventory that was being held at the Company's warehouse for future clearance. To a lesser degree, the decrease in gross margins resulted from (1) increased freight costs due to an increased use of air shipments as the Company attempted to rapidly increase its in-store inventory levels of newer merchandise, (2) a sale, at cost, of approximately $464,000 of inventory to an independent liquidator, and (3) additional inventory charges associated with certain of the Company's older designs and styles. GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General, administrative and store operating expenses increased to $37.2 million, or 49.4% of net sales, in fiscal 1998 from $33.7 million, or 52.7% of net sales, in fiscal 1997. 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 new store openings. The decrease in these expenses as a percentage of net sales was principally due to direct store costs which decreased by 2.4% of net sales due to leverage associated with the Company's 10.7% comparable store sales increase. To a lesser degree, the decrease is also attributable to net business interruption insurance proceeds related to the temporary closing of one of the Company's stores and a prior year nonrecurring cost of approximately $325,000 related to separation expenses associated with the former president of the Company, all net of the impact of an increase in marketing expenses. INTEREST EXPENSE, NET. Net interest expense decreased to approximately $372,000 in fiscal 1998 from approximately $404,000 in fiscal 1997. This decrease was primarily a result of an increase in interest earnings associated with the Company's improved cash position. NET INCOME. As a result of the factors discussed above, net income reflects an increase of 43.5% to $2.7 million in fiscal 1998 from net income of $1.9 million in fiscal 1997. The provision for income taxes represented an effective rate of 39.0% in the fifty-two weeks ended January 31, 1998, as compared to 40.0% in the fifty-three weeks ended February 1, 1997. The decrease in the effective income tax rate resulted from a lower effective state income tax rate. FIFTY-THREE WEEKS ENDED FEBRUARY 1, 1997 COMPARED TO PRO FORMA FIFTY-TWO WEEKS ENDED JANUARY 28, 1996 NET SALES. Net sales by Company owned stores for the fifty-three weeks ended February 1, 1997 (fiscal 1997) increased by $4.2 million over net sales by Company-owned stores for the pro forma fifty-two weeks ended January 28, 1996 (pro forma fiscal 1996). The increase was primarily the result of $3.9 million in additional sales provided (1) by the fourteen stores opened or acquired in the fiscal year ended February 1, 1997 (net of two stores closed during the fiscal year) prior to such stores being included in the Company's comparable store base and (2) by several extended clearance sales conducted at, or near, the Company's warehouse (approximately 5 7 $992,000 of additional net sales). Approximately $1.0 million of the additional sales were attributable to the twelve stores opened or acquired in the pro forma fiscal year ended January 28, 1996 (net of five stores closed during such period). These increases in net sales were offset in part by a comparable Company-owned store net sales decrease of $704,000. Net sales to franchisees for fiscal 1997 decreased by approximately $917,000, or 34.4%, compared to net sales to franchisees for pro forma fiscal 1996. This decrease in net sales to franchisees resulted in part from the acquisition by the Company of six franchised stores during the two fiscal years ended February 1, 1997, and the closing of one franchise in March 1996. Management believes the balance of this decrease in net sales to franchisees resulted in part from conservative buying positions established by the franchisees as the Company began delivering its new designs and styles in late March 1996, combined with increased returns of older merchandise in anticipation of a new, more restrictive return policy which became effective in July 1996. GROSS PROFIT. Gross profit for fiscal 1997 was $37.4 million, or 58.3% of net sales, compared with $34.3 million, or 56.4% of net sales for pro forma fiscal 1996. The increase in the gross profit percentage primarily resulted from improved gross margins related to the Company's new spring and holiday goods, and an increase in the Company's outlet gross margins due to a change in its merchandising strategies together with the effect of the decreased percentage of total sales attributable to franchisees which carry lower margins. GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General, administrative and store operating expenses increased to $33.7 million, or 52.6% of net sales, in fiscal 1997 from $30.8 million, or 50.7% of net sales, in pro forma fiscal 1996. The increase in general, administrative and store operating expenses, for the most part, was the result of increases in store operating expenses, including store compensation and occupancy costs associated with additional store openings. To a lesser degree, the increase in general, administrative and store operating expense was a result of increased marketing and promotion costs associated with mailings to existing and potential customers, combined with the Company's increased outreach efforts. In addition, the increase was also due to a nonrecurring cost of approximately $325,000 related to separation expenses associated with the former President of the Company. During the pro forma fiscal year ended January 28, 1996, general, administrative and store operating costs were negatively impacted by an approximate $235,000 nonrecurring cost related to the Company's refinancing of its outstanding indebtedness. The increase in these expenses as a percentage of net sales was principally a result of the increased marketing and promotion costs, combined with the decline in comparable Company-owned store net sales. INTEREST EXPENSE, NET. Interest expense, net, decreased to approximately $404,000 in fiscal 1997 from approximately $620,000 in fiscal 1996. This decrease was primarily a result of decreased interest rates due to the refinancing accomplished in January 1996. NET INCOME. As a result of the factors discussed above, net income reflects an increase of 15.1% to $1.9 million for fiscal 1997 from net income of $1.7 million for pro forma fiscal 1996. The income tax provision represented an effective rate of 40.0% for fiscal 1997, while the income tax provision for pro forma fiscal 1996 represented an effective rate of 40.5%. The decrease in the effective rate is largely attributable to lower permanent book-to-tax differences in the current fiscal year. COMPARISON OF FIFTY-THREE WEEKS ENDED FEBRUARY 1, 1997 TO FISCAL 1995 As is evident from the table shown previously, the results of operations for the pro forma fiscal year ended January 28, 1996 and the fiscal year ended December 31, 1995 are substantially the same, particularly as to the relative percentages of net sales for each line item. Accordingly, a discussion of a comparison of the fifty-three weeks ended February 1, 1997 to the fiscal year ended December 31, 1995 would be largely the same as the above discussion which compares the fifty-three weeks ended February 1, 1997 to the pro forma fifty-two weeks ended January 28, 1996. FOUR WEEKS ENDED JANUARY 28, 1996 GENERAL. The Company has historically cleared merchandise at marked down prices during the month of January. This practice, which the Company believes to be consistent with other apparel 6 8 retailers, results in a four week period that is not representative of the full year results. Weekly sales during this four week period are generally lower due to substantially increased returns resulting from the Christmas selling season, combined with the deep markdowns required to clear merchandise and meet competition. For the one month period ended January 28, 1996, the gross profit percentage of 49.0% is substantially less than the Company experiences on a full quarter basis due to the focus on clearance of goods. Further, the general, administrative and store operating expense percentage of 62.9% for the one month period was also substantially higher than the Company experiences on a full quarter basis due to the reduced sales described above, combined with certain relatively fixed levels of expenses. As a result of the above, the losses shown for this month are generally consistent with past January results. COMPARABLE COMPANY-OWNED STORE NET SALES Comparable Company store net sales increased by 10.7% for the fifty-two weeks ended January 31, 1998 when compared to the comparable fifty-two weeks of the previous period. Comparable Company store net sales data is calculated based on the change in net sales of currently open Company-owned stores that have been operated as a Company store for at least thirteen months. The Company believes that the increase in comparable Company store sales resulted primarily from the Company's return in June 1997 to its traditional Chico's look, fit and pricing policies. The Company also believes that the increase in comparable store sales was fueled by increased direct mail and other promotions, sales and markdowns of previous styles and designs as well as the Company's national sidewalk sale held in July 1997, and a more focused merchandising effort during the Christmas selling season. The following table sets forth for each of the four quarters of fiscal 1998, 1997 and 1996 (restated to reflect the change in year end), the percentage changes in comparable store net sales at Company-owned stores:
FISCAL QUARTERS ----------------------------------------- 1ST 2ND 3RD 4TH FULL QTR QTR QTR QTR YEAR ----- ----- ----- ----- ----- Fiscal year ended 1/31/98: (1.1%) 13.3% 12.0% 20.1% 10.7% Fiscal year ended 2/1/97: 2.9% 2.2% (0.3%) (10.6%) (1.3%) Fiscal year ended 1/28/96: (17.2%) (13.5%) (8.1%) 0.2% (10.1%)
LIQUIDITY AND CAPITAL RESOURCES. The Company's primary on going capital requirements are for funding capital expenditures related to new store openings and merchandise inventory purchases. During the fifty-two weeks ended January 31, 1998 (fiscal 1998) and the fifty-three weeks ended February 1, 1997 (fiscal 1997), the Company's primary source of working capital was cash flow from operations of $3.6 million and $3.2 million, respectively. The increase in cash flow from operations was primarily due to the increase in net income of approximately $839,000. The increase in cash flow provided by operations was also due to a deferred tax provision of approximately $32,000 in fiscal 1998 versus a deferred tax benefit of approximately $515,000 in fiscal 1997 and an increase in deferred rent of approximately $130,000 in fiscal 1998 versus a decrease of approximately $78,000 in fiscal 1997, offset by an increase in accounts payable and accrued liabilities of approximately $298,000 in fiscal 1998 versus an increase of $1.5 million in fiscal 1997. The Company invested $2.0 million during fiscal 1998 for capital expenditures primarily associated with the opening of fifteen new (or reacquired) stores, the relocating of three existing stores and the remodeling of several existing stores. The Company also sold a small piece of land it originally acquired for its headquarters (with a cost of approximately $60,000) for approximately $35,000 and the Company closed six stores during this period. Also, during fiscal 1998 the Company amended its credit facilities which reduced a required certificate of deposit from $1.6 million to $1.0 million. During fiscal 1997, the Company invested $2.9 million for capital expenditures associated with the opening of thirteen new stores, the remodeling of several existing stores and a company-wide refixturing program. 7 9 The Company repaid under its then available credit lines approximately $285,000 and $256,000 in fiscal 1998 and 1997, respectively. The Company also, repaid other debt and lease obligations of approximately $354,000 and $403,000 in the same periods. In addition, the Company invested $100,000 in intangible assets associated with the reacquisition of one franchised store and the Company invested approximately $54,000 in fiscal 1998 and $63,000 in fiscal 1997 in renewal fees associated with the extension of its existing credit lines. As more fully described in "Item 1-Business" beginning on page 14 of the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998, the Company is subject to ongoing 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. During fiscal 1998, the Company sold 21,268 shares at prices of $2.44 and $4.83 under its Employee Stock Purchase Plan, an officer of the Company exercised 100,000 stock options at the price of $4.08 and several employees exercised an aggregate of 5,931 stock options at prices ranging from $4.625 to $7.00. The proceeds from these issuances of stock amounted to approximately $665,000. During fiscal 1997, one of the former officers exercised 71,540 stock options at a price of $4.08, several other employees exercised an aggregate of 7,212 options at prices ranging from $5.50 to $8.75 and the Company sold 22,868 shares at prices of $3.83 and $5.42 under its Employee Stock Purchase Plan. The proceeds from these issuances of stock amounted to approximately $469,000. The Company plans to open approximately 16 to 20 new stores in fiscal 1999 and 20 to 24 stores in fiscal 2000. The Company believes that the liquidity needed for its planned new store growth, remodeling program and maintenance of proper inventory levels associated with this growth will be funded primarily from cash flow from operations. The Company further believes that this liquidity will be sufficient, based on currently planned new store openings, to fund anticipated capital needs over the near-term, including scheduled debt repayments. If cash flow from operations should prove to be less than anticipated or if there should arise a need for additional letter of credit capacity due to establishing new and expanded sources of supply, or if the Company were to increase the number of new Company stores planned to be opened in future periods, the Company might need to seek other sources of financing to conduct its operations or pursue its expansion plans and there can be no assurance that such other sources of financing would be available. 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 fiscal 1998 or during fiscal 1997. Although sales have been somewhat higher in the Company's first and second fiscal quarters (February through July), 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 the 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, performance of management 8 10 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 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 fluctuation, 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. The company has assessed the year 2000 readiness of its systems and has determined that the costs and uncertainties that may be associated with addressing the year 2000 issues for its systems are not expected to have a material impact on its business operations or its financial conditions. TRADING AND DIVIDEND INFORMATION The following table sets forth, for the periods indicated, the range of high and low closing sale prices for the Common Stock, as reported on the NASDAQ National Market System.
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 HIGH LOW - ------------------------------------------ ------ ----- First Quarter (February 2, 1997 - May 3, 1997).............. $ 4.25 $2.69 Second Quarter (May 4, 1997 - August 2, 1997)............... 5.50 2.75 Third Quarter (August 3, 1997 - November 1, 1997)........... 7.88 4.88 Fourth Quarter (November 2, 1997 - January 31, 1998)........ 8.75 6.25
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997 - ------------------------------------------ First Quarter (January 29, 1996 - April 28, 1996)........... $ 7.00 $4.13 Second Quarter (April 29, 1996 - July 28, 1996)............. 11.75 6.50 Third Quarter (July 29, 1996 - October 27, 1996)............ 9.00 6.00 Fourth Quarter (October 28, 1996 - February 1, 1997)........ 6.69 3.63
Since its initial public offering, the Company has not paid any cash dividends except for $5,853,000 of dividends representing previously taxed undistributed S corporation earnings which dividends were declared prior to the Company's initial public offering and paid to persons who were stockholders prior to the offering. The Company does not intend to pay any cash dividends for the foreseeable future and intends to retain earnings, if any, for the future operation and expansion of the Company's business. Any determination to pay dividends in the future will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors. The approximate number of equity security holders of the Company is as follows:
NUMBER OF RECORD HOLDERS TITLE OF CLASS AS OF APRIL 1, 1998 ------------------------ ------------------- Common Stock, par value $.01 per share...................... 569
9 11 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TO CHICO'S FAS, INC.: We have audited the accompanying balance sheets of Chico's FAS, Inc. (a Florida corporation) as of January 31, 1998, and February 1, 1997, and the related statements of income, stockholders' equity and cash flows for the fiscal years ended January 31, 1998, and February 1, 1997, for the period from January 1, 1996, through January 28, 1996, and for the fiscal year ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Chico's FAS, Inc. as of January 31, 1998, and February 1, 1997, and the results of its operations and its cash flows for the fiscal years ended January 31, 1998, and February 1, 1997, for the period from January 1, 1996, through January 28, 1996, and for the fiscal year ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Arthur Andersen LLP Tampa, Florida, March 3, 1998 10 12 CHICO'S FAS, INC. BALANCE SHEETS
ASSETS JANUARY 31, FEBRUARY 1, ------ 1998 1997 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents................................. $ 2,943,916 $ 832,176 Receivables, less allowances of $75,000 and $105,000 for sales returns, respectively............................ 894,895 763,451 Inventories............................................... 9,525,472 7,845,362 Prepaid expenses.......................................... 667,145 473,444 Deferred taxes............................................ 1,251,000 1,290,000 ----------- ----------- Total current assets.............................. 15,282,428 11,204,433 CERTIFICATE OF DEPOSIT...................................... 1,000,000 1,600,000 PROPERTY AND EQUIPMENT, net................................. 16,979,386 17,236,952 DEFERRED TAXES.............................................. 559,000 552,000 OTHER ASSETS, net........................................... 650,702 654,673 ----------- ----------- $34,471,516 $31,248,058 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY ----------------------------------------------- CURRENT LIABILITIES: Accounts payable.......................................... $ 3,520,265 $ 3,301,990 Accrued liabilities....................................... 2,540,375 2,461,026 Current portion of debt and lease obligations............. 251,762 456,602 ----------- ----------- Total current liabilities......................... 6,312,402 6,219,618 DEBT AND LEASE OBLIGATIONS, excluding current portion....... 6,703,229 7,007,842 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 25,000,000 shares authorized and 8,011,317 and 7,884,118 shares issued and outstanding, respectively.............................. 80,113 78,841 Additional paid-in capital................................ 8,219,707 7,555,708 Retained earnings......................................... 13,156,065 10,386,049 ----------- ----------- Total stockholders' equity........................ 21,455,885 18,020,598 ----------- ----------- $34,471,516 $31,248,058 ----------- -----------
The accompanying notes are an integral part of these balance sheets. 11 13 CHICO'S FAS, INC. STATEMENTS OF INCOME
PERIOD FROM FISCAL YEAR FISCAL YEAR JANUARY 1, 1996, FISCAL YEAR ENDED ENDED THROUGH ENDED JANUARY 31, FEBRUARY 1, JANUARY 28, DECEMBER 31, 1998 1997 1996 1995 ----------- ----------- ---------------- ------------ NET SALES BY COMPANY STORES.......... $73,596,969 $62,317,817 $3,619,519 $57,635,904 NET SALES TO FRANCHISEES............. 1,742,183 1,754,788 127,614 2,707,284 ----------- ----------- --------------- ----------- Net sales.......................... 75,339,152 64,072,605 3,747,133 60,343,188 COST OF GOODS SOLD................... 33,240,162 26,712,475 1,912,512 26,115,326 ----------- ----------- --------------- ----------- Gross profit....................... 42,098,990 37,360,130 1,834,621 34,227,862 GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES................. 37,184,671 33,738,523 2,358,122 30,742,863 ----------- ----------- --------------- ----------- Income (loss) from operations...... 4,914,319 3,621,607 (523,501) 3,484,999 INTEREST EXPENSE, net................ 372,303 404,054 39,492 621,403 ----------- ----------- --------------- ----------- INCOME (LOSS) BEFORE INCOME TAXES.... 4,542,016 3,217,553 (562,993) 2,863,596 INCOME TAX PROVISION (BENEFIT)....... 1,772,000 1,287,000 (225,000) 1,160,000 ----------- ----------- --------------- ----------- Net income (loss).................. $ 2,770,016 $ 1,930,553 $ (337,993) $ 1,703,596 ----------- ----------- --------------- ----------- PER SHARE DATA: NET INCOME PER COMMON SHARE -- BASIC.................. $.35 $.25 ($.04) $.22 NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE -- DILUTIVE.... $.34 $.24 ($.04) $.22 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -- BASIC............ 7,912,126 7,863,121 7,777,330 7,776,777 WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING -- DILUTIVE......... 8,032,871 7,976,466 7,777,330 7,838,401
The accompanying notes are an integral part of these statements. 12 14 CHICO'S FAS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ------------------- ADDITIONAL PAR PAID-IN RETAINED SHARES VALUE CAPITAL EARNINGS TOTAL --------- ------- ---------- ----------- ----------- BALANCE, JANUARY 1, 1995................ 7,775,305 $77,753 $7,058,389 $ 7,089,893 $14,226,035 Issuance of common stock.............. 7,193 72 29,247 -- 29,319 Net income for the fiscal year ended December 31, 1995.................. -- -- -- 1,703,596 1,703,596 --------- ------- ---------- ----------- ----------- BALANCE, DECEMBER 31, 1995.............. 7,782,498 77,825 7,087,636 8,793,489 15,958,950 Net loss for the period from January 1, 1996, through January 28, 1996............................... -- -- -- (337,993) (337,993) --------- ------- ---------- ----------- ----------- BALANCE, JANUARY 28, 1996............... 7,782,498 77,825 7,087,636 8,455,496 15,620,957 Issuance of common stock.............. 101,620 1,016 468,072 -- 469,088 Net income for the fiscal year ended February 1, 1997................... -- -- -- 1,930,553 1,930,553 --------- ------- ---------- ----------- ----------- BALANCE, FEBRUARY 1, 1997............... 7,884,118 78,841 7,555,708 10,386,049 18,020,598 Issuance of common stock.............. 127,199 1,272 509,999 -- 511,271 Tax benefit of stock options exercised.......................... -- -- 154,000 -- 154,000 Net income for the fiscal year ended January 31, 1998................... -- -- -- 2,770,016 2,770,016 --------- ------- ---------- ----------- ----------- BALANCE, JANUARY 31, 1998............... 8,011,317 $80,113 $8,219,707 $13,156,065 $21,455,885 --------- ------- ---------- ----------- -----------
The accompanying notes are an integral part of these statements. 13 15 CHICO'S FAS, INC. STATEMENTS OF CASH FLOWS
PERIOD FROM JANUARY 1, 1996, FISCAL YEAR ENDED FISCAL YEAR ENDED THROUGH FISCAL YEAR ENDED JANUARY 31, FEBRUARY 1, JANUARY 28, DECEMBER 31, 1998 1997 1996 1995 --------------- --------------- -------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).............. $ 2,770,016 $ 1,930,553 $ (337,993) $ 1,703,596 ---------------- ---------------- ---------------- ---------------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities -- Depreciation and amortization.............. 2,114,146 1,896,196 147,144 1,741,820 Deferred tax provision (benefit)................. 32,000 (515,000) 80,000 303,000 Deferred rent expense, net....................... 129,712 (77,610) 2,365 (62,218) Loss from disposal of property and equipment.... 317,206 200,103 -- 88,846 (Increase) decrease in assets -- Receivables............... (131,444) 113,063 (305,032) 18,659 Inventories............... (1,680,110) (1,724,081) 654,093 (139,681) Prepaid expenses.......... (193,700) (64,529) (31,928) (69,504) Other assets.............. (40,180) (65,991) 10,094 (47,422) Increase (decrease) in liabilities -- Accounts payable.......... 218,275 1,266,986 (70) (1,238,356) Accrued liabilities....... 79,349 222,091 (228,296) (222,688) ---------------- ---------------- ---------------- ---------------- Total adjustments...... 845,254 1,251,228 328,370 372,456 ---------------- ---------------- ---------------- ---------------- Net cash provided by (used in) operating activities........... 3,615,270 3,181,781 (9,623) 2,076,052 ---------------- ---------------- ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Redemption (purchase) of certificate of deposit...... 600,000 -- (1,600,000) -- Purchases of property and equipment................... (2,010,618) (2,926,309) (8,529) (1,046,858) Proceeds from sale of property and equipment............... 34,500 -- -- -- ---------------- ---------------- ---------------- ---------------- Net cash used in investing activities........... (1,376,118) (2,926,309) (1,608,529) (1,046,858) ---------------- ---------------- ---------------- ----------------
14 16 CHICO'S FAS, INC. STATEMENTS OF CASH FLOWS (CONTINUED)
PERIOD FROM JANUARY 1, 1996, FISCAL YEAR ENDED FISCAL YEAR ENDED THROUGH FISCAL YEAR ENDED JANUARY 31, FEBRUARY 1, JANUARY 28, DECEMBER 31, 1998 1997 1996 1995 --------------- --------------- -------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net........... 665,271 469,088 -- 29,319 Net borrowings (payments) under line of credit agreement.... (284,919) 29,103 (467,126) (103,895) Principal payments on debt..... (265,872) (288,311) (3,875,639) (549,969) Borrowings under mortgage note........................ -- -- 5,587,500 -- Principal payments on lease obligations................. (88,374) (115,006) (9,455) (110,699) Deferred finance costs......... (153,518) (62,536) (172,691) -- ---------------- ---------------- ---------------- ---------------- Net cash (used in) provided by financing activities........... (127,412) 32,338 1,062,589 (735,244) ---------------- ---------------- ---------------- ---------------- Net increase (decrease) in cash and cash equivalents.......... 2,111,740 287,810 (555,563) 293,950 ---------------- ---------------- ---------------- ---------------- CASH AND CASH EQUIVALENTS, beginning of period............ 832,176 544,366 1,099,929 805,979 ---------------- ---------------- ---------------- ---------------- CASH AND CASH EQUIVALENTS, end of period......................... $2,943,916 $ 832,176 $ 544,366 $1,099,929 ---------------- ---------------- ---------------- ---------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest...... $ 609,956 $ 571,038 $ 83,475 $ 594,384 Income taxes................ $1,757,259 $1,769,400 $ -- $ 947,546
The accompanying notes are an integral part of these statements. 15 17 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS JANUARY 31, 1998 1. BUSINESS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: BUSINESS ORGANIZATION Chico's FAS, Inc. (the Company) is a specialty retailer of exclusively designed, private label casual clothing and related accessories. As of January 31, 1998, the Company's retail store system consisted of 141 stores located throughout the United States, 132 of which were owned and operated by the Company, and 9 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 31, 1998, and February 1, 1997, and for the fiscal years then ended is as follows:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- Franchise stores closed..................................... -- 1 Franchise stores purchased from franchisees................. 1 1 Franchise stores in operation at fiscal year-end............ 9 10 Company-owned stores at fiscal year-end..................... 132 123
FISCAL YEAR In December 1996, management made the decision to change the Company's fiscal year-end from the Sunday closest to December 31 to the Saturday closest to January 31, continuing to result in a 52- or 53-week fiscal year. The change in year-end resulted in a four-week transition period from January 1, 1996, through January 28, 1996. Statements of income, shareholders' equity and cash flows for the transition period are included in the accompanying financial statements. The fiscal years ended January 31, 1998, and February 1, 1997, contained 52 and 53 weeks, respectively. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and investments with maturities of less than three months. INVENTORIES Raw material inventories of approximately $315,000 as of January 31, 1998, 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 first-in, first-out cost or market method had been used, inventories would have been approximately $267,000 and $161,000 higher at January 31, 1998, and February 1, 1997, respectively, than those reported in the accompanying balance sheets. Purchasing, distribution and design costs are expensed as incurred and are included in the accompanying statements of income as cost of goods sold. 16 18 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Fixtures manufactured and leasehold improvements constructed by the Company are recorded at cost, which includes elements of raw materials, labor and overhead. Depreciation of property 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 10 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 $431,000 and $475,000 as of January 31, 1998, and February 1, 1997, respectively. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121), which addresses when and how impairments to the value of long-lived assets should be recognized. SFAS 121 is effective for fiscal years beginning after December 15, 1995, and was implemented by the Company in the fiscal year ended February 1, 1997. The implementation of SFAS 121 did not have a material effect on the financial statements. INCOME TAXES The provision for income taxes includes federal and state income taxes currently payable and deferred income taxes, which are provided for temporary differences between the recognition of income and expenses for financial and income tax reporting purposes. FAIR VALUE OF FINANCIAL INSTRUMENTS The book value of all financial instruments approximates their fair market value as of January 31, 1998. In the opinion of management, the aggregate fair market value of the Company based on the above is not a valid estimate of the market valuation of the Company as a whole. REVENUE RECOGNITION Net sales by company stores includes sales made to retail customers during the period, net of estimated customer returns. Net sales to franchisees includes merchandise shipped to franchisees, net of estimated returns. 17 19 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) STORE PRE-OPENING COSTS Operating costs (including store set-up, rent and training expenses) incurred prior to the opening of new stores are expensed as incurred and are included in general, administrative and store operating expenses in the accompanying statements of income. INCOME PER COMMON AND COMMON EQUIVALENT SHARE In 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. The following is a reconciliation of the denominators of the basic and diluted EPS computations shown on the face of the accompanying statements of income:
PERIOD FROM JANUARY 1, 1996, FISCAL YEAR ENDED FISCAL YEAR ENDED THROUGH FISCAL YEAR ENDED JANUARY 31, FEBRUARY 1, JANUARY 28, DECEMBER 31, 1998 1997 1996 1995 ------------- ------------- ------------ ------------- Basic weighted average number of common shares..... 7,912,126 7,863,121 7,777,330 7,776,777 Dilutive effect of options outstanding............. 120,745 113,345 -- 61,624 ------------ ------------ ----------- ------------ Diluted weighted average common and common equivalent shares outstanding............. 8,032,871 7,976,466 7,777,330 7,838,401 ------------ ------------ ----------- ------------
The following options were outstanding as of the end of the fiscal years or the period 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:
JANUARY 31, FEBRUARY 1, JANUARY 28, DECEMBER 31, 1998 1997 1996 1995 ---------------- ---------------- ---------------- ---------------- Number of options.............................. 418,204 341,696 389,746 220,131 Exercise price (range)......................... $5.50 - $12.00 $7.00 - $12.00 $5.13 - $12.00 $7.00 - $12.00 Expiration date (range)........................ March 31, 2003 - March 31, 2003 - March 31, 2003 - March 31, 2003 - Sept. 21, 2007 April 30, 2005 July 7, 2004 March 31, 2004
As a result of adopting SFAS 128, the Company's EPS for the fiscal year ended February 1, 1997, the period from January 1, 1996, through January 28, 1996, and for the fiscal year ended December 31, 1995, were restated. 2. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following as of January 31, 1998, and February 1, 1997:
ESTIMATED JANUARY 31, FEBRUARY 1, USEFUL LIVES 1998 1997 -------------- ----------- ----------- Land........................................................ $ 1,039,904 $ 1,100,167 Land improvements........................................... 35 years 1,785,161 1,785,161 Building.................................................... 20 - 35 years 6,247,920 6,155,063 Equipment................................................... 2 - 10 years 4,076,277 3,908,268 Furniture and fixtures...................................... 3 - 10 years 3,618,457 3,299,829 Leasehold improvements...................................... 1 - 10 years 6,829,258 6,082,124 ----------- ----------- 23,596,977 22,330,612 Less -- Accumulated depreciation and amortization........... (6,617,591) (5,093,660) ----------- ----------- $16,979,386 $17,236,952 ----------- -----------
Assets acquired under capital lease obligations with a cost of $487,548 are included in equipment as of January 31, 1998, and February 1, 1997. The accumulated depreciation related to these assets is $408,399 and $278,877 as of January 31, 1998, and February 1, 1997, respectively. 18 20 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. ACCRUED LIABILITIES: Accrued liabilities consisted of the following as of January 31, 1998, and February 1, 1997:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- Accrued payroll, bonuses and severance costs................ $1,206,621 $1,044,372 Allowance for estimated merchandise returns................. 720,000 650,000 Other....................................................... 613,754 766,654 ----------- ----------- $2,540,375 $2,461,026 ----------- -----------
4. INCOME TAXES: The income tax provision (benefit) consisted of the following:
PERIOD FROM JANUARY 1, 1996 FISCAL YEAR ENDED FISCAL YEAR ENDED THROUGH FISCAL YEAR ENDED JANUARY 31, FEBRUARY 1, JANUARY 28, DECEMBER 31, 1998 1997 1996 1995 ----------------- ----------------- --------------- ----------------- Current: Federal........................................... $1,378,000 $1,434,000 $(242,000) $ 677,000 State............................................. 362,000 368,000 (63,000) 180,000 Deferred: Federal........................................... 24,000 (404,000) 62,000 301,000 State............................................. 8,000 (111,000) 18,000 2,000 -------------- -------------- ------------ -------------- Total income tax provision (benefit)............ $1,772,000 $1,287,000 $(225,000) $1,160,000 -------------- -------------- ------------ --------------
The reconciliation of the income tax provision (benefit) based on the U.S. statutory federal income tax rate (34 percent) to the Company's income tax provision (benefit) is as follows:
PERIOD FROM JANUARY 1, 1996 FISCAL YEAR ENDED FISCAL YEAR ENDED THROUGH FISCAL YEAR ENDED JANUARY 31, FEBRUARY 1, JANUARY 28, DECEMBER 31, 1998 1997 1996 1995 ----------------- ----------------- --------------- ----------------- Tax expense (benefit) at the statutory rate......... $1,544,000 $1,094,000 $(191,000) $ 974,000 State income tax expense (benefit), net of federal tax benefit............................... 225,000 176,000 (31,000) 157,000 Other............................................... 3,000 17,000 (3,000) 29,000 -------------- -------------- ------------ -------------- Total income tax provision (benefit).............. $1,772,000 $1,287,000 $(225,000) $1,160,000 -------------- -------------- ------------ --------------
Deferred tax assets are recorded due to different carrying amounts for financial and income tax reporting purposes arising from cumulative temporary differences. These differences consisted of the following as of January 31, 1998, and February 1, 1997:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- Accruals and allowances..................................... $1,105,000 $1,206,000 Inventories................................................. 786,000 718,000 Property and equipment...................................... 43,000 (12,000) Net operating loss carryforward............................. 146,000 200,000 ----------- ----------- 2,080,000 2,112,000 Less -- Valuation allowance................................. (270,000) (270,000) ----------- ----------- $1,810,000 $1,842,000 ----------- -----------
During the fiscal year ended February 1, 1997, the Company increased the valuation allowance for deferred tax assets by $100,000 to reserve for a portion of the deferred tax asset relating to the net operating loss for the tax reporting period from December 30, 1996, through February 1, 1997. Approximately $449,000 of a net operating loss for tax reporting purposes can be carried forward 19 21 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) ratably for the six subsequent fiscal years following the fiscal year ended February 1, 1997. The remaining net operating loss carryforward was approximately $374,000 as of January 31, 1998. 5. DEBT AND LEASE OBLIGATIONS: Debt and lease obligations consisted of the following as of January 31, 1998, and February 1, 1997:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- Line of credit (the Line), variable borrowing capability of up to $6 million, depending on inventory levels and the amount of outstanding commercial letters of credit (Note 7), interest payable at prime (8.5 percent as of January 31, 1998), secured by substantially all of the Company's assets other than land, land improvements and building, maturing in May 1999...................................... $ -- $ 284,919 Mortgage Note secured by a first priority mortgage on land, land improvements, building and certain equipment......... 5,437,500 5,509,500 Obligations under capital leases, imputed interest rate of 5.9 percent, secured by equipment, varying monthly payments of principal and interest, maturing September 1999...................................................... 167,176 255,550 Deferred rent............................................... 1,350,315 1,414,475 ---------- ---------- Total debt and lease obligations....................... 6,954,991 7,464,444 Less -- Current portion................................ (251,762) (456,602) ---------- ---------- $6,703,229 $7,007,842 ---------- ----------
Mortgage note payable (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 at the bank's prime rate plus .5 percent, through January 2003, at which time the remaining principal balance is due. On October 14, 1997, an interest rate swap 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 interest rate swap. A $1,000,000 certificate of deposit is held at the bank to secure the Line. An investment with the bank, satisfied by this certificate of deposit, is required to be maintained as long as the Line is in existence. As of January 31, 1998, the Line and Mortgage Note contained certain covenants requiring, among other things, approval of acquisitions of businesses and maintenance of specified tangible net worth, working capital, debt to equity and debt service coverage ratios. As of January 31, 1998, 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 were as follows as of January 31, 1998:
FISCAL YEAR ENDING AMOUNT - ----------- ---------- 1999........................................................ $ 72,000 2000........................................................ 72,000 2001........................................................ 72,000 2002........................................................ 72,000 2003........................................................ 5,149,500 ---------- $5,437,500 ----------
20 22 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Future minimum lease payments under capital lease obligations were as follows as of January 31, 1998:
FISCAL YEAR ENDING AMOUNT - ----------- -------- 1999........................................................ $ 85,224 2000........................................................ 92,176 -------- Total minimum lease payments................................ 177,400 Less -- Interest imputed at 5.9 percent..................... (10,224) -------- Present value of capital lease obligations.................. $167,176 --------
During the fiscal years ended January 31, 1998, and February 1, 1997, the period from January 1, 1996, through January 28, 1996, and the fiscal year ended December 31, 1995, capital lease obligations of $0, $130,598, $0 and $23,200, respectively, were incurred when the Company entered into leases for new equipment. In addition, existing capital lease obligations were refinanced to the terms shown above during the fiscal year ended February 1, 1997. During the fiscal year ended December 31, 1995, the Company acquired the assets of five franchised stores. Acquired assets, recorded at fair value, consisted of $79,796 in inventory, $196,000 in furniture, fixtures and leasehold improvements, $115,000 in franchise cancellation fees and $129,000 for a covenant not to compete which were included in other assets in the accompanying balance sheets. Accounts receivable of $330,581 from franchisees were forgiven, $323,798 in notes payable to franchisees were issued, and the Company incurred a loss of $97,584 related to the writedown of franchise inventory, which was included in general, administrative and store operating expenses. The remaining inventory writedown loss of $37,000 was accrued in prior years. Also, during the fiscal year ended December 31, 1995, a franchisee converted accounts receivable of approximately $273,800 into a note receivable, payable in $10,000 monthly installments of principal and interest through October 1997. The long-term portion of the note receivable was included in other assets and the current portion of the note receivable was included in receivables in the accompanying balance sheets. This note receivable was paid in the fiscal year ended January 31, 1998. 6. RELATED PARTY TRANSACTIONS: All officers have entered into agreements with the Company which provide for base salaries, annual bonuses or consulting fees, and certain severance benefits in the event that their employment is terminated by the Company "without cause" or by such officer or director following a "change of control." In January 1997, the Company and a former president and general merchandise manager reached agreement in concept that she would be resigning from the Company. In March 1997, a separation agreement was signed under which she received a consulting salary, severance compensation and certain benefits through December 31, 1997. Approximately $325,000 relating to the separation was accrued and is included in accrued liabilities in the accompanying balance sheet as of February 1, 1997. The separation agreement also provided that all of granted, unvested options be forfeited, and all exercisable options expired on June 24, 1997. In 1994, a separation agreement was signed, in connection with the resignation of a former president, under which he continued to receive his annual base salary, certain benefits and taxes through December 31, 1995, totaling approximately $274,000. This amount was paid in full as of December 31, 1995. Contemporaneously with the execution of the separation agreement, the former president sold 344,384 shares of common stock of the Company to a significant stockholder at a price above the market value on the closing date of the sale. The difference between the market value of the Company's common stock on the closing date of the transaction and the purchase price on this date was recorded by the Company as compensation expense and was reflected as an increase in additional paid-in capital. 21 23 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Company leased distribution center and storage facilities from certain stockholders and former stockholders of the Company (see Note 7). 7. COMMITMENTS AND CONTINGENCIES: The Company leases retail store space and various office equipment under operating leases expiring in various years through 2006. Certain of the leases provide that the Company may cancel the lease if the Company's retail sales at that location fall below an established level, while certain leases provide for additional rent payments to be made when sales exceed a base amount. Certain operating leases provide for renewal options for periods from three to five years at their fair rental value at the time of renewal. In the normal course of business, operating leases are generally renewed or replaced by other leases. Minimum future rental payments under noncancellable operating leases (exclusive of common area maintenance charges and/or contingent rental payments based on sales) as of January 31, 1998, were as follows:
FISCAL YEAR ENDING AMOUNT - ----------- ----------- 1999........................................................ $ 6,800,638 2000........................................................ 6,204,570 2001........................................................ 5,930,809 2002........................................................ 5,422,273 2003........................................................ 4,219,560 Thereafter.................................................. 8,534,145 ----------- $37,111,995 -----------
For the fiscal years ended January 31, 1998, and February 1, 1997, for the period from January 1, 1996, through January 28, 1996, and for the fiscal year ended December 31, 1995, total rent expense under the Company's operating leases was $9,728,207, $8,624,193, $674,651 and $7,934,824 respectively, including common area maintenance charges of $1,328,466, $1,252,635, $95,663 and $1,128,054, other rental charges of $1,469,512, $1,296,100, $100,241 and $1,145,643 and contingent rental expense of $140,523, $81,674, $6,900 and $128,243 based on sales, respectively. The Company leased its former distribution center and storage facilities from certain stockholders and former stockholders of the Company (see Note 6). The leases were classified as operating leases and provided for minimum annual rentals of approximately $216,000, with original lease terms through 1998. The remaining obligations under these leases were accrued during fiscal year 1994 when the Company's operations were moved to its new corporate headquarters and distribution center. During the fiscal year ended February 1, 1997, the Company replaced its obligations under the leases with an obligation to make up the difference between rental payments of a new tenant and the Company's lease terms. Rental payments of the new tenant reduced the company's expense by approximately $80,000 during the fiscal years ended January 31, 1998, and February 1, 1997, respectively. At January 31, 1998, the Company had $3,246,779 in commercial letters of credit outstanding which have arisen in the normal course of business due to foreign purchase commitments. The commercial letters of credit are secured by the same assets as the Line (see Note 5). The Company is involved in claims and actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the financial position of the Company. 22 24 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. STOCK OPTION PLANS AND CAPITAL STOCK TRANSACTIONS: 1992 STOCK OPTION PLAN During fiscal year 1992, the Company adopted a stock option plan (the 1992 Plan) which reserved 548,800 shares of common stock for future issuance under the 1992 Plan to eligible employees of the Company. The per share exercise price of each stock option is not less than the fair market value of the stock on the date of grant or, in the case of an employee owning more than 10 percent of the outstanding stock of the Company and to the extent incentive stock options as opposed to nonqualified stock options are issued, the price is not less than 110 percent of such fair market value. Also, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable for the first time by an employee in any calendar year may not exceed $100,000. As of January 31, 1998, 281,128 nonqualified options were outstanding and 178,588 had been exercised under the 1992 Plan. 1993 STOCK OPTION PLAN During fiscal year 1993, the Company adopted a stock option plan (the 1993 Plan) which reserved 680,000 shares of common stock for future issuance under the 1993 Plan to eligible employees of the Company. The terms of the 1993 Plan are the same as the 1992 Plan. As of January 31, 1998, 559,649 nonqualified options were outstanding and 6,545 had been exercised under the 1993 Plan. OTHER STOCK OPTIONS Since 1993, four independent directors of the Company have been granted a total of 137,000 nonqualified options at exercise prices ranging from $3.25 to $8.38. As of January 31, 1998, none of these options had been exercised. AGGREGATE STOCK OPTION ACTIVITY As of January 31, 1998, 977,777 nonqualified options were outstanding at a weighted average exercise price of $5.14 per share, and 202,890 remained available for future grants. Of the options outstanding, 537,637 options were immediately exercisable. The Company recognized no compensation expense for these options. Stock option activity for the fiscal years ended January 31, 1998, and February 1, 1997, for the period from January 1, 1996, through January 28, 1996, and for the fiscal year ended December 31, 1995, was as follows:
PERIOD FROM JANUARY 1, 1996, FISCAL YEAR ENDED FISCAL YEAR ENDED THROUGH FISCAL YEAR ENDED JANUARY 31, 1998 FEBRUARY 1, 1997 JANUARY 28, 1996 DECEMBER 31, 1995 -------------------- ------------------- ------------------- ------------------- WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED- NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE OF EXERCISE OF EXERCISE OF EXERCISE OF EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE -------- --------- ------- --------- ------- --------- ------- --------- Outstanding, beginning of period........... 971,206 $5.97 825,850 $5.74 821,799 $5.78 607,166 $6.45 Granted............. 354,700 3.36 319,200 6.97 10,100 4.29 293,100 5.31 Exercised........... (105,931) 4.15 (78,752) 4.33 -- -- -- -- Canceled or expired.......... (242,198) 6.42 (95,092) 8.85 (6,049) 7.67 (78,467) 9.26 -------- -------- ------- -------- ------- -------- ------- -------- Outstanding, end of period.............. 977,777 $5.14 971,206 $5.97 825,850 $5.74 821,799 $5.78 -------- ------- ------- ------- Options vested, end of period.............. 537,637 $5.84 534,789 $5.59 507,827 $5.57 510,083 $5.40
23 25 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information about stock options as of January 31, 1998:
OPTIONS OUTSTANDING OPTIONS VESTED -------------------------------------------- ---------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE RANGES OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE VESTED PRICE - ----------------------------- ----------- ------------ --------- ------- --------- $3.25-$6.50 713,161 7.5 $4.07 366,421 $4.57 $6.75-$12.00 264,616 7.0 8.01 171,216 8.56 ------- --- ----- ------- ----- 977,777 7.4 $5.14 537,637 $5.84 ----------- -------- -------- ------- --------
CAPITAL STOCK TRANSACTIONS The Board of Directors adopted a noncompensatory employee stock purchase plan (ESPP), which became effective upon the consummation of the Company's initial public offering on April 1, 1993, and was amended on December 18, 1993, covering an aggregate of 210,000 shares of common stock. Under the ESPP, all employees are given the right to purchase up to 600 shares of the common stock of the Company two times a year at a price equal to 85 percent of the value of the stock immediately prior to the beginning of each exercise period. For the fiscal years ended January 31, 1998, and February 1, 1997, for the period from January 1, 1996, through January 28, 1996, and for the fiscal year ended December 31, 1995, 21,268, 22,868, 0 and 7,193 shares, respectively, were purchased under the ESPP. The Company recognized no compensation expense for the issuance of these shares. SFAS NO. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), under which no compensation expense has been recognized. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which was effective for fiscal years beginning after December 15, 1995. SFAS 123 allows companies to continue following the accounting guidance of APB 25, but requires pro forma disclosure of net income and 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. The Company adopted SFAS 123 for disclosure purposes in 1996. For SFAS 123 purposes, the fair value of each option granted has been estimated as of the grant date using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 6.3 percent as of January 31, 1998 and 6.2 percent for the fiscal years ended February 1, 1997, and December 31, 1995 and for the period from January 1, 1996, through January 28, 1996, expected life of seven years, no expected dividends, and expected volatility of 75 percent. The weighted average fair value of options granted during the fiscal years ended January 31, 1998, and February 1, 1997, for the period from January 1, 1996, through January 28, 1996 and for the fiscal year ended December 31, 1995 was $3.16, $5.21, $3.17 and $3.96, respectively. Options granted under the 1992 Plan and 1993 Plan vest ratably over three years. All other options were either immediately exercisable or vested ratably over three years. The term of all options granted is ten years. Had compensation expense been determined consistent with SFAS 123, utilizing the assumptions detailed above, the Company's net income (loss) and net income (loss) per common and common equivalent shares outstanding would have been changed to the following pro forma amounts for the fiscal years ended January 31, 1998, and February 1, 24 26 CHICO'S FAS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1997, for the period from January 1, 1996, through January 28, 1996, and for the fiscal year ended December 31, 1995:
PERIOD FROM JANUARY 1, FISCAL YEAR FISCAL YEAR 1996 FISCAL YEAR ENDED ENDED THROUGH ENDED JANUARY 31, FEBRUARY 1, JANUARY 28, DECEMBER 31, 1998 1997 1996 1995 ----------- ----------- ----------- ------------ Net income (loss): As reported........................................ $2,770,016 $1,930,553 $(337,993) $1,703,596 Pro forma.......................................... 2,218,609 1,539,000 (357,000) 1,563,000 Net income (loss) per common share -- Basic: As reported........................................ $ .35 $ .25 $ (.04) $ .22 Pro forma.......................................... .28 .20 (.05) .20 Net income (loss) per common and common equivalent share -- Dilutive: As reported........................................ $ .34 $ .24 $ (.04) $ .22 Pro forma.......................................... .28 .19 (.05) .20
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 2, 1995, the resulting pro forma compensation expense may not be representative of that to be expected in future years. 9. PROFIT SHARING PLAN: In fiscal year 1992, the Company adopted a profit sharing plan (the Plan) covering substantially all employees. Employees' rights to Company-contributed benefits vest over two to six years of service, as specified in the Plan. The Company intends to make a contribution, to be paid in the year ending January 31, 1999, in recognition of services performed by employees in the calendar year ended December 31, 1997, in an amount not to exceed $300,000 which was included in accrued liabilities in the accompanying balance sheet as of January 31, 1998. For the fiscal years ended January 31, 1998, February 1, 1997, and December 31, 1995, the profit sharing expense was $280,000, $185,000 and $50,000, respectively. 10. QUARTERLY RESULTS OF OPERATIONS (RESTATED AND UNAUDITED):
NET INCOME (LOSS) PER NET GROSS INCOME NET INCOME (LOSS) PER COMMON AND COMMON SALES PROFIT (LOSS) COMMON SHARE -- BASIC EQUIVALENT SHARE -- DILUTIVE ----------- ----------- ---------- --------------------- ---------------------------- Restated fiscal year ended January 28, 1996: First quarter...... $16,296,974 $ 8,799,773 $ 620,898 $ .08 $ .08 Second quarter..... 15,436,821 9,184,838 722,539 .09 .09 Third quarter...... 14,812,600 8,523,099 470,214 .06 .06 Fourth quarter..... 14,216,858 7,771,900 (137,368) (.02) (.02) Fiscal year ended February 1, 1997: First quarter...... $17,302,552 $ 9,862,647 $1,080,368 $ .14 $ .14 Second quarter..... 16,073,289 10,080,421 940,998 .12 .12 Third quarter...... 15,727,262 9,368,363 655,964 .08 .08 Fourth quarter..... 14,969,502 8,048,699 (746,777) (.09) (.09) Fiscal year ended January 31, 1998: First quarter...... $18,719,797 $10,603,437 $1,002,456 $ .13 $ .13 Second quarter..... 20,080,574 10,918,044 967,556 .12 .12 Third quarter...... 18,923,374 10,884,187 955,532 .12 .12 Fourth quarter..... 17,615,407 9,693,322 (155,528) (.02) (.02)
25 27 REPORTS OF FORM 10-K A copy of the company's annual report to the Securities and Exchange Commission on Form 10-K will be sent to any shareholder without charge upon written request to Investor Relations at the current address below: Chico's FAS, Inc. 11215 Metro Parkway Fort Myers, Florida 33912 Website: www.chicos.com --------------------- Transfer Agent and Registrar: The Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016-3572 Legal Counsel: Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis Tampa, Florida Independent Certified Public Accountants: Arthur Andersen LLP Tampa, Florida ANNUAL SHAREHOLDERS' MEETING: Tuesday, June 9, 1998 at 2:00 p.m. Chico's World Headquarters 11215 Metro Parkway Fort Myers, Florida 33912 - -------------------------------------------------------------------------------- CHICO'S FAS, INC. EXECUTIVE OFFICERS MARVIN J. GRALNICK Chief Executive Officer President HELENE B. GRALNICK Senior Vice President -- Design & Concept CHARLES J. KLEMAN Chief Financial Officer Executive Vice President -- Finance Secretary/Treasurer SCOTT A. EDMONDS Senior Vice President -- Operations Assistant Secretary DIRECTORS MARVIN J. GRALNICK Chairman of the Board HELENE 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 Chief Executive Officer -- Mdr, Inc. JOHN W. BURDEN Partner Retail Options, Inc. 26 28 [GRAPHIC SETTING FORTH STORE LOCATIONS] 29 [GRAPHIC -- THREE FEMALE MODELS IN FIELD] 30 [GRAPHIC -- PICTURE OF FEMALE MODEL AT CHICO'S WORLD HEADQUARTERS] Chico's World Headquarters 11215 Metro Parkway Fort Myers, FL 33912 Phone: (941) 277-6200 -- Fax: (941) 277-5237 www.chicos.com EX-23 7 CONSENT 1 EXHIBIT 23 CONSENT TO USE OF REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the incorporation of our report, and to all references to our firm incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements (File No. 33-60524, File No. 33-63822 and File No. 33-83840). /s/ ARTHUR ANDERSEN LLP Tampa, Florida April 24, 1998 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED FINANCIAL STATEMENTS OF CHICO'S FAS, INC. FOR THE FIFTY-TWO WEEKS ENDED JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS YEAR JAN-31-1998 FEB-01-1997 JAN-31-1998 2,943,916 0 894,895 0 9,525,472 15,282,428 23,596,977 6,617,591 34,471,516 6,312,402 6,703,229 0 0 80,113 21,375,772 21,455,885 75,339,152 75,339,152 33,240,162 33,240,162 37,184,671 0 372,303 4,542,016 1,772,000 2,770,016 0 0 0 2,770,016 .35 .34
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