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ANNUAL REPORT FISCAL 2001 CHICO'S(R)
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A MESSAGE FROM OUR CEO TO OUR SHAREHOLDERS,
Fiscal 2001 was by far our best year in terms of financial,
operational and management accomplishments. The strength of our financial
position and the hiring of key management have positioned us to set very
aggressive goals for fiscal 2002. First, I'd like to briefly review
highlights of fiscal 2001 performance and events. Then, I will set out some
of our goals for this fiscal year.
Fiscal 2001 resulted in another banner year of growth in sales and
earnings. Sales increased by over 45% to $378.1 million, while earnings
grew by over 48% to $42.2 million, or $1.01 per share versus $0.69 in the
prior year (with the per share numbers adjusted for our two 3 for 2 stock
splits during fiscal 2001). Excluding the third quarter of last year during
which our country endured the dreadful terrorist attacks, we have had 16
consecutive quarters with net income increasing by at least 50%. Our gross
margins, which had been flat year-over-year in fiscal 2000, improved in
fiscal 2001 to 59.3% from 58.1% and our cash position (including marketable
securities) at the end of fiscal 2001 climbed to $53.8 million from $18.1
million at the end of fiscal 2000. Our continued focus on inventory
controls and inventory flow resulted in inventories climbing only 18.5% to
$28.9 million while book value rose by $58.2 million to $143.5 million.
Let me put this past year in a slightly different perspective. As I
look back, I see a company that went public in 1993 with annual sales of
$32.5 million and at an offering price, after adjusting for all of our
stock splits, of $1.56. In fiscal 2001, there were five separate months in
which the sales in each such month exceeded the annual sales for the entire
year in 1993, and our stock price hit an all time high of $37.25 earlier
this year.
We initiated television advertising in late February 2001 with great
success. During this past fiscal year we almost doubled our database of
current and prospective Chico's customers from 1,060,000 to approximately
2,000,000. Our permanent Passport membership grew from 220,000 members in
February 2001 to almost 400,000 in February 2002. We increased the catalog
mailings to 12 with a total circulation of 13.1 million in fiscal 2001,
from 9 catalog mailings with a total circulation of 7.2 million in fiscal
2000. With over 25 million women in our customer demographics, we have
every reason to believe that Chico's Passport Club is in its infancy in
terms of its growth potential.
We are particularly pleased with accomplishing a number of operational
initiatives during fiscal 2001 that should help set the stage for our
further growth. Chico's rolled out a real time point of sale system with
improved functionality and capability. The company restructured its outlet
division to enable us to liquidate substantially larger quantities of
merchandise at higher margins. We held a very successful second annual
analyst open house at our headquarters offices in Fort Myers, and held our
first annual vendor summit further solidifying our relations with our key
manufacturers and suppliers.
Fiscal 2001 launched our "bridge to a billion" infrastructure
initiative that we believe will allow us to handle a billion dollars plus
in annual sales. This initiative is designed to greatly enhance product
development, sourcing and production, planning and allocation, merchandise
distribution, financial management, and store operations. We began fiscal
2002 with the acquisition of a 230,000 square foot distribution facility
outside of Atlanta, Georgia. This facility, combined with state-of-the-art
material handling equipment and distribution center management software,
should be in operation by early 2003.
Our current plan is to have approximately 375 stores by the end of
fiscal 2002. Although we still can't pinpoint the exact number of Chico's
stores that is the optimal number for the U.S. market as a whole, we see
the potential for continued growth in the number of Chico's stores for many
years. At the same time, we are always looking for other opportunities that
would enable us to take full advantage of our core competencies. Beginning
in fiscal 2001, we have been actively testing product in women's apparel
that would be aimed at a customer in a somewhat younger age bracket and
with a slightly more moderate income level. These tests have resulted in
what we believe will be a new concept store that has the potential to be
rolled out nationwide. At this point, we expect to introduce this new
concept on a test basis beginning in early fiscal 2003. The plan is for the
new concept to have an entirely different name, a unique and different
store look, a different store location strategy and, as described above, a
somewhat different customer focus. The goal is to create a successful new
store concept without competing with, or detracting from, the Chico's
brand. We are excited to begin the test phase of this new concept.
As always, we are committed to our customer. Our commitment is to
provide her with quality and value that make her look and feel good.
We at Chico's see tremendous opportunities still available to us. We
believe that we remain at the beginning of our journey. We will never be
satisfied or complacent. We will seek to create shareholder value by
striving to do a better job every day as we continue to build our brand. AS
ALWAYS, KEEP YOUR EYE ON CHICO'S.
Sincerely,
/s/ Marvin J. Gralnick
----------------------
Marvin J. Gralnick
CEO
April 5, 2002
2
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In fiscal 2001,
there were FIVE SEPARATE MONTHS
in which the sales in each
such month EXCEEDED
the ANNUAL SALES for the
entire year in 1993,
and our stock price hit
an ALL TIME HIGH of $37.25
earlier this year.
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CONTENTS
6 Financial Highlights
7 Management's Discussion & Analysis
13 Stock Information
16 Financial Statements
32 Executive Officers/Directors
34 Store Listing
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5
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FINANCIAL HIGHLIGHTS
FISCAL YEAR ENDED
----------------------------------------------------------------------------------------------------------------
FEBRUARY 2, FEBRUARY 3, JANUARY 29, JANUARY 30, JANUARY 31,
2002 2001 2000 1999 1998
(52 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
----------------------------------------------------------------------------------------------------------------
(Dollars in thousands except per share data)
STATEMENT OF INCOME DATA:
Net Sales ......................... $378,085 $259,446 $155,002 $106,742 $ 75,339
Income from Operations ............ 67,536 45,363 24,806 15,134 4,914
Net Income ........................ 42,187 28,379 15,489 9,139 2,770
Basic Earnings Per Share (1) ...... 1.05 0.73 0.41 0.25 0.08
Diluted Earnings Per Share (1) .... 1.01 0.69 0.39 0.24 0.08
OPERATING DATA:
Total Assets ...................... $186,385 $117,807 $ 70,316 $ 49,000 $ 34,472
Long-Term Debt .................... 7,944 7,158 6,839 6,713 6,703
Stockholders' Equity .............. 143,495 85,321 52,641 34,303 21,456
# of Stores (at end of period):
Company-owned ..................... 300 239 191 154 132
Franchised ........................ 11 11 9 8 9
-------- -------- -------- -------- --------
TOTAL: ............................ 311 250 200 162 141
======== ======== ======== ======== ========
(1)Restated to give retroactive effect for the 3 for 2 stock
split payable in January 2002, the 3 for 2 stock split payable
in May 2001 and the 2 for 1 stock split payable in January
2000.
6
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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 311 stores as of February 2, 2002, of which 300 are Company-owned
stores and 11 are franchised stores. Since 1989, the Company has de-emphasized
the granting of new franchises as a strategy for growth in favor of expanding
its store base by opening Company-owned stores. Where possible and practical,
the Company has also acquired stores from its franchisees. Since fiscal 1997
(year ended January 31, 1998), the Company has acquired three stores from
franchisees, opened 191 new Company-owned stores, and one franchisee has opened
four new franchised stores. Of these new Company-owned stores, 64 were opened in
fiscal 2001 (year ended February 2, 2002), 51 were opened in fiscal 2000, 40
were opened in fiscal 1999, 22 were opened in fiscal 1998 and 14 were opened in
fiscal 1997. During this same time period, the Company closed 17 Company-owned
stores and no franchised stores closed. The Company plans to open a minimum of
65 net new Company-owned stores in the fiscal year ending February 1, 2003 and
65 to 70 net new Company-owned stores in the next fiscal year. In addition, the
Company is evaluating certain existing Company-owned store locations, including
stores with leases coming up for renewal, and is considering the possibility of
closing between one and three existing Company-owned stores in fiscal 2002.
RESULTS OF OPERATIONS
The following table sets forth, for each of the respective
periods indicated, certain operating statement data and the percentage
of the Company's net sales represented by each line item presented.
FISCAL YEAR ENDED (000'S)
------------------------------------------------------------------------
FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
(52 WEEKS) % (53 WEEKS) % (52 WEEKS) %
------------------------------------------------------------------------
Net sales by company stores ............................ $362,443 95.9% $252,168 97.2% $152,474 98.4%
Net sales by catalog and Internet ...................... 10,203 2.7 2,656 1.0 -- 0.0
Net sales to franchisees ............................... 5,439 1.4 4,622 1.8 2,528 1.6
-------- -------- -------- -------- -------- --------
Net sales ............................................ 378,085 100.0 259,446 100.0 155,002 100.0
Cost of goods sold ..................................... 153,937 40.7 108,671 41.9 64,950 41.9
-------- -------- -------- -------- -------- --------
Gross profit ......................................... 224,148 59.3 150,775 58.1 90,052 58.1
General, administrative and store operating expenses ... 146,611 38.8 99,757 38.4 62,133 40.1
Depreciation and amortization .......................... 10,001 2.6 5,655 2.2 3,113 2.0
-------- -------- -------- -------- -------- --------
Income from operations ............................... 67,536 17.9 45,363 17.5 24,806 16.0
Interest income, net ................................... 507 .1 409 .1 177 .1
-------- -------- -------- -------- -------- --------
Income before income taxes ........................... 68,043 18.0 45,772 17.6 24,983 16.1
Provision for income taxes ............................. 25,856 6.8 17,393 6.7 9,494 6.1
-------- -------- -------- -------- -------- --------
Net income ........................................... $ 42,187 11.2% $ 28,379 10.9% $ 15,489 10.0%
======== ======== ======== ======== ======== ========
7
FIFTY-TWO WEEKS ENDED FEBRUARY 2, 2002 COMPARED TO THE FIFTY-THREE
WEEKS ENDED FEBRUARY 3, 2001
NET SALES. Net sales by Company-owned stores for the fifty-two
weeks ended February 2, 2002 (fiscal 2001 or the current period)
increased by $110.3 million, or 43.7%, over net sales by Company-owned
stores for the fifty-three weeks ended February 3, 2001 (fiscal 2000 or
the prior period). The increase was the result of a comparable Company
store net sales increase of $42.1 million, and $68.2 million additional
sales from the new stores not yet included in the Company's comparable
store base (net of sales of $1.8 million from six stores closed in
fiscal 2001 and fiscal 2000, and net of $5.3 million sales from the
additional week in the prior year versus the current year).
Net sales from the Company's call center (website and catalog
sales), which began operations in late May 2000, increased by $7.5
million in the current period compared to the short year of selling in
fiscal 2000.
Net sales to franchisees for the current period increased by
approximately $817,000 or 17.7% compared to net sales to franchisees
for the prior period. The increase in net sales to franchisees was
primarily due to a net increase in purchases by the franchisees as a
whole, and the opening by an existing franchisee of two additional
franchised stores in fiscal 2000, net of the additional week in the
prior period.
GROSS PROFIT. Gross profit for the current period was $224.1
million, or 59.3% of net sales, compared with $150.8 million, or 58.1%
of net sales, for the prior period. The increase in the gross profit
percentage primarily resulted from an improvement in the Company's
initial markup on goods, offset, in part, by slightly higher markdowns
as a percent of sales in the current period versus the prior period. To
a lesser degree, the increase in the gross profit percentage resulted
from leveraging costs associated with the Company's product development
and merchandising areas, which costs are included in the Company's cost
of goods sold.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General,
administrative and store operating expenses increased to $146.6
million, or 38.8% of net sales, in the current period from $99.8
million, or 38.4% of net sales, in the prior period. The increase in
general, administrative and store operating expenses was, for the most
part, the result of increases in store operating expenses, including
store compensation, occupancy and other costs associated with
additional store openings and, to a lesser degree, an increase in
marketing expenses. The increase in these expenses as a percentage of
net sales was principally due to an increase in direct store expenses
related to costs associated with the Company's new cash register rolled
out in the first half of fiscal 2001 and an increase in direct
marketing expenses as a percentage of net sales, comprising 3.4% of net
sales in the current period, versus 2.7% of net sales in the prior
period, net of leverage associated with the Company's 17.1% comparable
Company store sales increase for the current period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased to $10.4 million, or 2.7% of net sales in the current period
from $6.0 million, or 2.3% of net sales, in the prior period. The
increase in depreciation and amortization was principally due to
capital expenditures related to new, remodeled and expanded stores as
well as capital expenditures related to the new cash registers and the
addition to the Company's Headquarters facility which opened in early
2001. The increase as a percentage of net sales was principally due to
the new cash registers and the Headquarters expansion.
INTEREST INCOME, NET. The Company had net interest income
during the current period of approximately $507,000 versus
approximately $409,000 in the prior period. The increase in net
interest income was primarily a result of the Company's increased cash
and marketable securities position throughout most of the year, net of
decreased interest rates earned on cash and marketable securities.
NET INCOME. As a result of the factors discussed above, net
income reflects an increase of 48.7% to $42.2 million in the current
period from net income of $28.4 million in the prior period. The income
tax provision represented an effective rate of 38.0% for the current
and prior period.
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8
FIFTY-THREE WEEKS ENDED FEBRUARY 3, 2001 COMPARED TO THE FIFTY-TWO WEEKS ENDED
JANUARY 29, 2000
NET SALES. Net sales by Company-owned stores for the fifty-three weeks
ended February 3, 2001 (fiscal 2000 or the current period) increased by $99.7
million, or 65.4%, over net sales by Company-owned stores for the fifty-two
weeks ended January 29, 2000 (fiscal 1999 or the prior period). The increase was
the result of a comparable Company store net sales increase of $52.0 million,
$42.4 million additional sales from the new stores not yet included in the
Company's comparable store base (net of sales of $1.1 million from six stores
closed in fiscal 1999 and fiscal 2000), and $5.3 million from the additional
week in the current year versus the prior year.
Net sales from the Company's call center (website and catalog sales),
which began operations in late May 2000, were $2.7 million.
Net sales to franchisees for the current period increased by $2.1
million or 82.8% compared to net sales to franchisees for the prior period. The
increase in net sales to franchisees was primarily due to a net increase in
purchases by the franchisees as a whole, the opening by an existing franchisee
of two additional franchised stores in fiscal 2000 and one additional franchised
store in fiscal 1999, and the additional week in the current period versus the
prior period.
GROSS PROFIT. Gross profit for the current period was $150.8 million,
or 58.1% of net sales, compared with $90.1 million, or 58.1% of net sales, for
the prior period. Although the gross profit percentage showed no appreciable
change in the current period versus the prior period, the Company experienced a
decline in the gross margins at its seven outlet locations which was offset by a
slight leverage in the Company's distribution center, product development and
merchandising areas due to the Company's 34.3% comparable Company store sales
increase for the current period.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General,
administrative and store operating expenses increased to $99.8 million, or 38.4%
of net sales, in the current period from $62.1 million, or 40.1% of net sales,
in the prior period. The increase in general, administrative and store operating
expenses was, for the most part, the result of increases in store operating
expenses, including store compensation, occupancy and other costs associated
with additional store openings and, to a lesser degree, an increase in marketing
expenses. The decrease in these expenses as a percentage of net sales was
principally due to leverage associated with the Company's 34.3% comparable
Company store sales increase for the current period, net of an increase in
marketing expenses as a percentage of sales.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
to $6.0 million, or 2.3% of net sales, in the current period from $3.3 million,
or 2.1% of net sales, in the prior period. The increase in dollars and
percentage was primarily due to capital expenditures related to the opening,
remodeling and expanding of new Chico's stores, which were, on the average, 30%
larger than the chain average size.
INTEREST INCOME, NET. The Company had net interest income during the
current period of approximately $409,000 versus approximately $177,000 in the
prior period. The increase in net interest income was primarily a result of the
Company's increased cash and marketable securities position throughout most of
the year, as well as improved interest rates earned on cash and marketable
securities.
NET INCOME. As a result of the factors discussed above, net income
reflects an increase of 83.2% to $28.4 million in the current period from net
income of $15.5 million in the prior period. The income tax provision
represented an effective rate of 38.0% for the current and prior period.
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9
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COMPARABLE COMPANY-OWNED STORE NET SALES
Comparable Company-owned store net sales increased by 17.1%
for the fifty-two weeks ended February 2, 2002 when compared to the
previous comparable fifty-two weeks. Comparable Company-owned store net
sales data is calculated based on the change in net sales of currently
open Company-owned stores that have been operated as a Company store
for at least thirteen months including stores that have been expanded
or relocated within the same general market area (approximately five
miles).
The comparable store percentage reported above includes 45
stores that were expanded or relocated within the last 2 fiscal years
by an average of 826 net selling square feet. If the stores that were
expanded or relocated had been excluded from the comparable
Company-owned store base (similar to new stores), the increase in
comparable Company-owned store net sales would have been 15.3% for
fiscal 2001 (versus 17.1%, as reported). In fiscal 2000, 1999 and 1998,
the exclusion of similar expansions/relocations from the comparable
Company-owned store base would have resulted in full year same store
sales increases of 32.4%, 22.7% and 29.8%, respectively (versus 34.3%,
23.3%, and 30.3%, respectively, as reported). The Company does not
consider this material to overall comparable store net sales and
believes the inclusion of expanded stores in the comparable store net
sales to be appropriate and consistent with the practice followed by
the Company in prior periods and by other retailers.
The Company believes that the increase in comparable Company
store net sales in the current fiscal year resulted from the continuing
effort to focus the Company's product development, merchandise
planning, buying and marketing departments on Chico's target customer.
The Company also believes that the look, fit and pricing policy of the
Company's product was in line with the needs of its target customer and
that the increase in comparable store sales was also fueled by
increased direct mailings of its catalog, a larger database of existing
customers for such mailings, national magazine advertising that began
in November 1999, television advertising that began in February 2001
and the success of the Company's preferred customer club (the "Passport
Club"). To a lesser degree, the Company believes the increase was due
to increased store-level training efforts associated with ongoing
training programs and continuing strong sales associated with several
styles of clothing produced from a related group of fabrics introduced
by the Company in the fourth quarter of fiscal 1997.
The following table sets forth for each of the quarters of the
previous four fiscal years, the percentage change in comparable store
net sales at Company-owned stores from the comparable period in the
prior fiscal year:
FISCAL YEAR ENDED
---------------------------------------------------------
2/2/02 2/3/01 1/29/00 1/30/99
------ ------ ------- -------
FULL YEAR 17.1% 34.3% 23.3% 30.3%
==== ==== ==== ====
First Quarter 27.7% 30.9% 22.6% 31.7%
Second Quarter 17.4% 34.3% 17.2% 23.0%
Third Quarter 7.0% 39.1% 26.9% 28.5%
Fourth Quarter 17.9% 32.2% 26.5% 38.5%
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary ongoing capital requirements are for
funding capital expenditures for new, expanded, relocated and remodeled
stores and for merchandise inventory purchases. Also, during fiscal
2002 the Company will experience the need for capital to address the
acquisition of a new distribution center and various software packages
as more fully described below.
During the current fiscal year (current year) and the prior
fiscal year (prior year), the Company's primary source of working
capital was cash flow from operations of $65.5 million and $39.2
million, respectively. The increase in cash flow from operations of
$26.3 million was primarily due to an increase of $13.8 million in net
income, an increase in the tax benefit of options exercised of $5.6
million, an increase of $4.4 million in depreciation and amortization
and a decrease in receivables of $0.9 million versus an increase in the
prior year receivables, of $1.3 million. The increase in inventories of
$4.5 million for the current year slowed versus last year's increase of
$9.6 million as the Company's sales in January exceeded expectations
and thus reduced inventory growth year over year. The slower growth in
accounts payable and accrued expenses resulted from the completion of
the Company's Headquarters expansion and cash register rollout in the
current year, which was in progress at the end of the prior year.
The Company invested $37.4 million in the current fiscal year
for capital expenditures primarily associated with the planning and
opening of new Company stores, and the remodeling/relocating/expansion
of numerous existing stores. During the same period in the prior fiscal
year, the Company invested $40.5 million primarily for capital
expenditures associated with the opening of new Company stores, the
remodeling of several existing stores, and additional expenditures for
a new point-of-sale device, expansion of its office and design
facilities and infrastructure associated with its Internet and catalog
operations.
10
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During the current year, eleven of the Company's current officers and
one of its independent directors exercised 967,989 stock options (split adjusted
for both splits in fiscal 2001) at prices ranging from $.722 to $8.5833 (split
adjusted for both splits in fiscal 2001) and several employees and former
employees (including former officers) exercised 321,901 options at prices
ranging from $.722 to $15.3067 (split adjusted for both splits in fiscal 2001).
Also during this period, the Company sold 129,886 shares of common stock (split
adjusted for both splits in fiscal 2001) under its employee stock purchase plan
at prices of $16.8533 and $14.7333 (split adjusted for both splits in fiscal
2001). The proceeds from these issuances of stock amounted to approximately $7.7
million.
During the current fiscal year, the Company invested $26.2 million,
net, in marketable securities, paid $66,000 of existing debt and incurred
approximately $78,000 of deferred finance costs related to the renewal of its
existing credit line.
As more fully described in "Item 1" beginning on page 15 of the
Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2002,
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 2002, the Company acquired 52 acres of land with an
existing distribution center of approximately 202,000 square feet and existing
office space of 31,000 square feet. The cost of this acquisition was $7.2
million and it is anticipated that the Company will need to incur additional
costs during fiscal 2002 of between $2.5 million and $4.5 million to equip and
modify this facility. It is anticipated that this new facility will fully
replace the existing distribution center in Ft. Myers, Florida by the first
quarter of fiscal 2003. In order to secure the benefits of various governmental
incentives with respect to the new distribution facility, the Company entered
into a transaction with the local development authority involving a fully
prepaid long-term lease and a nominally priced repurchase option exercisable by
the Company at any time. The aquisition was fully funded out of the Company's
available cash resources and the Company's interest in the property will be
reported as an asset in the Company's balance sheet.
During fiscal 2001 the Company amended its mortgage loan agreement to
extend the balloon payment on its mortgage loan from early in 2003 to early in
2012. The monthly payments were increased from $6,000 principal plus interest to
$11,083 principal plus interest, beginning in February 2002. Monthly principal
payments thereafter increase by 6% each February through 2011. Other terms of
the mortgage remained unchanged. The Company does not anticipate obtaining any
additional mortgage financing for its new or existing facilities at this time.
The Company has also signed contracts with various software vendors
pursuant to which the Company will replace certain of its existing software
systems, including its merchandising, financial and distribution systems, as
well as implement new systems, such as global sourcing and human resources,
during fiscal 2002. The Company estimates that it will incur costs of between $7
million and $9 million as capital expenditures for this project and that these
packages will be fully functional in the first or second quarter of fiscal 2003.
As with any major new software installation, there are various implementation
risks which, if manifested, could adversely impact the Company's operations. In
an effort to manage these potential risks and to help minimize the potential for
such adverse impact, the implementation is expected to be carefully monitored
and controlled and the Company plans to run parallel software systems until the
corresponding new system has been installed and the operation thereof has been
tested and demonstrated to run successfully in all material respects.
The Company plans to open a minimum of approximately 65 net
Company-owned new stores in fiscal 2002, 10 of which were open as of April 19,
2002. Further, the Company plans to open between 65 and 70 net Company-owned new
stores in fiscal 2003. The Company believes that the liquidity needed for its
planned new store growth, continuing remodel/expansion program, acquisition and
equipping of the new distribution center, installation of new software packages
and maintenance of proper inventory levels associated with this growth will be
funded primarily from cash flow from operations and its strong existing cash and
marketable securities balances. The Company further believes that this liquidity
will be sufficient, based on the above, to fund anticipated capital needs over
the near-term, including scheduled debt repayments. Given the Company's existing
cash and marketable securities balances and the capacity included in its bank
credit facilities, the Company does not believe that it would need to seek other
sources of financing to conduct its operations or pursue its expansion plans
even if cash flow from operations should prove to be less than anticipated or if
there should arise a need for additional letter of credit capacity due to
establishing new and expanded sources of supply, or if the Company were to
increase the number of new Company stores planned to be opened in future
periods.
SEASONALITY AND INFLATION
Although the operations of the Company are influenced by general
economic conditions, the Company does not believe that inflation has had a
material effect on the results of operations during the current or prior
periods. The Company does not consider its business to be seasonal.
11
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This annual report contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, 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. The statements address items such as
future sales, gross profit expectations, planned store openings,
closings and expansions, future comparable store sales, future product
sourcing plans, inventory levels, planned capital expenditures and
future cash needs. In addition, from time to time, the Company may
issue press releases and other written communications, and
representatives of the Company may make oral statements which contain
forward-looking information.
These statements, including those in this annual report and
those in press releases or made orally, may include the words
"expects," "believes," and similar expressions. Except for historical
information, matters discussed in such oral and written statements,
including this annual report, are forward-looking statements. 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 financial strength of retailing in
particular and the economy in general, the extent of financial
difficulties that may be experienced by customers, the ability of the
Company to secure and maintain customer acceptance of Chico's styles,
the propriety of inventory mix and sizing, the quality of merchandise
received from vendors, the extent and nature of competition in the
markets in which the Company operates, the extent of the market demand
and overall level of spending for women's private label clothing and
related accessories, the adequacy and perception of customer service,
the ability to coordinate product development with buying and planning,
the ability of the Company's suppliers to timely produce and deliver
clothing and accessories, the changes in the costs of manufacturing,
labor and advertising, the rate of new store openings, the performance,
implementation and integration of management information systems, the
ability to hire, train, energize and retain qualified sales associates
and other employees, the availability of quality store sites, the
ability to hire and train qualified managerial employees, the ability
to effectively and efficiently establish and operate catalog and
Internet sales, the ability to secure and protect trademarks and other
intellectual property rights, the ability to transition the Company's
distribution operations to the newly acquired facility in Georgia and
to effectively and efficiently integrate and operate the newly acquired
facility, risks associated with terrorist activities and other risks.
In addition, there are potential risks and uncertainties that are
peculiar to the Company's reliance on sourcing from foreign vendors
including the impact of work stoppages, transportation delays and other
interruptions, political instability, foreign currency fluctuations,
imposition of and changes in tariffs and import and export controls
such as import quotas, changes in governmental policies in or towards
foreign countries and other similar factors.
The forward-looking statements included herein are only made
as of the date of this annual report. The Company undertakes no
obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
LITIGATION
In the normal course of business, the Company is subject to
proceedings, lawsuits and other claims including proceedings under laws
and government regulations relating to labor, product, intellectual
property and other matters, including the matter described in Item 3 of
Part I of the Company's Annual Report on Form 10-K for the fiscal year
ended February 2, 2002. Such matters are subject to many uncertainties,
and outcomes are not predictable with assurance. Consequently, the
ultimate aggregate amount of monetary liability or financial impact
with respect to these matters at February 2, 2002, cannot be
ascertained. Although these matters could affect the operating results
of any one quarter when resolved in future periods and although there
can be no assurance with respect thereto, management believes that
after final disposition, any monetary liability or financial impact to
the Company would not be material to the annual consolidated financial
statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of the Company's financial instruments as of
February 2, 2002 has not significantly changed since February 3, 2001.
The Company is exposed to market risk from changes in interest rates on
its indebtedness. The Company's exposure to interest rate risk relates
in part to its revolving line of credit with its bank; however, as of
February 2, 2002, the Company did not have any outstanding balance on
its line of credit and, given its strong liquidity position, does not
expect to utilize its line of credit in the foreseeable future except
for its continuing use of the letter of credit facility portion
thereof. The Company's exposure to interest rate risk also relates to
its $5.2 million mortgage loan indebtedness which bears a variable
interest rate based upon changes in the LIBOR rate.
RECENT SEC DISCLOSURE GUIDANCE
In December 2001 and January 2002, the Securities and Exchange
Commission issued financial reporting releases, FR-60, "Cautionary
Advice Regarding Disclosure About Critical Accounting Policies" and
FR-61, "Commission Statement About Management's Discussion and Analysis
("MD&A") of Financial Condition and Results of Operations,"
respectively. FR-60 focuses on the need for more discussion about
critical accounting policies. FR-61 focuses on additional disclosure
relating to liquidity and capital resources, including off-balance
sheet arrangements and related party transactions. The extent of the
Company's off-balance sheet arrangements are limited to letters of
credit and operating leases for retail store space and various office
equipment (see Notes 5 and 7 to the accompanying consolidated financial
statements). Although the Company's interest in its new distribution
facility in Georgia is nominally documented as a long term lease with a
favorable continuing purchase option, the acquisition was fully funded
out of the Company's available cash resources and the Company's
interest in the property will be reported as an asset in the Company's
balance sheet. The Company's only related party transactions are
employment agreements with certain officers (see Note 6 to accompanying
consolidated financial statements). The Company's critical accounting
policies are disclosed in Note 1 to the accompanying consolidated
financial statements.
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12
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets". SFAS 141
requires the purchase method of accounting to be used for all business
combinations initiated after June 30, 2001, establishes specific criteria for
the recognition of intangible assets separately from goodwill, and required
unallocated negative goodwill to be written off immediately as an extraordinary
gain (instead of being deferred and amortized). SFAS 142 provides that goodwill
and intangible assets which have indefinite useful lives will not be amortized
but rather be tested annually for impairment. It also provides that intangible
assets that have finite useful lives will continue to be amortized over their
useful lives, but those lives will no longer be limited to forty years.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires the recognition of a liability
for an asset retirement obligation in the period in which it is incurred. When
the liability is initially recorded, the carrying amount of the related
long-lived asset is correspondingly increased. Over time, the liability is
accreted to its present value and the related capitalized charge is depreciated
over the useful life of the asset.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" which provides clarifications of
certain implementation issues within SFAS 121, along with additional guidance on
the accounting for the impairment or disposal of long-lived assets. SFAS 144
supersedes SFAS 121 and applies to all long-lived assets (including discontinued
operations) and consequently amended APB 30 "Reporting the Effects of Disposal
of a Segment of a Business." SFAS 144 develops one accounting model (based on
the model in SFAS 121) for long-lived assets that are to be disposed of by sale,
as well as addresses the principal implementation issues.
SFAS No. 141 is effective for all business combinations initiated after
June 30, 2001 and for all business combinations accounted for by the purchase
method for which the date of acquisition is after June 30, 2001. The provisions
of SFAS No. 142 are effective for fiscal years beginning after December 15,
2001. The Company will adopt SFAS No. 142 beginning February 3, 2002. The
provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years.
The Company does not anticipate that the adoption of SFAS No. 142, 143,
and 144 beginning February 3, 2002 will have a material effect on the Company's
financial position or results of operations.
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 New
York Stock Exchange and Nasdaq National Market System. (1)
FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2002 HIGH(2) LOW (2)
------- -------
Fourth Quarter (November 4, 2001 - February 2, 2002) $30.58 $17.00
Third Quarter (August 5, 2001 - November 3, 2001) 26.00 13.67
Second Quarter (May 6, 2001 - August 4, 2001) 25.67 17.33
First Quarter (February 4, 2001 - May 5, 2001) 20.89 13.72
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2001 HIGH(2) LOW (2)
------- -------
Fourth Quarter (October 29, 2000 - February 3, 2001) $19.33 $ 7.72
Third Quarter (July 30, 2000 - October 28, 2000) 17.78 12.33
Second Quarter (April 30, 2000 - July 29, 2000) 13.00 7.25
First Quarter (January 30, 2000 - April 29, 2000) 9.67 3.92
(1) On April 11, 2001, the Company commenced its trading on the New York
Stock Exchange.
(2) Adjusted for the 3 for 2 stock split payable in January 2002, the 3
for 2 stock split payable in May 2001 and the 2 for 1 stock split
payable in January 2000.
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:
Title of Class Number of Record Holders As of April 19, 2002
-------------- ---------------------------------------------
Common Stock, par value $.01 per share 662
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13
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[PHOTO OF MODEL]
[PHOTO OF CHAIR]
Report of Independent Certified
Public Accountants
TO CHICO'S FAS, INC. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of Chico's FAS,
Inc. (a Florida corporation) and subsidiaries as of February 2, 2002, and
February 3, 2001, and the related consolidated statements of income,
stockholders' equity and cash flows for the fiscal years ended February 2, 2002,
February 3, 2001, and January 29, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chico's FAS, Inc. and
subsidiaries as of February 2, 2002, and February 3, 2001, and the results of
their operations and their cash flows for the fiscal years ended February 2,
2002, February 3, 2001, and January 29, 2000, in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Tampa, Florida,
March 4, 2002
15
CHICO'S FAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS FEBRUARY 2, FEBRUARY 3,
2002 2001
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 13,376,864 $ 3,914,118
Marketable securities ..................................................... 40,428,675 14,221,520
Receivables, less allowances of $293,000 and $155,000 for sales
returns, respectively ................................................ 2,083,470 2,998,910
Inventories ............................................................... 28,905,066 24,394,162
Prepaid expenses .......................................................... 3,796,798 2,254,349
Deferred taxes ............................................................ 4,400,000 3,003,000
------------- -------------
Total current assets ................................................ 92,990,873 50,786,059
PROPERTY AND EQUIPMENT:
Land and land improvements ................................................ 2,870,111 2,861,582
Building and building improvements ........................................ 12,424,784 11,693,884
Equipment, furniture and fixtures ......................................... 41,752,754 28,083,542
Leasehold improvements .................................................... 57,259,004 37,559,359
------------- -------------
Total property and equipment ........................................ 114,306,653 80,198,367
Less accumulated depreciation and amortization ............................ (23,000,701) (14,613,356)
------------- -------------
Property and equipment, net ......................................... 91,305,952 65,585,011
DEFERRED TAXES .............................................................. 1,166,000 747,000
OTHER ASSETS, net ........................................................... 922,535 688,547
------------- -------------
$ 186,385,360 $ 117,806,617
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................... $ 18,054,137 $ 13,751,762
Accrued liabilities ....................................................... 16,585,157 11,299,352
Current portion of debt and lease obligations ............................. 306,876 276,410
------------- -------------
Total current liabilities ........................................... 34,946,170 25,327,524
DEBT AND LEASE OBLIGATIONS, excluding current portion ....................... 7,944,259 7,157,852
------------- -------------
Total liabilities ................................................... 42,890,429 32,485,376
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 100,000,000 shares authorized and
40,790,659 and 39,373,585 shares issued and outstanding, respectively 407,907 393,736
Additional paid-in capital ................................................ 34,634,396 18,717,087
Retained earnings ......................................................... 108,350,203 66,163,172
Accumulated other comprehensive income .................................... 102,425 47,246
------------- -------------
Total stockholders' equity .......................................... 143,494,931 85,321,241
------------- -------------
$ 186,385,360 $ 117,806,617
============= =============
The accompanying notes are an integral part of these
consolidated balance sheets.
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16
CHICO'S FAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
----------------- ----------------- -----------------
NET SALES BY COMPANY STORES ................ $362,443,217 $252,168,208 $152,473,637
NET SALES BY CATALOG AND INTERNET .......... 10,202,908 2,656,156 --
NET SALES TO FRANCHISEES ................... 5,439,215 4,621,532 2,528,644
------------ ------------ ------------
Net sales ............................. 378,085,340 259,445,896 155,002,281
COST OF GOODS SOLD ......................... 153,937,579 108,670,577 64,949,930
------------ ------------ ------------
Gross profit .......................... 224,147,761 150,775,319 90,052,351
GENERAL, ADMINISTRATIVE AND STORE
OPERATING EXPENSES .................... 146,610,788 99,757,264 62,133,580
DEPRECIATION AND AMORTIZATION .............. 10,001,087 5,654,582 3,112,997
------------ ------------ ------------
Income from operations ................ 67,535,886 45,363,473 24,805,774
INTEREST INCOME, net ....................... 507,145 408,146 177,606
------------ ------------ ------------
Income before income taxes ............ 68,043,031 45,771,619 24,983,380
INCOME TAX PROVISION ....................... 25,856,000 17,393,000 9,494,000
------------ ------------ ------------
Net income ............................ $ 42,187,031 $ 28,378,619 $ 15,489,380
============ ============ ============
PER SHARE DATA:
Net income per common share - basic ........ $ 1.05 $ .73 $ .41
Net income per common and
common equivalent share - diluted ..... $ 1.01 $ .69 $ .39
Weighted average common shares
outstanding - basic ................... 40,182,675 39,041,893 38,120,023
Weighted average common and common
equivalent shares outstanding - diluted 41,889,168 40,832,697 39,782,335
The accompanying notes are an integral part of these
consolidated statements.
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17
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CHICO'S FAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ACCUMULATED
-------------------------- ADDITIONAL OTHER
PAR PAID-IN RETAINED COMPREHENSIVE
SHARES VALUE CAPITAL EARNINGS (LOSS) INCOME TOTAL
------------ ------------ ------------ ------------ ------------- ------------
BALANCE, JANUARY 30, 1999 ................. 37,768,572 $ 377,685 $ 11,630,175 $ 22,295,173 $ -- $ 34,303,033
Net income for the fiscal year ended
January 29, 2000 .................... -- -- -- 15,489,380 -- 15,489,380
Unrealized loss on marketable
securities, net ..................... -- -- -- -- (24,334) (24,334)
------------
Comprehensive income .............. 15,465,046
Issuance of common stock ............. 770,634 7,707 1,740,956 -- -- 1,748,663
Tax benefit of stock options exercised -- -- 1,124,000 -- -- 1,124,000
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, JANUARY 29, 2000 ................. 38,539,206 385,392 14,495,131 37,784,553 (24,334) 52,640,742
Net income for the fiscal year ended
February 3, 2001 .................... -- -- -- 28,378,619 -- 28,378,619
Unrealized gain on marketable
securities, net ..................... -- -- -- -- 71,580 71,580
------------
Comprehensive income .............. 28,450,199
Issuance of common stock ............. 834,379 8,344 1,534,800 -- -- 1,543,144
Stock option compensation ............ -- -- 70,156 -- -- 70,156
Tax benefit of stock options exercised -- -- 2,617,000 -- -- 2,617,000
BALANCE, FEBRUARY 3, 2001 ................. 39,373,585 393,736 18,717,087 66,163,172 47,246 85,321,241
------------ ------------ ------------ ------------ ------------ ------------
Net income for the fiscal year ended
February 2, 2002 .................... -- -- -- 42,187,031 -- 42,187,031
Unrealized gain on marketable
securities, net ..................... -- -- -- -- 55,179 55,179
------------
Comprehensive income .............. 42,242,210
Issuance of common stock ............. 1,417,074 14,171 7,688,665 -- -- 7,702,836
Stock option compensation ............ -- -- 44,644 -- -- 44,644
Tax benefit of stock options exercised -- -- 8,184,000 -- -- 8,184,000
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, FEBRUARY 2, 2002 ................. 40,790,659 $ 407,907 $ 34,634,396 $108,350,203 $ 102,425 $143,494,931
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated statements.
18
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CHICO'S FAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 42,187,031 $ 28,378,619 $ 15,489,380
------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization, cost of goods sold .... 405,787 323,162 194,542
Depreciation and amortization, other ................. 10,001,087 5,654,582 3,112,997
Stock option compensation ............................ 44,644 70,156 --
Deferred tax benefit ................................. (1,816,000) (606,000) (746,000)
Tax benefit of options exercised ..................... 8,184,000 2,617,000 1,124,000
Deferred rent expense, net ........................... 882,873 406,971 238,498
Loss from disposal of property and equipment ......... 1,445,078 393,970 354,498
Decrease (increase) in assets --
Receivables, net ..................................... 915,440 (1,292,249) (557,583)
Inventories .......................................... (4,510,904) (9,559,362) (4,729,647)
Prepaid expenses ..................................... (1,542,449) (1,585,654) (157,810)
Other assets, net .................................... (292,305) (109,821) (125,270)
Increase in liabilities --
Accounts payable ..................................... 4,302,375 7,769,078 1,987,561
Accrued liabilities .................................. 5,285,805 6,706,248 913,749
------------ ------------ ------------
Total adjustments .................................. 23,305,431 10,788,081 1,609,535
------------ ------------ ------------
Net cash provided by operating activities .......... 65,492,462 39,166,700 17,098,915
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities ....................... (56,396,476) (30,131,458) (14,019,861)
Proceeds from sale of marketable securities .............. 30,244,500 29,977,045 --
Purchases of property and equipment ...................... (37,436,496) (40,468,993) (15,169,791)
------------ ------------ ------------
Net cash used in investing activities .............. (63,588,472) (40,623,406) (29,189,652)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................... 7,702,836 1,543,144 1,748,663
Principal payments on debt ............................... (66,000) (72,000) (72,000)
Principal payments on capital lease obligations .......... -- -- (89,772)
Deferred finance costs ................................... (78,080) (81,250) --
------------ ------------ ------------
Net cash provided by financing activities .......... 7,558,756 1,389,894 1,586,891
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 9,462,746 (66,812) (10,503,846)
CASH AND CASH EQUIVALENTS, beginning of period ............. 3,914,118 3,980,930 14,484,776
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period ................... $ 13,376,864 $ 3,914,118 $ 3,980,930
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Unrealized gain (loss) on marketable securities, net . $ 55,179 $ 71,580 $ (24,334)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest ............................... $ 610,384 $ 893,811 $ 566,205
Cash paid for income taxes ........................... $ 17,657,563 $ 15,839,172 $ 9,409,705
The accompanying notes are an integral part of these
consolidated statements.
19
CHICO'S FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 2, 2002
1. BUSINESS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ORGANIZATION
The accompanying consolidated financial statements include the accounts of
Chico's FAS, Inc., a Florida corporation, and its wholly-owned subsidiaries,
Chico's Distribution, Inc., Chico's Concept, Inc. and Chico's Media, Inc.
(collectively, the Company). The subsidiaries were formed in February 1999. The
Company operates as a specialty retailer of exclusively designed, private label
casual clothing and related accessories. The Company sells its products through
traditional retail stores, catalog, a small franchise network, and via the
Internet at www.chicos.com. As of February 2, 2002, the Company's retail store
system consisted of 311 stores located throughout the United States, 300 of
which are owned and operated by the Company, and 11 of which are owned and
operated by franchisees.
FISCAL YEAR
The Company has a 52-53 week fiscal year ending on the Saturday closest to
January 31. The fiscal years ended February 2, 2002, February 3, 2001, and
January 29, 2000, contained 52, 53 and 52 weeks, respectively.
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 February 2, 2002, and February 3,
2001, and for the fiscal years then ended is as follows:
FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 2, FEBRUARY 3,
2002 2001
------------ ------------
Franchise stores opened ........................ -- 2
Franchise stores in operation at fiscal year-end 11 11
Company-owned stores at fiscal year-end ........ 300 239
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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. Significant
estimates and assumptions made by management primarily impact the following key
financial areas:
INVENTORY VALUATION
The Company identifies potentially excess and slow-moving inventory by
evaluating turn rates and inventory levels in conjunction with the
Company's overall growth rate. Excess quantities are identified through
evaluation of inventory ageings, review of inventory turns and historical
sales experiences, as well as specific identification based on fashion
trends. Further, exposure to inadequate realization of carrying value is
identified through analysis of gross margins and markdowns in combination
with changes in the fashion industry.
INVENTORY SHRINKAGE
The Company estimates its expected shrinkage of inventory between physical
inventory counts by assessing the chain-wide average shrinkage experience
rate, applied to the related periods' sales volume. Such assessments are
updated on a regular basis to reflect the most recent physical inventory
shrinkage experience rates.
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20
SALES RETURNS
The Company's policy is to honor customer refunds at all times. Returns
after 30 days of the original purchase, or returns without the original
receipt, qualify for store credit only. The Company will, in certain
circumstances, offer full customer refunds either after 30 days or without
a receipt. The Company estimates its reserve for likely customer returns
based on the average refund experience in relation to sales for the
related period.
RECLASSIFICATIONS
Reclassifications of certain prior-year balances were made in order to conform
to current-year presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand and in banks with original
maturities of three months or less.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale securities and are
carried at fair value, with the unrealized holding gains and losses, net of
income taxes, reflected as a separate component of stockholders' equity until
realized. For the purposes of computing realized and unrealized gains and
losses, cost is determined on a specific identification basis.
INVENTORIES
Raw material inventories consisting of fabric of approximately $2,400,000 and
$3,644,000 as of February 2, 2002, and February 3, 2001, respectively, are
recorded at the lower of cost, using the first-in, first-out (FIFO) method, or
market. All other inventories consist of finished clothing and accessories and
are recorded at the lower of cost, using the last-in, first-out (LIFO) method,
or market. If the lower of FIFO or market method had been used, inventories
would have been approximately $1,578,000 and $1,153,000 higher as of February 2,
2002, and February 3, 2001, respectively, than those reported in the
accompanying consolidated balance sheets. Purchasing, distribution and design
costs are expensed as incurred, and are included in the accompanying
consolidated statements of income as a component of cost of goods sold.
FREIGHT COSTS
The Company incurs various types of transportation and delivery costs in
connection with inventory purchases and distribution of merchandise to its
stores. Such costs are included as a component of the overall cost of goods
sold.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Fixtures manufactured and leasehold
improvements constructed by the Company are recorded at cost, which includes
elements of raw materials, labor and overhead. Depreciation of property and
equipment is provided on a straight-line basis over the estimated useful lives
of the assets. Leasehold improvements are depreciated over the lesser of the
useful lives of the assets or the lease terms. The Company's property and
equipment is depreciated using the following estimated useful lives:
ESTIMATED USEFUL LIVES
----------------------
Land and land improvements .............................. 35 years
Building and building improvements ...................... 20 - 35 years
Equipment, furniture and fixtures........................ 2 - 10 years
Leasehold improvements .................................. 1 - 10 years
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.
INTANGIBLE ASSETS
Other assets include intangible assets which include legal and other costs of
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. 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 $129,000 and $187,000 as of February 2, 2002, and February 3,
2001,respectively.
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21
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ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including identifiable intangibles, are reviewed periodically
for impairment if events or changes in circumstances indicate that the carrying
amount should be addressed. The Company has determined that there has been no
impairment in the carrying value of long-lived assets, as of February 2, 2002.
INCOME TAXES
The Company follows the liability method, which establishes deferred tax assets
and liabilities for the temporary differences between the financial reporting
bases and the tax bases of the Company's assets and liabilities at enacted tax
rates expected to be in effect when such amounts are realized or settled. Net
deferred tax assets, whose realization is dependent on taxable earnings of
future years, are recognized when a greater than 50 percent probability exists
that the tax benefits will actually be realized sometime in the future.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has cash and cash equivalents, marketable securities, short-term
trade receivables and payables and long-term debt instruments. The carrying
values of cash and cash equivalents, marketable securities, trade receivables
and trade payables equal current fair value. The terms of the Company's
revolving credit agreement and term loan agreement, as amended, include variable
interest rates, which approximate current market rates.
REVENUE RECOGNITION
Net sales by Company stores include sales made to retail customers during the
period, net of estimated customer returns. Net sales by catalog and Internet
include shipments made to catalog and Internet customers during the period, net
of estimated customer returns. Net sales to franchisees include merchandise
shipped to franchisees, net of estimated returns.
STORE PRE-OPENING COSTS
Operating costs (including store set-up, rent and training expenses) incurred
prior to the opening of new stores are expensed as incurred and are included in
general, administrative and store operating expenses in the accompanying
consolidated statements of income.
ADVERTISING COSTS
Costs associated with advertising are charged to expense when the advertising
occurs. During the fiscal years ended February 2, 2002, February 3, 2001, and
January 29, 2000, advertising costs of approximately $12,816,000, $7,051,000 and
$2,667,000, respectively, are included in general, administrative and store
operating expenses.
STOCK-BASED COMPENSATION PLANS
As allowed by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company has elected to
account for its stock-based compensation plans under the intrinsic value method
of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). Under APB 25, compensation
expense would be recorded ratably over the vesting period if the current market
price of the underlying stock exceeded the exercise price. The Company has
adopted the disclosure requirements of SFAS 123.
COMMON STOCK SPLITS
During the fiscal years ended February 2, 2002, and January 29, 2000, the Board
of Directors (the Board) declared three common stock splits (collectively, the
Stock Splits). No common stock splits were declared during the fiscal year ended
February 3, 2001. On December 14, 1999, the Board declared a two-for-one stock
split of the Company's common stock, payable in the form of a stock dividend on
January 14, 2000, to shareholders of record as of the close of business on
December 27, 1999. On April 19, 2001, the Board declared a three-for-two stock
split of the Company's common stock, payable in the form of a stock dividend on
May 16, 2001, to shareholders of record as of the close of business on May 2,
2001. On December 19, 2001, the Board declared a three-for-two stock split of
the Company's common stock, payable in the form of a stock dividend on January
18, 2002, to shareholders of record as of the close of business on December 31,
2001. Accordingly, all historical weighted average share and per share amounts
and all references to the number of common shares elsewhere in the consolidated
financial statements and notes thereto have been restated to reflect the Stock
Splits. Par value remains unchanged at $0.01.
22
[PHOTO OF STORE ENTRANCE]
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
SFAS No. 128, "Earnings per Share" (SFAS 128), requires companies with complex
capital structures that have publicly held common stock or common stock
equivalents to present both basic and diluted earnings per share (EPS) on the
face of the income statement. As provided by SFAS 128, basic EPS is based on the
weighted average number of common shares outstanding and diluted EPS is based on
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 consolidated statements
of income as restated for the Stock Splits:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
----------------- ----------------- -----------------
Weighted average common shares outstanding - basic 40,182,675 39,041,893 38,120,023
Dilutive effect of options outstanding ........... 1,706,493 1,790,804 1,662,312
------------ ------------ ------------
Weighted average common and common equivalent
shares outstanding - diluted ..................... 41,889,168 40,832,697 39,782,335
============ ============ ============
The following options were outstanding as of the end of the fiscal years but
were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common shares:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
----------------- ----------------- -----------------
Number of options ................................ 186,500 513,000 25,783
Exercise price ................................... $21.33 - $26.67 $14.61 - $15.44 $7.39
Expiration date................................... May 23, 2010 - August 7, 2010 - October 25, 2009
January 2, 2012 October 30, 2010
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations" (SFAS 141), and SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 141 requires the purchase method of
accounting to be used for all business combinations initiated after June 30,
2001, establishes specific criteria for the recognition of intangible assets
separately from goodwill and required unallocated negative goodwill to be
written off immediately as an extraordinary gain (instead of being deferred and
amortized). SFAS 142 provides that goodwill and intangible assets which have
indefinite useful lives will not be amortized but rather will be tested at least
annually for impairment. It also provides that intangible assets that have
finite useful lives will continue to be amortized over their useful lives, but
those lives will no longer be limited to forty years.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143). SFAS 143 requires the recognition of a liability for an
asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the carrying amount of the related long-lived
asset is correspondingly increased. Over time, the liability is accreted to its
present value and the related capitalized charge is depreciated over the useful
life of the asset.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144), which provides clarifications of
certain implementation issues within SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(SFAS 121), along with additional guidance on the accounting for the impairment
or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and applies to
all long-lived assets including discontinued operations and consequentially
amended APB Opinion No. 30, "Reporting the Effects of Disposal of a Segment of a
Business." SFAS 144 develops one accounting model (based on the model in SFAS
121) for long-lived assets that are to be disposed of by sale, as well as
addresses the principal implementation issues.
SFAS 141 is effective for all business combinations initiated after June 30,
2001, and for all business combinations accounted for by the purchase method for
which the date of acquisition is after June 30, 2001. The provisions of SFAS 142
are effective for fiscal years beginning after December 15, 2001. The Company
will adopt SFAS 142 beginning February 3, 2002. The provisions of SFAS 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years.
The Company does not anticipate that the adoption of SFAS 142, 143 and 144
beginning February 3, 2002, will have a material effect on the Company's
financial position or results of operations.
23
2. MARKETABLE SECURITIES:
Marketable securities classified as available-for-sale consist of the following:
FEBRUARY 2, FEBRUARY 3,
2002 2001
------------ ------------
Municipal bonds, cost ............................ $ 40,326,250 $ 14,174,274
Municipal bonds, fair value....................... 40,428,675 14,221,520
------------ ------------
Unrealized gain................................. $ 102,425 $ 47,246
============ ============
During the fiscal years ended February 2, 2002, and February 3, 2001, realized
gains of approximately $500 and $5,000, respectively, were recognized on sales
of the Company's marketable securities and are included in interest income, net
in the accompanying consolidated statements of income. At February 2, 2002,
approximately 22 percent of the Company's marketable securities mature within
one year, 29 percent between one and three years and the remainder by 2031.
3. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following:
FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 2, FEBRUARY 3,
2002 2001
----------------- -----------------
Accrued payroll, bonuses and severance costs .............. $ 6,203,882 $ 5,568,668
Allowance for estimated customer returns, gift certificates
and store credits ........................................ 5,598,777 3,476,323
Other ..................................................... 4,782,498 2,254,361
------------ ------------
$ 16,585,157 $ 11,299,352
============ ============
4. INCOME TAXES:
The Company's total income tax provision consisted of the following:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
----------------- ----------------- -----------------
Current:
Federal ................... $ 24,394,000 $ 15,820,000 $ 9,176,000
State ..................... 3,278,000 2,179,000 1,064,000
Deferred:
Federal ................... (1,603,000) (492,000) (635,000)
State ..................... (213,000) (114,000) (111,000)
------------ ------------ ------------
Total income tax provision $ 25,856,000 $ 17,393,000 $ 9,494,000
============ ============ ============
The reconciliation of the income tax provision based on the U.S. statutory
federal income tax rate (35 percent) to the Company's income tax provision is as
follows:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2002 2001 2000
----------------- ----------------- -----------------
Tax expense at the statutory rate .................. $ 23,815,000 $ 16,020,000 $ 8,744,000
State income tax expense, net of federal tax benefit 2,041,000 1,369,000 633,000
Other .............................................. -- 4,000 117,000
------------ ------------ ------------
Total income tax provision ....................... $ 25,856,000 $ 17,393,000 $ 9,494,000
============ ============ ============
[PHOTO OF BUILDING]
24
Deferred tax assets and liabilities are recorded due to different carrying
amounts for financial and income tax reporting purposes arising from cumulative
temporary differences. These differences consist of the following as of February
2, 2002, and February 3, 2001:
FEBRUARY 2, FEBRUARY 3,
2002 2001
------------ ------------
Assets:
Accrued liabilities and allowances $ 2,897,000 $ 1,810,000
Inventories ...................... 1,431,000 1,196,000
Lease obligations ................ 1,176,000 841,000
Other ............................ 207,000 84,000
------------ ------------
5,711,000 3,931,000
Liabilities:
Property and equipment ........... (145,000) (108,000)
------------ ------------
5,566,000 3,823,000
Less valuation allowance ......... -- (73,000)
------------ ------------
$ 5,566,000 $ 3,750,000
============ ============
5. DEBT AND LEASE OBLIGATIONS:
Debt and lease obligations consisted of the following:
FEBRUARY 2, FEBRUARY 3,
2002 2001
------------ ------------
Line of credit ................... $ -- $ --
Mortgage Note .................... 5,155,500 5,221,500
Deferred rent .................... 3,095,635 2,212,762
------------ ------------
Total debt and lease obligations 8,251,135 7,434,262
Less current portion ........... (306,876) (276,410)
------------ ------------
$ 7,944,259 $ 7,157,852
============ ============
During the fiscal year ended February 3, 2001, the Company entered into a
two-year unsecured revolving credit facility (the Credit Facility), whereby the
Company was able to borrow up to $25 million. The Credit Facility consisted of a
$10 million line of credit and $15 million in reserves for letters of credit
(see Note 7). During the fiscal year ended February 2, 2002, the Company amended
the Credit Facility, to (i) increase the reserve for letters of credit from $15
million to $20 million and lower the line of credit from $10 million to $5
million and (ii) extend the Mortgage Note through February 2012, as more fully
described below. All borrowings under the Credit Facility bear interest at the
LIBOR rate, plus an additional amount ranging from 0.80 percent to 2.90 percent
adjusted quarterly based on the Company's performance per annum (a combined 2.57
percent at February 2, 2002). The Company is also required to pay, quarterly in
arrears, a commitment fee of 0.10 percent per annum on the average daily unused
portion of the Line. There are no compensating balance requirements associated
with the Credit Facility.
The Credit Facility contains certain restrictions regarding additional
indebtedness, business operations, guaranties, transfers and sales of assets,
transactions with subsidiaries or affiliates and liens. In addition, the Company
must comply with certain quarterly restrictions (based on a rolling
four-quarters basis) regarding net worth, leverage ratio, fixed charge coverage
and current ratio requirements. The Company was in compliance with all covenants
at February 2, 2002.
The Mortgage Note was financed with a bank, initially bearing interest at the
bank's prime rate plus .5 percent. During the fiscal year ended February 3,
2001, in connection with the closing of the Credit Facility, the Company amended
the Mortgage Note to provide that the existing indebtedness would bear interest
under the same provision as that in the Credit Facility and the restrictive
covenants would be modified to be the same as those in the Credit Facility. The
Mortgage Note is secured by a first priority mortgage on land, land improvements
and certain building and equipment. During December 2001, the Company amended
the Mortgage Note to extend the balloon payment due date from 2003 to February
2012. The monthly payments were increased from $6,000 principal plus interest to
$11,083 principal plus interest, beginning February 2002. Monthly principal
payments thereafter increase annually by 6% each February through 2011. Other
terms of the Mortgage Note remain unchanged.
On October 14, 1997, an interest rate swap (the Swap) with a notional principal
amount of approximately $5,462,000 was effectuated, whereby the interest at the
bank's prime rate plus .5 percent was exchanged for a fixed rate of 9 percent of
the outstanding principal of the Mortgage Note. The Company incurred no
additional costs associated with the Swap during the fiscal year ended January
30, 1999. The Company bought out the Swap during the fiscal year ended January
29, 2000, for approximately $8,000, which is included in general, administrative
and store operating expenses in the accompanying consolidated statement of
income.
[PHOTO OF MODEL]
25
[PHOTO OF STORE ENTRANCE]
Maturities of the Mortgage Note are as follows as of February 2, 2002:
FISCAL YEAR ENDING AMOUNT
------------------ ----------
February 1, 2003 ................................ $ 133,001
January 31, 2004 ................................ 141,626
January 29, 2005 ................................ 150,811
January 28, 2006 ................................ 160,591
February 2, 2007 ................................ 171,006
Thereafter ...................................... 4,398,465
----------
$5,155,500
==========
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.
6. RELATED PARTY TRANSACTIONS:
Certain officers have entered into agreements with the Company, which provide
for base salaries, annual bonuses and certain severance benefits in the event
that their employment is terminated by the Company "without cause" or following
a "change of control" of the Company.
7. COMMITMENTS AND CONTINGENCIES:
The Company leases retail store space and various office equipment under
operating leases expiring in various years through the fiscal year ending 2012.
Certain of the leases provide that the Company may cancel the lease if the
Company's retail sales at that location fall below an established level, while
certain leases provide for additional rent payments to be made when sales exceed
a base amount. Certain operating leases provide for renewal options for periods
from three to five years at their fair rental value at the time of renewal. In
the normal course of business, operating leases are generally renewed or
replaced by other leases.
Minimum future rental payments under noncancellable operating leases (including
leases with certain minimum sales cancellation clauses described below and
exclusive of common area maintenance charges and/or contingent rental payments
based on sales) as of February 2, 2002, are approximately as follows:
FISCAL YEAR ENDING AMOUNT
------------------ ------------
February 1, 2003 .............................. $ 23,511,000
January 31, 2004 .............................. 23,096,000
January 29, 2005 .............................. 21,838,000
January 28, 2006 .............................. 20,104,000
February 3, 2007 .............................. 17,496,000
Thereafter .................................... 49,959,000
------------
$156,004,000
============
As mentioned earlier, a majority of the Company's store operating leases contain
cancellation clauses that allow the leases to be terminated at the Company's
discretion, if certain minimum sales levels are not met within the first few
years of the lease term. The Company has not historically exercised many of
these cancellation clauses and, therefore, has included the full lease terms of
such leases in the above table. For the fiscal years ended February 2, 2002,
February 3, 2001, and January 29, 2000, total rent expense under the Company's
operating leases was approximately $30,818,000, $21,185,000 and $14,843,000,
respectively, including common area maintenance charges of approximately
$3,560,000, $2,511,000 and $1,827,000, respectively, other rental charges of
approximately $3,406,000, $2,473,000 and $1,928,000, respectively, and
contingent rental expense of approximately $3,431,000, $2,437,000 and
$1,084,000, respectively, based on sales.
At February 2, 2002, the Company has approximately $14,432,000 in commercial
letters of credit outstanding (see Note 5), which have arisen in the normal
course of business due to foreign purchase commitments.
8. LITIGATION:
The Company has been named as defendant in a suit filed in September 2001 in the
Superior Court for the State of California for the County of Orange. This suit,
Carmen Davis vs. Chico's FAS, Inc., was filed by the plaintiff, seeking to
represent all other Company assistant store managers, sales associates and
hourly employees in California from September 21, 1997, to the present. The
Company responded by seeking to dismiss the complaint and strike selected claims
in order to either eliminate the litigation or gain greater clarity as to the
basis for plaintiff's action. In response, the plaintiff filed an amended
complaint on February 15, 2002,which differs in a number of material respects
from the original complaint. The amended complaint alleges that the Company
failed to pay overtime wages and failed to provide rest breaks and meal periods.
The action seeks to be classified as a "class action" and seeks unspecified
monetary damages. The Company is actively investigating the merits of this
action and believes (a) that the merits of this action do not warrant class
action status and (b) that it has certain defenses to the claims. The Company
intends to vigorously defend the action,
26
[PHOTO OF MODEL]
including contesting the certification of the action as a class action.
Nevertheless, an unfavorable outcome in this matter could have a material
adverse effect on our financial condition, and any change in our labor practices
that may be required as a result of this litigation could have a negative impact
on our ongoing results of operations.
Chico's is not a party to any other legal proceedings, other than various claims
and lawsuits arising in the normal course of the Company's business, none of
which the Company believes should have a material adverse effect on its
financial condition or results of operations.
9. STOCK OPTION PLANS AND CAPITAL STOCK TRANSACTIONS:
1992 STOCK OPTION PLAN
During fiscal year 1992, the Board approved a stock option plan (the 1992 Plan),
which reserved approximately 928,000 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.
Options granted under the terms of the 1992 Plan generally vest evenly over
three years and have a 10-year term. As of February 2, 2002, approximately
288,000 nonqualified options are outstanding and approximately 639,000 have been
exercised under the 1992 Plan.
1993 STOCK OPTION PLAN
During fiscal year 1993, the Board approved a stock option plan, as amended in
fiscal 1999 (the 1993 Plan), which reserved approximately 4,192,000 shares of
common stock for future issuance under the 1993 Plan to eligible employees of
the Company. The terms of the 1993 Plan are essentially the same as the 1992
Plan. As of February 2, 2002, approximately 2,996,000 nonqualified options are
outstanding and approximately 747,000 have been exercised under the 1993 Plan.
INDEPENDENT DIRECTORS' PLAN
In October 1998, the Board approved a stock option plan (the Independent
Directors' Plan), which reserved 650,000 shares of common stock for future
issuance to eligible independent directors of the Company. Options granted under
the terms of the Independent Directors' Plan and these individual grants vest
after six months and have a 10-year term. 222,500 shares had been granted, as of
February 2, 2002, under the Independent Directors' Plan. Since 1993 and prior to
adoption of the Independent Directors' Plan, four independent directors of the
Company had been granted a total of 325,500 nonqualified options through
individual grants at exercise prices ranging from $1.86 to $2.85. Subsequent to
the adoption of the Independent Directors' Plan, three independent directors of
the Company were granted 60,000 nonqualified stock options through individual
grants at exercise prices equal to $8.58 per share. As of February 2, 2002,
approximately 342,000 of these individual grant nonqualified options and options
under the Independent Directors' Plan are outstanding and approximately 266,000
have been exercised.
EXECUTIVE OFFICERS' SUPPLEMENTARY STOCK OPTION PROGRAM
During the fiscal year ended February 3, 2001, the Board approved an executive
officers' supplementary stock option program (the Executive Officers' Program),
which reserved 375,000 shares of common stock for future issuance to eligible
executive officers of the Company. Options granted under the terms of the
Executive Officers' Program vest after three years and have a 10-year term. As
of February 2, 2002, all 375,000 shares have been granted under the Executive
Officers' Program at exercise prices ranging from $6.80 to $10.20. Of the
375,000 shares granted, 45,000 shares were granted at exercise prices below fair
market value. The granting of these shares resulted in stock compensation
expense of approximately $45,000 and $70,000 being recorded in the accompanying
consolidated financial statements for the fiscal years ended February 2, 2002,
and February 3, 2001, respectively. As of February 2, 2002, 125,000 of these
options have been exercised and 250,000 have been cancelled.
AGGREGATE STOCK OPTION ACTIVITY
As of February 2, 2002, 3,625,613 nonqualified options are outstanding at a
weighted average exercise price of $7.32 per share, and 878,303 remain available
for future grants. Of the options outstanding, 2,083,844 options are
exercisable.
Stock option activity for the fiscal years ended February 2, 2002, February 3,
2001, and January 29, 2000, was as follows:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 2, 2002 FEBRUARY 3, 2001 JANUARY 29, 2000
----------------------------- ---------------------------- ----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
Outstanding, beginning of period 4,356,079 $ 4.80 3,860,906 $ 2.28 3,611,939 $ 1.34
Granted 963,500 17.67 1,350,000 10.04 893,250 5.45
Exercised (1,289,890) 4.42 (793,022) 1.51 (615,028) 1.43
Canceled or expired (404,076) 14.13 (61,805) 4.17 (29,255) 1.05
--------- --------- ---------
Outstanding, end of period 3,625,613 7.32 4,356,079 4.80 3,860,906 2.28
========= ========= =========
Options exercisable, end of period 2,083,844 3.27 2,502,149 2.29 2,303,273 1.57
27
The following table summarizes information about stock options as of February 2,
2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------- --------------------------------------
WEIGHTED-AVERAGE
RANGES OF NUMBER REMAINING CONTRACTUAL WEIGHTED-AVERAGE NUMBER WEIGHTED- AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- --------------------- ---------------- ----------- -----------------
$ 0.72 - $ 4.99 1,402,693 5.25 $ 1.37 1,387,691 $ 1.33
$ 5.00 - $ 9.99 1,248,920 7.78 5.95 650,153 6.14
$10.00 - $19.99 780,000 9.04 16.59 1,000 14.86
$20.00 - $34.75 194,000 9.38 21.81 45,000 21.60
--------- ---------
3,625,613 7.16 7.32 2,083,844 3.27
========= =========
EMPLOYEE STOCK PURCHASE PLAN
The Board adopted a noncompensatory employee stock purchase plan (ESPP),which
became effective upon the consummation of the Company's initial public offering
on April 1, 1993. Under the ESPP, all employees are given the right to purchase
up to 800 shares of the common stock of the Company two times a year at a price
equal to 85 percent of the value of the stock immediately prior to the beginning
of each exercise period. During the fiscal years ended February 2, 2002,
February 3, 2001, and January 29, 2000, approximately 130,000, 41,000 and
156,000 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 APB 25. The
FASB later issued SFAS 123. SFAS 123 allows companies to continue following the
accounting guidance of APB 25, but requires pro forma disclosure of net income
and EPS for the effects on compensation expense had the accounting guidance of
SFAS 123 been adopted. The pro forma disclosures are required only for options
granted in fiscal years that begin after December 15, 1994.
For SFAS 123 purposes, the fair value of each option granted has been estimated
as of the grant date using the Black-Scholes option pricing model with the
following weighted average assumptions: risk-free interest rate of 5.1, 6.3 and
6.2 percent for the fiscal years ended February 2, 2002, February 3, 2001, and
January 29, 2000, respectively, expected life of seven years, no expected
dividends, and expected volatility of 73, 74 and 67 percent for the fiscal years
ended February 2, 2002, February 3, 2001, and January 29, 2000, respectively.
The weighted average fair value of options granted during the fiscal years ended
February 2, 2002, February 3, 2001, and January 29, 2000, was $17.67, $8.17 and
$5.45, respectively. Options granted under the 1992 Plan and 1993 Plan generally
vest ratably over three years. All other options were either exercisable after
six months or vested ratably over three years. The term of all options granted
is 10 years. Had compensation expense been determined consistent with SFAS 123,
utilizing the assumptions detailed above,the Company's net income and net income
per common and common equivalent shares outstanding would have been changed to
the following pro forma amounts for the fiscal years ended February 2, 2002,
February 3, 2001, and January 29, 2000:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FEBRUARY 2, 2002 FEBRUARY 3, 2001 JANUARY 29, 2000
----------------- ----------------- -----------------
Net income:
As reported $ 42,187,031 $28,378,619 $15,489,380
Pro forma 37,372,941 26,382,313 14,451,495
Net income per common share - basic:
As reported $ 1.05 $ .73 $ .41
Pro forma .93 .68 .38
Net income per common and common equivalent share - diluted:
As reported $ 1.01 $ .69 $ .39
Pro forma .85 .61 .34
10. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution employee benefit 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. Under the Plan,
employees may contribute up to 20 percent of their annual compensation, subject
to certain statutory limitations. The Company has elected to match employee
contributions at 33 1/3 percent on the first 6 percent of the employees'
contributions and can elect to make additional contributions over and above the
mandatory match. For the fiscal years ended February 2, 2002, February 3, 2001,
and January 29, 2000, the Company's costs under the Plan were approximately
$425,000, $283,000 and $276,000, respectively.
[PHOTO OF BUILDING]
28
11. SUBSEQUENT EVENTS:
During the fiscal year ending February 1, 2003,the Company acquired 52 acres of
land with an existing distribution center of approximately 202,000 square feet
and existing office space of approximately 31,000 square feet. The cost of this
acquisition was $7.2 million and it is anticipated that the Company will need to
incur additional costs during the fiscal year ending February 1, 2003,of between
$2.5 million and $4.5 million to equip and modify this facility. It is
anticipated that this new facility will fully replace the existing distribution
center in Fort Myers, Florida, by the first quarter of the fiscal year ending
January 31, 2004. In order to secure the benefits of various governmental
incentives with respect to the new distribution facility,the Company entered
into a transaction with the local developmental authority involving a fully
prepaid long-term lease and a nominally priced re-purchase option exercisable by
the Company at any time. Although the Company's interest in its new distribution
facility in Georgia is documented as a long-term lease with a favorable
continuing purchase option, the acquisition was funded, and the equipping and
modification of this facility will be funded, out of the Company's available
cash resources and the Company's interest in the property will be reported as an
asset in the Company's balance sheet.
The Company's Board adopted the Chico's FAS, Inc. Deferred Compensation Plan
(the Deferred Compensation Plan), effective April 1, 2002. Under the Deferred
Compensation Plan, certain members of management and other highly compensated
employees are eligible to defer a portion of their compensation and to invest
the compensation deferral as provided by a Deferred Compensation Plan committee.
The Board has the discretion to contribute amounts, on behalf of the Company, to
the individual deferral accounts of participating employees.
The Company's 2002 Employee Stock Purchase Plan (the 2002 ESPP) was adopted by
the Board on February 18, 2002. The 2002 ESPP replaces the Company's 1993 ESPP,
which has essentially no additional shares remaining available thereunder and
was set to expire by its terms in 2002. Upon the approval of the 2002 ESPP by
the stockholders at the Company's 2002 annual meeting of stockholders, the 1993
ESPP will be considered to have terminated.
The Board approved the Chico's FAS, Inc. Omnibus Stock and Incentive Plan (the
Omnibus Plan) in April 2002,subject to stockholder approval at the Company's
2002 annual meeting of stockholders. The Omnibus Plan provides for awards of
nonqualified stock options, incentive stock options, restricted stock awards and
restricted stock units. If the Omnibus Plan is approved by the Company's
stockholders, no new grants will thereafter be made under the Company's existing
1992 Plan, 1993 Plan or Independent Directors' Plan, and such existing plans
will remain in effect only for purposes of administering options that are
outstanding thereunder on the date the Omnibus Plan is approved by the Company's
stockholders.
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
NET INCOME PER
NET INCOME PER COMMON AND COMMON
NET SALES GROSS PROFIT NET INCOME COMMON SHARE - BASIC EQUIVALENT SHARE - DILUTED
--------- ------------ ---------- -------------------- --------------------------
Fiscal year ended
January 29, 2000:
First quarter $ 36,424,981 $21,524,358 $ 4,216,453 $ .11 $ .11
Second quarter 36,771,293 21,276,944 3,946,666 .10 .10
Third quarter 40,008,995 23,408,317 4,078,309 .11 .10
Fourth quarter 41,797,012 23,842,732 3,247,952 .09 .08
Fiscal year ended
February 3, 2001:
First quarter $ 56,692,814 $33,928,820 $ 7,475,922 $ .19 $ .19
Second quarter 60,638,316 34,994,364 7,377,426 .19 .18
Third quarter 68,990,473 40,669,142 7,820,096 .20 .19
Fourth quarter 73,124,293 41,182,993 5,705,175 .15 .13
Fiscal year ended
February 2, 2002:
First quarter $ 93,233,012 $56,291,716 $12,379,128 $ .31 $ .30
Second quarter 89,492,217 53,684,549 11,090,613 .28 .27
Third quarter 93,978,124 55,542,287 8,899,660 .22 .21
Fourth quarter 101,381,987 58,629,209 9,817,630 .24 .23
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REPORTS ON FORM 10-K
A copy of the Company's annual report to the Securities and Exchange
Commission on Form 10-K will be sent to any shareholder without charge
upon written request to Investor Relations at the current mailing
address or website address below:
Chico's FAS, Inc.
11215 Metro Parkway
Fort Myers, Florida 33912
Website: www.chicos.com
Transfer Agent and Registrar:
The Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Legal Counsel:
Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis
Tampa, Florida 33602
Independent Certified Public Accountants:
Arthur Andersen LLP
Tampa, Florida 33602
Investor Relations:
11215 Metro Parkway
Fort Myers, Florida 33912
(877) 424-4267
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Annual Shareholders' Meeting:
Tuesday, June 25, 2002 at 2 p.m.
Sanibel Harbour Resort
Fort Myers, Florida 33908
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EXECUTIVE OFFICERS
Marvin J. Gralnick
Chief Executive Officer
Helene B. Gralnick
Senior Vice President-
Design & Concept
Scott A. Edmonds
President
Chief Operating Officer
Charles J. Kleman
Chief Financial Officer
Executive Vice President-
Finance
Secretary/Treasurer
Patricia A. Murphy
Senior Vice President-
General Merchandise
Manager
Mori C. MacKenzie
Senior Vice President-
Stores
James P. Frain
Vice President-Marketing
Ajit Patel
Vice President-
Chief Information Officer
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
Retailing Consultant
Ross E. Roeder
Chairman and Chief Executive
Officer-Smart & Final, Inc.
John W. Burden
Retailing Consultant
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WASHINGTON D.C. Georgetown Union Station WISCONSIN Brookfield Fox Point
Wauwatosa WYOMING Jackson Hole
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CHICO'S FAS, INC.
11215 Metro Parkway
Fort Myers, Florida 33912
p. 239.277.6200
f. 239.277.5237
1.888.855.4986
www.chicos.com