[CHICO'S LOGO)
FINANCIAL HIGHLIGHTS
ONE PRO FORMA
MONTH FISCAL YEAR
FISCAL YEAR PERIOD ENDED FISCAL YEAR ENDED
ENDED ENDING (UNAUDITED) ------------------------------------------------------
DECEMBER 31, JANUARY 28, JANUARY 28, FEBRUARY 1, JANUARY 31, JANUARY 30, JANUARY 29,
1995 1996 (1) 1996 (1) 1997 (1) 1998 1999, 2000
(52 WEEKS) (4 WEEKS) (52 WEEKS) (53 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
-------------- ------------- ------------ ------------- ------------- ------------- ------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net Sales .................... $ 60,343 $ 3,747 $ 60,763 $ 64,763 $ 75,339 $ 106,742 $ 155,002
Income (loss) from
Operations .................. 3,485 (524) 3,437 3,622 4,914 15,134 24,806
Net Income (loss) ............ 1,704 (338) 1,676 1,931 2,770 9,139 15,489
Basic Earnings (loss) Per
Share (2) ................... 0.11 (0.02) 0.11 0.12 0.18 0.56 0.91
Diluted Earnings (loss)
Per Share (2) ............... 0.11 (0.02) 0.10 0.12 0.17 0.54 0.88
OPERATING DATA :
Total Assets ................. $ 27,009 $ 27,681 $ 31,248 $ 34,472 $ 49,000 $ 70,316
Long-Term Debt ............... 5,896 7,231 7,008 6,703 6,713 6,839
Stockholder's Equity ......... 15,959 15,621 18,021 21,456 34,303 52,641
# of Stores (at end of period):
Company-owned ............... 111 111 123 132 154 191
Franchised .................. 12 12 10 9 8 9
--------- --------- --------- --------- --------- ---------- ----------
TOTAL ......................... 123 123 133 141 162 200
========= ========= ========= ========= ========= ========== ==========
(1) In December 1996, the Company elected to change its fiscal year end,
effective January 29, 1996, from a 52/53 week fiscal year ending on the
Sunday closest to December 31st to a 52/53 week fiscal year ending on the
Saturday closest to January 31st. The selected financial data presents
financial results for, among other periods, the short one month transition
period in January 1996 and a pro forma fiscal year ended January 28, 1996.
(2) Restated to give retroactive effect for the 2 for 1 stock split payable in
January 2000.
INDEX
7 Management's Discussion & Analysis
14 Stock Information
15 Financial Statements
31 Executive Officers/Directors
32 Store Listing
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Since the Company opened its first store in 1983 principally selling folk
art, its retail store system, now selling principally women's apparel, has
grown to 200 stores as of January 29, 2000 (fiscal 2000), of which 191 are
Company-owned stores and nine are franchised stores. Since fiscal 1989, the
Company has de-emphasized the granting of new franchises as a strategy for
growth and, at the same time, has been expanding its store base by opening
Company-owned stores. Where possible and practical, the Company has also
acquired stores from its franchisees. Since the beginning of fiscal 1995, the
Company has acquired nine stores from franchisees and opened 97 new
Company-owned stores, and one franchisee has opened two new franchised stores
in this period. Of these new Company-owned stores, 40 were opened in fiscal
2000, 22 were opened in fiscal 1999, 14 were opened in fiscal 1998, 13 were
opened in fiscal 1997 and 8 were opened in the pro forma fiscal year ended
January 28, 1996. During this same time period, the Company closed nine
Company-owned stores and one franchised store also closed. The Company plans to
open a minimum of 45 new Company-owned stores in the fiscal year ending
February 3, 2001 (fiscal 2001). In addition, the Company is evaluating certain
existing Company-owned store locations, including stores with leases coming up
for renewal, and is considering the possibility of closing between one and
three existing Company-owned stores in fiscal 2001.
RESULTS OF OPERATIONS
The following table sets forth, for each of the respective periods
indicated, certain operating statement data and the percentage of the Company's
net sales represented by each line item presented.
FISCAL YEAR ENDED (000'S)
-------------------------------------------------------------------------
JANUARY 31, JANUARY 30, JANUARY 29,
1998 1999 2000
(52 WEEKS) % (52 WEEKS) % (52 WEEKS) %
------------- ---------- ------------- ---------- ------------ ----------
Net sales by company stores ............... $73,597 97.7% $104,981 98.4% $152,474 98.4%
Net sales to franchisees .................. 1,742 2.3 1,761 1.6 2,528 1.6
------- ----- -------- ----- -------- -----
Net sales ................................ 75,339 100.0 106,742 100.0 155,002 100.0
Cost of goods sold ........................ 33,240 44.1 44,197 41.4 64,950 41.9
------- ----- -------- ----- -------- -----
Gross profit ............................. 42,099 55.9 62,545 58.6 90,052 58.1
General, administrative and store operating
expenses ................................. 37,185 49.4 47,411 44.4 65,246 42.1
------- ----- -------- ----- -------- -----
Income from operations ................... 4,914 6.5 15,134 14.2 24,806 16.0
Interest expense, net ..................... 372 .5 151 .2 177 .1
------- ----- -------- ----- -------- -----
Income before taxes ...................... 4,542 6.0 14,983 14.0 24,983 16.1
Provision for income taxes ................ 1,772 2.3 5,844 5.4 9,494 6.1
------- ----- -------- ----- -------- -----
Net income ............................... $ 2,770 3.7% $ 9,139 8.6% $ 15,489 10.0%
======= ===== ======== ===== ======== =====
FIFTY-TWO WEEKS ENDED JANUARY 29, 2000 COMPARED TO THE FIFTY-TWO WEEKS ENDED
JANUARY 30, 1999
NET SALES. Net sales by Company-owned stores for the fifty-two weeks ended
January 29, 2000 (fiscal 2000) increased by $47.5 million, or 45.2%, over net
sales by Company-owned stores for the comparable fifty-two weeks ended January
30, 1999 (fiscal 1999). The increase was the result of a comparable Company
store net sales increase of $23.7 million and $23.8 million additional sales
from
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
the new (or reacquired) stores not yet included in the Company's comparable
store base, net of sales of $2.3 million from five stores closed in fiscal 1999
and fiscal 2000 and exclusive of special liquidation sales.
Net sales to franchisees for fiscal 2000 increased by approximately
$768,000 or 43.6% compared to net sales to franchisees for fiscal 1999. The
increase in net sales to franchisees primarily reflects increased sales to
franchisees due to the opening of two additional franchised locations (one each
in fiscal 1999 and fiscal 2000) by an existing franchisee and by a net increase
in purchases by the other franchised stores.
GROSS PROFIT. Gross profit for fiscal 2000 was $90.1 million, or 58.1% of
net sales, compared with $62.5 million, or 58.6% of net sales, for fiscal 1999.
The decrease in the gross profit percentage primarily resulted from additional
promotional activities and entitlement to discounts including those associated
with expanding the Company's frequent shopper club (the "Passport Club") which
was relaunched in the first quarter of this year. To a lesser degree, the
decrease was the result of the mix of product which generally included a lower
average initial mark-up.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General,
administrative and store operating expenses increased to $65.2 million, or
42.1% of net sales, in fiscal 2000 from $47.4 million, or 44.4% of net sales,
in fiscal 1999. The increase in general, administrative and store operating
expenses was, for the most part, the result of increases in store operating
expenses, including store compensation, occupancy and other costs associated
with additional store openings. The decrease in these expenses as a percentage
of net sales was principally due to direct store and non-store general and
administrative costs, which decreased as a percentage of net sales due to
leverage associated with the 23.3% comparable Company store net sales increase.
This decrease was partially offset by a .7% increase in marketing and promotion
costs.
INTEREST INCOME, NET. The Company had net interest income during fiscal
2000 of approximately $177,000 versus net interest expense of approximately
$151,000 in the prior period. The improvement to net interest income from net
interest expense was primarily a result of increased interest earnings during
fiscal 2000 resulting from the Company's increased overall cash position, as
well as improved yields related to its investments in marketable securities.
NET INCOME. As a result of the factors discussed above, net income
reflects an increase of 69.5% to $15.5 million in fiscal 2000 from net income
of $9.1 million in the prior period. The income tax provision represented an
effective rate of 38.0% for the current period and 39.0% in the prior period.
The decrease in the income tax rate is attributable to a decrease in the
effective state income tax rate associated with certain restructurings of the
Company's operations, net of a Federal income tax rate increase due to higher
earnings.
FIFTY-TWO WEEKS ENDED JANUARY 30, 1999 COMPARED TO THE FIFTY-TWO WEEKS ENDED
JANUARY 31, 1998.
NET SALES. Net sales by Company-owned stores for the fifty-two weeks ended
January 30, 1999 (fiscal 1999) increased by $31.3 million, or 42.6%, over net
sales by Company-owned stores for the comparable fifty-two weeks ended January
31, 1998 (fiscal 1998). The increase was the result of a
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
comparable Company store net sales increase of $21.1 million and $10.2 million
additional sales from the new (or reacquired) stores not yet included in the
Company's comparable store base (net of sales of $1.0 million from seven stores
closed in fiscal 1998 and fiscal 1999).
Net sales to franchisees for fiscal 1999 increased by approximately
$18,000, or 1.0% compared to net sales to franchisees for fiscal 1998. The
increase in net sales to franchisees primarily reflects increased sales to
franchisees due to the opening of one additional franchised location by an
existing franchisee and increased purchases by existing franchisees, net of
reduced sales attributable to the re-acquisition of three franchised stores in
fiscal 1998 and fiscal 1999.
GROSS PROFIT. Gross profit for fiscal 1999 was $62.5 million, or 58.6% of
net sales, compared with $42.1 million, or 55.9% of net sales, for fiscal 1998.
The increase in the gross profit percentage primarily resulted from merchandise
planning and distribution costs which decreased by 1% of net sales as a result
of leverage associated with the Company's 30.3% comparable Company store net
sales increase for fiscal 1999, and higher margins in its front-line stores as
a result of fewer and less aggressive markdowns believed to be attributable to
the Company's refocusing of its product development departments as described
more fully below under the heading "Comparable Company-Owned Store Net Sales."
To a lesser degree, this increase in the gross profit percentage was due to
decreased shipping costs to the Company's stores because of a change in common
carriers, offset by an increase in inventory reserves for merchandise intended
for liquidation.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General,
administrative and store operating expenses increased to $47.4 million, or
44.4% of net sales, in fiscal 1999 from $37.2 million, or 49.4% of net sales,
in fiscal 1998. The increase in general, administrative and store operating
expenses was, for the most part, the result of increases in store operating
expenses, including store compensation, occupancy and other costs associated
with additional store openings. The decrease in these expenses as a percentage
of net sales was principally due to leverage in direct store costs, including
store compensation, associated with the Company's 30.3% comparable Company
store sales increase for fiscal 1999, net of an effective increase in general
and administrative costs attributable to the fact that administrative costs in
fiscal 1998 had reflected the benefit of certain business interruption
insurance proceeds related to the temporary closing of one of the Company's
stores.
INTEREST EXPENSE, NET. Net interest expense decreased to approximately
$151,000 in fiscal 1999 from approximately $372,000 in fiscal 1998. This
decrease was primarily a result of increased interest earnings during fiscal
1999 resulting from the Company's increased cash position.
NET INCOME. As a result of the factors discussed above, net income
reflects an increase of 237% to $9.1 million in fiscal 1999 from net income of
$2.8 million in fiscal 1998. The income tax provision represented an effective
rate of 39% for both the current and prior periods.
COMPARABLE COMPANY-OWNED STORE NET SALES
Comparable Company-owned store net sales increased by 23.3% for the
fifty-two weeks ended January 29, 2000 when compared to the comparable
fifty-two weeks of the previous period.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Comparable Company-owned store net sales data is calculated based on the change
in net sales of currently open Company-owned stores that have been operated as
a Company store for at least thirteen months.
The Company believes that the increase in comparable Company-owned store
net sales resulted from a refocusing of the Company's product development;
merchandise planning and buying departments on Chico's target customer. The
Company also believes that the look, fit, timing of receipts and pricing policy
(including markdowns) of the Company's product were in line with the refocusing
effort and that the increase in comparable store sales was fueled by the launch
in February of 1999 of a new and modified "Passport Club" program. This new
"Passport Club" program allows the Company to track customer sales at the SKU
level through the use of newly licensed software, allows for mailings to
separate niches of customers and offers discounts and other benefits for
increased frequent shopping. The launch of the "Passport Club" resulted in
increased direct mailings and a larger database of existing customers for such
mailings. To a lesser degree, the Company believes the increase was due to
increased store-level training efforts associated with the Company's training
programs, continuing sales associated with several styles of clothing produced
from a group of fabrics newly introduced by the Company beginning in the fourth
quarter of fiscal 1998, and the increases were further fueled by a limited
national magazine advertising program done for the first time in the fourth
quarter of fiscal 2000. Clothing, which utilizes the newly introduced group of
fabrics, represented approximately 27% of net apparel sales in fiscal 2000,
compared to approximately 21% of net apparel sales in 1999.
The "Passport Club", which had approximately 25,000 members accounting for
approximately 10% of sales in February 1999, has over 100,000 members which
currently account for 45-49% of sales. The club offers a 5% discount on all
future purchases after the customer has spent an aggregate of $500 at Chico's.
In addition, the Company has over 300,000 "temporary" members who have signed
up to join the club, but have not yet spent the required $500 to become a
permanent member. The temporary members account for over 30% of sales and do
not yet qualify for the 5% discount. The Company offers the substantial
discount because it believes the Passport members shop more frequently and
spend more on each transaction than do the non-passport members. The Company
further believes the Passport Club, combined with national magazine
advertising, is adding significant incremental sales to its stores, promoting
its brand name and developing a loyal customer base.
The following table sets forth for each of the four quarters of fiscal
2000, 1999 and 1998, the percentage change in comparable store net sales at
Company-owned stores from the previous period:
FISCAL QUARTERS
--------------------------------------------------------------
FULL YEAR 1ST QTR 2ND QTR 3RD QTR 4TH QTR
----------- ----------- --------- --------- ----------
Fiscal year ended 1/29/00 23.3% 22.6% 17.2% 26.9% 26.5%
Fiscal year ended 1/30/99 30.3% 31.7% 23.0% 28.5% 30.4%
Fiscal year ended 1/31/98 10.7% (1.1)% 13.3% 12.0% 20.1%
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary ongoing capital requirements are for funding capital
expenditures to new store openings and merchandise inventory purchases. In
addition, over the next twelve months, the Company anticipates experiencing the
need for capital to address expansions of its office and design facility at its
headquarters facilities, the chain-wide roll out of new point-of-sale devices
beginning in the second quarter of fiscal 2001 and the development of
infrastructure, including internal call and fulfillment centers, to support the
Company's planned expansion into catalog and Internet sales.
During the current fiscal year (fiscal 2000) and the prior fiscal year
(fiscal 1999), the Company's primary source of working capital was cash flow
from operations of $16.0 million and $12.3 million, respectively. The increase
in cash flow from operations of $3.7 million was primarily due to an increase
of $6.4 million in net income, and an increase of $1.3 million in the growth
rate of accounts payable and accrued liabilities, offset by an increase in
inventories of $4.7 million in the current fiscal year, versus an inventory
increase of approximately $580,000 in the prior fiscal year. The increase in
accounts payable and inventories is associated with increased fabric purchases
(which generally have an extended payment due date) and other required
increased inventory purchase activities to support the Company's significant
sales increases.
The Company invested $15.2 million in the current fiscal year for capital
expenditures primarily associated with the opening of 40 new Company stores,
and the remodeling/relocating/expansion of numerous existing stores. Since the
Company is now seeking stores in the 1,800-2,000 net selling square foot range
(versus 1,458 average net selling square foot currently) and the Company is
incorporating more sophisticated store fronts and fixtures, its average cost of
leasehold improvements and fixtures for new stores has generally increased. It
is anticipated these higher costs for initial stores will continue as the
Company refines its newer store presentation. During the prior fiscal year, the
Company invested $5.0 million for capital expenditures associated with the
opening of 24 new (or reacquired) Company stores, and the remodeling of several
existing stores.
During the current fiscal year, the Company invested $14.0 million in high
quality tax free municipal bonds in an effort to improve the after-tax interest
earnings from its increased cash and marketable securities position. Also
during the current fiscal year, the Company terminated its interest rate swap
agreement at a cost of approximately $8,000. The swap agreement had effectively
fixed its mortgage loan rate at 9%. The mortgage note, financed with a bank,
bears interest at prime plus .5%.
During fiscal 2000, four of the Company's officers and two of its
directors exercised 176,996 stock options at prices ranging from $1.63 to $4.63
and several employees and former employees exercised 96,350 options at prices
ranging from $1.63 to $6.00. Also during the current period, the Company sold
69,158 shares of common stock under its employee stock purchase plan at prices
of $10.71 and $13.28. The proceeds from these issuances of stock, together with
the tax benefit recognized by the Company from the exercise of the stock
options, amounted to approximately $2.9 million. All per share amounts and
price have been restated to give retroactive effect for the 2 for 1 stock split
in January 2000.
As more fully described in "Item 1-Business" beginning on page 13 of the
Company's Annual Report on Form 10-K for the fiscal year ended January 29,
2000, the Company is subject to ongoing
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
risks associated with imports. The Company's reliance on sourcing from foreign
countries causes the Company to be exposed to certain unique business and
political risks. Import restrictions, including tariffs and quotas, and changes
in such tariffs or quotas could affect the importation of apparel generally
and, in that event, could increase the cost or reduce the supply of apparel
available to the Company and have an adverse effect on the Company's business,
financial condition and/or results of operations. The Company's merchandise
flow could also be adversely affected by political instability in any of the
countries in which its goods are manufactured, by significant fluctuations in
the value of the U.S. dollar against applicable foreign currencies and by
restrictions on the transfer of funds.
The Company plans to open approximately 45 new stores in fiscal 2001, four
of which were open as of March 31, 2000. The Company is also in the initial
building stage for a 32,000 square foot expansion of the office and design
facilities at its headquarters site, is preparing to rollout new point-of-sale
devices in all of its stores, is building out its call center and fulfillment
facilities to assist in catalog and Internet sales and is also continuing with
various other plans for implementing catalog and Internet sales activities. The
Company believes that the liquidity needed for its planned new store growth,
continuing remodel program, maintenance of proper inventory levels associated
with this growth and expansion of its office and design facilities and
establishment of catalog and Internet sales activities will be funded primarily
from cash flow from operations and its strong existing cash balances. The
Company further believes that this liquidity will be sufficient, based on
currently planned new store openings, to fund anticipated capital needs over
the near-term, including scheduled debt repayments. Given the Company's strong
cash and marketable securities balances, the Company does not believe that it
would need to seek other sources of financing to conduct its operations or
pursue its expansion plans even if cash flow from operations should prove to be
less than anticipated or even if there should arise a need for additional
letter of credit capacity due to establishing new and expanded sources of
supply, or if the Company were to increase the number of new Company stores
planned to be opened in future periods.
SEASONALITY AND INFLATION
Although the operations of the Company are influenced by general economic
conditions, the Company does not believe that inflation has had a material
effect on the results of operations during the current or prior periods. The
Company does not consider its business to be seasonal.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This annual report may contain forward-looking statements which reflect
the current views of the Company with respect to certain events that could have
an effect on the Company's future financial performance. These statements
include the words "expects", "believes", and similar expressions. These
forward-looking statements are subject to various risks and uncertainties that
could cause actual results to differ materially from historical results or
those currently anticipated. These potential risks and uncertainties include
ability to secure customer acceptance of Chico's styles, propriety of inventory
mix and sizing, quality of merchandise received from vendors, timeliness of
vendor production and deliveries, increased competition, extent of the market
demand by women for private label clothing and related accessories, adequacy
and perception of customer service, ability to coordinate product development
along with buying and planning, rate of new store openings,
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
performance of management information systems, ability to hire, train, energize
and retain qualified sales associates and other employees, availability of
quality store sites, ability to hire and retain qualified managerial employees,
ability to effectively and efficiently establish and operate catalog and
Internet sales activities and other risks. In addition, there are potential
risks and uncertainties that are peculiar to the Company's heavy reliance on
sourcing from foreign vendors including the impact of work stoppages,
transportation delays and other interruptions, political instability, foreign
currency fluctuations, imposition of and changes in tariffs and import and
export controls such as import quotas, changes in governmental policies in or
towards such foreign countries and other similar factors.
YEAR 2000
The year 2000 issue results from computer programs and electronic
circuitry that do not differentiate between the year 1900 and the year 2000
because they are written using two, rather than four, digit dates to define the
applicable year. If not corrected, many computer applications and date-sensitive
devices could have failed or produced erroneous results when processing dates
after December 31, 1999. The year 2000 issue had some impact on virtually all
companies and organizations including Chico's.
Chico's did not experience any significant systems or other year 2000
problems and there has been no material change in total costs. Further, Chico's
does not anticipate any additional costs and does not anticipate the need to
further address the year 2000 issue.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of the Company's financial instruments as of January 29,
2000 has not significantly changed since January 30, 1999 with the exception of
the termination of the interest rate swap agreement associated with the
Company's mortgage loan. The Company is exposed to market risk from changes in
interest rates on its indebtedness. The Company's exposure to interest rate
risk relates in part to its revolving line of credit with its bank; however, as
of January 29, 2000, the Company did not have any outstanding balance on its
line of credit and, given its strong liquidity position, does not expect to
utilize its line of credit in the foreseeable future except for its continuing
use of the letter of credit facility portion thereof. As a consequence of the
swap termination, the Company's exposure to interest rate risk also relates to
its $5.2 million mortgage loan indebtedness which bears a variable interest
rate based upon changes in the prime rate.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
TRADING AND DIVIDEND INFORMATION
The following table sets forth, for the periods indicated, the range of
high and low closing sale prices for the Common Stock, as reported on the
Nasdaq National Market System.
HIGH(1) LOW(1)
----------- -----------
For the Fiscal Year Ended January 29, 2000
Fourth Quarter (October 31, 1999 -- January 29, 2000) $ 22.38 $ 13.69
Third Quarter (August 1, 1999 -- October 30, 1999) 17.50 9.34
Second Quarter (May 2, 1999 -- July 31, 1999) 14.88 10.56
First Quarter (January 31, 1999 -- May 1, 1999) 16.31 8.81
For the Fiscal Year Ended January 30, 1999
Fourth Quarter (November 1, 1998 -- January 30, 1999) $ 14.00 $ 7.75
Third Quarter (August 2, 1998 -- October 31, 1998) 8.82 5.00
Second Quarter (May 3, 1998 -- August 1, 1998) 9.00 4.69
First Quarter (February 1, 1998 -- May 2, 1998) 5.00 3.19
(1) Adjusted for the 2 for 1 stock split distributed on January 14, 2000 to
stockholders of record on December 27, 1999.
The Company does not intend to pay any cash dividends for the foreseeable
future and intends to retain earnings, if any, for the future operation and
expansion of the Company's business. Any determination to pay dividends in the
future will be at the discretion of the Company's Board of Directors and will
be dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant by the Board of
Directors.
The approximate number of equity security holders of the Company is as
follows:
Number of Record Holders
Title of Class As of March 31, 2000
- -------------------------------------------------------- ---------------------
Common Stock, par value $.01 per share ......... 417
14
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO CHICO'S FAS, INC. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of Chico's FAS,
Inc. (a Florida corporation) and subsidiaries as of January 29, 2000, and
January 30, 1999, and the related consolidated statements of income,
stockholders' equity and cash flows for the fiscal years ended January 29,
2000, January 30, 1999, and January 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chico's FAS, Inc. and
subsidiaries as of January 29, 2000, and January 30, 1999, and the results of
their operations and their cash flows for the fiscal years ended January 29,
2000, January 30, 1999, and January 31, 1998, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Tampa, Florida,
February 25, 2000
15
CHICO'S FAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 29, JANUARY 30,
2000 1999
---------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................. $ 3,980,930 $ 14,484,776
Marketable securities ................................................. 13,995,527 --
Receivables, less allowances of $93,000 and $90,000 for sales returns,
respectively ......................................................... 1,706,661 1,149,078
Inventories ........................................................... 14,834,800 10,105,153
Prepaid expenses ...................................................... 668,695 510,885
Deferred taxes ........................................................ 2,038,000 1,586,000
------------ ------------
Total current assets ................................................ 37,224,613 27,835,892
PROPERTY AND EQUIPMENT, net ............................................ 31,344,997 19,665,261
DEFERRED TAXES ......................................................... 1,106,000 812,000
OTHER ASSETS, net ...................................................... 640,211 686,923
------------ ------------
$ 70,315,821 $ 49,000,076
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ...................................................... $ 5,982,684 $ 3,995,123
Accrued liabilities ................................................... 4,593,104 3,679,355
Current portion of debt and lease obligations ......................... 260,111 309,520
------------ ------------
Total current liabilities ........................................... 10,835,899 7,983,998
DEBT AND LEASE OBLIGATIONS, excluding current portion .................. 6,839,180 6,713,045
------------ ------------
Total liabilities ................................................... 17,675,079 14,697,043
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares authorized and
17,128,536 and 16,786,032 shares issued and outstanding, respectively 171,285 167,860
Additional paid-in capital ............................................ 14,709,238 11,840,000
Retained earnings ..................................................... 37,784,553 22,295,173
Accumulated other comprehensive loss .................................. (24,334) --
------------ ------------
Total stockholders' equity .......................................... 52,640,742 34,303,033
------------ ------------
$ 70,315,821 $ 49,000,076
============ ============
The accompanying notes are an integral part of these consolidated balance
sheets.
16
CHICO'S FAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
----------------- --------------- ---------------
NET SALES BY COMPANY STORES ....................... $ 152,473,637 $104,981,219 $ 73,596,969
NET SALES TO FRANCHISEES .......................... 2,528,644 1,760,374 1,742,183
------------- ------------ ------------
Net sales ....................................... 155,002,281 106,741,593 75,339,152
COST OF GOODS SOLD ................................ 64,949,930 44,196,426 33,240,162
------------- ------------ ------------
Gross profit .................................... 90,052,351 62,545,167 42,098,990
GENERAL, ADMINISTRATIVE AND STORE OPERATING
EXPENSES .......................................... 65,246,577 47,411,057 37,184,671
------------- ------------ ------------
Income from operations .......................... 24,805,774 15,134,110 4,914,319
INTEREST INCOME (EXPENSE), net .................... 177,606 (151,002) (372,303)
------------- ------------ ------------
Income before income taxes ...................... 24,983,380 14,983,108 4,542,016
INCOME TAX PROVISION .............................. 9,494,000 5,844,000 1,772,000
------------- ------------ ------------
Net income ...................................... $ 15,489,380 $ 9,139,108 $ 2,770,016
============= ============ ============
PER SHARE DATA:
NET INCOME PER COMMON SHARE [0096] BASIC ......... $ .91 $ .56 $ .18
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE -- DILUTED .................... $ .88 $ .54 $ .17
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING -- BASIC ........................... 16,942,233 16,335,518 15,824,252
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING -- DILUTED .................. 17,681,038 17,059,792 16,065,742
The accompanying notes are an integral part of these consolidated statements.
17
CHICO'S FAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ACCUMULATED
------------------------- ADDITIONAL OTHER
PAR PAID-IN RETAINED COMPREHENSIVE
SHARES VALUE CAPITAL EARNINGS LOSS TOTAL
------------ ------------ -------------- --------------- -------------- ---------------
BALANCE, February 1, 1997 .......... 15,768,236 $ 157,682 $ 7,476,867 $ 10,386,049 $ -- $ 18,020,598
Net income for the fiscal year
ended January 31, 1998 ........... -- -- -- 2,770,016 -- 2,770,016
Issuance of common stock .......... 254,398 2,544 508,727 -- -- 511,271
Tax benefit of stock options
exercised ....................... -- -- 154,000 -- -- 154,000
---------- --------- ----------- ------------ ---------- ------------
BALANCE, JANUARY 31, 1998 .......... 16,022,634 160,226 8,139,594 13,156,065 -- 21,455,885
Net income for the fiscal year
ended January 30, 1999 .......... -- -- -- 9,139,108 -- 9,139,108
Issuance of common stock .......... 763,398 7,634 2,205,406 -- -- 2,213,040
Tax benefit of stock options
exercised ....................... -- -- 1,495,000 -- -- 1,495,000
---------- --------- ----------- ------------ ---------- ------------
BALANCE, JANUARY 30, 1999 .......... 16,786,032 167,860 11,840,000 22,295,173 -- 34,303,033
Net income for the fiscal year
ended January 29, 2000 .......... -- -- -- 15,489,380 -- 15,489,380
Unrealized loss on marketable
securities, net ................. -- -- -- -- (24,334) (24,334)
Comprehensive income ............ 15,465,046
Issuance of common stock .......... 342,504 3,425 1,745,238 -- -- 1,748,663
Tax benefit of stock options
exercised ....................... -- -- 1,124,000 -- -- 1,124,000
---------- --------- ----------- ------------ ---------- ------------
BALANCE, JANUARY 29, 2000 .......... 17,128,536 $ 171,285 $14,709,238 $ 37,784,553 $ (24,334) $ 52,640,742
========== ========= =========== ============ ========== ============
The accompanying notes are an integral part of these consolidated statements.
18
CHICO'S FAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
-------------------- ------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................. $ 15,489,380 $ 9,139,108 $ 2,770,016
------------- ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities -- Depreciation
and amortization ...................................... 3,307,539 2,407,799 2,114,146
Deferred tax (benefit) provision ....................... (746,000) (588,000) 32,000
Deferred rent expense, net ............................. 238,498 216,978 129,712
Loss from disposal of property and equipment ........... 354,498 195,027 317,206
(Increase) decrease in assets -- Receivables ........... (557,583) (254,183) (131,444)
Inventories ............................................ (4,729,647) (579,681) (1,680,110)
Prepaid expenses ....................................... (157,810) 156,260 (193,700)
Other assets ........................................... (125,270) (46,418) (40,180)
Increase in liabilities -- Accounts payable ............. 1,987,561 474,858 218,275
Accrued liabilities .................................... 913,749 1,138,980 79,349
------------- ------------ ------------
Total adjustments ..................................... 485,535 3,121,620 845,254
------------- ------------ ------------
Net cash provided by operating activities ............. 15,974,915 12,260,728 3,615,270
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption of certificate of deposit .................... -- 1,000,000 600,000
Purchase of marketable securities ....................... (14,019,861) -- --
Purchases of property and equipment ..................... (15,169,791) (5,045,809) (2,010,618)
Proceeds from sale of property and equipment ............ -- -- 34,500
------------- ------------ ------------
Net cash used in investing activities .................. (29,189,652) (4,045,809) (1,376,118)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net ............. 2,872,663 3,708,040 665,271
Net payments under line of credit agreement ............. -- -- (284,919)
Principal payments on debt .............................. (72,000) (72,000) (265,872)
Principal payments on capital lease obligations ......... (89,772) (77,404) (88,374)
Deferred finance costs .................................. -- (232,695) (153,518)
------------- ------------ ------------
Net cash provided by (used in) financing activities 2,710,891 3,325,941 (127,412)
------------- ------------ ------------
Net (decrease) increase in cash and cash
equivalents .......................................... (10,503,846) 11,540,860 2,111,740
CASH AND CASH EQUIVALENTS,
Beginning of period ..................................... 14,484,776 2,943,916 832,176
------------- ------------ ------------
CASH AND CASH EQUIVALENTS,
End of period ........................................... $ 3,980,930 $ 14,484,776 $ 2,943,916
============= ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest .................................. $ 566,205 $ 611,238 $ 609,956
Income taxes ............................................ $ 9,409,705 $ 4,873,065 $ 1,757,259
The accompanying notes are an integral part of these consolidated statements.
19
CHICO'S FAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 29, 2000
1. BUSINESS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ORGANIZATION
The accompanying consolidated financial statements include the accounts of
Chico's FAS, Inc., a Florida corporation, and its wholly-owned subsidiaries,
Chico's Distribution, Inc., Chico's Concept, Inc. and Chico's Media, Inc.
(collectively, the Company). The subsidiaries were formed in February 1999. The
Company operates in one business segment as a specialty retailer of exclusively
designed, private label casual clothing and related accessories. As of January
29, 2000, the Company's retail store system consisted of 200 stores located
throughout the United States, 191 of which were owned and operated by the
Company, and nine of which were owned and operated by franchisees.
FRANCHISE OPERATIONS
A summary of the changes in the number of the Company's franchise stores as
compared to total company-owned stores as of January 29, 2000, and January 30,
1999, and for the fiscal years then ended is as follows:
FISCAL YEAR ENDED FISCAL YEAR ENDED
JANUARY 29, JANUARY 30,
2000 1999
-------------------- ------------------
Franchise stores opened .................................. 1 1
Franchise stores purchased from franchisees .............. -- 2
Franchise stores in operation at fiscal year-end ......... 9 8
Company-owned stores at fiscal year-end .................. 191 154
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand and in banks with original
maturities of three months or less.
20
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale securities, as
defined by Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115),
and are carried at fair value, with the unrealized holding gains and losses,
net of income taxes, reflected as a separate component of stockholders' equity
until realized. For the purposes of computing realized and unrealized gains and
losses, cost is identified on a specific identification basis.
INVENTORIES
Raw material inventories of approximately $2,117,000 and $639,000 as of January
29, 2000, and January 30, 1999, respectively, are recorded at the lower of
cost, using the first-in, first-out (FIFO) method, or market. All other
inventories consist of finished clothing and accessories and are recorded at
the lower of cost, using the last-in, first-out (LIFO) method, or market. If
the lower of FIFO or market method had been used, inventories would have been
approximately $586,000 and $360,000 higher at January 29, 2000, and January 30,
1999, respectively, than those reported in the accompanying consolidated
balance sheets. Purchasing, distribution and design costs are expensed as
incurred, and are included in the accompanying consolidated statements of
income as cost of goods sold.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Fixtures manufactured and leasehold
improvements constructed by the Company are recorded at cost, which includes
elements of raw materials, labor and overhead. Depreciation of property and
equipment is provided on a straight-line basis over the estimated useful lives
of the assets. Assets acquired under capital lease obligations and leasehold
improvements are depreciated over the lesser of the useful lives of the assets
or the lease terms. Maintenance and repairs of property and equipment are
expensed as incurred, and major improvements are capitalized.
Upon retirement, sale or other disposition of property and equipment, the cost
and accumulated depreciation or amortization are eliminated from the accounts,
and any gain or loss is charged to operations.
OTHER ASSETS
Included in other assets are intangible assets which include legal and other
costs of obtaining the Company's trademark and debt financing agreements,
territory rights agreements related to franchise repurchases and franchise
cancellation fees for stores that were acquired by the Company, and are
currently in operation as company-owned stores. Trademark costs and non-compete
agreements are being amortized on a straight-line basis over ten and five
years, respectively; debt-financing costs are being amortized over the term of
the respective debt agreement; and franchise cancellation fees are being
amortized over the remaining terms of the related facilities' leases.
Intangible assets, net of accumulated amortization, are approximately $249,000
and $421,000 as of January 29, 2000, and January 30, 1999, respectively.
21
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including identifiable intangibles, are reviewed
periodically for impairment if events or changes in circumstances indicate that
the carrying amount should be addressed. The Company has determined that there
has been no impairment in the carrying value of long-lived assets, as of
January 29, 2000.
INCOME TAXES
The Company follows the liability method, which establishes deferred tax assets
and liabilities for the temporary differences between the financial reporting
bases and the tax bases of the Company's assets and liabilities at enacted tax
rates expected to be in effect when such amounts are realized or settled. Net
deferred tax assets, whose realization is dependent on taxable earnings of
future years, are recognized when a greater than 50 percent probability exists
that the tax benefits will actually be realized sometime in the future.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book value of all financial instruments approximates their fair market
value as of January 29, 2000.
REVENUE RECOGNITION
Net sales by Company stores includes sales made to retail customers during the
period, net of estimated customer returns. Net sales to franchisees includes
merchandise sold to franchisees, net of estimated returns.
STORE PRE-OPENING COSTS
Operating costs (including store set-up, rent and training expenses) incurred
prior to the opening of new stores are expensed as incurred and are included in
general, administrative and store operating expenses in the accompanying
consolidated statements of income.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
During the fiscal year ended January 31, 1998, the Company adopted SFAS No.
128, "Earnings per Share" (SFAS 128). SFAS 128 establishes new standards for
computing and presenting earnings per share (EPS). Specifically, SFAS 128
replaces the presentation of primary EPS with a presentation of basic EPS,
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Basic EPS is
based upon the weighted average number of common shares outstanding and diluted
EPS is based upon the weighted average number of common shares outstanding plus
the dilutive common equivalent shares outstanding during the period. As a
result of Chico's FAS, Inc.'s two-for-one common stock split (the Stock Split),
effective in January 2000, the Company has retroactively restated prior years'
EPS (see Note 9).
22
The following is a reconciliation of the denominators of the basic and diluted
EPS computations shown on the face of the accompanying consolidated statements
of income as restated for the Stock Split:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
-------------------- ------------------- ------------------
Weighted average common shares outstanding - basic ..... 16,942,233 16,335,518 15,824,252
Dilutive effect of options outstanding ................. 738,805 724,274 241,490
---------- ---------- ----------
Weighted average common and common equivalent
shares outstanding -- diluted ......................... 17,681,038 17,059,792 16,065,742
========== ========== ==========
The following options were outstanding as of the end of the fiscal years but
were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common
shares:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
-------------------- ---------------------- -------------------
Number of options 11,459 4,000 836,408
Exercise price $ 16.63 $ 11.53-$13.13 $2.75 - $6.00
Expiration date October 25, 2009 December 21, 2008 - March 31, 2003 -
January 6, 2009 Sept. 21, 2007
2. MARKETABLE SECURITIES:
Marketable securities classified as available-for-sale consisted of the
following as of January 29, 2000:
MUNICIPAL
BONDS
---------------
Cost .................... $ 14,019,861
Fair value .............. 13,995,527
Unrealized loss ......... $ 24,334
No realized gains or losses were recognized on sales of the Company's
marketable securities during the fiscal year ended January 29, 2000. At January
29, 2000, approximately 39 percent of the Company's marketable securities
mature within one year and substantially all of the remainder within three
years.
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
ESTIMATED JANUARY 29, JANUARY 30,
0 USEFUL LIVES 2000 1999
---------------- ---------------- --------------
Land ..................................................... $ 1,039,904 $ 1,039,904
Land improvements ........................................ 35 years 1,790,761 1,785,161
Building ................................................. 20 - 35 years 6,321,714 6,273,250
Equipment ................................................ 2 - 10 years 5,633,770 4,213,678
Furniture and fixtures ................................... 3 - 10 years 7,057,023 4,268,966
Leasehold improvements ................................... 1 - 10 years 19,373,988 10,086,055
------------ ------------
41,217,160 27,667,014
Less-- Accumulated depreciation and amortization ......... (9,872,163) (8,001,753)
------------ ------------
$ 31,344,997 $ 19,665,261
============ ============
23
Assets acquired under capital lease obligations with a cost of approximately
$488,000 and accumulated depreciation of approximately $456,000 are included in
equipment as of January 30, 1999. The Company disposed of these assets during
the fiscal year ended January 29, 2000.
4. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following:
JANUARY 29, JANUARY 30,
2000 1999
-------------- --------------
Accrued payroll, bonuses and severance costs ......... $ 2,002,931 $ 1,759,928
Allowance for estimated merchandise returns .......... 1,698,000 1,065,000
Other ................................................ 892,173 854,427
----------- -----------
$ 4,593,104 $ 3,679,355
=========== ===========
5. INCOME TAXES:
The Company's total income tax provision consisted of the following:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
-------------------- ------------------- ------------------
Current:
Federal ............................ $ 9,176,000 $ 5,080,000 $ 1,378,000
State .............................. 1,064,000 1,352,000 362,000
Deferred:
Federal ............................ (635,000) (462,000) 24,000
State .............................. (111,000) (126,000) 8,000
----------- ----------- -----------
Total income tax provision ......... $ 9,494,000 $ 5,844,000 $ 1,772,000
=========== =========== ===========
The reconciliation of the income tax provision based on the U.S. statutory
federal income tax rate (35 percent) to the Company's income tax provision is
as follows:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
-------------------- ------------------- ------------------
Tax expense at the statutory rate ............................ $ 8,744,000 $ 5,094,000 $ 1,544,000
State income tax expense, net of federal tax benefit ......... 633,000 769,000 225,000
Other ........................................................ 117,000 (19,000) 3,000
----------- ----------- -----------
Total income tax provision ................................... $ 9,494,000 $ 5,844,000 $ 1,772,000
=========== =========== ===========
24
Deferred tax assets are recorded due to different carrying amounts for
financial and income tax reporting purposes arising from cumulative temporary
differences. These differences consisted of the following as of January 29,
2000, and January 30, 1999:
JANUARY 29, JANUARY 30,
2000 1999
-------------- --------------
Accruals and allowances ................. $ 1,866,000 $ 1,480,000
Inventories ............................. 940,000 828,000
Property and equipment .................. 423,000 243,000
Net operating loss carryforward ......... 85,000 117,000
----------- -----------
3,314,000 2,668,000
Less -- Valuation allowance ............. (170,000) (270,000)
----------- -----------
$ 3,144,000 $ 2,398,000
=========== ===========
Approximately $449,000 of a net operating loss (NOL) for tax reporting purposes
can be carried forward ratably for the six subsequent fiscal years following
the fiscal year ended February 1, 1997. The remaining NOL carryforward was
approximately $224,000 as of January 29, 2000. A valuation allowance of
$100,000 was reversed during the fiscal year ended January 29, 2000, partly due
to the utilization of a portion of the NOL carryforwards.
6. DEBT AND LEASE OBLIGATIONS:
Debt and lease obligations consisted of the following:
JANUARY 29, JANUARY 30,
2000 1999
-------------- ---------------
Line of credit (the Line), variable borrowing capability of up to $6 million,
depending on inventory levels and the amount of outstanding
commercial letters of credit (Note 8), interest payable at prime
(8.5%percent as of January 29, 2000), secured by substantially all of
the Company's assets other than land, land improvements and
building, maturing in May 2000 ............................................. $ -- $ --
Mortgage note secured by a first priority mortgage on land, land
improvements, building and certain equipment ............................... 5,293,500 5,365,500
Obligations under capital leases, imputed interest rate of 5.9 percent,
secured by equipment, varying monthly payments of principal and
interest, matured September 1999 ........................................... -- 89,772
Deferred rent ............................................................... 1,805,791 1,567,293
----------- -----------
Total debt and capital lease obligations .................................... 7,099,291 7,022,565
Less -- Current portion ..................................................... (260,111) (309,520)
----------- -----------
$ 6,839,180 $ 6,713,045
The mortgage note (the Mortgage Note) was financed with a bank, bearing
interest at the bank's prime rate plus .5 percent. The Mortgage Note is payable
in 84 monthly installments of $6,000, plus accrued interest, through January
2003, at which time the remaining principal balance is due. On October 14,
1997, an interest rate swap (the Swap) with a notional principal amount of
approximately $5,462,000 was effectuated, whereby the interest at the bank's
prime rate plus .5 percent was exchanged for a fixed rate of 9 percent of the
outstanding principal of the Mortgage Note. The Company incurred no additional
costs associated with the Swap during the fiscal year ended January 30, 1999.
The Company bought out the Swap during the fiscal year ended January 29, 2000,
for approximately $8,000, which is included in general, administrative and
store operating expenses in the accompanying consolidated statements of income.
25
As of January 31, 1998, a $1,000,000 certificate of deposit (the CD) was held
at the bank to secure the Line. During the fiscal year ended January 30, 1999,
the bank waived the CD requirement and the CD was redeemed. Management intends
to refinance the Line during the fiscal year ended February 3, 2001.
The Line and the Mortgage Note contain certain covenants requiring, among other
things, approval of acquisitions of businesses and maintenance of specified
tangible net worth, working capital, debt to equity and debt service coverage
ratios. As of January 29, 2000, the Company was in compliance with all
covenants under these agreements.
Deferred rent represents the difference between actual operating lease
obligations due and operating lease expense, which is recorded by the Company
on a straight-line basis over the terms of its leases. Maturities of the
Mortgage Note are as follows as of January 29, 2000:
FISCAL YEAR ENDING AMOUNT
- -------------------- --------------
2001 ............. $ 72,000
2002 ............. 72,000
2003 ............. 5,149,500
-----------
$ 5,293,500
===========
7. RELATED PARTY TRANSACTIONS:
Certain officers have entered into agreements with the Company which provide
for base salaries, annual bonuses and certain severance benefits in the event
that their employment is terminated by the Company "without cause" or following
a "change of control" of the Company.
8. COMMITMENTS AND CONTINGENCIES:
The Company leases retail store space and various office equipment under
operating leases expiring in various years through 2012. Certain of the leases
provide that the Company may cancel the lease if the Company's retail sales at
that location fall below an established level, while certain leases provide for
additional rent payments to be made when sales exceed a base amount. Certain
operating leases provide for renewal options for periods from three to five
years at their fair rental value at the time of renewal. In the normal course
of business, operating leases are generally renewed or replaced by other
leases.
Minimum future rental payments under noncancellable operating leases (including
leases with certain minimum sales cancellation clauses described below and
exclusive of common area maintenance charges and/or contingent rental payments
based on sales) as of January 29, 2000, were as follows:
FISCAL YEAR ENDING AMOUNT
- ------------------------ ---------------
2001 ................. $ 11,676,248
2002 ................. 10,745,821
2003 ................. 9,567,695
2004 ................. 8,417,435
2005 ................. 6,701,853
Thereafter ........... 17,717,227
------------
$ 64,826,279
============
26
A majority of the Company's store operating leases contain cancellation clauses
that allow the leases to be terminated at the Company's discretion, if certain
minimum sales levels are not met within the first few years of the lease term.
The Company has not historically exercised many of these cancellation clauses
and, therefore, has included the full lease terms of such leases in the above
table. For the fiscal years ended January 29, 2000, January 30, 1999, and
January 31, 1998, total rent expense under the Company's operating leases was
$14,842,529, $11,332,480 and $9,728,207, respectively, including common area
maintenance charges of $1,826,986, $1,480,176 and $1,328,466, other rental
charges of $1,927,743, $1,637,276 and $1,469,512, and contingent rental expense
of $1,084,362, $425,859 and $140,523, based on sales, respectively.
At January 29, 2000, the Company had approximately $4,260,000 in commercial
letters of credit outstanding, which have arisen in the normal course of
business due to foreign purchase commitments. The commercial letters of credit
are secured by the same assets as the Line (see Note 6).
The Company is involved in claims and actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate disposition of these matters is not expected to have a material
adverse effect on the financial position of the Company.
9. STOCK OPTION PLANS AND CAPITAL STOCK TRANSACTIONS:
1992 STOCK OPTION PLAN
During fiscal year 1992, the Company adopted a stock option plan (the 1992
Plan), which reserved 1,097,600 shares (restated) of common stock for future
issuance under the 1992 Plan to eligible employees of the Company. The per
share exercise price of each stock option is not less than the fair market
value of the stock on the date of grant or, in the case of an employee owning
more than 10 percent of the outstanding stock of the Company and to the extent
incentive stock options, as opposed to nonqualified stock options, are issued,
the price is not less than 110 percent of such fair market value. Also, the
aggregate fair market value of the stock with respect to which incentive stock
options are exercisable for the first time by an employee in any calendar year
may not exceed $100,000. Options granted under the terms of the 1992 Plan
generally vest evenly over three years and have a 10-year term. As of January
29, 2000, approximately 397,000 nonqualified options were outstanding and
approximately 697,000 had been exercised under the 1992 Plan.
1993 STOCK OPTION PLAN
During fiscal year 1993, the Company adopted a stock option plan (the 1993
Plan), which reserved 1,360,000 shares (restated) of common stock for future
issuance under the 1993 Plan to eligible employees of the Company. During the
fiscal year ended January 29, 2000, the Board of Directors amended the Plan to
increase the aggregate number of shares available for purchase by 1,000,000.
The terms of the 1993 Plan are essentially the same as the 1992 Plan. As of
January 29, 2000, approximately 1,106,000 nonqualified options were outstanding
and 398,000 had been exercised under the 1993 Plan.
OTHER STOCK OPTIONS
In October 1998, the Board of Directors (the Board) approved a stock option
plan (the Independent Directors' Plan) which reserved 300,000 shares (restated)
of common stock for future issuance to eligible independent directors of the
Company. Options granted under the terms of the Independent
27
Directors' Plan vest after six months and have a 10-year term. As of January
29, 2000, 60,000 shares had been granted under the Independent Directors' Plan.
Since 1993 and prior to adoption of the Independent Directors' Plan, four
independent directors of the Company had been granted a total of 394,000
nonqualified options (restated) through individual grants at exercise prices
ranging from $1.63 to $13.56. As of January 29, 2000, 212,000 of these
individual grant nonqualified options were outstanding and 242,000 had been
exercised.
AGGREGATE STOCK OPTION ACTIVITY
As of January 29, 2000, 1,715,958 nonqualified options (restated) were
outstanding at a weighted average exercise price of $5.14 per share, and
1,098,182 remained available for future grants. Of the options outstanding,
1,023,677 options were exercisable. The Company recognized no compensation
expense for these options.
Stock option activity for the fiscal years ended January 29, 2000, January 30,
1999, and January 31, 1998, was as follows:
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
------------------------- ------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------- ----------- ------------- ----------- ------------- ----------
Outstanding, beginning of period ......... 1,605,306 $ 3.02 1,955,554 $ 2.57 1,942,412 $ 2.99
Granted ................................. 397,000 12.27 391,500 4.50 709,400 1.68
Exercised ............................... (273,346) 3.21 (693,848) 2.64 (211,862) 2.08
Canceled or expired ..................... (13,002) 2.37 (47,900) 2.46 (484,396) 3.21
--------- -------- --------- -------- --------- --------
Outstanding, end of period ............... 1,715,958 $ 5.14 1,605,306 $ 3.02 1,955,554 $ 2.57
========= ======== ========= ======== ========= ========
Options exercisable, end of
period ................................. 1,023,677 $ 3.54 865,386 $ 3.05 1,075,274 $ 2.92
The following table summarizes information about stock options as of January
29, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGES OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ----------------------- ------------- -------------- ----------- ------------- ----------
$1.63 - $4.00 937,526 6.17 $ 2.17 759,054 $ 2.30
$4.01 - $9.99 377,432 6.82 4.91 203,920 5.15
$10.00 - $16.63 401,000 9.35 12.27 61,333 13.54
1,715,958 8.08 $ 5.14 1,023,677 $ 3.54
EMPLOYEE STOCK PURCHASE PLAN
The Board adopted a noncompensatory employee stock purchase plan (ESPP), which
became effective upon the consummation of the Company's initial public offering
on April 1, 1993, and as amended, that covers an aggregate of 420,000 shares
(restated) of common stock. Under the ESPP, all employees are given the right
to purchase up to 800 shares of the common stock of the Company two times a
year at a price equal to 85 percent of the value of the stock immediately prior
to the beginning of each exercise period. For the fiscal years ended January
29, 2000, January 30, 1999, and
28
January 31, 1998, 69,158, 69,550 and 42,536, respectively, were purchased under
the ESPP. The Company recognized no compensation expense for the issuance of
these shares.
COMMON STOCK SPLIT
On December 14, 1999, the Board declared a two-for-one stock split of the
Company's common stock, payable in the form of a stock dividend on January 14,
2000, to shareholders of record as of the close of business on December 27,
1999. Common stock and additional paid-in-capital have been restated for all
periods presented to reflect the Stock Split. Par value remains unchanged at
$.01. All references to the number of common shares and per share amounts
elsewhere in the consolidated financial statements and notes thereto have been
restated as appropriate to reflect the effect of the Stock Split for all
periods presented.
SFAS NO. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION"
The Company accounts for its stock-based compensation plans under Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), under which no compensation expense has been recognized.
The FASB later issued SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123). SFAS 123 allows companies to continue following the accounting
guidance of APB 25, but requires pro forma disclosure of net income and EPS for
the effects on compensation expense had the accounting guidance of SFAS 123
been adopted. The pro forma disclosures are required only for options granted
in fiscal years that begin after December 15, 1994.
For SFAS 123 purposes, the fair value of each option granted has been estimated
as of the grant date using the Black-Scholes option pricing model with the
following weighted average assumptions: risk-free interest rate of 6.2 percent
for the fiscal year ended January 29, 2000, and 6.3 percent for the fiscal
years ended January 30, 1999, and January 31, 1998, expected life of seven
years, no expected dividends, and expected volatility of 67 percent for the
fiscal year ended January 29, 2000, and 75 percent for the fiscal years ended
January 30, 1999, and January 31, 1998. The weighted average fair value of
options granted during the fiscal years ended January 29, 2000, January 30,
1999, and January 31, 1998, was $12.27, $9.05, and $3.16, respectively. Options
granted under the 1992 Plan and 1993 Plan vest ratably over three years. All
other options were either exercisable after six months or vested ratably over
three years. The term of all options granted is 10 years. Had compensation
expense been determined consistent with SFAS 123, utilizing the assumptions
detailed above, the Company's net income and net income per common and common
equivalent shares outstanding would have been changed to the following pro
forma amounts for the fiscal years ended January 29, 2000, January 30, 1999,
and January 31, 1998:
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
----------------- ---------------- ----------------
Net income:
As reported ................................................ $ 15,489,380 $ 9,139,108 $ 2,770,016
Pro forma .................................................. 14,451,495 8,443,686 2,218,609
Net income per common share -- Basic:
As reported ................................................ $ .91 $ .56 $ .18
Pro forma .................................................. .85 .52 .14
Net income per common and common equivalent share -- Diluted:
As reported ................................................ $ .88 $ .54 $ .17
Pro forma .................................................. .77 .49 .14
29
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 2, 1995, the resulting pro forma compensation expense
may not be representative of that to be expected in future years.
10. PROFIT SHARING PLAN:
The Company has a defined contribution profit sharing plan (the Plan) covering
substantially all employees. Employees' rights to Company-contributed benefits
vest over two to six years of service, as specified in the Plan. Effective as
of January 1, 1999, the Company amended the Plan to incorporate a 401(k)
savings plan feature (the 401(k)) into the Plan. Under the 401(k), employees
may contribute up to 20 percent of their annual compensation, subject to
certain statutory limitations. The Company matches employee contributions at 33
1/3 percent up to 6 percent of the employees' contributions. The Company
contributions to the 401(k) vest ratably over two to six years of service, as
specified in the Plan. For the fiscal years ended January 29, 2000, January 30,
1999, and January 31, 1998, the Company's costs under the Plan were
approximately $276,000, $487,000 and $280,000, respectively.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
NET INCOME (LOSS) PER
NET GROSS INCOME NET INCOME (LOSS) PER COMMON AND COMMON
SALES PROFIT (LOSS) COMMON SHARE -- BASIC EQUIVALENT SHARE -- DILUTED
--------------- --------------- -------------- ----------------------- ----------------------------
Fiscal year ended
January 31, 1998:
First quarter .......... $ 18,719,797 $ 10,603,437 $ 1,002,456 $ .06 $ .06
Second quarter ......... 20,080,574 10,918,044 967,556 .06 .06
Third quarter .......... 18,923,374 10,884,187 955,532 .06 .06
Fourth quarter ......... 17,615,407 9,693,322 (155,528) ( .01) ( .01)
Fiscal year ended
January 30, 1999:
First quarter .......... $ 25,895,908 $ 15,126,755 $ 2,328,505 $ .15 $ .14
Second quarter ......... 27,358,542 16,346,471 2,713,082 .17 .16
Third quarter .......... 26,754,149 15,713,456 2,371,442 .15 .14
Fourth quarter ......... 26,732,994 15,358,485 1,726,079 .10 .10
Fiscal year ended
January 29, 2000:
First quarter .......... $ 36,424,981 $ 21,524,358 $ 4,216,453 $ .25 $ .24
Second quarter ......... 36,771,293 21,276,944 3,946,666 .23 .22
Third quarter .......... 40,008,995 23,408,317 4,078,309 .24 .23
Fourth quarter ......... 41,797,012 23,842,732 3,247,952 .19 .18
30
REPORTS ON FORM 10-K
A copy of the Company's annual report to the Securities and Exchange Commission
Form 10-K will be sent to any shareholder without charge upon written request
to Investor Relations at the
current mailing address or website address below:
Chico's FAS, Inc.
11215 Metro Parkway
Fort Myers, Florida 33912
Website: www.chicos.com
***
Transfer Agent and Registrar:
The Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Legal Counsel:
Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis
Tampa, Florida 33602
Independent Certified Public Accountants:
Arthur Andersen LLP
Tampa, Florida 33602
Investor Relations:
The Investor Relations Company
One Northbrook Place
Northbrook, IL 60062
***
Annual Shareholders' Meeting:
Tuesday, June 13, 2000 at 2:00 p.m.
`Tween Waters Inn
Captiva, Florida
- --------------------------------------------------------------------------------
[CHICO'S FAS, INC. LOGO]
EXECUTIVE OFFICERS
***
Marvin J. Gralnick
Chief Executive Officer
President
Helen B. Gralnick
Senior Vice President -- Design & Concept
Charles J. Kleman
Chief Financial Officer
Executive Vice President -- Finance
Secretary/Treasurer
Scott A. Edmonds
Chief Operating Officer
Assistant Secretary
Patricia A. Murphy
Vice President -- General Merchandise Manager
Mori C. MacKenzie
Vice President -- Director of Stores
Karen M. Glass
Vice President -- Product Development and Design
DIRECTORS
***
Marvin J. Gralnick
Chairman of the Board
Helen B. Gralnick
Senior Vice President -- Design & Concept
Charles J. Kleman
Chief Financial Officer
Executive Vice President -- Finance
Secretary/Treasurer
Verna K. Gibson
Partner-Retail Options, Inc.
Ross E. Roeder
Chairman and Chief Executive Officer -- Smart & Final, Inc.
John W. Burden
Retailing Consultant
31