FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT
For the Quarter Ended: Commission File Number:
July 31, 1999 0-21258
CHICO'S FAS, INC.
(Exact name of registrant as specified in charter)
Florida 59-2389435
(State of Incorporation) (I.R.S. Employer Identification No.)
11215 Metro Parkway, Fort Myers, Florida 33912
(Address of principal executive offices)
941-277-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
At September 3, 1999, there were 8,473,765 shares outstanding of Common Stock,
$.01 par value per share.
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CHICO'S FAS, INC.
Index
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Condensed Balance Sheets - July 31, 1999 and January 30, 1999....................3
Condensed Statements of Income for the Thirteen and Twenty-six weeks Ended
July 31, 1999 and August 1, 1998............................................4
Condensed Statements of Cash Flows for the Twenty-six weeks Ended
July 31, 1999 and August 1, 1998............................................5
Notes to Condensed Financial Statements..........................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..............................................7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..............12
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................14
Signatures .......................................................................14
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CHICO'S FAS, INC.
CONDENSED BALANCE SHEET
[UNAUDITED]
AS OF AS OF
7-31-99 1-30-99
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,035,630 $ 14,484,776
Marketable securities, at market 12,683,993 --
Receivables, net 1,817,272 1,149,078
Inventories 12,433,481 10,105,153
Prepaid expenses 749,108 510,885
Deferred taxes 1,819,000 1,586,000
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TOTAL CURRENT ASSETS 35,538,484 27,835,892
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LAND, BUILDING AND EQUIPMENT:
Cost 32,044,283 27,667,014
Less accumulated depreciation and amortization (8,603,560) (8,001,753)
------------ ------------
LAND, BUILDING AND EQUIPMENT, NET 23,440,723 19,665,261
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OTHER ASSETS:
Deferred taxes 941,000 812,000
Other assets, net 660,997 686,923
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TOTAL OTHER ASSETS 1,601,997 1,498,923
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$ 60,581,204 $ 49,000,076
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,779,974 $ 3,995,123
Accrued liabilities 3,442,283 3,679,355
Current portion of debt and lease obligations 249,247 309,520
------------ ------------
TOTAL CURRENT LIABILITIES 10,471,504 7,983,998
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NONCURRENT LIABILITIES:
Notes and capital leases payable 5,257,500 5,293,500
Deferred rent 1,519,489 1,419,545
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TOTAL NONCURRENT LIABILITIES 6,776,989 6,713,045
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STOCKHOLDERS' EQUITY:
Common stock 84,521 83,930
Additional paid-in capital 12,784,370 11,923,930
Unrealized gain on investments 5,527 --
Retained earnings 30,458,293 22,295,173
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Total Stockholders' Equity 43,332,711 34,303,033
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$ 60,581,204 $ 49,000,076
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CHICO'S FAS, INC.
CONDENSED STATEMENTS OF INCOME
[UNAUDITED]
TWENTY-SIX WEEKS ENDED THIRTEEN WEEKS ENDED
---------------------------- ----------------------------
7-31-99 8-1-98 7-31-99 8-1-98
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Net sales by company stores $71,913,385 $ 52,336,889 $36,192,085 $ 26,818,037
Net sales to franchisees 1,282,889 917,561 579,208 540,505
----------- ------------ ----------- ------------
NET SALES 73,196,274 53,254,450 36,771,293 27,358,542
Cost of goods sold 30,394,972 21,781,224 15,494,349 11,012,071
----------- ------------ ----------- ------------
GROSS PROFIT 42,801,302 31,473,226 21,276,944 16,346,471
General, administrative and
store operating expenses 29,679,614 22,961,690 14,954,637 11,794,759
----------- ------------ ----------- ------------
INCOME FROM OPERATIONS 13,121,688 8,511,536 6,322,307 4,551,712
Interest income (expense), net 44,431 (109,949) 42,359 (30,630)
----------- ------------ ----------- ------------
INCOME BEFORE TAXES 13,166,119 8,401,587 6,364,666 4,521,082
Income tax provision 5,003,000 3,360,000 2,418,000 1,808,000
----------- ------------ ----------- ------------
NET INCOME $ 8,163,119 $ 5,041,587 $ 3,946,666 $ 2,713,082
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PER SHARE DATA:
Net income per common share - basic $ 0.97 $ 0.63 $ 0.47 $ 0.34
=========== ============ =========== ============
Net income per common and common
equivalent share-diluted $ 0.93 $ 0.60 $ 0.45 $ 0.32
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Weighted average common shares
outstanding-basic 8,423,573 8,052,351 8,442,292 8,092,661
=========== ============ =========== ============
Weighted average common and common
equivalent shares outstanding-diluted 8,791,021 8,369,164 8,808,819 8,471,686
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CHICO'S FAS, INC.
CONDENSED STATEMENT OF CASH FLOWS
[UNAUDITED]
TWENTY-SIX WEEKS ENDED
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7-31-99 8-1-98
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 8,163,119 $ 5,041,587
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Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,464,529 1,129,141
Deferred taxes (362,000) (545,000)
Loss on disposal of property and equipment 112,206 44,632
Increase in deferred rent 99,944 138,520
Increase in unrealized gain on investments 5,527 --
Changes in assets and liabilities:
Increase in receivables (668,194) (108,154)
(Increase) decrease in inventories (2,328,328) 1,677,184
(Increase) decrease in prepaids and other assets (298,288) 85,978
Increase (decrease) in accounts payable 2,784,851 (198,375)
(Decrease) increase in accrued liabilities (237,072) 934,512
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Total adjustments 573,175 3,158,438
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Net cash provided by operating activities 8,736,294 8,200,025
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CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption of certificate of deposit -- 1,000,000
Purchase of marketable securities (12,683,993) --
Purchase of land, buildings and equipment (5,266,205) (2,011,290)
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Net cash used in investing activities (17,950,198) (1,011,290)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 861,031 1,366,762
Principal payments on debt (96,273) (52,054)
Deferred finance costs -- (198,000)
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Net cash used in financing activities 764,758 1,116,708
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Net (decrease) increase in cash and cash equivalents (8,449,146) 8,305,443
CASH AND CASH EQUIVALENTS-Beginning of Period 14,484,776 2,943,916
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CASH AND CASH EQUIVALENTS-End of Period $ 6,035,630 $ 11,249,359
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CHICO'S FAS INC.
NOTES TO
CONDENSED FINANCIAL STATEMENTS
JULY 31, 1999
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Chico's
FAS, Inc. (the "Company") have been prepared in accordance with the instructions
to Form 10-Q and do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, refer to the financial statements and notes thereto for the
year ended January 30, 1999, included in the Company's Annual Report on Form
10-K filed on April 28, 1999. The January 30, 1999 balance sheet amounts were
derived from audited financial statements included in the Company's Annual
Report.
Operating results for the thirteen and twenty-six weeks ended July 31,
1999 are not necessarily indicative of the results that may be expected for the
entire fiscal year.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
SFAS 128, which became effective in fiscal 1998, requires dual
presentation of basic and diluted earnings per share (EPS) on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Basic EPS is based
upon the weighted average number of common shares outstanding and diluted EPS is
based upon the weighted average number of common shares outstanding plus the
dilutive common equivalent shares outstanding during the period. The following
is a reconciliation of the denominators of the basic and diluted EPS
computations shown on the face of the accompanying statements of income:
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TWENTY-SIX WEEKS ENDED THIRTEEN WEEKS ENDED
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7-31-99 8-1-98 7-31-99 8-1-98
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Basic weighted average number of common
shares outstanding 8,423,573 8,052,351 8,442,292 8,092,661
Dilutive effect of options outstanding 367,448 316,813 366,527 379,025
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Diluted weighted average common and
common equivalent shares outstanding 8,791,021 8,369,164 8,808,819 8,471,686
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THIRTEEN WEEKS ENDED JULY 31, 1999 COMPARED TO THE
THIRTEEN WEEKS ENDED AUGUST 1, 1998.
NET SALES. Net sales by Company-owned stores for the thirteen weeks
ended July 31, 1999 (the current period) increased by $9.4 million, or 35.0%,
over net sales by Company-owned stores for the comparable thirteen weeks ended
August 1, 1998 (the prior period). The increase was the result of a comparable
Company store net sales increase of $4.4 million and $5.0 million additional
sales from the new stores not yet included in the Company's comparable store
base, net of sales of approximately $468,000 from four stores closed in fiscal
1999 and fiscal 2000 and net of approximately $428,000 in decreased special
liquidation sales.
Net sales to franchisees for the current period increased by
approximately $39,000, or 7.2 % compared to net sales to franchisees for the
prior period. The increase in net sales to franchisees was primarily due to the
opening of one additional franchised location in fiscal 2000 by an existing
franchisee, net of an increase in returned product from the franchisees as a
whole.
GROSS PROFIT. Gross profit for the current period was $21.3 million, or
57.9% of net sales, compared with $16.3 million, or 59.8% of net sales, for the
prior period. The decrease in the gross profit percentage resulted from the mix
of product in the current period which generally included a lower average
initial mark-up, combined with additional promotional activities and entitlement
to discounts associated with expanding the Company's frequent shopper club (the
"Passport Club") which was relaunched in the first quarter of this year.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General,
administrative and store operating expenses increased to $15.0 million, or 40.7%
of net sales, in the current period from $12.0 million, or 43.1% 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. The decrease in these expenses as a percentage
of net sales was principally due to non-store general, administrative and
marketing costs which decreased as a percentage of net sales due to leverage
associated with the Company's 17.2% comparable company store sales increase for
the current period.
INTEREST INCOME, NET. The Company had net interest income during the
current period of approximately $42,000 versus net interest expense of
approximately $31,000 in the prior period. The improvement to net interest
income from net interest expense was primarily a result of increased interest
earnings during the current period resulting from the Company's increased cash
and marketable securities position.
NET INCOME. As a result of the factors discussed above, net income
reflects an increase of 45.5% to $4.0 million in the current period from net
income of $2.7 million in the prior period. The income tax provision represented
an effective rate of 38% for the current period and 40% 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 restructuring of the Company's
operations, net of a Federal income tax increase due to higher earnings.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS - TWENTY-SIX WEEKS ENDED JULY 31, 1999 COMPARED TO THE
TWENTY-SIX WEEKS ENDED AUGUST 1, 1998.
NET SALES. Net sales by Company-owned stores for the twenty-six weeks
ended July 31, 1999 (the current period) increased by $19.6 million, or 37.4%,
over net sales by Company-owned stores for the comparable twenty-six weeks ended
August 1, 1998 (the prior period). The increase was the result of a comparable
Company store net sales increase of $10.0 million and $9.6 million additional
sales from the new (or reacquired) stores not yet included in the Company's
comparable store base, net of sales of $1.7 million from four stores closed in
fiscal 1999 and fiscal 2000 and from special liquidation sales.
Net sales to franchisees for the current period increased by
approximately $365,000, or 39.8% compared to net sales to franchisees for the
prior period. The increase in net sales to franchisees was primarily caused by
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 the current period was $42.8 million, or
58.5% of net sales, compared with $31.5 million, or 59.1% of net sales, for the
prior period. The decrease in the gross profit percentage primarily resulted
from the mix of product which generally included a lower average initial
mark-up, combined with additional promotional activities and entitlement to
discounts associated with expanding the Company's frequent shopper club (the
"Passport Club") which was relaunched in the first quarter of this year.
GENERAL, ADMINISTRATIVE AND STORE OPERATING EXPENSES. General,
administrative and store operating expenses for the current period were $29.7
million, or 40.5% of net sales, compared with $23.0 million, or 43.1% of net
sales, for 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. 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 19.8% comparable Company store sales
increase for the six months.
INTEREST EXPENSE, NET. The Company had net interest income during the
current period of approximately $44,000 versus net interest expense of
approximately $110,000 in the prior period. The improvement to net interest
income from net interest expense was primarily a result of increased interest
earnings during the current period resulting from the Company's increased cash
and marketable securities position.
NET INCOME. As a result of the factors discussed above, net income
reflects an increase of 61.9% to $8.2 million in the current period from net
income of $5.0 million in the prior period. The income tax provision represented
an effective rate of 38.0% for the current period and 40.0% 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 restructuring of the
Company's operations, net of a Federal income tax increase due to higher
earnings.
COMPARABLE COMPANY STORE NET SALES. Comparable Company store net sales
increased by 17.2% in the current quarter and 19.8% in the first six months of
1998 when compared to the comparable prior periods. Comparable Company store net
sales data is calculated based on the change in net sales of currently open
Company-owned stores that have been operated as a Company store for at least
thirteen months.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS - TWENTY-SIX WEEKS ENDED JULY 31, 1999 COMPARED TO THE
TWENTY-SIX WEEKS ENDED AUGUST 1, 1998.
COMPARABLE COMPANY STORE NET SALES. (CONTINUED) The Company believes
that the increase in comparable Company store net sales in both the quarter and
six month period resulted from the continuing effort to refocus 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 refocusing effort
and that the increase in comparable store sales was fueled by increased direct
mailings, a larger database of existing customers for such mailings and the
relaunch of the Company's frequent shopper club (the "Passport Club"). To a
lesser degree, the Company believes the increase was due to increased
store-level training efforts associated with newly introduced training programs
and continuing strong sales associated with several styles of clothing produced
from a fabric newly introduced by the Company in the fourth quarter of fiscal
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary ongoing capital requirements are for funding capital
expenditures related to new store openings and merchandise inventory purchases.
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 roll out of new point-of-sale devices beginning
early next fiscal year and the development of infrastructure to support the
Company's planned expansion into catalog and Internet sales.
During the current and prior periods, the Company's primary source of working
capital was cash flow from operations of $8.7 million and $8.2 million,
respectively. The increase in cash flow from operations of approximately
$500,000 was primarily due to an increase of $3.1 million in net income, and an
increase of $1.8 million in the growth rate of accounts payable and accrued
liabilities, offset by an increase in inventories of $2.3 million in the current
period, versus an inventory decrease of $1.7 million in the prior period and an
increase in receivables (net) of approximately $700,000 in the current period,
versus an increase of approximately $100,000 in the prior period. 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 purchase activities to support the Company's significant sales
increases. The increase in receivables (net) is due to the additional franchise
opened in fiscal 2000 and additional tenant improvement reimbursements due to
the growth in the Company's store opening program.
The Company invested $5.3 million in the current period for capital expenditures
primarily associated with the opening of 17 new company stores, and the
remodeling of several existing stores. Since the Company is now seeking stores
in the 1800-2000 net selling square foot range (versus 1350 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 period the Company invested $2.0 million for
capital expenditures associated with the opening of nine new (or reacquired)
company stores, and the remodeling of several existing stores.
During the current period, the Company invested $12.7 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 quarter, the Company terminated its interest rate swap agreement at a
cost of approximately
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
$8,000. The swap agreement had effectively fixed its mortgage loan rate at 9%.
The mortgage note, financed
During the current period, one of the Company's officers exercised 15,666 stock
options at prices ranging from $3.25 to $8.75 and several employees exercised
34,177 options at prices ranging from $3.25 to $9.25. Also during the current
period, the Company sold 9,206 shares of common stock under its employee stock
purchase plan at a price of $21.41. The proceeds from these issuances of stock,
together with the tax benefit recognized by the Company, amounted to
approximately $861,000.
As more fully described in "Item 1-Business" appearing on pages 1 through 16 of
the Company's Annual Report on Form 10-K for the fiscal year ended January 30,
1999, 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.
The Company plans to open approximately 40 new stores in fiscal 2000, 20 of
which were open as of September 1, 1999. The Company plans to open at least 45
new stores in fiscal 2001. The Company is also in the initial planning stage for
an expansion of the office and design facilities at its headquarters site, is
reviewing requests for proposals for new point-of-sale devices and is also
exploring planned 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 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.
Although sales have tended to be somewhat higher in the Company's first and
second fiscal quarters (February through July), the Company does not consider
its business to be seasonal.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This 10-Q 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, 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
fail or produce erroneous results when processing dates after December 31, 1999.
The Year 2000 issue affects virtually all companies and organizations including
Chico's.
Chico's employs a number of information technology systems in its operations,
including without limitation, computer networking systems, financial systems and
other similar systems, most of which are licensed from outside vendors, while a
few are internally developed. A number of these systems, including the Company's
merchandising, financial and sales software systems, have relatively recently
been upgraded and thus most of these recently upgraded systems are believed to
be Year 2000 compliant. Management has substantially implemented a plan to
identify, convert, modify and upgrade those other critical data processing
systems which were not already Year 2000 compliant.
Throughout its operations, the Company also employs electronic equipment such as
building security, product handling and other devices containing embedded
electronic circuits. Chico's has substantially completed the process of
identifying and prioritizing those embedded technology devices which may be
deemed to be mission critical or that tend to have a more significant impact on
normal operations. A team of internal staff and management that was designated
to manage Chico's Year 2000 initiative has secured confirmation that the
Company's embedded technology devices, which are critical to Chico's overall
operations, are Year 2000 compliant.
The costs that have been incurred to implement the Year 2000 initiatives amount
to less than $75,000 and management currently does not expect any additional
significant costs to be incurred in connection with the
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 (CONTINUED)
Company's Year 2000 initiatives relative to information technology systems and
the higher priority embedded technology devices, including internal costs.
Chico's has sought to evaluate and manage the potential risk posed by the impact
of the Year 2000 issue on its major suppliers and vendors. Formal and informal
communications with these major suppliers and vendors relative to these risks
have been conducted. Based upon these communications, Chico's is not aware of
any major suppliers or vendors who have not either addressed their Year 2000
issues or provided assurances that such issues will be timely addressed. In
particular, Chico's key financial institution has confirmed that it will be Year
2000 compliant on or before December 31, 1999. However, although Chico's has
secured certain written and oral assurances in this regard, it has been
difficult to determine with any certainty whether Chico's suppliers and vendors
will be able to successfully address their respective Year 2000 issues and the
extent to which any failure to do so would negatively impact Chico's operations.
The Company has identified that a significant disruption in the product supply
chain represents the most reasonably likely worst case Year 2000 scenario.
Potential sources of risk include (a) the inability of principal suppliers or
logistics providers to be Year 2000-ready, which could result in delays in
product deliveries from such suppliers or logistics providers and (b) disruption
of the distribution channel, including ports, transportation vendors, and the
Company's own distribution centers as a result of a general failure of systems
and necessary infrastructure such as electricity supply. The Company is
preparing plans to flow inventory around an assumed period of disruption to the
supply chain, which could include accelerating selected critical products to
reduce the impact of significant failure.
Although Chico's does not believe, based on its current evaluation of these
matters, that the Year 2000 issue will have a significant effect on its overall
operations, Chico's initiatives in this regard are subject to a variety of risks
and uncertainties, some of which are beyond the Company's control. The failure
of Chico's or any of its major suppliers or vendors to achieve Year 2000
readiness could adversely impact the Company's business operations, which could
in turn have an adverse effect on the Company's future financial results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk of the Company's financial instruments as of July 31, 1999 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
to its revolving line of credit with its bank; however, as of July 31, 1999, 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 $5.3 million
mortgage loan indebtedness which bears a variable interest rate based upon
changes in the prime rate.
Page 12
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders of the Company was held on June 8, 1999.
There were 8,415,431 shares of common stock entitled to vote. The following
matters were voted upon at the meeting:
a) Election of Directors: VOTES FOR VOTES WITHHELD
--------- --------------
Class III - Term Expiring in 2002
Marvin J. Gralnick 6,967,456 113,425
John W. Burden 6,967,443 113,438
b) Board of Directors proposal to ratify the appointment of Arthur Andersen LLP
as independent certified public accountants.
Voting Results: For the proposal 7,000,066
Against the proposal 77,390
Abstentions 3,425
c) Board of Directors proposal to approve the non-employee directors' stock
option plan.
Voting Results: For the proposal 5,007,249
Against the proposal 719,097
Abstentions 11,159
Non-votes 1,343,376
d) Board of Directors proposal to ratify the amendment of the 1993 employee
stock purchase plan.
Voting Results: For the proposal 5,625,754
Against the proposal 100,105
Abstentions 11,806
Non-votes 1,343,216
e) Board of Directors proposal to ratify the amendment of the 1993 stock option
plan.
Voting Results: For the proposal 5,148,787
Against the proposal 575,172
Abstentions 12,046
Non-votes 1,344,876
Page 13
<PAGE>
PART II - OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 27 Financial Data Schedule
(b) Reports on Form 8-K The Company did not file any reports on
Form 8-K during the current period
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: SEPTEMBER 9, 1998 By: /S/ MARVIN GRALNICK
------------------- ----------------------
Marvin Gralnick
Chief Executive Officer
(Principal Executive Officer)
Date: SEPTEMBER 9, 1998 By: /S/ CHARLES J. KLEMAN
------------------ ------------------------
Charles J. Kleman
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 14
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