CHICO’S FAS, INC.
11215 Metro Parkway
Ft. Myers, Florida 33966

 

April 30, 2008

 

TO OUR STOCKHOLDERS:

 

It is our pleasure to invite you to attend our 2008 Annual Meeting of Stockholders, which will be held at The Ritz Carlton Sarasota, 1111 Ritz-Carlton Drive, Sarasota, Florida on June 26, 2008 at 2:00 P.M., local time. The meeting will begin with a discussion and voting on the matters described in the attached Proxy Statement and Notice of Annual Meeting of Stockholders, followed by a report by several of our officers on Chico’s financial performance and operations.

 

The attached Proxy Statement is a critical element of the corporate governance process. Its purpose is to answer your questions, and to provide you with information about Chico’s Board of Directors and executive officers and a discussion of proposals that require your vote.

 

Please read these materials so that you’ll know what we plan to do at the meeting. Also, please sign and return the accompanying proxy card. This way, your shares will be voted as you direct even if you can’t attend the meeting.

 

On behalf of the management and directors of Chico’s FAS, Inc., we want to thank you for your continued support and confidence in Chico’s.

 

SCOTT A. EDMONDS
Chairman, President and Chief Executive Officer

CHICO’S FAS, INC.
11215 Metro Parkway
Ft. Myers, Florida 33966

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 26, 2008

 

To the Stockholders of Chico’s FAS, Inc.:

 

 

By Order of the Board of Directors,

 

 

A. Alexander Rhodes
Secretary

 

April 30, 2008

 

TABLE OF CONTENTS

 

CHICO’S FAS, INC.

11215 Metro Parkway

Ft. Myers, Florida 33966

 

PROXY STATEMENT

 

ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD JUNE 26, 2008

 

Chico’s FAS, Inc.:

 

These proxy materials are delivered in connection with the solicitation by the Board of Directors of Chico’s FAS, Inc. (“Chico’s,” the “Company,” “we,” or “us”), a Florida corporation, of proxies to be voted at our 2008 Annual Meeting of Stockholders and at any adjournments or postponements thereof.

 

You are invited to attend our Annual Meeting of Stockholders on June 26, 2008, beginning at 2:00 P.M., local time. The Annual Meeting will be held at The Ritz Carlton Sarasota, 1111 Ritz-Carlton Drive, Sarasota, Florida. Stockholders will be admitted beginning at approximately 1:30 P.M. The operation of cameras (including cellular phones with photographic capabilities), recording devices and other electronic devices will not be permitted at the meeting.

 

It is important that proxies be returned promptly to avoid unnecessary expense to the Company. Therefore, regardless of whether you plan to attend the Annual Meeting or the number of shares of stock you own, please date, sign and return the enclosed proxy promptly.

 

At the Annual Meeting, stockholders will act upon the matters outlined in the accompanying notice of meeting, including the election of directors and ratification of the Company’s independent public accountants. In addition, the Company’s management will report on the performance of the Company during the fiscal year ended February 2, 2008 and respond to questions from stockholders.

 

This proxy statement and the form of proxy are being mailed starting on approximately May 7, 2008.

 

It is your legal designation of another person to vote the stock you own. That other person is called a proxy. If you designate someone as your proxy in a written document, that document also is called a proxy or a proxy card. The form of proxy card included with this proxy statement designates each of Scott A. Edmonds, Kent A. Kleeberger and A. Alexander Rhodes as proxies for the 2008 Annual Meeting.

 

It is a document that the Securities and Exchange Commission (“SEC”) regulations require us to give you when we ask you to sign a proxy card designating individuals as proxies to vote on your behalf.

 

If your shares are registered in your name, you are a stockholder of record. Owners of record receive their proxy materials from us. When you properly complete, sign and return your proxy card, you are instructing the named proxies to vote your shares in the manner you indicate on the proxy card.

 

If your shares are held in the name of your broker or other financial institution, which is usually the case if you hold your shares in a brokerage or similar account, your shares are held in “street name.” Your broker or other financial institution or its respective nominee is the stockholder of record for your shares. As the holder of record, only your broker, other institution or nominee is authorized to vote or grant a proxy for your shares. Accordingly, if you wish to vote your shares in person, you must contact your broker or other institution to obtain the authority to do so. Street name holders receive their proxy materials directly from their broker or other institution, not from Chico’s. When you properly complete, sign and return your proxy card, you are giving your broker, other financial institution or nominee instructions on how to vote the shares they hold for you.

 

The record date for the 2008 Annual Meeting is April 30, 2008. The record date is established by the Board of Directors as required by law and the Company’s Articles of Incorporation and By-laws. Owners of record of common stock at the close of business on the “record date” are entitled to:

 

(a) receive notice of the meeting, and

 

(b) vote at the meeting and any adjournments or postponements of the meeting.

 

A certain minimum number of shares must be present or represented by proxy at a meeting before any stockholder vote at the meeting can be effective. A quorum is necessary to conduct business at the meeting. For the Annual Meeting, the quorum requirement will be satisfied if a majority of the outstanding shares of common stock is present and/or represented by proxy. You are part of the quorum if you have voted by proxy. Abstentions, broker non-votes and votes withheld from director nominees count as “shares present” at the meeting for purposes of determining a quorum. However, abstentions and broker non-votes do not count in the voting results.

 

If you are a common stockholder of record at the close of business on the record date, you can vote. For each matter presented for vote, you have one vote for each share you own. If you are a holder in street name at the close of business on the record date, you generally will have the right to instruct your broker or other financial institution how to vote your shares, although specific procedures depend on the terms of your account arrangement. As of the record date, there were 176,443,600 common shares outstanding. Each common share is entitled to one vote on each matter properly brought before the Annual Meeting. Shares of common stock, par value $.01 per share, are the only outstanding voting securities of the Company.

 

Stockholders of record can vote by:

 

 

If you hold your shares in street name, you can vote by submitting a voting instruction card to your broker or other institution in accordance with the procedures and requirements applicable to your account. If your shares are held in street name and you wish to cast your vote in person at the Annual Meeting, you must either (i) obtain a

“legal proxy,” executed in your favor, from the bank, broker, or nominee, as the case may be, or (ii) obtain a proxy direction form from the bank, broker, or nominee, as the case may be, and follow the instructions on the form so as to provide such bank, broker or nominee with your directions as to how you want such shares to be voted.

 

The Company has not established procedures to allow telephone or electronic voting by stockholders of record, but may do so for future stockholder meetings if we determine that the added convenience to our stockholders would justify the additional costs to the Company associated with these voting methods.

 

Street name holders may vote by telephone or the Internet if their bank or broker makes those methods available, in which case your bank or broker will enclose the instructions with this proxy statement.

 

You may revoke your proxy or change your voting instructions before the time of voting at the meeting in several ways.

 

If you are a stockholder of record, you may revoke or change your proxy instructions at any time prior to the vote at the Annual Meeting. To do so:

 

 

If you hold your shares in street name, you may revoke or change your proxy instructions at any time prior to the vote at the Annual Meeting by submitting new voting instructions to your broker or other institution in accordance with the procedures and requirements applicable to your account.

 

If you submit a properly executed proxy card, the individuals named on the card, as your proxies, will vote your shares in the manner you indicate. If you sign and return the card without indicating your instructions, your shares will be voted for the election of the three nominees to serve three-year terms on our Board of Directors, for approval and ratification of the Amended and Restated Chico’s FAS, Inc. 2002 Omnibus Stock and Incentive Plan, for ratification of the appointment of Ernst & Young LLP as the Company’s independent public accountants for the fiscal year ending January 31, 2009 (fiscal 2008), and otherwise as recommended by the Board of Directors.

 

Your vote is important. Whether or not you plan to attend the meeting, we encourage you to vote by proxy as soon as possible.

 

Your shares may be voted if they are held in the name of a broker or other institution, even if you do not provide the broker or other institution with voting instructions. Brokers and certain other institutions have the authority, under the rules of the New York Stock Exchange, to vote shares on certain “routine” matters for which their customers do not provide voting instructions by the tenth day before the meeting. The election of directors and the ratification of the appointment of Ernst & Young LLP as the independent public accountants of the Company are considered routine matters and thus may be voted on the matters scheduled to come before the meeting as your broker or other institution may determine if you have not provided voting instructions within the applicable time frame.

 

The Board’s recommendations regarding the proposals to be considered at the Annual Meeting are set forth together with the descriptions of the proposals in this proxy statement. In summary, the Board recommends a vote:

 

 

With respect to any other matter that properly comes before the meeting, the proxy holders will vote as recommended by the Board of Directors or, if no recommendation is given, in their own discretion. At the date this proxy statement went to press, we did not know of any other matter to be raised at the Annual Meeting.

 

Election of Directors.  Directors shall be elected by a plurality of the votes present in person or represented by proxy at the Annual Meeting and entitled to vote on the election of directors. A properly executed proxy marked “WITHHOLD AUTHORITY” with respect to the election of one or more directors will not be voted with respect to the director or directors indicated, even though it will be counted for purposes of determining whether there is a quorum present at the Annual Meeting.

 

Approval and Ratification of Amended and Restated Chico’s FAS, Inc. 2002 Omnibus Stock and Incentive Plan.  The Amended and Restated Chico’s FAS, Inc. 2002 Omnibus Stock and Incentive Plan will be approved and ratified if the number of votes cast “FOR” approval and ratification of the amendments by holders entitled to vote exceeds the number of votes cast opposing the approval and ratification of the amendments.

 

Ratification of Appointment of Accountants.  The appointment of Ernst & Young LLP as the Company’s independent public accountants for the fiscal year ending January 31, 2009 will be ratified if the number of votes cast “FOR” ratification of the appointment by holders entitled to vote exceeds the number of votes cast opposing the ratification of the appointment.

 

Other Items.  If any other item requiring a stockholder vote should come before the meeting, the item will be approved if the number of shares voting for the item is greater than the number of shares voting against the item.

 

An abstention occurs when a stockholder of record (which may be a broker or other nominee of a street name holder) is present at a meeting (or deemed present) but fails to vote on a proposal, indicates that the stockholder abstains from voting on the proposal, or withholds authority from proxies to vote for director nominees while failing to vote for other eligible candidates in their place. A broker non-vote occurs when a broker or other nominee who holds shares for another does not vote on a particular item because the nominee does not have discretionary voting authority for that item and has not received instructions from the street name owner of the shares.

 

Abstentions (that is, a properly executed proxy marked “WITHHOLD AUTHORITY” with respect to the election of directors or “ABSTAIN” with respect to any other matter) and broker non-votes with respect to a particular matter do not count in any vote totals for or against any matter, even though the shares associated with such abstentions and broker non-votes are counted for purposes of determining whether there is a quorum present at the Annual Meeting. Accordingly, for purposes of any vote, abstentions and broker non-votes will have the same effect as does a share that is not present or otherwise not voted, as more specifically described below.

 

Election of Directors.  Abstentions will have no effect on the outcome of the election of candidates for director. Additionally, the election of directors is a matter on which a broker or other nominee is generally

empowered to vote, and therefore no broker non-votes are expected to exist in connection with the election of directors.

 

Approval and Ratification of Amended and Restated 2002 Omnibus Stock and Incentive Plan.  Because the proposal to approve and ratify the Amended and Restated 2002 Omnibus Stock and Incentive Plan is a matter on which brokers are not empowered to vote without instructions, there may be broker non-votes. However, for purposes of approval and ratification of the Amended and Restated 2002 Omnibus Stock and Incentive Plan, neither abstentions nor broker non-votes will have any effect on the outcome of the vote, which recognizes only actual votes cast for or against the proposal.

 

Ratification of Appointment of Accountants.  Abstentions will have no effect on the outcome of the ratification of the appointment of the accountants. As for broker non-votes, the ratification of the appointment of the independent public accountants for the fiscal year ending January 31, 2009 is a matter on which a broker or other nominee is generally empowered to vote. Accordingly, no broker non-votes are expected to exist in connection with ratification of the appointment.

 

The votes of all stockholders are held in confidence from directors, officers and employees, except:

 

(a) as necessary to meet applicable legal requirements and to assert or defend claims for or against the Company,

 

(b) in case of a contested proxy solicitation,

 

(c) if a stockholder makes a written comment on the proxy card or otherwise communicates his/her vote to management, or

 

(d) to allow the independent inspectors of election to certify the results of the vote.

 

All votes will be tabulated by employees of The Registrar and Transfer Company, the Company’s transfer agent for the common stock, whose representatives will serve as one or more of the inspectors of election.

 

We will pay the expenses of soliciting proxies. Proxies may be solicited on our behalf by directors, officers or employees in person or by telephone, mail, electronic transmission, facsimile transmission or telegram. The Company will request brokerage houses and other custodians, nominees and fiduciaries to forward soliciting material to stockholders and the Company will reimburse such institutions for their out-of-pocket expenses incurred thereby. The Company has not engaged any outside service provider to assist in the solicitation of proxies.

 

In some cases we may send only one annual report and proxy statement to an address shared by two or more stockholders, unless we have received contrary instructions from one or more stockholders at that address. This practice, known as “householding,” is designed to reduce our printing and postage costs. If you are a stockholder of record residing at such an address and you wish to receive a separate copy of our 2007 Annual Report or this proxy statement, please contact Laurie Evans by phone at (239) 274-4588 or in writing at 11215 Metro Parkway, Ft. Myers, Florida 33966 and we will promptly send you separate copies. If we have been sending only one annual report and proxy statement to your household but you or another stockholder in the household wishes to receive separate copies of annual reports and/or proxy statements in the future, please contact us in the same manner. Please also contact us if your household receives multiple copies of our annual report and proxy statement and you would prefer that we send only one copy for the entire household.

 

You can send written communications to one or more members of the Board, addressed to:

 

Lead Director, Board of Directors
Chico’s FAS, Inc.
c/o Corporate Secretary
11215 Metro Parkway
Ft. Myers, Florida 33966

 

All such communications will be forwarded to the relevant director(s), except for solicitations or other matters unrelated to the Company.

 

The Company’s 2009 annual meeting is currently expected to be on June 25, 2009. If a stockholder wishes to have a proposal considered for inclusion in next year’s proxy statement, he or she must submit the proposal in writing so that we receive it by January 9, 2009. Proposals should be addressed to the Company’s Corporate Secretary, 11215 Metro Parkway, Ft. Myers, Florida 33966. In addition, the Company’s Amended and Restated Articles of Incorporation also require certain advance notice to the Company of any stockholder proposal and of any nominations by stockholders of persons to stand for election as directors at a stockholders’ meeting. That notice must provide certain other information as described in the Company’s Amended and Restated Articles of Incorporation. See “Stockholder Proposals for Presentation at the 2009 Annual Meeting.”

 

As previously announced or reported, the following key officer and director changes occurred since the Company’s 2007 Annual Meeting:

 

 

 

The full Board is currently comprised of eight directors. The Board is divided into three classes with Class I having two directors, Class II having three directors and Class III having three directors.

 

Directors are elected for three-year terms.

 

The terms of the existing Class III directors, John W. Burden III, David F. Walker and John J. Mahoney expire at the 2008 Annual Meeting.

 

The Class I directors, Scott A. Edmonds and Ross E. Roeder, serve until the Annual Meeting of stockholders in 2009 and the Class II directors, Verna K. Gibson, Betsy S. Atkins and David F. Dyer, serve until the Annual Meeting of stockholders in 2010. Charles J. Kleman, who had served as a Class I director during most of 2007, stepped down from his director position, as well as his officer positions, on November 5, 2007, upon the appointment of Kent A. Kleeberger as his successor to the positions of Chief Financial Officer and Treasurer.

 

The election of the three Class III directors will take place at the 2008 Annual Meeting. At its meeting on February 26, 2008, the Board approved the recommendation of the Corporate Governance and Nominating Committee that the following persons stand for election at the 2008 Annual Meeting:

 

Class III Director Seats

 

John W. Burden, III
David F. Walker
John J. Mahoney

 

If elected, John W. Burden III, David F. Walker and John J. Mahoney, will continue their service on the Board beginning at the 2008 Annual Meeting and will serve on the Board until the Annual Meeting in 2011, or until their successors are duly elected and qualified, or until their earlier death, resignation or removal. Unless otherwise directed, the persons named in the enclosed form of proxy intend to vote such proxy “FOR” the election of John W. Burden III, David F. Walker and John J. Mahoney as Class III directors of the Company.

 

Each of the proposed nominees for election as directors has consented to serve if elected. If, as a result of circumstances not now known or foreseen, any of the nominees becomes unable or unwilling to serve as a director, proxies may be voted for the election of such other person or persons as the Board of Directors may select. The Board of Directors has no reason to believe that any of the nominees will be unable or unwilling to serve.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF THESE NOMINEES FOR ELECTION AS CLASS III DIRECTORS. The nominees that receive a plurality of the votes cast by the shares entitled to vote at the Annual Meeting shall be elected as the directors.

 

Nominees for election at this meeting to terms expiring in 2011:

 

John W. Burden, III, 71, has been a director since 1997 and is currently an independent retailing consultant, having served as a consultant and partner in Retail Options, Inc. from November 1993 to December 1997. From December 1990 to March 1993, Mr. Burden’s principal occupation was as an officer in Pelican Palms Realty Company, a real estate sales company he owned. In 1990, he retired as the Chairman of both Federated Department Stores, Inc., and Allied Department Stores, Inc., following a 19 year career in various merchandising positions in the Federated organization, including President of Burdines and Chairman of the Abraham & Strauss Division. Prior to that time, he spent 12 years with Macy’s.

 

David F. Walker, 54, has been a director since 2005 and is currently the Director of the Accountancy Program at the University of South Florida in St. Petersburg and leads the school’s Program for Social Responsibility and Corporate Governance. He has held these positions since 2002. Mr. Walker also has been an independent consultant with respect to accounting, auditing and business issues since 2002. For approximately 27 years, through 2002, Mr. Walker was with the accounting firm of Arthur Andersen LLP, having served as a

partner with the firm from 1986 until 2002, and most recently until 2002 as partner in charge of the firm’s assurance and business advisory services practice in the Florida/Caribbean region. Mr. Walker is a certified public accountant, certified fraud examiner, and holds a Masters of Business Administration degree from the University of Chicago Graduate School of Business. He currently also serves on the Board of Directors of First Advantage Corporation, Comm Vault Systems, Inc., and Technology Research Corporation, Inc.

 

John J. Mahoney, 56, has been a director since 2007 and is currently the Vice Chairman and Chief Financial Officer for Staples, Inc., having served as Vice Chairman since January 2006 and as Chief Financial Officer since 1996. Prior to 1996, Mr. Mahoney was a partner at Ernst & Young LLP. Mr. Mahoney joined the Board in August 2007 to fill a vacancy created by the Board, having been recommended for service as a director by David Dyer.

 

Directors whose present terms continue until 2009 (Class I directors):

 

Scott A. Edmonds, 50, has been a director since 2004 and is President and Chief Executive Officer of the Company and Chairman of the Board of Directors. Mr. Edmonds has been employed by the Company since September 1993, when he was hired as Operations Manager. In February 1994, he was elected to the position of Vice President-Operations and, effective January 1, 1996, he was promoted to the position of Senior Vice President-Operations. In February 2000, Mr. Edmonds was further promoted to Chief Operating Officer, in September 2001, Mr. Edmonds was promoted to President, and in September 2003, Mr. Edmonds was appointed to the additional office of Chief Executive Officer. In September 2007, Mr. Edmonds was appointed to the additional office of Chairman of the Board. Prior to joining the Company in 1993, Mr. Edmonds was employed by Ferguson Enterprises, Inc., a plumbing and electrical wholesale company, since 1980. His last position with Ferguson was President of the Fort Myers, Florida Division.

 

Ross E. Roeder, 70, has been a director since 1997 and is the former Chairman of Smart & Final, Inc., having held this position from 1999 and having also served as a director of SFI Corporation, the parent corporation of Smart & Final, from 1984 until his retirement in 2007. From 1999 until 2004, Mr. Roeder also held the position of Chief Executive Officer of Smart & Final, Inc. From 1986 to 1998, Mr. Roeder served as a director of Morgan-Kaufman Publishers, Inc., a publisher of computer science text and reference books, and from 1993 to 1998 served as its Chairman of the Board. From 1986 until February 1993, Mr. Roeder was President and Chief Executive Officer of Federal Construction Company.

 

Directors whose present terms continue until 2010 (Class II directors):

 

Verna K. Gibson, 65, has been a director since 1993 and presently is a retailing consultant. From 1985 to 1991, Ms. Gibson was President and Chief Executive Officer of the Limited Stores Division of The Limited, Inc., a retail apparel specialty chain. From January 1991 through 1995, she served as President of Outlook Consulting Int., Inc. and in January 1999, she resumed the position of President of Outlook Consulting Int., Inc. From December 1994 to July 1996, Ms. Gibson was the Chairman of the Board of Petrie Retail, Inc. From 1993 to fall 1999, Ms. Gibson was a partner of Retail Options, Inc., a New York based retail consulting firm.

 

Betsy S. Atkins, 54, has been a director since 2004 and is the Chief Executive Officer of Baja Ventures, an independent venture capital firm focused on the technology and life sciences industry since 1994. Prior to 1994, Ms. Atkins was Chairman and Chief Executive Officer of NCI, Inc. a Functional Food/Nutraceutical company from 1991 through 1993. Ms. Atkins was a co-founder of Ascend Communications, Inc. in 1989, a member of their Board of Directors, and served as its Global Market, Sales, and International Executive Vice President prior to its acquisition by Lucent Technologies in 1999. Ms. Atkins also serves on the Boards of Directors of Polycom, Inc., Reynolds American Inc., and SunPower Corporation. Ms. Atkins publishes and keynote speaks on corporate board governance best practices for the National Association of Corporate Directors. Ms. Atkins was a Presidential-appointee to the Pension Benefit Guaranty Corporation advisory committee, and is a Governor-appointed member of the Florida International University Board of Trustees.

 

David F. Dyer, 58, has been a director since 2007 and is the former President and Chief Executive Officer of Tommy Hilfiger Corporation where he served from August 2003 until his retirement in May 2006. Prior to joining Tommy Hilfiger Corporation, Mr. Dyer served as President and Chief Executive Officer of Lands’ End from 1998 through 2002. From June 2002 until August 2003, Mr. Dyer also served as Executive Vice President of Sears and a member of the Management Executive Committee at Lands’ End, in addition to his position as President and Chief Executive Officer. His responsibilities included, in addition to Lands’ End, the Sears Direct businesses, both internet and catalog, and the Great Indoors Home division of Sears. Mr. Dyer previously served in various other roles at Lands’ End from 1989 to 1994, including as Vice Chairman and Director from 1991 to 1994. Mr. Dyer began his career with Burdines, a division of Federated Department Stores, and held various merchandising and marketing posts during his 17 years there. He later served as President and Chief Operating Officer of Home Shopping Network and was Acting President of J. Crew Catalog from 1997 to 1998.

 

The Company has adopted Corporate Governance Guidelines that are available at www.chicos.com by first clicking “Our Company,” then “Investor Relations,” then “Corporate Governance,” and then “Corporate Governance Guidelines.” The “Corporate Governance Guidelines” are also available in print to any stockholder who requests it by contacting the Company’s Corporate Secretary, 11215 Metro Parkway, Ft. Myers, Florida 33966. These guidelines were adopted by the Board to formalize its obligation to be independent from management, to adequately perform its function as the overseer of management, and to align the interests of the Board and management with the interests of the stockholders. The Guidelines have been updated from time to time since their initial adoption. The Guidelines, as adopted by the Board, meet the updated listing standards of the New York Stock Exchange. The Company has completed its annual review of the Guidelines. Any revisions to the Guidelines continue to meet the applicable listing standards of the New York Stock Exchange and have been posted on the Company’s website.

 

On an annual basis, each director and executive officer is obligated to complete a Director and Officer Questionnaire which, among other things, requires disclosure of any transactions with the Company in which the director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest. As of March 31, 2008, no such transactions have been disclosed.

 

The members of the Board of Directors on the date of this proxy statement, and the committees of the Board on which they currently serve, are identified below:

 

Governance Structure

 

Corporate governance is typically defined as the system that allocates duties and authority among a company’s stockholders, board of directors, and management. The stockholders elect the board and vote on extraordinary matters. The board is the Company’s governing body, responsible for hiring, overseeing and evaluating executive management, particularly the Chief Executive Officer, and management runs the Company’s day-to-day operations. Our Board of Directors currently consists of eight directors. The current Board members include seven independent directors and one individual who is a member of the Company’s senior management. If all of the nominees for election are elected, the Board will continue to be comprised of seven independent directors and one non-independent director.

 

Board Responsibilities

 

The primary responsibilities of the Board of Directors are oversight, counseling, and direction to the Company’s executive management in the long-term interests of Chico’s and its stockholders. To the extent appropriate under Florida law, the Board, in carrying out its duties, also may consider the interests of other constituencies, which include employees, suppliers, customers and the communities in which it does business, and the economy of the state of Florida and the United States. The Board’s detailed responsibilities include: (a) selecting, regularly evaluating the performance of, and approving the compensation of the Chief Executive Officer and other senior executives; (b) planning for succession with respect to the position of Chief Executive Officer and monitoring management’s succession planning for other senior executives; (c) reviewing and, where appropriate, approving Chico’s major financial objectives, strategic and operating plans and actions; (d) overseeing the conduct of Chico’s business to evaluate whether the business is being properly managed and whether proper internal controls are in place and effective; and (e) overseeing the processes for maintaining Chico’s integrity with regard to its financial statements and other public disclosures and compliance with law and ethics. The Board of Directors has delegated to the Chief Executive Officer, working with Chico’s other executive officers, the authority and responsibility for managing the Company’s business in a manner consistent with the Company’s standards and practices, and in accordance with any specific plans, instructions or directions of the Board. The Chief Executive Officer and management are responsible for seeking the advice and, in appropriate situations, the approval of the Board and/or its various committees with respect to significant actions to be undertaken by Chico’s.

 

 

The Board and its committees meet throughout the year on a set schedule, and also hold special meetings and act by written consent from time to time as appropriate. The Board of Directors held six meetings during fiscal 2007 and each incumbent director attended at least 75% of the total number of Board meetings and meetings of committees on which he or she served. The average director attendance was approximately 98%.

 

During fiscal 2007, the non-employee directors of the Board met without the Chief Executive Officer or other members of management present during four of the six regularly scheduled Board meetings.

 

 

In August 2003, the Board originally created the position of Lead Director, whose primary responsibility was to preside over periodic executive sessions of the Board in which management directors and other members of management do not participate. Verna K. Gibson was serving in the position of Lead Director when in December 2006, the Board appointed a Chairman who was an independent member of the Board. The Company decided that Michael Weiss, the then newly appointed Chairman, should take over the duties and responsibilities previously held by the Lead Director. The transition of these responsibilities from Ms. Gibson to Mr. Weiss was completed at the 2007 Annual Meeting of Stockholders. However, shortly thereafter, Mr. Weiss accepted an offer to reassume the position of Chief Executive Officer of Express, and because of a concern about a perceived conflict, Mr. Weiss offered to resign from the Company’s Board and his position of Chairman. The Board accepted his resignation with regret and, after deliberation, decided to appoint Scott Edmonds to replace Mr. Weiss as the Chairman. Because Mr. Edmonds is not an independent member of the Board, the Board immediately reinstituted the position of Lead Director with the same responsibilities as before. In September 2007, the non-management members of the Board appointed Ross Roeder to the position of Lead Director, and Mr. Roeder has been designated to continue serving in this position until at least the Company’s 2008 Annual Meeting of stockholders.

 

Pursuant to the Corporate Governance Guidelines, the Board undertook a review of director and director nominee independence in February 2008. During this review, the Board considered transactions and relationships between each director or nominee or any member of his or her immediate family and the Company and its subsidiaries and affiliates. The Board also examined transactions and relationships between directors, nominees or their affiliates and members of the Company’s senior management or their affiliates. As provided in the Guidelines, the purpose of this review was to determine whether any such relationships or transactions were inconsistent with a determination that the director is independent. A director is considered independent only if the Board affirmatively determines that the director has no material relationship with the Company, either directly or indirectly. In accordance with the Guidelines and the NYSE standards, a director is not independent if:

 

 

As a result of this review, and based on information furnished by all members of the Board regarding their relationships with the Company and research conducted by management with respect to outside affiliations, the Board affirmatively determined that seven of the eight current directors, Ms. Gibson, Mr. Roeder, Mr. Burden, Ms. Atkins, Mr. Walker, Mr. Dyer and Mr. Mahoney are independent of the Company and its management under the independence standards set forth in the Guidelines, under the NYSE independence standards and under the independence standards set forth in Rule 10A-3 under the Securities Exchange Act of 1934. In particular, the Board considered the position with the Company held by Mr. Burden’s son-in-law, as described under the heading “Certain Relationships and Related Party Transactions,” and determined that such relationship did not cause Mr. Burden to fail to meet the applicable independence standards. As a result of this review and this process, the Board also affirmatively determined that the Audit, Compensation and Benefits, and Corporate Governance and Nominating Committees are all comprised entirely of independent directors. In addition, members of the Compensation and Benefits Committee meet the additional standards applicable to “outside directors” under Internal Revenue Code Section 162(m) and qualify as “non-employee directors” as defined in Rule 16b-3 under the Securities Exchange Act of 1934. Mr. Edmonds is considered an inside director because of his continued employment as a senior

executive of the Company. The Board also determined that Michael Weiss, a director whose resignation was accepted in early September 2007, was independent of the Company and its management under the independence standards set forth in the Guidelines, under the NYSE independence standards and under the independence standards set forth in Rule 10A-3 under the Securities Exchange Act of 1934 while he served on the Board, but that Charles J. Kleman, a director whose retirement from the Board was effective in November 2007, was considered an inside director because of his employment as a senior executive of the Company.

 

The Company has a Code of Ethics, which is applicable to all employees and directors of the Company, including the principal executive officer, the principal financial officer and the principal accounting officer, and to all the directors. The Code of Ethics is available under the Investor Relations portion of the Company’s website (www.chicos.com) by clicking on Our Company. The Company intends to post amendments to, or waivers from its Code of Ethics (to the extent applicable to the Company’s chief executive officer, principal financial officer, principal accounting officer or its directors) at this location on its website. No waivers have been granted under the Code of Ethics.

 

Stockholders and other parties interested in communicating with the Lead Director or with the other non-management directors as a group may do so by writing to: Lead Director, Board of Directors, Chico’s FAS, Inc., c/o Corporate Secretary, 11215 Metro Parkway, Ft. Myers, Florida 33966. Letters addressed to the Lead Director or any of the other non-management directors will be routed to the Secretary who will review all such correspondence, will keep a file with copies of such correspondence (including a log thereof), will regularly forward such correspondence that, in the opinion of the Secretary, deals with the functions of the Board or committees thereof or that he otherwise determines requires their attention and may also provide each of the Board members with summaries of all such correspondence. Directors may at any time review the file of such correspondence or the log of such correspondence and may request copies of any such correspondence.

 

A separate process has been established for dealing with concerns relating to accounting, internal controls or auditing matters. Stockholders, employees, and other parties interested in communicating about any of these particular matters may alternatively submit such communications by calling a third party hotline that has been established by the Board of Directors (1-888-669-4911, ext. 2273) and such reports will immediately be brought directly to the attention of the chair of the Company’s Audit Committee and separately to the General Counsel and to the Vice President – Internal Audit. If instead a communication relating to accounting, internal controls or auditing matters is received in writing by the Company, the Secretary will promptly forward such written correspondence to the chair of the Company’s Audit Committee and separately to the General Counsel and to the Vice President – Internal Audit. These particular reports, whether received through the hotline or in writing, will be handled in accordance with procedures established by the Company’s Audit Committee.

 

The Company has no policy with regard to Board members’ attendance at stockholders’ annual meetings; however, it has been the custom for Chico’s directors to attend the annual meeting of stockholders. Eight of the nine directors then holding office attended the Annual Meeting in June 2007.

 

The Company’s Corporate Governance Guidelines are intended to provide a set of flexible guidelines for the effective functioning of the Board and are reviewed annually and revised as necessary or appropriate in response to changing regulatory requirements and evolving best practices. They are posted on the Corporate Governance section of the Company’s website at www.chicos.com.

 

In addition to the Company’s Corporate Governance Guidelines, other information relating to corporate governance at Chico’s is available on the Corporate Governance section of the Company’s website, including:

 

 

The Board of Directors has a standing Corporate Governance and Nominating Committee, Audit Committee, Compensation and Benefits Committee, and Executive Committee. The current charters of each of these committees as well as Chico’s Corporate Governance Guidelines and Code of Ethics are available under the Investor Relations portion of the Company’s website (www.chicos.com) by clicking on Our Company. Chico’s stockholders may obtain printed copies of these documents by writing to Chico’s FAS, Inc. Corporate Secretary, 11215 Metro Parkway, Ft. Myers, Florida 33966.

 

Corporate Governance and Nominating Committee

 

The Corporate Governance and Nominating Committee held six meetings during fiscal 2007. This Committee is responsible for developing and implementing policies and practices relating to corporate governance, including reviewing and monitoring implementation of the Company’s Corporate Governance Guidelines. In addition, its principal responsibilities from the perspective of its role as a nominating committee are to interview, evaluate, nominate, and recommend individuals for membership on the Company’s Board of Directors and its committees. This Committee also prepares and supervises the Board’s annual review of director independence and the Board’s performance self-evaluation. This Committee’s charter is available under the Investors Relations portion of the Company’s website (www.chicos.com) by clicking on Our Company.

 

All of the members of this Committee are independent within the meaning of the listing standards of the New York Stock Exchange and the Company’s Corporate Governance Guidelines.

 

Audit Committee

 

The Audit Committee held seven meetings during fiscal 2007. The Audit Committee’s principal responsibilities are to assist the Board in its general oversight of Chico’s financial reporting, internal controls, ethics compliance, and audit functions. This Committee is directly responsible for the appointment, compensation, and oversight of the work of the Company’s independent public accountants, reviews the annual financial results and the annual audit of the Company’s financial statements and approves the inclusion of the audited financial statements in the Form 10-K, reviews the Company’s quarterly financial results and approves the Form 10-Q, and meets with the independent accountants and the Vice President-Internal Audit from time to time in order to review the Company’s internal controls and financial management practices. During each fiscal year, at least one (and usually more) of the meetings between this Committee and the independent accountants is held separately without management present. This Committee has established policies and procedures for the engagement of the independent accountants to provide permissible non-audit services, which includes pre-approval of all permissible non-audit services to be provided by the independent accountants. This Committee has the authority to hire its own outside legal and other

advisors. This Committee’s charter is available under the Investors Relations portion of the Company’s website (www.chicos.com) by clicking on Our Company.

 

All members of this Committee are independent within the meaning of the listing standards of the New York Stock Exchange and the Company’s Corporate Governance Guidelines. Federal regulations also require the Board to determine if a member of its Audit Committee is an “Audit Committee Financial Expert.” According to these regulations, an audit committee member can be designated an Audit Committee Financial Expert only when the audit committee member satisfies five specified qualification requirements, including experience in (or “experience actively supervising” others engaged in) preparing, auditing, analyzing, or evaluating financial statements presenting a level of accounting complexity comparable to what is encountered in connection with the Company’s financial statements. The regulations further require such qualifications to have been acquired through specified means of experience or education. The Board has determined that Mr. Walker, the chair of this Committee, and John J. Mahoney are each qualified as an Audit Committee Financial Expert within the meaning of the SEC regulations, and that each of them has accounting and related financial management expertise within the meaning of the listing standards of the New York Stock Exchange. Although the Board of Directors has determined that Mr. Walker and Mr. Mahoney each has the requisite attributes defined under the rules of the SEC, their respective responsibilities are generally the same as those of the other Audit Committee members. The Audit Committee members are not auditors or accountants for the Company, do not perform “field work” and are not full-time employees of any audit firm. The SEC has determined that an audit committee member who is designated as an Audit Committee Financial Expert will not be deemed to be an “expert” for any purpose as a result of being identified as an Audit Committee Financial Expert. See the Audit Committee Report on page 29 for further information.

 

Compensation and Benefits Committee

 

The Compensation and Benefits Committee held seven meetings during fiscal 2007 and regularly acts by written consent. The principal responsibilities of this Committee are to review and make recommendations to the Board of Directors concerning the compensation of all officers of the Company, to provide input and make recommendations to the Board on individuals elected to be executive officers of the Company, to review and make recommendations with respect to the Company’s existing and proposed compensation and bonus plans, and to serve as the committee responsible for administering the Company’s various equity incentive plans, Deferred Compensation Plan, 401(k) Plan, and the Cash Bonus Incentive Plan. This Committee’s charter is available under the Investors Relations portion of the Company’s website (www.chicos.com) by clicking on “Our Company.”

 

All of the members of this Committee are independent within the meaning of the listing standards of the New York Stock Exchange and the Company’s Corporate Governance Guidelines. See the Compensation and Benefits Committee Report on page 33 for further information.

 

Executive Committee

 

The Executive Committee serves primarily as a means for taking action requiring Board approval between regularly scheduled meetings of the Board. The Executive Committee is authorized to act for the full Board on matters other than those specifically reserved by Florida law to the Board. In practice, the Committee’s actions are generally limited to more routine matters such as the authorization of ordinary-course corporate credit facilities and borrowings. The Executive Committee held one meeting during fiscal 2007 and may, from time to time, act by written consent. This Committee’s charter is available under the Investors Relations portion of the Company’s website (www.chicos.com) by clicking on “Our Company.”

 

Transactions and relationships that involve directors, executive officers or other related persons and that constitute a conflict with the Company’s interests require, in advance, a full disclosure to and review by the Company’s Audit Committee of all facts and circumstances concerning the transaction and relationships, all in accordance with our Code of Ethics.

 

Responsibility for Selection of Director Candidates

 

The Board is responsible for selecting director candidates. The Board has delegated the screening process to the Corporate Governance and Nominating Committee, with the expectation that other members of the Board and executives will be asked to take part in the process as appropriate. Candidates recommended by the Corporate Governance and Nominating Committee are subject to approval by the Board.

 

Stockholder Nominees

 

The policy of the Corporate Governance and Nominating Committee is to consider written recommendations from stockholders for positions on the Board of Directors. A stockholder who wishes to recommend a prospective nominee for the Board should notify the Secretary of the Company or any member of such Committee in writing with whatever supporting material the stockholder considers appropriate, including the nominee’s name and qualifications for Board membership. In evaluating such nominations, such Committee seeks to address the criteria set forth under “Director Criteria” and “Director Obligations” below. Such Committee will also consider whether to nominate any person nominated by a stockholder pursuant to the provisions set forth in the Amended and Restated Articles of Incorporation of the Company relating to stockholder nominations. See “Stockholder Proposals for Presentation at the 2009 Annual Meeting” on page 69 for further information. The Company received no stockholder nominations in fiscal 2007.

 

Identifying and Evaluating Nominees

 

The Corporate Governance and Nominating Committee utilizes a variety of methods for identifying and evaluating nominees for director positions. The Committee regularly assesses the appropriate size of the Board, and whether any vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Committee considers various potential candidates for the director positions. Candidates may come to the attention of the Committee through current Board members, current management, professional search firms, stockholders (as described above) or other persons. Once the Committee has identified a prospective nominee, it will make an initial determination as to whether to conduct a full evaluation of the candidate. This initial determination is based on whatever information is provided to the Committee with the recommendation of the prospective candidate, as well as the Committee’s own knowledge of the prospective candidate, which may be supplemented by inquiries to the person making the recommendation or others. The preliminary determination is based primarily on the need for additional Board members to fill vacancies or expand the size of the Board and the likelihood that the prospective nominee can satisfy the applicable criteria for directors.

 

If the Committee determines, in consultation with the Chairman of the Board and other Board members, as appropriate, that additional consideration is warranted, it may ask Board members or engage third parties to gather additional information about the prospective nominee’s background and experience and to report the findings to the Committee. The Committee then evaluates the prospective nominee against the criteria set out in the Company’s Corporate Governance Guidelines. The Committee also considers such other relevant factors as it deems appropriate, including the backgrounds, qualifications and skills of existing Board members, the balance of management and independent directors, the need for Audit Committee expertise, and the Committee’s evaluation of other prospective nominees.

 

In connection with this evaluation, the Committee determines whether to interview the prospective nominee, and if warranted, the Chair of the Committee, one of the other independent directors, as well as the Chief Executive Officer, and others as appropriate, interview prospective nominees in person or by telephone. After completing these evaluations and interviews, the Committee deliberates and makes a recommendation to the full Board as to the persons who should be nominated by the Board, and the Board determines the nominees after considering the recommendation and report of the Committee.

Director Criteria

 

The Corporate Governance and Nominating Committee is responsible for reviewing with the Board the requisite skills and characteristics of new Board candidates in the context of the then current composition of the Board. This assessment includes experience in industry, finance, administration, operations and marketing, as well as diversity. Director candidates should be able to provide insights and practical wisdom based on their experience and expertise. Service on other boards and other commitments are considered by such Committee when reviewing Board candidates.

 

Director Obligations

 

Directors are expected to prepare for, attend and participate in Board meetings and meetings of the committees of the Board on which they serve, to ask direct questions and require straight answers, and to spend the time needed and meet as frequently as necessary to properly discharge their responsibilities and duties as directors. Each Board member is expected to ensure that other existing and planned future commitments do not materially interfere with the member’s service as a director.

 

Certain compensation arrangements have been in effect for the non-management directors in fiscal 2007. Although these compensation arrangements remain in effect as of the date of this proxy statement, the Board recently voted to change the compensation arrangements for the non-management directors and such changes will take effect as of the date of the 2008 Annual Meeting.

 

In recent years, the Company’s compensation consultants have assisted the Board in its review of director compensation, including conducting a total outside director compensation analysis in early 2008 utilizing data for the Company’s peer group companies. The 2008 analysis was used in connection with making the decision recently to change the compensation arrangements for the non-management directors, as described below.

 

Base Compensation and Benefits.  Under the compensation arrangements for directors in effect in fiscal 2007, each non-management director received an annual retainer of $40,000, and an additional $1,000 for each board and committee meeting attended, whether in person or by telephone. When a non-management director was serving as the Chairman of the Board, such non-management director received an additional annual retainer of $40,000. Each non-management director who serves as a committee chair for the Audit and Compensation and Benefits Committees receives an additional annual retainer of $20,000 and all other Committee chairs receive an additional annual retainer of $10,000. The Lead Director receives an additional annual retainer of $20,000. All directors are also entitled to reimbursement of their reasonable out-of-pocket expenses for attendance at board and committee meetings. Non-employee directors may also elect to participate in the Company’s health insurance program with coverage provided for the director and his or her dependents and with the cost thereof paid by the Company. During the last fiscal year, Ms. Gibson and Ms. Atkins participated in this program.

 

Effective as of the Annual Meeting, the revised compensation plan eliminates all meeting fees, each non-management director will receive an annual retainer of $60,000 per year, the Lead Director shall receive an additional annual retainer of $30,000 per year, all additional retainers for Committee chairs will remain at the current levels, the Company shall propose to the stockholders an Amended and Restated 2002 Omnibus Stock and Incentive Plan that, among other things, eliminates the annual grant of 10,000 stock options for non-management directors. If the Amended and Restated 2002 Omnibus Stock and Incentive Plan is adopted by the stockholders, the Board will retain the discretion to issue equity based compensation to the non-management directors. At its meeting in February 2008, the Board approved an award to the non-management directors of 10,000 shares of restricted stock that would fully vest in one year, to be granted shortly after the adjournment of the Annual Meeting. All directors will continue to be entitled to reimbursement of their reasonable out-of-pocket expenses for attendance at Board and committee meetings and non-employee directors will also continue to be entitled to elect to participate in the Company’s health insurance program with coverage provided for the director and his or her dependents and with the cost thereof paid by the Company. In addition, the Board agreed to maintain the current Stock Ownership Guidelines for directors at an amount equal to three times the annual retainer.

Stock Options and Restricted Stock.  Under the current compensation arrangements for directors which were also in effect in fiscal 2007, each year following the Annual Meeting of stockholders, each continuing non-employee director was entitled to receive an automatic grant of stock options to purchase 10,000 shares of common stock. In the fiscal year ended February 2, 2008, Ms. Gibson, Ms. Atkins, Mr. Burden, Mr. Roeder, Mr. Walker, Mr. Weiss and Mr. Dyer each received automatic grants under the Company’s 2002 Omnibus Stock and Incentive Plan for 10,000 shares. Each such option grant, which vests in 1/3 increments annually beginning June 26, 2008, has a ten-year term, and permits the holder to purchase shares at their fair market value on the date of grant, which in the case of these particular stock options was $24.58. Mr. Weiss’ grant was forfeited in its entirety on September 24, 2007, upon his resignation from the Board.

 

In addition, under the current compensation arrangements for directors which were also in effect in fiscal 2007, any new non-employee director would be entitled to receive 10,000 options upon election or appointment. Mr. Mahoney, upon his appointment to the Board of Directors in August 2007, received a grant of 10,000 options under the Company’s 2002 Omnibus Stock and Incentive Plan. Mr. Mahoney’s stock options, which vest in 1/3 increments annually beginning August 22, 2008, have a ten-year term and permit Mr. Mahoney to purchase shares at the fair market value on their date of grant, which in the case of Mr. Mahoney’s stock options was $18.23.

 

Under the current compensation arrangements, the Company’s current non-employee directors, Ms. Gibson, Ms. Atkins, Mr. Burden, Mr. Roeder, Mr. Walker, Mr. Dyer and Mr. Mahoney may occasionally receive additional option grants or restricted stock awards at the discretion of the Board of Directors under the Company’s 2002 Omnibus Stock and Incentive Plan. In fiscal 2007, on March 9, 2007, each of Ms. Gibson, Ms. Atkins, Mr. Burden, Mr. Roeder, Mr. Walker, Mr. Dyer and Mr. Weiss were granted 2,500 shares of restricted stock. For those directors who remained directors on March 9, 2008, these restricted stock awards vested 1/3 on March 9, 2008 and are scheduled for further 1/3 vesting on each of March 9, 2009 and March 9, 2010. The restricted stock award granted in 2007 to Mr. Weiss never vested either in whole or in part and was forfeited upon his resignation from the Board.

 

The Board has adopted the Amended and Restated Chico’s FAS, Inc. 2002 Omnibus Stock and Incentive Plan, which if approved at the 2008 Annual Meeting by the stockholders, will change the equity portion of the compensation arrangements for non-employee directors. See, “Proposal to Approve and Ratify Amended and Restated Chico’s FAS, Inc. 2002 Omnibus Stock and Incentive Plan.” If the amended and restated plan is approved by the stockholders, the non-employee directors will no longer receive automatic grants of stock options either for continuing directors or for newly elected directors. Instead, it is anticipated that each year following the annual meeting of stockholders, beginning with the 2008 Annual Meeting, but at the discretion of the Board, each continuing non-employee director would be awarded a determined number of shares of restricted stock. The restricted stock would fully vest one year following the grant date. If the amended and restated plan is not approved by the stockholders, the automatic grants of stock options will continue as long as shares remain available.

Non-Employee Director Compensation Table

 

The following table provides information on the compensation for non-employee directors for the fiscal year ended February 2, 2008.

 

 

 

 

 

 

Indemnification.  We indemnify our directors and certain of our officers to the fullest extent permitted by law so that they will serve free from undue concern that they will not be indemnified. This is authorized under our By-laws, and accordingly we have signed agreements with each of those individuals contractually obligating us to provide this indemnification to them.

 

 

Background

 

The Board, the Compensation and Benefits Committee and Company management believe the effective use of stock-based long-term incentive compensation has been integral to the Company’s success in the past and is vital to its ability to achieve continued strong performance in the future. In 2002, the Board and the stockholders adopted the Chico’s FAS, Inc. 2002 Omnibus Stock and Incentive Plan (the “2002 Omnibus Plan”). In June 2006, the 2002 Omnibus Plan was amended to change the vesting schedule for options automatically granted to non-employee directors, applicable only to new option awards taking effect following the date of the amendment.

 

Subject to the approval of the Company’s stockholders, the Board has adopted an amendment and restatement of the 2002 Omnibus Plan. The proposed Amended and Restated Chico’s FAS, Inc. 2002 Omnibus Stock and Incentive Plan (the “Amended and Restated 2002 Omnibus Plan”) would make several significant changes to the 2002 Omnibus Plan, as described below. The Amended and Restated 2002 Omnibus Plan was approved by the Board on April 17, 2008 and will become effective upon approval by the Company’s stockholders at the Annual Meeting. In the event that the required vote of the stockholders to approve the Amended and Restated 2002 Omnibus Plan is not obtained, the amendments to the 2002 Omnibus Plan reflected in the Amended and Restated 2002 Omnibus Plan will not become effective and the Company will continue to make grants of awards pursuant to the terms of the 2002 Omnibus Plan as currently in effect and subject to applicable law.

 

As required by the 2002 Omnibus Plan and applicable New York Stock Exchange rules, the Company is submitting the Amended and Restated 2002 Omnibus Plan for approval by the Company’s stockholders, and has specifically conditioned the effectiveness of the amendments and restatement on such approval.

 

Summary of Proposed Changes

 

At this time, the stockholders are being asked to approve the Amended and Restated 2002 Omnibus Plan. The material changes to the 2002 Omnibus Plan that would be implemented by the Amended and Restated 2002 Omnibus Plan are as follows:

 

 

 

All other material terms and conditions of the 2002 Omnibus Plan will remain unchanged.

 

The Company believes additional shares are required to support the continuation of the 2002 Omnibus Plan through June 25, 2012, the date after which awards can no longer be made under the 2002 Omnibus Plan. For information regarding shares currently available for issuance under the 2002 Omnibus Plan, please see “New Plan Benefits” below. For the most part, the other changes to the 2002 Omnibus Plan being presented to the stockholders for approval are designed to provide the Board and the Compensation and Benefits Committee with greater flexibility and to bring the Company’s plan more in line with plans in effect at other publicly traded companies, including peer group companies.

 

The amendments do not affect the nature or amount of awards previously made under the 2002 Omnibus Plan.

 

Summary of the Amended and Restated 2002 Omnibus Plan

 

The full text of the Amended and Restated 2002 Omnibus Plan appears as Appendix A to this proxy statement. The following is a summary of the principal provisions of the Amended and Restated 2002 Omnibus Plan.

 

General.  An aggregate of 9,710,280 shares of common stock were initially reserved for issuance under the 2002 Omnibus Plan. This number reflects the automatic adjustments that were effectuated to take into account the July 30, 2002 two-for-one stock split and the February 22, 2005 two-for-one stock split. As of April 30, 2008, an aggregate of approximately 700,000 shares of common stock remain available for future grants under the 2002 Omnibus Plan, subject to certain sublimits for restricted stock and restricted stock unit awards. As amended and restated, an aggregate of approximately 10,700,000 shares of common stock will be available for future grants under the Amended and Restated 2002 Omnibus Plan, subject to certain sublimits for individual awards in any one calendar year. The sublimit for aggregate awards of stock options and stock appreciation rights to any single individual in any one calendar year is 1,000,000 shares. The sublimit for performance awards, restricted stock awards and restricted stock unit awards that are intended to be “performance-based compensation” to any single individual in any one calendar year is 400,000 shares. As for performance awards that are denominated in cash and that are intended to be “performance-based compensation”, the maximum dollar value payable to any one

individual during any one calendar year is $5,000,000. However, unlike the prior terms of the 2002 Omnibus Plan, there will be no aggregate sublimit on the number of shares of common stock covered by the Amended and Restated 2002 Omnibus Plan that could be granted to all recipients in the form of restricted stock awards or restricted stock units.

 

The aggregate number of shares covered by the Amended and Restated 2002 Omnibus Plan, as well as the number of shares covered by outstanding options (and the per share purchase price thereof), the number of shares covered by outstanding stock appreciation rights, the number of shares covered by outstanding restricted share units (and the per share purchase price thereof, if any) and the number of shares covered by performance awards are each subject to further automatic adjustment, without further action of the Board or the stockholders, in the event of any subsequent stock dividend, stock split, or certain other recapitalizations with respect to the common stock.

 

Plan Administration.  Generally, the Amended and Restated 2002 Omnibus Plan provides for administration of the plan by the Compensation and Benefits Committee; provided, however, with respect to matters concerning awards to non-employee directors, the plan provides that the authority for the administration of the Amended and Restated 2002 Omnibus Plan rests with the Board. The committee administering the Amended and Restated 2002 Omnibus Plan (except with respect to matters concerning awards to non-employee directors) must consist of not less than two (2) nor more than five (5) persons, each of whom must be a member of the Board and be a “non-employee director” (as such term is defined in Rule 16b-3 under the Securities Exchange Act of 1934) and who also qualify as “outside directors” within the meaning of Section 162(m) of the Code and the related regulations and as “independent” under the applicable stock exchange requirements.

 

The Compensation and Benefits Committee currently consists of three directors of the Company who are not employees of the Company or its subsidiaries (i.e., David F. Dyer, Betsy S. Atkins and John J. Mahoney) and who each meet the requisite criteria. The Amended and Restated 2002 Omnibus Plan provides the Committee with broad authority to administer and interpret the plan, including authority to make awards, determine the size and terms applicable to awards, establish performance goals, determine and certify the degree of goal achievement, and amend the terms of awards consistent with the terms of the Amended and Restated 2002 Omnibus Plan, except that the Amended and Restated 2002 Omnibus Plan does not permit, without further approval of the stockholders of the Company, the repricing of previously granted stock options or the cancellation of a stock option when the exercise price exceeds the fair market value of the underlying shares of common stock in exchange for a new stock option grant.

 

Amendment and Termination.  The Amended and Restated 2002 Omnibus Plan provides that the Board may amend the plan (or suspend or discontinue it) at any time, without further stockholder approval, except with respect to certain major changes such as increasing the total number of shares of the common stock available for grants under the Amended and Restated 2002 Omnibus Plan, changing the designation of the class of employees eligible to receive incentive stock options or non-qualified stock options, decreasing the minimum option price set forth in the Amended and Restated 2002 Omnibus Plan, extending the period during which an option may be granted or exercised beyond the maximum period specified in the Amended and Restated 2002 Omnibus Plan or withdrawing from the Committee the authority to administer the Amended and Restated 2002 Omnibus Plan as to awards made to employees. In addition, it is the Company’s intent that any further amendments to the Amended and Restated 2002 Omnibus Plan will be submitted for stockholder approval to the extent required by the Code or other applicable laws, regulations or rules. The Amended and Restated 2002 Omnibus Plan will continue indefinitely until the Board terminates the plan, but generally no awards may be made under the plan after June 25, 2012, which is the ten-year anniversary of the original effective date of the plan.

 

Types of Awards

 

The Amended and Restated 2002 Omnibus Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units, stock appreciation rights and other stock-based awards.

 

Stock Options.  Stock options entitle the participant to purchase up to the number of shares of common stock specified in the grant at a specified price (the “Exercise Price”). The Committee (or the Board, as the case may

be) may grant incentive stock options or nonqualified stock options. The Committee (or the Board, as the case may be) will establish the terms of stock options including the Exercise Price, vesting, duration, transferability, and exercise procedures.

 

Incentive stock options are intended to comply with Section 422 of the Code. Incentive stock options may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all incentive stock options granted to a participant under the plan shall be exercisable during his or her lifetime only by such participant.

 

The Exercise Price of each incentive stock option may not be less than the fair market value of the common stock on the date of grant or, in the case of an employee owning more than 10% of the outstanding common stock of the Company, not less than 110% of such fair market value. Also, the aggregate fair market value of the stock with respect to which options are exercisable for the first time by an employee in any calendar year may not exceed $100,000.

 

The per share Exercise Price of each nonqualified stock option may not be less than the fair market value of the stock on the date of grant.

 

An exception to these Exercise Price requirements is made for any options the Company grants in substitution for options held by directors, officers or employees of a company that the Company acquires. In such a case, the Exercise Price would be adjusted to preserve the economic value of such holder’s option from his or her former employer.

 

If exercised, an option must be exercised within the exercise period by payment of the option price in cash, by check, by delivery of shares already owned by the option holder, by withholding shares issuable in connection with the exercise of the option, or by other means prescribed by the Committee (or the Board, as the case may be).

 

Options are generally exercisable based on vesting schedules established by the Committee (or the Board, as the case may be). If an individual’s affiliation with the Company as an employee is terminated during the term of the option, the end of the option period will be accelerated. Notwithstanding the foregoing general rules, the Committee (or the Board, as the case may be) may issue options for shorter periods of time and may permit the earlier exercise of outstanding options.

 

Unless otherwise provided for by the Committee (or the Board, as the case may be), an individual may not transfer any option granted under the plan, although, in some circumstances after the individual’s death, the individual’s personal representative may exercise the option.

 

Restricted Stock and Restricted Stock Units.  Restricted stock grants are shares awarded subject to the fulfillment of a certain time or price/time goal or a performance goal or other conditions. The Committee (or the Board, as the case may be) also can impose other restrictions and conditions on the restricted stock awards such as payment of a stipulated purchase price. Generally, when the conditions are fulfilled, the shares are delivered free and clear of all restrictions. If such conditions are not satisfied, restricted stock may be forfeited.

 

A restricted stock unit entitles the recipient, upon achievement of a time or price/time goal or a performance goal established by the Committee (or the Board, as the case may be), to receive cash and/or shares of common stock based on the market price of the common stock at the time of achievement of the applicable goal. If the goal is not achieved, restricted stock units may be forfeited. Except for voting and dividend rights, they may have all of the characteristics of restricted stock, as described above.

 

The Committee (or the Board, as the case may be) may, at the time of grant, make a restricted stock or restricted stock unit award subject to such performance objectives as to qualify it for deduction under Section 162(m) of the Internal Revenue Code. The performance objectives for each restricted stock or restricted stock unit award intended to so qualify for purposes of Section 162(m) of the Internal Revenue Code will be based on one or more of the following measures: net sales; revenue; revenue growth or product revenue growth; operating income (before or after taxes); pre- or after-tax income (before or after allocation of corporate overhead and bonus); net earnings; earnings per share; net income (before or after taxes); return on equity; total shareholder return; return on assets or net assets; appreciation in and/or maintenance of share price; gross profits; earnings (including earnings before taxes, earnings before interest and taxes or earnings before interest, taxes, depreciation and amortization);

economic value-added models or equivalent metrics; comparisons with various stock market indices; reductions in costs; cash flow or cash flow per share (before or after dividends); return on capital (including return on total capital or return on invested capital); cash flow return on investment; improvement in or attainment of expense levels or working capital levels; operating margins, gross margins or cash margin; year-end cash; debt reductions; shareholder equity; market share; regulatory achievements; implementation, completion, or attainment of measurable objectives with respect to research, development, products or projects and recruiting and maintaining personnel. The Committee (or the Board, as the case may be) may determine that special one-time or extraordinary gains and/or losses should or should not be included in determining whether such performance objectives have been met.

 

Other Stock-Based Awards.  Under the Amended and Restated 2002 Omnibus Plan, the Committee (or the Board, as the case may be) has the right to grant other awards of the Company’s common stock or awards otherwise based upon the Company’s common stock or other property, including without limitation rights to purchase shares of the Company’s common stock and stock appreciation rights, having such terms as the Committee (or the Board, as the case may be) may determine consistent with the terms of the plan.

 

Eligibility to Receive Awards

 

The Company’s employees, officers and directors have been eligible to be granted awards under the 2002 Omnibus Plan and would continue to be eligible to be granted awards under the Amended and Restated 2002 Omnibus Plan.

 

As of April 30, 2008, approximately 14,600 persons were eligible to receive awards under the 2002 Omnibus Plan, including the Company’s ten executive officers and seven non-employee directors.

 

Market Value

 

As of April 30, 2008, the market value of a share of common stock was $7.07.

 

New Plan Benefits

 

During fiscal 2007, the following equity awards were made under the 2002 Omnibus Plan to the following groups:

 

 

 

As of February 2, 2008, the following awards remain outstanding under the 2002 Omnibus Plan: (i) an aggregate of 4,925,689 options at a weighted average exercise price of $21.63 with a weighted average remaining life of 7.18 years and 504,671 unvested shares of restricted stock. The unvested restricted shares are already included in the Company’s total number of shares of its Common Stock outstanding. At issuance, the outstanding options would increase the total number of shares of the Company’s Common Stock outstanding, which, as of February 2, 2008, was 176,244,677 shares. Also, as of February 2, 2008, 1,353,502 shares of Common Stock (subject to adjustment as permitted by the terms of the Plan) remain available for issuance under the Plan, without giving effect to the amendment being proposed.

Since the 2002 Omnibus Plan was first adopted and through February 2, 2008, the Company has granted the following awards to the individuals and groups:

 

 

Registration with the SEC

 

The Company intends to file a registration statement with the SEC pursuant to the Securities Act of 1933, as amended, covering the additional shares being authorized for issuance under the Amended and Restated 2002 Omnibus Plan.

 

Federal Income Tax Consequences

 

The following is a brief and general discussion of the United States federal income tax consequences to recipients of awards granted under the Amended and Restated 2002 Omnibus Plan. This summary is not comprehensive and is based upon laws and regulations in effect as of the date of this filing. Such laws and regulations are subject to change and changes to these laws and regulations could alter the tax consequences described below. This summary is intended for the information of stockholders considering how to vote and not as tax guidance to participants in the Amended and Restated 2002 Omnibus Plan. Participants in the Amended and Restated 2002 Omnibus Plan should consult their own tax advisors regarding the tax consequences of participation. This summary assumes that all awards granted under the Amended and Restated 2002 Omnibus Plan are exempt from, or comply with, the rules under Section 409A of the Internal Revenue Code related to nonqualified deferred compensation.

Stock Options.

 

Incentive Stock Options.  The recipient of an incentive stock option should not recognize any taxable income or loss for federal income tax purposes at the time the incentive stock option is granted. Also, except as described below, a recipient should not recognize income upon exercise of an incentive stock option if the recipient has been employed by the Company at all times beginning with the option grant date and ending three months before the date the recipient exercises the option. If the recipient has not been so employed during that time, the recipient will be taxed as described below under “Nonqualified Stock Options.”

 

Upon exercise of an incentive stock option, the difference between the exercise price and the fair market value of the shares received may be subject to the alternative minimum tax.

 

If the common stock purchased upon the exercise of an incentive stock option is held for at least two years after the granting of the option and at least one year after exercise, the recipient should receive a long term capital gain or loss upon the sale or disposition of the common stock based on the difference between the fair market value of the common stock on the date of sale or other disposition and the purchase price of the common stock under the option. The Company will not be entitled to any deductions with respect to the granting or exercise of the incentive stock option in such cases.

 

If the recipient of an incentive stock option does not hold the shares for two years after the grant of the option and one year after exercise, the recipient will generally recognize as ordinary income in the year of disposition the difference between (i) the purchase price of common stock covered by the option and (ii) the lesser of the sales price or the fair market value of the shares on the date of exercise; and the Company will be entitled to a corresponding deduction for such amount in that year, subject in certain cases to applicable limitations for deductibility of executive compensation exceeding $1,000,000. Any remaining gain would be taxable to the recipient as capital gain. However, if the sales price is less than the purchase price under the option, no income will be recognized; the recipient would generally realize a capital loss equal to the difference between the purchase price and the disposition price; and the Company will not receive any deduction.

 

The general rules described in the preceding paragraph apply only when the sale is made to an unrelated party, such as a sale on the New York Stock Exchange made through a stockbroker. If the recipient makes a sale or other disposition to certain related persons or entities before the end of the applicable holding periods, then the recipient will be treated as having received ordinary income (with a corresponding deduction to the Company) in the year of disposition in an amount equal to the difference between the sales price and the fair market value of the shares on the date of exercise (even if the fair market value of the shares is less on the date of sale or other disposition).

 

Nonqualified Stock Options.  Because the Company does not anticipate that any nonqualified stock option will have a readily ascertainable fair market value when issued, the recipient of such an option should not recognize any taxable income or loss for federal income tax purposes at the time the option is granted. The exercise of the nonqualified stock option, however, will result in the immediate recognition of taxable income by its holder at ordinary income rates based on the difference between the purchase price for shares covered by the option and the fair market value of the shares received at the time of exercise. The Company will receive a corresponding deduction at the same time, subject in certain cases to applicable limitations for deductibility of executive compensation exceeding $1,000,000. Additional gain or loss, determined under general rules of taxation, may be realized upon the sale of the shares.

 

Restricted Stock.  A participant receiving restricted stock generally will recognize ordinary income in the amount of the fair market value of the restricted stock at the time the respective shares are no longer subject to forfeiture, less any consideration paid for the restricted stock. At this time, the Company is entitled to a deduction in the same amount. However, a participant who is granted restricted stock may, within 30 days of receiving the award, choose to have any applicable risk of forfeiture disregarded for tax purposes by making an “83(b) election.” A participant who makes an 83(b) election will recognize ordinary income equal to the difference between the value of the shares and the price paid for the shares, if any, at the time of the transfer of the restricted stock. The holding period to determine whether the participant has long-term or short-term capital gain or loss on the subsequent sale of

such shares generally begins when the restriction period expires, and the participant’s tax basis for such shares will generally equal the fair market value of such shares on such date.

 

Restricted Stock Units.  A participant who has received restricted stock units under the Plan will generally recognize ordinary income upon receipt of any shares of common stock in satisfaction of the restrictions attached to the award in an amount equal to the then fair market value of such shares received, less the purchase price, if any. A participant is not permitted to make an 83(b) election for a restricted stock unit.

 

Other Stock-Based Awards.  The tax consequences associated with other stock-based awards granted under the Amended and Restated 2002 Omnibus Plan will vary depending on the specific terms of such award. Among the relevant factors are whether or not the award has a readily ascertainable fair market value, whether or not the award is subject to forfeiture provisions or restrictions on transfer, the nature of the property to be received by the participant under the award and the participant’s holding period and tax basis for the award or underlying our common stock.

 

Withholding Taxes.  Because the amount of ordinary income a participant recognizes with respect to the receipt or exercise of an award may be treated as compensation that is subject to applicable withholding of federal, state and local income taxes and social security taxes, the Company may require the participant to pay the amount required to be withheld before delivering to the participant any shares or other payment to be received under the Amended and Restated 2002 Omnibus Plan. Arrangements for payment may include deducting the amount of any withholding or other tax due from other compensation, including salary or bonus, otherwise payable to the participant.

 

The specific application and impact of the tax rules will vary depending on the specific personal situation of individual employees.

 

Certain Limitations on Deductibility of Compensation

 

In general, whenever a recipient is required to recognize ordinary income in connection with an award, the Company will be entitled to a corresponding tax deduction. However, pursuant to Section 162(m) of the Code, the deductibility for federal corporate tax purposes of compensation paid to certain individual senior executive officers of the Company in excess of $1,000,000 in any year may be restricted, subject to certain exceptions. One exception applies to certain “performance-based” compensation, provided that this compensation has been approved by stockholders in a separate vote and certain other requirements are met, such as equity awards granted under the Plan. The Amended and Restated 2002 Omnibus Plan is designed to permit the Compensation and Benefits Committee to grant awards that qualify for purposes of satisfying the conditions of Section 162(m). The Compensation and Benefits Committee would exclusively use one or more of the following performance measures in establishing performance goals for awards if the award is intended to satisfy the condition of Section 162(m): net sales; revenue; revenue growth or product revenue growth; operating income (before or after taxes); pre- or after-tax income (before or after allocation of corporate overhead and bonus); net earnings; earnings per share; net income (before or after taxes); return on equity; total shareholder return; return on assets or net assets; appreciation in and/or maintenance of share price; gross profits; earnings (including earnings before taxes, earnings before interest and taxes or earnings before interest, taxes, depreciation and amortization); economic value-added models or equivalent metrics; comparisons with various stock market indices; reductions in costs; cash flow or cash flow per share (before or after dividends); return on capital (including return on total capital or return on invested capital); cash flow return on investment; improvement in or attainment of expense levels or working capital levels; operating margins, gross margins or cash margin; year-end cash; debt reductions; shareholder equity; market share; regulatory achievements; implementation, completion, or attainment of measurable objectives with respect to research, development, products or projects and recruiting and maintaining personnel. The performance goals may be expressed in terms of absolute growth, cumulative growth, percentage growth, a designated absolute amount, percentage of sales and/or per share value. In addition, the performance goals may be measured solely by reference to the Company’s performance or the performance of a subsidiary, division, business segment or business unit or based upon performance relative to the performance of one or more other companies or an index covering multiple companies. The Company believes that, as a general rule, it is in the best interests of the Company’s stockholders to meet the requirements for deductibility of Section 162(m) while still maintaining the goals of the Company’s

compensation programs. However, when it has been deemed necessary and in the best interests of the Company to continue to attract and retain the best possible executive talent, and to motivate such executives to achieve the goals inherent in the Company’s business strategy, the Compensation and Benefits Committee may approve compensation to executive officers which exceeds the Section 162(m) limits of deductibility.

 

Recommendation and Required Vote

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE APPROVAL AND RATIFICATION OF THE AMENDED AND RESTATED CHICO’S FAS, INC. 2002 OMNIBUS STOCK AND INCENTIVE PLAN. The amended and restated plan will be approved and ratified if the number of votes cast “FOR” approval and ratification of the amended and restated plan by holders entitled to vote exceeds the number of votes cast opposing the approval and ratification of the amended and restated plan.

 

 

Based on the recommendation of the Company’s Audit Committee, the Company has selected Ernst & Young LLP (“E&Y”) as its independent public accountants for the current fiscal year ending January 31, 2009 (fiscal 2008), subject to ratification of such appointment by the stockholders. Ratification of the Company’s independent public accountants is not required by the Company’s By-Laws or otherwise, but the Board of Directors has decided to seek such ratification as a matter of good corporate practice. E&Y has audited the accounts of the Company since first being engaged by the Company effective July 1, 2002. Representatives of E&Y are expected to be present at the Annual Meeting. They will have the opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions by stockholders.

 

We have been advised by E&Y that neither the firm, nor any member of the firm, has any financial interest, direct or indirect, in any capacity in the Company or its subsidiaries.

 

The persons named in the enclosed form of proxy intend, unless otherwise directed, to vote such proxy “FOR” ratification of the appointment of Ernst & Young LLP as independent public accountants for the period specified. If the stockholders do not ratify this appointment, other certified public accountants will be considered by the directors upon recommendations of the Audit Committee.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE RATIFICATION OF APPOINTMENT OF ERNST & YOUNG LLP AS OUR INDEPENDENT PUBLIC ACCOUNTANTS FOR THE PERIOD SPECIFIED. The appointment will be ratified if the number of votes cast “FOR” ratification of the appointment by holders entitled to vote exceeds the number of votes cast opposing the ratification of the appointment.

 

The following table presents fees for professional services rendered by E&Y for the audit of the Company’s annual financial statements for fiscal 2007 (ended February 2, 2008) and fiscal 2006 (ended February 3, 2007) and fees billed for audit-related services, tax services and all other services rendered by E&Y for fiscal 2007 and fiscal 2006.

 

Audit Fees

 

Fees for audit services include fees associated with the annual audits, the reviews of the Company’s quarterly reports on Form 10-Q and other SEC filings and audit consultations and the Sarbanes-Oxley Section 404 attestation.

 

Audit-Related Fees

 

Fees for audit-related services in fiscal 2007 principally related to a review of the Company’s purchase price allocation related to the acquisition of its remaining franchise operations and to the Company’s adoption of FIN 48. For fiscal 2006, such fees principally related to a review of the Company’s adoption of SFAS 123R.

 

Tax Fees

 

Fees for tax services in fiscal 2007 principally related to transfer pricing services and the review of the Company’s federal and certain state income tax returns. For fiscal 2006, such fees principally related to the review of the Company’s federal and certain state income tax returns.

 

All audit-related services, tax services and other services in fiscal 2007 were pre-approved by the Audit Committee, which concluded that the provision of such services by E&Y was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions. The Audit Committee’s outside auditor independence policy provides for pre-approval of audit, audit-related and tax services specifically described by the Audit Committee on an annual basis and, in addition, individual engagements anticipated to exceed pre-established thresholds must be separately approved. The policy authorizes the Committee to delegate to one or more of its members pre-approval authority with respect to permitted services.

 

The following report of the Audit Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this report by reference therein.

 

The Audit Committee consists of four directors and operates under a written charter adopted by the Board of Directors. This Committee’s charter is available under the Investor Relations portion of the Company’s website (www.chicos.com) by clicking on Our Company. The current members of this Committee are David F. Walker (Chair), Verna K. Gibson, Ross E. Roeder, and John J. Mahoney. Each member of the Committee is independent, in the judgment of the Company’s Board of Directors, as required by the listing standards of The New York Stock Exchange and as set forth in the Company’s Corporate Governance Guidelines. This Committee is responsible for selecting, engaging and negotiating fee arrangements with the Company’s independent registered public accountants (the independent accountants) with input from the Company’s Board and management. Management is responsible for the Company’s internal controls and the financial reporting process. The independent accountants are responsible for performing an audit of internal control over financial reporting that is integrated with an audit of the Company’s consolidated financial statements in accordance with auditing standards of the Public Company Accounting Oversight Board in the United States, and for expressing opinions thereon. This Committee’s responsibility is to monitor and oversee these processes. In this context, this Committee has met and held discussions with management, the internal auditors and the independent accountants.

 

The Sarbanes-Oxley Act of 2002 and regulations issued thereunder added a number of provisions to federal law to strengthen the authority of, and increase the responsibility of, corporate audit committees. Related rules concerning audit committee structure, membership, authority and responsibility have been promulgated by The New York Stock Exchange.

 

The members of this Committee are not professional accountants or auditors, and their functions are not intended to duplicate or to certify the activities of management or the independent accountants, nor can this Committee certify that the independent accountants are “independent” under applicable rules. This Committee serves a board-level oversight role, in which it provides advice, counsel and direction to management, internal auditors, and the independent accountants on the basis of several factors, including the information it receives, discussions with management, internal auditors, and the independent accountants, and the experience of this Committee’s members in business, financial and accounting matters.

 

As part of its oversight of the Company’s financial statements, this Committee reviews and discusses with both management and the Company’s independent accountants all annual and quarterly financial statements prior to their issuance. This Committee reviewed and discussed the audited consolidated financial statements of the Company as of and for the year ended February 2, 2008 (fiscal 2007), with management, the internal auditor and the Company’s independent accountants. With respect to fiscal 2007, management advised the Audit Committee that each set of the Company’s consolidated financial statements reviewed had been prepared in accordance with accounting principles generally accepted in the United States, and reviewed significant accounting and disclosure issues with this Committee. Discussions regarding the Company’s audited financial statements included the independent accountants’ judgments about the quality, not just the acceptability, of the Company’s accounting principles and underlying estimates used in the Company’s financial statements, as well as other matters, as required by Statement on Auditing Standards (SAS) 114 (The Auditor’s Communication With Those Charged With Governance) and by the Audit Committee’s charter. The Company’s independent accountants also provided to the Committee the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Committee discussed with the independent accountants that firm’s independence and satisfied itself as to that firm’s independence.

 

In addition, this Committee reviewed key initiatives and programs aimed at strengthening the effectiveness of the Company’s internal and disclosure control structure. As part of this process, this Committee continued to monitor the scope and adequacy of the Company’s internal auditing program, reviewing staffing levels and steps taken to implement recommended improvements in internal procedures and control.

Based upon the Audit Committee’s discussion with management, the internal auditor, and the independent accountants, this Committee’s review of the representations of management, and the report of the independent accountants to this Committee, and subject to the limitations on the role and responsibilities of this Committee described above and in the Committee’s charter, this Committee recommended that the Board of Directors approve the inclusion of the Company’s audited consolidated financial statements in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission as of and for the fiscal year ended February 2, 2008.

 

MEMBERS OF THE AUDIT COMMITTEE

 

David F. Walker, Chair

Verna K. Gibson

Ross E. Roeder

John J. Mahoney

 

The following table sets forth certain information regarding the Company’s current executive officers.

 

 

 

Non-Director Executive Officers

 

Kent A. Kleeberger is Executive Vice President-Finance, Chief Financial Officer and Treasurer, having recently joined the Company in November 2007. From 2004 through October 2007, Mr. Kleeberger was the Senior Vice President-Chief Financial Officer for Dollar Tree Stores, Inc. From 1998 to 2004, he served in numerous capacities for Too Inc., now known as Tween Brands, Inc., culminating in his appointment as Executive Vice President, Chief Operating Officer, Chief Financial Officer, Secretary and Treasurer. Prior to that, Mr. Kleeberger served in various financial positions with The Limited, Inc. Mr. Kleeberger also serves on the Board of Directors of Shoe Carnival, Inc.

 

Michele M. Cloutier is Brand President-Chico’s for the Company, having just been promoted to that position in October 2007. Ms. Cloutier joined the Company in September 2006 as Executive Vice President-General Merchandise Manager-Chico’s, after having served in the capacity of an independent consultant from 2004 to 2006. From 2003 to 2004, Ms. Cloutier served as Senior Vice President-General Merchandising Manager at Ann Taylor Stores. From 1993 to 2002, she held several senior merchandising roles in multiple divisions at The Gap, Inc. Earlier in her specialty retailing career, Ms. Cloutier held buying positions at Macy’s and Abraham & Strauss.

 

Donna M. Colaco is Brand President-White House Black Market for the Company, having joined the Company in August 2007. Ms. Colaco has over 25 years of experience in woman’s specialty apparel. Prior to joining the Company, Ms. Colaco worked for Ann Taylor Corporation for more than 10 years in numerous capacities including, most recently serving as President of Ann Taylor LOFT. Prior to Ann Taylor, Ms. Colaco worked for the Lerner New York Division of Limited, Inc. and Petrie Stores Corporation.

 

Charles L. Nesbit, Jr. is Executive Vice President-Chief Operating Officer for the Company. Mr. Nesbit has been with the Company since August 2004, when he was hired as Senior Vice President-Strategic Planning and Business Development. He was promoted to Executive Vice President-Operations in April 2005 and to the additional title of Chief Operating Officer in August 2005. Prior to joining the Company, Mr. Nesbit spent twenty years at the Sara Lee Corporation where he most recently served as a corporate vice president and Chief Supply Chain Officer for the corporation’s U.S. and Canada apparel operations. He served as President and Chief Executive Officer of Sara Lee Intimate Apparel, the largest intimate apparel company in the United States and Canada, from 1999 to 2003, and President and Chief Executive Officer of the Bali Company from 1996 to 1999.

Manuel O. Jessup is Executive Vice President-Chief Human Resources Officer of the Company, having been promoted to that position in December 2007. Mr. Jessup joined the Company in October 2006 as Senior Vice President of Human Resources. Mr. Jessup was previously employed by Sara Lee Branded Apparel where he most recently served as Corporate Vice President, Human Resources. During his 21 year career at Sara Lee, he also served as Global Vice President, Human Resources, Sara Lee Branded Apparel, Latin America and Asia, as well as Vice President, Human Resources, Sara Lee Hosiery. Prior to joining Sara Lee, Mr. Jessup held human resources management positions at Levi Strauss and J.P. Stevens.

 

Gary A. King is Executive Vice President-Chief Information Officer for the Company. Mr. King joined the Company in October 2004 after five years at Barnes & Noble, Inc., where he most recently served as Vice President, Chief Information Officer. From 1988 to 1999, Mr. King held various positions with Avon Products, Inc. including Vice President, Global Information Technology. From 1982 to 1987, Mr. King held various system management positions with Unisys Corporation and Burroughs Corporation.

 

Mori C. MacKenzie is Executive Vice President-Chief Stores Officer for the Company. Ms. MacKenzie has been with the Company since October 1995, when she was hired as the Director of Stores. From June 1999 until October 2001, she served as Vice President-Director of Stores. In October 2001, Ms. MacKenzie was promoted to Senior Vice President-Stores, and effective February 2004 she was promoted to the position of Executive Vice President-Chief Stores Officer. From January 1995 until October 1995, Ms. MacKenzie was the Vice President of Store Operations for Canadians Corporation. From August 1994 until December 1994, she was the Vice President of Store Development for Goody’s Family Clothing. From April 1992 until August 1994, Ms. MacKenzie was the Vice President of Stores for United Retail Group (“URG”) and from August 1991 until April 1992 she was employed by Conston Corporation, a predecessor of URG. In addition, Ms. MacKenzie was Vice President-Stores for Park Lane from November 1987 until July 1991, and was Regional Director of Stores for the Limited, Inc. from June 1976 until October 1987.

 

Michael J. Kincaid is Senior Vice President-Finance, Chief Accounting Officer and Assistant Secretary for the Company. Mr. Kincaid has been with the Company since August 1999 when he was hired as Controller and Director of Finance. In October 2001, Mr. Kincaid was promoted to Vice President-Finance, in November 2003, Mr. Kincaid was promoted to the additional position of Chief Accounting Officer, in December 2004, Mr. Kincaid was elected to the additional position of Assistant Secretary, and in March 2005, was promoted to Senior Vice President-Finance. From 1991 to 1999, Mr. Kincaid was employed by Tractor Supply Company, most recently as Vice President-Controller, Treasurer and Secretary. From 1981 to 1991, he held various management and accounting positions with Cole National Corporation, Revco D.S., Inc. and Price Waterhouse.

 

A. Alexander Rhodes is Senior Vice President-General Counsel and Secretary for the Company. Mr. Rhodes joined the Company in January 2003 as its Intellectual Property Counsel, expanding his oversight of legal matters for the Company into several other areas until October 2004, when he was promoted to Vice President-Corporate Counsel and Secretary. In April 2006, Mr. Rhodes was promoted to Senior Vice President-General Counsel and Secretary. Mr. Rhodes graduated from the Stetson University College of Law in 1994. From 1997 through December 2002, Mr. Rhodes practiced law with the Annis Mitchell Cockey Edwards & Roehn and Carlton Fields law firms working primarily in the areas of commercial litigation and intellectual property.

 

None of the executive officers or directors who currently serve or who served in such capacities during fiscal 2007 are related to one another. There are no arrangements or understandings pursuant to which any executive officer was elected to office. Executive officers are elected by and serve at the discretion of the Board of Directors.

 

The following report of the Compensation and Benefits Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this report by reference therein.

 

The Compensation and Benefits Committee (the “Committee”) evaluates and establishes compensation for executive officers and oversees the deferred compensation plan, the Company’s management stock plans, and other management incentive, benefit and perquisite programs. Management has the primary responsibility for the Company’s financial statements and reporting process, including the disclosure of executive compensation. With this in mind, the Committee has reviewed and discussed with management the Compensation Discussion and Analysis found on pages 34-44 of this proxy statement. The Committee is satisfied that the Compensation Discussion and Analysis fairly and completely represents the philosophy, intent, and actions of the Committee with regard to executive compensation. We recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement for filing with the Securities and Exchange Commission.

 

MEMBERS OF THE COMPENSATION
AND BENEFITS COMMITTEE

 

David F. Dyer, Chair
Betsy S. Atkins
John J. Mahoney

 

Overview of Compensation Philosophy and Objectives

 

In a highly competitive business such as ours, it is essential that our executive compensation program is designed to help us attract, motivate, and retain highly skilled executive officers who are able to drive long term, sustainable, and profitable growth for our Company. Ultimately, the goal of our executive compensation program is the same as our goal for the Company – to increase stockholder value over the long term. To this end, we have implemented a compensation program designed to reward our executive officers for entrepreneurial activity that increases stockholder value through sustained financial performance and outstanding leadership that reflects our values and unique culture.

 

The Company’s Compensation and Benefits Committee has the responsibility to review and approve the annual compensation, compensation procedures and compensation plans and programs for our officers, including the Named Executive Officers (“NEOs”). The Committee is also responsible for monitoring adherence with our compensation philosophy.

 

The Company bases its executive compensation programs and decisions on the same objectives that guide the Company in establishing all of its compensation programs:

 

 

Role of the Committee and the Executive Officers in Compensation Decisions

 

The Committee, in consultation with its external compensation consultant, makes all compensation decisions with respect to the compensation for the CEO including establishing his base salary, the terms under which his cash incentive bonuses are paid, and determining the extent to which he receives stock-based compensation awards. The Chief Human Resources Officer (“CHRO”) assists the Committee with gathering relevant data but does not participate in setting the CEO’s compensation.

 

The Committee also determines the amount and terms of the cash based compensation and stock-based compensation awards for the other executive and non-executive officers, taking into account recommendations on individual compensation levels and performance evaluation input from the CEO and CHRO. The CEO and CHRO have limited authority to make changes and adjustments to cash based compensation, with the expectation that any adjustments would be in keeping with our overall compensation philosophy. No other NEO assumed an active role in the evaluation, design, or administration of the 2007 executive officer compensation program, although in fiscal 2007 our former Chief Financial Officer (“CFO”) assisted the CEO and the Committee in developing recommendations on the bonus program. In addition, each NEO provided input to the CEO and CHRO on individual compensation levels for those officers who directly report to him or her.

 

Setting Executive Compensation – Benchmarking and Use of Compensation Experts

 

In 2007, the Committee engaged Frederic W. Cook & Co., Inc. (“Cook”), as its independent compensation consultant, to provide us with relevant market and benchmarking data and strategic alternatives to consider when making compensation decisions and recommendations for our executive officers for fiscal 2008. This was the first year the Committee retained Cook to assist us with setting executive compensation. The Committee chose a new compensation consultant to help secure a fresh perspective on executive compensation. During this time, Cook provided only compensation consulting services to the Committee. Cook does no work for management unless requested by the Committee Chair, receives no compensation from the Company other than for its work advising the Committee, and maintains no other economic relationship with the Company. In addition, our human resources department includes associates with significant compensation experience who provide the CHRO and the Committee with additional support, data, and analysis.

 

In making compensation decisions, the Committee reviews all compensation components for the NEOs taking into account a tally sheet showing overall compensation for each NEO. The Committee also compares each element of total compensation against a peer group of publicly-traded specialty retailers (the “Compensation Peer Group”). The Compensation Peer Group, which is periodically reviewed and updated, consists of U.S. based publicly traded retailers of generally similar size and scope to us and against which the Company competes for talent and for stockholder investment. The companies currently comprising the Compensation Peer Group are:

 

 

In fiscal 2007, we generally tried to set base salaries between the 50th and 75th percentiles of the Compensation Peer Group and to set total compensation, where performance targets are achieved, at or near the 75th percentile of the Compensation Peer Group. Variations to this objective may occur as dictated by the experience level of the individual and by other market factors. These objectives take into account our expectations and desires that, over the long term, we will be able to generate stockholder returns in excess of the average of our peer group.

Principal Components of Executive Compensation

 

The principal components of our executive compensation program are:

 

 

Mix of Compensation Components

 

Executive compensation is designed to help emphasize executive performance measures that correlate closely with the achievement of our shorter-term performance objectives as well as our longer-term focus on increasing stockholder value, consistent with our overriding compensation objectives and philosophy. To this end, a substantial portion of the annual and long-term compensation for our NEOs is at-risk. We define at-risk compensation to include potential bonus payments under our executive bonus plan and the targeted economic value of equity awards.

 

There is no pre-established policy or target for the allocation between either cash and non-cash incentive compensation or short-term and long-term incentive compensation. Rather, the Committee reviews information provided by consultants, surveys, and other information considered relevant that is available to it to determine the appropriate level and mix of incentive compensation for each executive officer. However, the portion of the compensation that is at-risk tends to increase commensurate with the executive’s position within the Company. This approach is designed to provide more upside potential and downside risk for those with more senior positions because we believe that the more senior executive officers tend to have greater influence on our performance as a whole. The following chart describes the percent of target pay at-risk for our NEOs in 2007:

 

 

Components of Compensation

 

Base Salaries

 

We provide our NEOs and other employees with base salaries to compensate them for services rendered during the fiscal year. Base salary ranges for our NEOs are determined based on each executive’s position, level of responsibility and accountability, experience and performance, and by using market data. In fiscal 2007, we targeted base salaries between the 50th and 75th percentiles of the relevant market. We may set a base salary above the 75th percentile when necessary to attract or retain key executives.

 

During its review of base salaries for our executives, the Committee primarily considers:

 

 

 

The Committee reviews the base salaries of our NEOs on an annual basis as well as at the time of any promotion or other material change in responsibilities.

 

Because of our weaker financial performance in fiscal 2006, the CEO, CFO and Chief Operating Officer (“COO”) as well as other executive officers did not receive any performance-based increase in their base salary from fiscal 2006 to fiscal 2007. In fiscal 2007, we decided to eliminate the car allowance that certain executive officers were receiving and simply added that amount to the officer’s base salary. In recognition of Ms. Cloutier’s promotion to Executive Vice President-Chief Merchandising Officer in March 2007 and subsequent promotion to Brand President-Chico’s in November 2007, Ms. Cloutier received increases to her base salary for such promotions of 16.2% and 8.5%, respectively. Because of our continued weaker financial performance in fiscal 2007, however, no NEO and only one officer at the Executive Vice President level or above received any increase in his or her base salary from fiscal 2007 to fiscal 2008.

 

Annual Cash Incentive Bonuses

 

An important component of an executive officer’s potential total cash compensation consists of an incentive bonus, which is intended to make a significant portion of the executive’s compensation dependent on our performance and to provide executive officers with incentives to achieve our near and long-term goals, increase stockholder value, and work as a team in meeting goals and overcoming challenges.

 

In 2007, bonuses were generally determined pursuant to our Cash Bonus Incentive Plan. Under this Cash Bonus Incentive Plan, the bonuses for NEOs were based on one or two performance measures depending on an executive’s functional responsibilities. For 2007, the Committee reviewed and approved the performance measures for each executive.

 

For our NEOs the performance levels were principally designed to stimulate growth in sales and earnings per share to align the executive’s bonus compensation with the stockholders’ interests. These performance measures, which are set forth in more detail in the chart below, were chosen to provide incentives for achieving both near and long-term financial goals.

 

Under the Cash Bonus Incentive Plan, each executive is to have an assigned target bonus, expressed as a percentage of his or her base salary, generally ranging from 20% to 100% of base salary, depending on the executive’s position. The actual bonus awards can range from 0% to 175% of target, depending on the Company’s actual financial performance. The following chart describes the basics of financial performance needed to achieve the referenced bonus payouts.

 

 

Thus, if the Company failed to achieve any of the minimum performance measures applicable to a particular executive, then no performance based bonuses would be awarded to that particular executive and if the Company achieved certain of the minimum performance measures applicable to a particular executive but failed to achieve others, then only a portion of the performance based bonus would be awarded. On the other hand, if the Company’s performance exceeds all or a portion of the performance measures, then the NEO may receive more than the targeted bonus.

 

Under the Plan, bonuses based on the performance criteria were awarded twice during the fiscal year, with the midyear bonuses based on achieving the respective performance measures the first six months of the fiscal year and with year end bonuses based on achieving the respective performance measures for the last six months of the fiscal year.

The bonus measures, target financial performance, target payout, and actual payouts for fiscal 2007 for each respective NEO are set forth below.

 

 

For each of the NEOs, the applicable bonus measures and the financial targets were tailored to drive growth in earnings per share, consolidated sales, brand sales and brand gross margin, as appropriate based upon their respective roles and responsibilities. Where more than one bonus measure was used, each measure was weighted equally.

 

Bonus targets were based on job responsibilities, internal relativity, and peer group data. The Company’s objective was to set bonus targets such that total annual cash compensation was within the broad upper middle range of peer group companies and a substantial portion of that compensation was linked to Company performance.

 

The bonuses paid for fiscal 2007 pursuant to the Plan appear in the Summary Compensation Table under the “Non-Equity Incentive Plan Compensation” column. Satisfactory individual performance is a condition to payment. At the end of the performance period, the Committee has the option to award a discretionary bonus to reward individual productivity improvements even in the face of weaker overall Company performance.

 

In fiscal 2007, the Company experienced below-target growth in several key financial categories. Despite the below target growth, however, the Company was still a profitable enterprise. At the recommendation of the CEO and in light of a concern over the ability to retain talent in the face of the significant impact that the below market performance had on bonus amounts and the negative impact on our equity based incentives, the Committee authorized approximately $500,000 in aggregate discretionary bonuses for certain Company associates at the Vice President and Director levels. No officer at the Senior Vice President level and above and none of the NEOs received any discretionary bonus. The bonuses paid to officers for fiscal 2007 based solely on the performance measures were only approximately 9% of target and, when coupled with the discretionary bonuses paid, were only approximately 10% of target. Overall, our officers were awarded a total of approximately $1.1 million in incentive bonuses for the 2007 fiscal year.

 

In February 2008, the Committee approved the bonus measures, bonus targets, and financial performance levels for the fiscal 2008 annual incentive compensation under the Plan. The performance measures are primarily designed, to stimulate growth in sales and brand operating margins, improve return on invested capital, and grow earnings per share. These performance criteria and the weighting of a minimum of 3 metrics for each eligible officer are intended to motivate and reward officers for continued financial improvement for the Company, consistent with increasing stockholder value. In addition, achievement of the fiscal 2008 targets will require an improvement in our operating results over our fiscal 2007 results, which we believe should increase stockholder value when met. Moreover, the bonus measures for the CEO and CFO will be a combination of the measures noted above and no longer entirely based on growth in earnings per share.

Sign On and “Guaranteed” Bonuses

 

The Company will, as necessary, pay sign on and first year guaranteed bonuses in order to attract the management talent necessary to drive long term and sustainable growth. Executives we recruit from other companies are often required to give up a significant amount of compensation, in the form of lost bonus opportunities or unvested equity. Sign on and first year guaranteed bonuses are a necessary and effective means of offsetting the losses an officer will incur when he or she leaves his or her former employer. In those instances in which we have provided an officer with a sign on bonus, we generally require the newly hired officer to pay back a pro rata portion of the sign on bonus if they voluntarily leave the Company within a year after joining us. Sign on and guaranteed bonuses paid to NEOs in fiscal 2007 are listed in the chart on page 45.

 

Long-Term Incentive Stock-Based Compensation

 

We believe that meaningful equity participation by each executive officer is one of the primary motivating factors that will result in significant long term and sustained increases in value and growth. This belief is reflected in our officer and director stock ownership guidelines and well as the aggregate awards of stock options and restricted stock that we have made to our executive officers. The stock ownership guidelines are described on page 43 and are available on the Company’s website at www.chicos.com.

 

Providing executive officers stock-based compensation is the most effective way to align their interests with those of our stockholders. Stock options and restricted stock provide an incentive, beginning immediately upon grant, to executive officers to manage the Company from the perspective of an owner with an equity interest in the business. In addition, stock-based compensation has been and continues to be a key part of our program for motivating and rewarding key employees over the long term. We intend to continue to have stock based compensation serve as an important part of the compensation program for key employees.

 

The Committee, in consultation with its outside compensation consultant, determines the stock based compensation for the CEO. The Committee, upon the recommendation by the CEO and the CHRO, also makes final decisions regarding stock based awards for all other officers. Such factors as performance and responsibilities of individual officers and the management team as a whole, as well as general industry practices, play an integral role in the determination of the number of stock options, number of shares of restricted stock and/or number of restricted stock units awarded to a particular award recipient. In determining the size of the individual stock based awards, the Committee also considers the amount of stock based awards outstanding and previously granted, the amount of stock based awards remaining available for grant under the 2002 Omnibus Stock and Incentive Plan, the aggregate amount of current awards, and the amount of awards believed necessary to attract and retain qualified management. All stock based awards vest over time as a means to encourage the recipient to remain in service with us.

 

In fiscal 2007, (i) a total of 1,180,875 stock options were granted to our employees and non-employee directors, including 285,000 stock options that were awarded to executive officers and 90,000 stock options that were awarded to non-employee directors and (ii) a total of 396,451 shares of restricted stock were awarded to our employees and non-employee directors including 131,668 shares of restricted stock that were awarded to executive officers and 17,500 shares of restricted stock that were awarded to non-employee directors. The restricted stock award to executive officers includes an out of cycle award of 25,000 shares to the CEO in recognition of his special efforts in building and strengthening the executive management team with a group of key senior personnel considered necessary to drive long term, sustainable, and profitable growth for our Company.

 

Stock Options

 

Substantially all stock options granted to key employees have a ten-year term and vest in equal amounts over a period of three years from the date of grant. Stock option award levels are determined based on market data and vary among participants based on their positions within the Company. The option exercise price is the closing price on the date of grant. We grant stock options as an incentive for our executives to create stockholder value by encouraging a culture of ownership at the Company. For an executive to receive value from a stock option, the stock price at the time of intended exercise must be greater than the grant price.

In fiscal 2007, we awarded stock options to our NEOs as follows:

 

 

Currently, stock option awards for non-employee directors are preset under the terms of the 2002 Omnibus Stock and Incentive Plan, with 10,000 options being granted shortly following each annual meeting of stockholders to each non-employee director then serving in such capacity and with 10,000 options being granted to each new non-employee director on the date such director first joins the board and takes office as a director. Reelected directors receive the normal annual grants, but do not become entitled to another new election/appointment grant at the time of his or her reelection. If the proposed Amended and Restated 2002 Omnibus Stock and Incentive Plan is approved by the stockholders at the 2008 Annual Meeting, the automatic grants of stock options will be eliminated and equity awards to non-employee directors will be discretionary. At its February 2008 meeting, however, the Board approved an award to non-employee directors of 10,000 shares of restricted stock with a one year vesting period to be granted shortly after the adjournment of the Annual Meeting. If the Amended and Restated 2002 Omnibus Stock and Incentive Plan is not approved by the stockholders, the automatic grants of stock options will continue as long as shares remain available.

 

We have not re-priced or replaced options in response to declining stock prices.

 

Restricted Stock and Restricted Stock Units

 

Awards of shares of restricted stock are granted to key employees based on similar criteria as stock option grants. The restricted stock that was granted to senior executives as part of fiscal 2005 compensation vested 100% at the end of three years from the date of grant and was primarily an associate retention tool. In 2006, the Company changed the vesting of any newly issued restricted stock awards to now vest in equal annual amounts over a three year period from the date of grant. In this way, restricted stock can serve the dual purposes of associate retention and driving stockholder value. Thus, the restricted stock granted to senior executives as part of fiscal 2007 compensation and as part of fiscal 2008 compensation vests in equal annual amounts over a period of three years from the date of grant. Restricted stock encourages executives to not only create stockholder value, but also to preserve value. We believe restricted stock grants provide a balance with stock options and further aligns the interests of management and stockholders.

 

In fiscal 2007, the Committee awarded the following shares of restricted stock to the NEOs:

 

 

Unlike stock options, restricted stock awards for directors are not preset under the currently effective terms of the 2002 Omnibus Stock and Incentive Plan. However, since fiscal 2005 and until fiscal 2007, the Board has

awarded 2,500 shares of restricted stock to each non-employee director on an annual basis around the same time that awards of restricted stock are made to executive officers. The restricted stock granted to non-employee directors provides for vesting in equal amounts over a period of three years from the date of grant. If the Amended and Restated 2002 Omnibus Stock and Incentive Plan is not approved by the stockholders, the Board may act anyway to award restricted stock to the non-employee directors shortly following the 2008 Annual Meeting, although comprised of fewer shares because of the continued automatic grant of stock options.

 

Granting of Stock Options and Restricted Stock Awards

 

The Committee’s procedure for making equity grants (stock options and restricted stock) is designed to provide some measure of assurance that grant awards are not being manipulated to result in a price that is unreasonably favorable to the recipients of the grants. Beginning in fiscal 2007, the annual equity grant date for all officers was changed to the date on which the trading window period first opens following the public release of year end earnings. This grant date is generally in late February or early March and is established by us well in advance. Because the Committee does not generally meet on this date, the Committee will authorize the grants at its meeting first preceding the grant date, usually several weeks in advance, specifying an effective prospective grant date consistent with this policy. The exercise price for stock options is generally the closing date price on the specified prospective grant date, but in no event less than such closing date price. This grant date is driven by two principal considerations:

 

 

Similarly, as was the case in 2007, the annual equity grant date for all non-officers, which occurs later in the fiscal year, is designed to coincide with our non-officer performance management cycle. Again this allows us to deliver the equity awards close in time to performance appraisals, which increases the impact of the awards by strengthening the link between pay and performance. Because the Committee does not generally meet on this date, the Committee will authorize the grants at its meeting first preceding the September grant date, usually several weeks in advance, specifying an effective prospective grant date consistent with this policy. Again, the exercise price for stock options is generally the closing date price on the specified prospective grant date, but in no event less than such closing date.

 

Retirement and Welfare Benefits

 

401(k) Plan

 

In 1992, the Company adopted a profit sharing plan to provide a means for all eligible employees at all levels of the Company to share in our profits and accumulate retirement savings. Effective January 1, 1999, we incorporated a 401(k) feature into our profit sharing plan as a further means for all eligible employees at all levels of the Company to accumulate retirement savings. Under the 401(k) aspect of the plan, eligible employees can elect to defer up to 100% of their respective compensation subject to certain statutory limitations and have it contributed to the plan. The Company has elected to match employee contributions at 50% on the first 6% of the employees’ contributions and can elect to make additional contributions over and above the mandatory match, based on the amount it deems appropriate in light of our operating results for any given year. During the fiscal year ended February 2, 2008, our aggregate matching contributions, including both mandatory and additional matching contributions, were approximately $2.4 million, of which $57,000 was contributed for the benefit of our executive officers.

Employee Stock Purchase Plan

 

In 2002, the Company adopted a new stock purchase plan (replacing our 1993 employee stock purchase plan) to continue to provide all eligible employees at all levels an opportunity to become stockholders of the Company. As an inducement, eligible employees may purchase shares of stock in the Company during each exercise period at a 15% discount to the value of the stock. This plan was amended and restated in 2004 to address certain technical amendments. The executive officers are eligible to participate in this stock purchase plan.

 

Health and Welfare Benefits

 

Our executive officers also are eligible to participate in the health and dental coverage, life insurance, paid vacation and holiday and other programs that are generally available to all of our employees.

 

Perquisites and Other Benefits

 

We do not provide significant perquisites or personal benefits to executive officers. We do offer to pay for an annual physical examination for certain officers, which includes all NEOs. The cost of the annual physical is immaterial and we believe the Company benefits from this perquisite because it helps to mitigate the risk of losing the services of a member of senior management due to otherwise undetected health issues. We value perquisites at their incremental cost to us in accordance with SEC regulations, and the NEOs are allowed to reimburse us for such perquisites at their incremental cost to us to the extent that limitations on personal use are exceeded. These amounts are reflected in the Summary Compensation Table below.

 

Deferred Compensation Plan

 

The Company has adopted two unfunded, nonqualified plans that permit executive officers to defer current compensation for retirement savings, one of which relates to deferrals made through December 31, 2004 and related earnings and the other of which relates to deferrals since January 1, 2005 and related earnings. Pursuant to the deferred compensation plans, participants have been allowed to defer all or a portion of qualifying remuneration payable by us. Under each plan, a book account is then maintained for each such executive officer in which there is an accounting of such deferred compensation and deemed earnings thereon based upon selection of deemed investment options by the executive officer. The Company has not made any matching funds or other contribution to any participant’s account. In accordance with the terms of each of the plans, the deferral must be placed in a “rabbi” trust. This trust arrangement offers a degree of assurance for ultimate payment of benefits without causing constructive receipt of the deferral or earnings thereon for income tax purposes. The assets in the trust remain subject to the claims of our creditors and are not the property of the executive officer. This provides further incentive to the executive officer to drive future performance.

 

Section 409A of the Internal Revenue Code (the “Code”) imposes restrictions on the funding of, distributions made under, and elections to participate in, nonqualified deferred compensation arrangements. Although we believe that we are operating in compliance with the statutory provisions relating to Section 409A that are currently effective and although we are in the process of completing documents to reflect appropriate modifications to the applicable plan, the statute and its regulations are complex and subject to further interpretation and uncertainty. Thus, it is possible that we will have to make additional adjustments to our nonqualified deferred compensation arrangements to comply with the applicable rules as further interpretations are issued.

 

Severance and Change in Control Benefits

 

The Committee, based on research and experience, has concluded that we must offer reasonable severance benefits in order to attract and retain highly skilled officers. These severance benefits should reflect the fact that our competition offers comparable benefits and that it may be difficult for such officers to find comparable employment within a short period of time following severance.

 

Certain of the executive officers have employment agreements that provide for severance benefits which trigger in connection with certain employment terminations, with separate provisions that would govern a severance associated with a change in control. In particular, these contractual severance benefits are extended to the following

executive officers: Scott A. Edmonds, the Chief Executive Officer; Patricia Murphy Kerstein, the former Chief Merchandising Officer; and Charles L. Nesbit, Jr., the Chief Operating Officer. The principal terms of these employment agreements and the related severance benefits are described beginning on page 52 of this proxy statement.

 

In fiscal 2007, the Company adopted an officer severance plan. This plan, which applied to all officers (other than those officers who had a superseding individual agreement), sets forth the severance benefits for which such officers are eligible upon the occurrence of certain termination of employment events. The plan is on file with the Securities and Exchange Commission, as required, and its material terms are summarized on page 60 of this proxy statement. In fiscal 2007, Michael Leedy was the only NEO who received any severance as a result of the severance plan.

 

Tally Sheets

 

With respect to fiscal 2007 compensation, the Committee utilized a tally sheet of all compensation and maximum potential payouts when approving compensation matters. Through the use of such tally sheet, the Committee reviewed all components of the compensation of our CEO, CFO, and other NEOs, including base salary and annual cash incentive compensation as well as long term equity based incentive compensation and accumulated realized and unrealized equity award gains.

 

Other Matters

 

Share Retention Guidelines; Hedging Prohibition

 

The Company has adopted stock ownership guidelines for all officers and directors, including the NEOs. Compliance with the ownership guidelines are reviewed at least annually by the Committee. The current guidelines include: (i) CEO – ownership equal to three times prior year’s salary; (ii) other covered officers – ownership equal to one to two times prior year’s salary; and (iii) non-employee directors – ownership equal to three times annual retainer.

 

Through fiscal 2007, the guidelines provided that covered officers and directors had a period of three years in which to satisfy the guidelines, either from the date of adoption of the policy in October 2005, or the date of such person’s appointment to a qualifying position, whichever is later. Shares counted toward this requirement will be based on shares owned outright as well as shares otherwise beneficially owned by such officer or director (as beneficial ownership is defined by the SEC’s rules and regulations) and the value of the gain on vested but unexercised in-the-money options. Unvested restricted shares and unvested options awarded under our stock incentive plan are not counted for these purposes. Officers and directors are not permitted to hedge their economic exposures to the Company stock that they own. In fiscal 2008, the guidelines were amended as more thoroughly described below.

 

Deductibility of Executive Compensation

 

Section 162(m) of the Internal Revenue Code prohibits publicly held companies, such as us, from deducting certain compensation to any one NEO in excess of $1,000,000 during the tax year. However, Section 162(m) provides that, to the extent that compensation is based on the attainment of performance goals set by the Committee pursuant to plans approved by our stockholders, the cash compensation is not included for purposes of arriving at the $1,000,000.

 

The Company may seek to qualify executive compensation as tax deductible to the extent feasible and where we believe it is in the best interests of the Company and its stockholders but we have not adopted a policy that all compensation must be deductible. In particular, our annual cash incentive compensation awards currently count against the Section 162(m) limitation on deductible compensation because we have not sought to have our cash incentive bonus plan approved by our stockholders, allowing the Committee to keep flexibility to use judgment to adjust awards (up or down) based on evaluations of individual performance and contribution. Thus, to the extent the cash incentive compensation awards in combination with salaries and certain other compensation elements for any NEO exceeds $1,000,000, such compensation will not be deductible. However, we do not anticipate that any

significant portion of the applicable compensation for the NEO will exceed the $1,000,000 limit and thus any amount that may not be deductible should be a relatively small portion of the cash compensation paid to the NEO.

 

The Company is permitted to and reserves the right to pay other amounts that are not tax deductible to meet the design goals of our executive compensation program. In any event, because of the uncertainties associated with the application and interpretation of Section 162(m) and the regulations issued thereunder, there can be no assurance that compensation intended to satisfy the requirements for deductibility under Section 162(m) will in fact be deductible.

 

2008 Compensation Framework

 

For 2008, the Company implemented several noteworthy changes in compensation arrangements for its executive officers.

 

First, the Committee decided to target base salaries to the 50th percentile of the relevant market. Previously, base salaries were targeted between the 50th and 75th percentiles. We may deviate from this targeted positioning as necessary to attract or retain a key executive. Although no base salaries were reduced as a result of this change, we expect salaries will approach this target over time.

 

Second, as discussed more fully on page 38, the Committee made changes in the performance criteria and weightings under the Company’s cash incentive bonus plan. In evaluating the effectiveness of our fiscal 2007 bonus program, the Committee concluded that the performance measures should be changed in order to better drive associate behaviors necessary to stimulate growth in sales and brand operating margins, improve return on invested capital, and grow earnings per share. In addition, bonus payouts for all officers as well as for all director level associates in shared services will change from semi-annual to annual. All other eligible associates will continue to receive bonus payouts on a semi-annual basis.

 

Third, the Company entered into “Clawback” Agreements with the CEO, CFO, and Chief Accounting Officer. Under these Agreements, which have been filed with the SEC, each Participant is required to reimburse the Company for incentive compensation previously paid to the Participant under any of the Company’s executive bonus programs if within two years from the date of payment of such incentive compensation, the Company is required to prepare an accounting restatement due to material noncompliance of the Company with any then applicable financial reporting requirement under the securities laws as a result of misconduct by the Participant and/or gross negligence by the Participant in failing to prevent the misconduct or if the Participant is otherwise subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002. The Committee believes that the officers who certify the Company’s financial reporting should not be unjustly enriched in the event of a restatement.

 

Fourth, the Company amended its Stock Ownership Guidelines. The amendments eliminated the established timeframes to meet the Guidelines. The amendments also require officers and directors to hold at least 25% of all shares obtained as a result of a stock option exercise or the vesting of restricted shares until such time as the officer or director is in compliance with the Guidelines.

 

Otherwise, all compensation programs are largely unchanged from fiscal 2007.

 

The following table includes information concerning compensation for fiscal years 2005, 2006 and 2007 in reference to the NEOs, which includes the Company’s principal executive officer, the persons who served as the Company’s principal financial officers during fiscal 2007, the three most highly compensated executive officers of the Company other than the principal executive officer and the principal financial officers and two other persons who would have been among the three most highly compensated executive officers but who were not serving as executive officers at the end of fiscal 2007. A description of the material terms of the employment agreements for each of the NEOs, including a description of potential post employment payments, appears below under the headings “Employment Agreements” and “Potential Payments Upon Termination or Change in Control.

 

 

 

 

The following table sets forth certain information with respect to the equity and non-equity awards granted during or for the fiscal year ended February 2, 2008 to each of our executive officers listed in the Summary Compensation Table.