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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED
FEBRUARY 2, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM______ TO _____
COMMISSION FILE NO. 1-8899
CLAIRE'S STORES, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 59-0940416
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 S.W. 129TH AVENUE, PEMBROKE PINES, FLORIDA 33027
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 433-3900
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- ---------------------------- -----------------------------
Common Stock, $.05 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
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Class A Common Stock, $.05 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 31, 2002, the aggregate market value of the 42,555,628 shares of
Class A Common Stock and Common Stock held by non-affiliates of the registrant
was $828,983,000. All outstanding shares of Class A Common Stock and Common
Stock, except for shares held by executive officers and members of the Board of
Directors and their affiliates, are deemed to be held by non-affiliates.
At March 31, 2002, there were outstanding 45,951,557 shares of registrant's
Common Stock, $.05 par value, and 2,828,909 shares of the registrant's Class A
Common Stock, $.05 par value, including Treasury Shares.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the 2002 Annual Meeting of Stockholders, to be filed
no later than 120 days after the end of the registrant's fiscal year covered by
this report, is incorporated by reference into Part III of this report.
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TABLE OF CONTENTS
ITEM PAGE NO.
- ---- --------
PART I
1. Business........................................................3
2. Properties......................................................6
3. Legal Proceedings...............................................7
4. Submission of Matters to a Vote of Security Holders.............7
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................8
6. Selected Financial Data.........................................9
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................10
7A. Quantitative and Qualitative Disclosures About
Market Risk....................................................23
8. Financial Statements and Supplementary Data....................23
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................44
PART III
10. Directors and Executive Officers of the Registrant.............44
11. Executive Compensation.........................................44
12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.................44
13. Certain Relationships and Related Transactions.................44
PART IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................................44
2
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995, or the Act, provides a
safe harbor for "forward-looking statements" made by or on our behalf. We and
our representatives may from time to time make written or verbal forward-looking
statements, including statements contained in this and other filings with the
Securities and Exchange Commission and in our press releases and reports to
shareholders. All statements which address operating performance, events or
developments that we expect or anticipate will occur in the future, including
statements relating to new store openings, customer demand, future operating
results, are forward-looking statements within the meaning of the Act and as
defined in Section 21E of the Securities Exchange Act of 1934, as amended. The
forward-looking statements are and will be based on management's then current
views and assumptions regarding future events and operating performance, and we
assume no obligation to update any forward-looking statement. Forward-looking
statements involve known or unknown risks, uncertainties and other factors which
may cause our actual results, performance or achievements, or industry results
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Factors that could
cause or contribute to such differences include but are not limited to:
fluctuations in sales and same-store sales results, fashion trends, dependence
on foreign suppliers, competition from other retailers, relationships with mall
developers and operators, general economic conditions, success of joint ventures
and relationships with and reliance upon third parties, uncertainties generally
associated with specialty retailing, and the other factors referred to herein
including, but not limited to, the items discussed in Part II, Item 7 under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Certain Risk Factors Relating to our Business." Unless the
context requires otherwise, all references to the "company", "we", "us" or "our"
include Claire's Stores, Inc. and its subsidiaries.
PART I
ITEM 1. BUSINESS
GENERAL
We are a leading mall-based retailer of popular-priced fashion accessories for
pre-teens and teenagers through our wholly-owned subsidiaries, Claire's
Boutiques, Inc., which also operates through its Icing by Claire's division
(formerly Afterthoughts), Claire's Puerto Rico Corp., Claire's Canada Corp.,
Claire's Accessories UK Ltd., Bijoux One Trading AG (Bijoux), Claire's France
and through our 50%-owned joint venture Claire's Nippon Co., Ltd. We are
primarily organized based on our geographic markets, which include our North
American operations and our international operations.
We also own Lux Corp. (Mr. Rags), a mall-based retailer of popular-priced
apparel for teenagers. In January 2002, our Board of Directors authorized the
disposition of the Mr. Rags stores and, among other alternatives, plans to sell
Lux Corp. by the end of this fiscal year. As of March 31, 2002, we operated 155
Mr. Rags stores in the United States. The operations of Mr. Rags have been
accounted for as a discontinued operation in our consolidated financial
statements and accordingly, our business description generally does not include
Mr. Rags.
As of March 31, 2002, we operated a total of 2,877 stores in all 50 states of
the United States, Canada, the Caribbean, the United Kingdom, Switzerland,
Austria, Germany, France, Ireland and Japan. The stores are operated mainly
under the trade names "Claire's Boutiques", "Claire's Accessories",
"Afterthoughts", "The Icing", "Icing by Claires", and "Bijoux One". We are in
the process of transitioning our "Afterthoughts" stores to "Icing by Claire's"
stores to capitalize on the Claire's brand name.
RECENT ACQUISITIONS AND REINCORPORATION
In February 2000, we acquired Cleopatre S.A. (France), a privately held 42-store
fashion accessory chain with its headquarters in Paris, France. In December
1999, we acquired Afterthoughts, a 768-store fashion accessory chain operating
as a division of the Venator Group, Inc. In June 2000, we completed our
reincorporation from the state of Delaware to the State of Florida through a
merger transaction with one of our wholly-owned subsidiaries.
3
BUSINESS DESCRIPTION
We specialize in selling popular-priced fashion accessories designed to
predominantly appeal to pre-teen and teenage females. Our merchandise typically
ranges in price between $2 and $20, with the average product priced at about $4.
Our stores share a similar format and our different trade names allow us to have
multiple store locations in a single mall. Although we face competition from a
number of small specialty store chains and others selling fashion accessories,
we believe that our stores comprise the largest and among the most successful
chain of specialty retail stores in the world, devoted to the sale of
popular-priced pre-teen and teenage fashion accessories.
As a result of our decision to discontinue the operations of Mr. Rags, which
comprised our apparel stores, our operations are divided into two principal
product categories:
o Jewelry--Costume jewelry, earrings and ear piercing services; and
o Accessories--Other fashion accessories, hair ornaments, totebags and
novelty items.
The following table compares our sales of each product category for the last
three fiscal years (dollars in thousands):
FISCAL YEAR ENDED
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FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
---------------------------- ----------------------------- -----------------------------
Jewelry $425,494 46.3% $473,989 50.1% $360,812 47.2%
Accessories 493,243 53.7% 472,726 49.9% 404,036 52.8%
-------------- ------------ --------------- ------------ --------------- ------------
$918,737 100.0% $946,715 100.0% $764,848 100.0%
============== ============ =============== ============ =============== ============
A summary of North American and international operations is presented below
(dollars in thousands):
FISCAL YEAR ENDED
----------------------------------
2002 2001 2000
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REVENUES
North American operations $711,299 $764,154 $625,652
International operations 207,438 182,561 139,196
-------- -------- --------
Total revenues $918,737 $946,715 $764,848
======== ======== ========
LONG-LIVED ASSETS
North American operations $315,740 $340,245 $375,379
International operations 81,411 68,509 36,702
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Total long-lived assets $397,151 $408,754 $412,081
======== ======== ========
SEASONALITY
Sales of each category of merchandise vary from period to period depending on
current fashion trends. We experience traditional retail patterns of peak sales
during the Christmas, Easter and back-to-school periods. Sales, as a percentage
of total sales in each of the four quarters of the fiscal year ended February 2,
2002 were 23%, 24%, 22% and 31% in the first, second, third and fourth quarters,
respectively.
4
EMPLOYEES
On March 31, 2002, we had approximately 16,300 employees, 56% of whom were
part-time. Part-time employees typically work up to 20 hours per week. We do not
have collective bargaining agreements with any labor unions and we consider
employee relations to be good.
STORES
Our stores in North America are located primarily in enclosed shopping malls.
Our stores in North America operating as "Claire's Boutiques" and "Claire's
Accessories" average approximately 1,000 square feet while those stores
operating as "The Icing", "Icing by Claire's" and "Afterthoughts" average
approximately 1,200 square feet. Our stores in the United Kingdom, Switzerland,
Austria, Germany, France, Ireland and Japan average approximately 600 square
feet and are located primarily in enclosed shopping malls and central business
districts. Each store uses our proprietary displays, which permit the
presentation of a wide variety of items in a relatively small space.
Our stores are distinctively designed for customer identification, ease of
shopping and quantity of selection. Store hours are dictated by the mall
operators and the stores are typically open from 10:00 A.M. to 9:00 P.M., Monday
through Saturday, and, where permitted by law, from Noon to 5:00 P.M. on Sunday.
Approximately 79% of sales are made in cash, with the balance made by credit
cards. We permit, with restrictions on certain items, returns for exchange or
refund.
PURCHASING AND DISTRIBUTION
We purchase our merchandise from approximately 1,300 suppliers. We are not
dependent on an individual vendor for merchandise purchased. Substantially all
of the costume jewelry and fashion accessories that we sell are purchased from
importers or imported directly. All merchandise is shipped from suppliers to our
distribution facility in Hoffman Estates, Illinois, a suburb of Chicago, which
services the North American stores, or the distribution facility in Birmingham,
England, which services the stores in the United Kingdom, Ireland and France, or
the distribution facilities in Zurich, Switzerland, Vienna, Austria, or
Grossostheim, Germany, which service the stores in Switzerland, Austria and
Germany, respectively. After inspection, merchandise is shipped via common
carrier to the individual stores. Stores typically receive three to five
shipments a week.
STORE MANAGEMENT
Except as stated below, our Executive Vice President of Store Operations is
responsible for managing our North American stores and reports directly to our
Chief Executive Officer. We currently employ 220 District Managers in North
America, each of whom oversees approximately 10 stores in his or her respective
geographic area and reports to one of 19 Regional Managers. Each Regional
Manager reports to one of 6 Territorial Vice Presidents, who reports to the
Executive Vice President of Store Operations. Each store is staffed by a
Manager, an Assistant Manager and one or more part-time employees. A majority of
the District Managers have been promoted from within the organization, while a
majority of the Regional Managers were hired externally. All of the Territorial
Vice Presidents were promoted from within the organization. The reporting
structure for our stores in the UK and Europe is similar to the reporting
structure in North America. The Presidents of Claire's France and Bijoux report
to the Chief Executive Officer of Europe, who reports to the Chief Executive
Officer of Claire's Stores, our parent company. In Europe, there are a total of
5 Regional Managers and 60 District Managers.
5
STORE OPENINGS, CLOSINGS AND FUTURE GROWTH
For the fiscal year ended February 2, 2002, which is referred to as Fiscal 2002,
we expanded our operations by 58 stores, net, in the United Kingdom, resulting
in a total of 414 stores, by 16 stores, net, in Bijoux, resulting in a total of
87 stores, and by 15 stores, net, in France, resulting in a total of 57 stores.
In North America, we decreased our operations by 82 stores, net to 2,220 stores.
We plan to increase our operations by opening approximately 10 stores, net, in
North America, 55 stores, net, in the United Kingdom, 50 stores, net, in France
and 19 stores, net, in Bijoux during the fiscal year ending February 1, 2003,
which is referred to as Fiscal 2003. In Fiscal 2002, we and our joint venture
partner, Aeon Co. Ltd. (formerly known as Jusco Co., Ltd.), a Japanese company,
reduced our operations in Japan by 5 stores to 97 stores. There are 2 store
openings planned in Japan in Fiscal 2003. Net stores refers to stores opened,
net of closings, if any.
We closed 632 stores in the last three fiscal years, primarily due to certain
locations not meeting our established profit benchmarks or the unwillingness of
landlords to renew leases on terms acceptable to us, and the elimination of
stores in connection with our acquisition of Afterthoughts, as well as the
process discussed below. We have not experienced any substantial difficulty in
renewing desired store leases and have no reason to expect any such difficulty
in the future. For each of the last three fiscal years, no individual store
accounted for more than one percent of total sales.
In December 1999, as a result of our acquisition of Afterthoughts, we began
eliminating redundant field operations and optimizing square footage in North
America. In connection with this plan, we closed 430 stores and expect to close
or not renew the leases for approximately 50 additional stores in Fiscal 2003.
We plan to continue opening stores when suitable locations are found and
satisfactory lease negotiations are concluded. Our initial investment in new
stores opened during Fiscal 2002, which includes leasehold improvements and
fixtures, averaged approximately $91,000 per store.
Our continued growth depends on our ability to open and operate stores on a
profitable basis. Our ability to expand successfully will be dependent upon a
number of factors, including sufficient demand for our merchandise in existing
and new markets, our ability to locate and obtain favorable store sites and
negotiate acceptable lease terms, obtain adequate merchandise supply and hire
and train qualified management and other employees.
ITEM 2. PROPERTIES
Our stores are located in all 50 states of the United States, Puerto Rico,
Canada, the United Kingdom, Switzerland, Austria, Germany, France, Ireland and
Japan. We lease all of our 2,877 store locations, generally for terms of seven
to ten years (up to 25 years in Europe). Under the leases, we pay a fixed
minimum rent and/or rentals based on gross sales in excess of specified amounts.
We also pay certain other expenses (e.g., common area maintenance charges and
real estate taxes) under the leases. The internal layout and fixtures of each
store are designed by management and constructed under contracts with third
parties. At March 31, 2002, we also operated 155 Mr. Rags stores in the U.S.
which have been accounted for as a discontinued operation.
Most of our stores in North America are located in enclosed shopping malls,
while some stores are located within central business districts and others are
located in "open-air" outlet malls or "strip centers". Our criteria for new
stores includes geographic location, demographic aspects of communities
surrounding the store site, quality of anchor tenants, advantageous location
within a mall, appropriate space availability and proposed rental rates. We
believe that sufficient desirable locations are available to accommodate our
expansion plans. We refurbish our existing stores on a regular basis.
6
We own central buying and store operations offices and North American
distribution center located in Hoffman Estates, Illinois which is on
approximately 24.8 acres. The property has buildings with approximately 520,000
total square feet of space, of which 404,000 square feet is devoted to receiving
and distribution and 116,000 square feet is devoted to office space.
Our subsidiary, Claire's Accessories UK Ltd., or UK, leases distribution and
office space in Birmingham, England. The facility consists of 25,000 square feet
of office space and 60,000 square feet of distribution space. The lease expires
on December 2024 and UK has the right to assign or sublet this lease at any time
during the term of the lease. UK also has a lease for 26,000 square feet of
office and distribution space which it occupied prior to its current location.
UK intends to utilize this space to support its growing needs for distribution
to Ireland and France, but also has the right to assign or sublet the old lease.
Our stores operated by our subsidiary, Bijoux One Trading AG, or Bijoux, are
serviced by distribution centers and offices in Zurich, Switzerland, Vienna,
Austria and Grossostheim, Germany. The facility maintained in Zurich,
Switzerland consists of 13,700 square feet devoted to distribution and 8,500
square feet devoted to offices. The lease for this location expires on December
31, 2006. In Vienna, Austria, the facility consists of 18,100 square feet
devoted to distribution and 3,400 square feet devoted to offices. The lease on
this facility does not have an expiration date but can be terminated by Bijoux
with six months notice to the landlord. In Grossostheim, Germany, the facility
consists of 1,700 square feet devoted to offices and 3,200 square feet not yet
in use, which could be used for distribution and/or offices. The lease for this
facility does not have an expiration date but can be terminated by Bijoux with
six months notice to the landlord.
We lease from Rowland Schaefer & Associates (formerly Two Centrum Plaza
Associates) approximately 33,000 square feet in Pembroke Pines, Florida, where
we maintain our executive, accounting and finance offices. The lease provides
for the payment of annual base rent of approximately $608,000, which is subject
to annual cost-of-living increases, and a proportionate share of all taxes and
operating expenses of the building. We exercised a five year renewal option
under the lease, which now expires on July 31, 2005. See note 11 entitled
"Related Party Transactions" to our consolidated financial statements included
in this report of Form 10-K.
We also own 10,000 square feet of warehouse space in Miami, Florida. The
property is being utilized as a storage facility. We also lease executive office
space in New York City and are the owner of a cooperative apartment in New York
City.
ITEM 3. LEGAL PROCEEDINGS
We are, from time to time, involved in routine litigation incidental to the
conduct of our business including proceedings to protect our trademark rights,
litigation instituted by persons injured upon premises within our control and
litigation with present and former employees. We believe that such pending
litigation will not have a significant impact on our financial position,
earnings or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of Fiscal 2002.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
We have two classes of common stock, par value $.05 per share, outstanding:
common stock having one vote per share and Class A common stock having ten votes
per share. The common stock is traded on the New York Stock Exchange, Inc. under
the symbol CLE. The Class A common stock has only limited transferability and is
not traded on any stock exchange or in any organized market. However, the Class
A common stock is convertible on a share-for-share basis into common stock and
may be sold, as common stock, in open market transactions. The following table
sets forth, for each quarterly period within the last two fiscal years, the high
and low closing prices of the common stock on the NYSE Composite Tape. At March
31, 2002, the approximate number of record holders of shares of common stock and
Class A common stock was 1,488 and 505, respectively.
CLOSING
OF
COMMON STOCK
--------------------------------------
HIGH LOW
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YEAR ENDED FEBRUARY 2, 2002
First Quarter $20.27 $16.65
Second Quarter 22.65 17.00
Third Quarter 17.37 11.69
Fourth Quarter 18.80 12.51
YEAR ENDED FEBRUARY 3, 2001
First Quarter $22.30 $15.97
Second Quarter 22.41 16.06
Third Quarter 22.77 16.13
Fourth Quarter 24.94 15.63
We have paid regular quarterly dividends to our shareholders on the common stock
since 1985 and on the Class A common stock since July 1994. Our board of
directors, in its sole discretion, has determined the distribution rate based on
our results of operations, economic conditions, tax considerations and other
factors. In Fiscal 2001 and Fiscal 2002, we paid quarterly cash dividend
distributions each year (four in the amount of $.04 per share of common stock
each year and four in the amount of $.02 share of Class A common stock each
year) totaling $.16 per share of common stock each year and $.08 per share of
Class A common stock each year. We expect to continue paying dividends. However,
there is no assurance that we will be able to continue to do so because the
declaration and payment of dividends are subject to various factors, including
contingencies such as our earnings and financial condition and other factors our
Board of Directors consider relevant as well as certain limitations on our
ability to make dividend distributions that could become effective if we fail to
meet specified financial covenants under our credit facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
8
ITEM 6. SELECTED FINANCIAL DATA
The balance sheet and income statement data set forth below is derived from our
consolidated financial statements and should be read in conjunction with our
consolidated financial statements included in Part II, Item 8 of this report on
Form 10-K, and in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in this report. The
consolidated balance sheet data as of January 29, 2000, January 30, 1999, and
January 31, 1998 and the consolidated income statement for each of the two
fiscal years in the period ended January 30, 1999 and January 31, 1998 are
derived from our consolidated financial statements, which are not included
herein.
Fiscal Year Ended
----------------------------------------------------------------
FEB. 2, FEB. 3, JAN. 29, JAN. 30, JAN. 31,
2002 (3) 2001(1)(3) 2000(3) 1999(2)(3) 1998(3)
-------- -------- -------- -------- --------
(In thousands except per share amounts)
Operating Statement Data:
Net Sales $918,737 $946,715 $764,848 $605,784 $500,152
Income from continuing operations 41,126 67,772 93,203 68,340 58,189
Net Income 19,583 64,975 87,935 62,280 59,595
Income Per Share:
Basic:
From continuing operations $ 0.84 $ 1.36 $ 1.83 $ 1.35 $ 1.21
Net income 0.40 1.30 1.72 1.23 1.19
Diluted:
From continuing operations $ 0.84 $ 1.35 $ 1.82 $ 1.34 $ 1.21
Net income 0.40 1.30 1.71 1.22 1.17
Cash Dividends
Share:
Common stock $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.12
Class A Common stock 0.08 0.08 0.08 0.08 0.06
Balance Sheet Data:
Current assets $214,424 $265,964 $297,283 $245,919 $204,129
Current liabilities 82,536 94,452 91,676 67,490 46,494
Working capital 131,888 171,512 205,607 178,429 157,635
Total assets 611,575 660,261 695,292 392,218 306,269
Long-term debt 110,104 151,374 192,000 -- --
Stockholders' equity 404,188 399,700 398,786 314,218 257,258
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(1) Consists of 53 weeks.
(2) We adopted a plan to discontinue the operations of our Just Nikki catalog
segment in January 1999.
(3) We adopted a plan to discontinue the operations of Mr. Rags (Lux Corp.) in
January 2002. See Note 3 to the consolidated financial statements for
additional information.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and notes thereto included in Part II, Item 8 of this
report on Form 10-K. The following Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including changes in estimates and judgments used in
preparing our financial statements set forth under "Critical Accounting Policies
and Estimates" and the factors set forth under "Certain Risk Factors Relating to
our Business" in this section.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to inventories, investments, intangible assets, income taxes, financing
operations, contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements.
Inventory Valuation--We mark down our inventory for estimated unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory markdowns may be required, which could
reduce our margins and operating results. Management records these inventory
markdowns periodically based on the various assumptions, including customer
demand and preferences. Our success is largely dependent upon management's
ability to gauge the fashion tastes of our customers and provide merchandise
that satisfies customer demand. Any failure to provide appropriate merchandise
in quantities that mirror demand could increase future inventory write-downs.
Additionally, our inventories are valued using the retail method in North
America and Bijoux, and average cost in the United Kingdom and France.
Fluctuations in demand for inventory affect the value of our inventory.
Asset Impairment-- We invest in property and equipment in connection with the
opening and remodeling of stores. We evaluate the recoverability of these assets
periodically and record an impairment charge when we believe the cash flow may
not be sufficient to recover the assets. Future adverse changes in market
conditions or poor operating results of underlying assets could result in losses
or an inability to recover the carrying value of the investments that may not be
reflected in an investment's current carrying value, thereby possibly requiring
an impairment charge in the future. In addition, we make investments through our
international subsidiaries in intangible assets upon the acquisition and opening
of many of our store locations in Europe. We evaluate the market value of these
assets periodically and record an impairment charge when we believe an asset has
experienced a decline in value that is other than temporary.
Goodwill Impairment--We continually evaluate whether events and changes in
circumstances warrant revised estimates of useful lives or recognition of an
impairment loss of unamortized goodwill. The conditions that would trigger an
impairment assessment of unamortized goodwill include a significant, sustained
negative trend in our operating results or cash flows, a decrease in demand for
our products, a change in the competitive environment and other industry and
economic factors. We measure impairment of unamortized goodwill utilizing the
discounted cash flow method. The estimated cash flows are then compared to our
goodwill amounts. If the unamortized balance of the goodwill exceeds the
estimated cash flows, the excess of the unamortized balance is written off.
Future cash flows may not meet projected amounts, which could result in
impairment. We will adopt SFAS No. 142 in the first quarter of Fiscal 2003. With
the adoption of SFAS No. 142, we will assess the impact based on a two-step
10
approach to assess goodwill based on applicable reporting units and will
reassess any intangible assets, including goodwill, recorded in connection with
our previous acquisitions. We recorded approximately $8.7 million of
amortization on goodwill during Fiscal 2002 and would have recorded
approximately $8.6 million of amortization during Fiscal 2003 had SFAS No. 142
not been adopted. In lieu of amortization, we are required to perform an initial
impairment review of our goodwill in Fiscal 2003 and an annual impairment review
thereafter. We are currently assessing, but have not yet determined the impact
the adoption of SFAS No. 142 will have on our consolidated financial statements.
As of February 2, 2002, we had unamortized goodwill of approximately $193.1
million.
Accounting for Leases -- We finance certain leasehold improvements and equipment
used in our stores through transactions accounted for as non-cancelable
operating leases. As a result, the rental expense for these leasehold
improvements and equipment is recorded during the term of the lease contract in
our consolidated financial statements, generally over four to seven years. In
the event that any of the real property leases where leasehold improvements or
equipment is located that are subject to these non-cancelable operating leases
is terminated by us or our landlord prior to the scheduled expiration date of
the real property lease, we will be required to accrue all future rent payments
under these operating leases as a charge against our earnings in the year of
termination.
Deferred Taxes--We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. While we have
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance, in the event we were
to determine that we would not be able to realize our deferred tax assets in the
future, an adjustment to the valuation allowance would be made. Likewise, should
we determine that we would not be able to realize all or part of a net deferred
tax asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made.
CERTAIN RISK FACTORS RELATING TO OUR BUSINESS
The following are some of the factors that could cause actual results to differ
materially from estimates contained in our forward-looking statements:
FLUCTUATIONS IN CONSUMER PREFERENCE AND ECONOMIC CONDITIONS AFFECT THE DEMAND OF
OUR PRODUCTS
Our retail jewelry and fashion accessories business fluctuates according to
changes in consumer preferences which are dictated in part by fashion and
season. In addition, certain economic conditions affect the level of consumer
spending on merchandise that we offer, including, among others, business
conditions, unemployment levels, interest rates, energy costs, taxation rates
and consumer confidence in future economic conditions. Consumer preference and
economic conditions may differ or change from time to time in each market in
which we operate and negatively affect our net sales and profitability.
PURCHASES IN ADVANCE OF MERCHANDISE INVENTORY, EXCESSIVE MARKDOWNS,
INTERRUPTIONS IN DISTRIBUTION AND MATERIAL INVENTORY SHRINKAGE MAY NEGATIVELY
IMPACT OUR PROFITABILITY
Fluctuations in the demand for retail fashion accessories and apparel especially
affect the inventory we own because we usually order our merchandise well in
advance of the applicable season and sometimes before fashion trends are
identified or evidenced by customer purchases. In addition, the cyclical nature
of the retail business requires us to carry a significant amount of inventory,
especially prior to peak selling seasons when we and other retailers generally
build up inventory levels. We must enter into contracts for the purchase and
manufacture of merchandise with our suppliers well in advance of the applicable
selling season. As a result, we are vulnerable to demand and pricing shifts and
to suboptimal selection and timing of merchandise purchases.
We review our inventory aging in order to identify slow-moving merchandise and
use markdowns to clear merchandise. Markdowns may be used if inventory exceeds
customer demand for reasons of style, seasonal adaptation, changes in customer
preference or lack of consumer acceptance of fashion items, or if it is
determined that the inventory in stock will not sell at its currently marked
price. Such markdowns may have an adverse impact on earnings, depending on the
extent of the markdowns and amount of inventory affected.
11
Distribution functions for all of our North American stores are handled from our
distribution center in Hoffman Estates, Illinois. Distribution functions for all
of our stores in the United Kingdom, France and Ireland are handled from our
distribution center in Birmingham, United Kingdom. Any significant interruption
in the operation of these distribution centers, due to natural disaster or
otherwise, would have a material effect on our business, financial condition and
results of operations.
We have a loss prevention program in order to control inventory shrinkage,
including surveillance systems, education of store personnel and monitoring of
returns. However, there can be no assurance that these safeguards will prevent
or adequately limit inventory shrinkage. Any material inventory shrinkage would
have a material adverse effect on our net sales and profitability.
FLUCTUATIONS IN SAME-STORE NET SALES MAY AFFECT THE PRICE OF OUR STOCK
Our comparable same-store net sales results have fluctuated in the past, on a
monthly, quarterly and annual basis, and are expected to continue to fluctuate
in the future. A variety of factors affect our same-store net sales results,
including changes in fashion trends, changes in our merchandise mix, calendar
shifts of holiday periods, actions by competitors, weather conditions and
general economic conditions. Our comparable store net sales results for any
particular fiscal month, fiscal quarter or fiscal year in the future may
decrease. As a result of these or other factors, our future comparable store net
sales results are likely to have a significant effect on the market price of our
common stock because investors may look to our same-store net sales results to
determine how we performed from period to period absent sales attributable to
new stores.
STORE OPERATIONS AND EXPANSION MAY AFFECT OUR ABILITY TO INCREASE NET SALES AND
OPERATE PROFITABLY
Our continued success depends, in part, upon our ability to increase sales at
existing store locations, to open new stores and to operate stores on a
profitable basis and to maintain good relationships with mall developers and
operators. Because we are primarily a mall-based retailer, our future growth is
significantly dependent on our ability to open new stores in desirable
locations, including malls. Our ability to open new stores depends on a number
of factors, including our ability to locate and obtain favorable store sites
primarily in malls, negotiate acceptable lease terms, obtain adequate supplies
of merchandise and hire and train qualified employees. Our ability to operate
stores on a profitable basis depends on, among other factors, whether we have to
take additional merchandise markdowns due to excessive inventory levels compared
to sales trends, and whether we can reduce the number of under-performing stores
which have a higher level of fixed costs in comparison to net sales. There can
be no assurance that our growth will result in enhanced profitability or that we
will achieve our targeted growth rates with respect to new store openings.
THE FAILURE TO EXECUTE OUR INTERNATIONAL EXPANSION OR SUCCESSFULLY INTEGRATE OUR
INTERNATIONAL OPERATIONS MAY IMPEDE OUR STRATEGY OF INCREASING NET SALES AND
ADVERSELY AFFECT OUR OPERATING RESULTS
Our international expansion is an integral part of our strategy to increase our
net sales through expansion. If our international expansion is not successful,
our results of operations are likely to be adversely affected. Our ability to
grow successfully in the continental European market depends in part on
determining a sustainable formula to build customer loyalty and gain market
share in the especially challenging retail environments of France and Germany.
Additionally, the integration of our operations in foreign countries presents
certain challenges not necessarily presented in the integration of our North
American operations, such as integration of information systems. For example, we
currently use the retail method to value our inventory in North America, but use
the average cost method for valuing our inventory in our international
subsidiaries. We are in the process of conforming our inventory valuation
methods in our international subsidiaries to the retail method, which will
require implementing certain procedures and controls, including integration of
our information systems. The failure to expand and integrate our foreign
operations could have a material adverse effect on our operating results and
impede our strategy of increasing our net sales through expansion.
12
A DISRUPTION OF IMPORTS FROM OUR FOREIGN SUPPLIERS MAY INCREASE OUR COSTS AND
REDUCE OUR SUPPLY OF MERCHANDISE
We purchase merchandise from approximately 1,300 domestic and international
suppliers. Approximately 21% of all merchandise units purchased for our North
American stores (representing approximately 35% of total cost) were purchased
domestically and the remaining 79% of all merchandise units (65% of cost) were
purchased from outside the United States. Approximately 38% of our total
merchandise units purchased for our North American stores (representing 36% of
cost) were from China, including Hong Kong, with the remainder coming from 10
other foreign countries. Any event causing a sudden disruption of imports from
China or other foreign countries, including political instability or the
imposition of additional import restrictions, would be likely to have a material
adverse effect on our operations. Substantially all of our foreign purchases of
merchandise are negotiated and paid for in U.S. dollars.
We cannot predict whether any of the countries in which our products currently
are manufactured or may be manufactured in the future will be subject to
additional trade restrictions imposed by the U.S. and other foreign governments,
including the likelihood, type or effect of any such restrictions. Trade
restrictions, including increased tariffs or quotas, embargoes, and customs
restrictions, against merchandise could increase the cost or reduce the supply
of merchandise available to us and adversely affect our business, financial
condition and results of operations. We pursue a diversified global sourcing
strategy that includes relationships with vendors in 12 countries. These
sourcing operations may be adversely affected by political and financial
instability resulting in the disruption of trade from exporting countries,
significant fluctuation in the value of the U.S. dollar against foreign
currencies, restrictions on the transfer of funds and/or other trade
disruptions.
CHANGES IN THE ANTICIPATED SEASONAL BUSINESS PATTERN COULD ADVERSELY EFFECT OUR
SALES AND PROFITS AND OUR QUARTERLY RESULTS MAY FLUCTUATE DUE TO A VARIETY OF
FACTORS
Our business follows a seasonal pattern, peaking during the Christmas, Easter
and back-to-school periods. During Fiscal 2002, these periods accounted for
approximately 30% of our annual sales. Any decrease in sales or margins during
these periods would be likely to have a material adverse effect on our business,
financial condition and results of operations. Seasonal fluctuations also affect
inventory levels, because we usually order merchandise in advance of peak
selling periods. We must carry a significant amount of inventory in anticipation
of these selling periods. Our quarterly results of operations may also fluctuate
significantly as a result of a variety of factors, including the time of store
openings; the amount of revenue contributed by new stores; the timing and level
of mark downs; the timing of store closings, expansions and relocations;
competitive factors; and general economic conditions.
THE USEFUL LIFE AND VALUE OF OUR GOODWILL WILL CONTINUE TO BE REEVALUATED AND
COULD RESULT IN A WRITE-DOWN OF OUR INTANGIBLE ASSETS IN A FUTURE PERIOD
As of February 2, 2002, intangible assets, which include goodwill and other
separately identifiable intangible assets, totaled approximately 32% of our
total assets. During Fiscal 2002, these intangible assets were amortized over 25
years. At the time of or following each acquisition by us, we evaluate each
acquisition and establish an appropriate useful life for all intangible assets
identified based on the specific underlying facts and circumstances of each such
acquisition. Subsequent to such initial evaluation, we annually, or more
frequently if impairment indicators arise, reevaluate such facts and
circumstances to determine if the related intangible asset continues to be
realizable and if the useful life continues to be appropriate. As the underlying
facts and circumstances subsequent to the date of acquisition can change, there
can be no assurance that we will realize the value of such intangible assets. At
February 2, 2002, we did not consider any of the unamortized balance of
intangible assets to be impaired. Any future determination, based on
reevaluation of the underlying facts and circumstances that a significant
impairment has occurred, would require the write-off of the impaired portion of
unamortized intangible assets, which would be likely to have a material adverse
effect on our results of operations.
13
OUR INDUSTRY IS HIGHLY COMPETITIVE
The specialty retail business is highly competitive. We compete with national
and local department stores, specialty and discount store chains, independent
retail stores and internet and catalog businesses that market similar lines of
merchandise. Some competitors have more resources than us. Given the large
number of companies in the retail industry, we cannot estimate the number of our
competitors.
Depth of selection in sizes, colors and styles of merchandise, merchandise
procurement and pricing, ability to anticipate fashion trends and consumer
preferences, inventory control, reputation, quality of merchandise, store design
and location, and customer service are all important factors in competing
successfully in the retail industry.
Our successful performance in recent years has increased the amount of imitation
by other retailers. Such imitation has made and will continue to make the retail
environment in which we operate more competitive.
In addition, our competitive position depends upon a number of factors relating
to consumer spending, including future economic conditions affecting disposable
consumer income such as unemployment, business conditions, interest rates,
energy costs and taxation. A decline in consumer spending on fashion accessories
and apparel could have a material adverse effect on our net sales and
profitability.
A DECLINE IN NUMBER OF PEOPLE WHO GO TO MALLS COULD REDUCE THE NUMBER OF OUR
CUSTOMERS AND REDUCE OUR NET SALES
Substantially all of our North American stores are located in regional shopping
malls. Our sales are derived, in part, from the high volume of traffic in those
malls. We benefit from the ability of the mall's "anchor" tenants, generally
movie theaters, large department stores and other area attractions to generate
consumer traffic around our stores and the continuing popularity of malls as
shopping destinations for pre-teens and teenagers. Sales volume and mall traffic
may be adversely affected by economic downturns in a particular area,
competition from non-mall retailers, other malls where we do not have stores and
the closing of anchor tenants in a particular mall. In addition, a decline in
the popularity of mall shopping among our target customers, pre-teens and
teenagers, and increased gasoline prices that may curtail customer visits to
malls, could result in decreased sales that would have a material adverse affect
on our business, financial condition and results of operations.
THE RECENT TERRORIST ATTACKS HAVE HEIGHTENED SECURITY CONCERNS AND COULD RESULT
IN LOWER CUSTOMER TRAFFIC IN OUR STORES
In response to the terrorist attacks of September 11, 2001, security is being
heightened in public areas. Any further threat of terrorist attacks or actual
terrorist events, particularly in public areas, could lead to lower customer
traffic in regional shopping malls. In addition, local authorities or mall
management could close regional shopping malls in response to any immediate
security concern. For example, on September 11, 2001, a substantial number of
our stores were closed early due to closure of the malls in response to the
terrorist attacks. Mall closures, lower customer traffic due to security
concerns and increased gasoline prices that may curtail customer visits to
malls, could result in decreased sales that would have a material adverse affect
on the our business, financial condition and results of operations.
WE DEPEND ON KEY PERSONNEL
Our success and ability to properly manage our growth depends to a significant
extent both upon the performance of our current executive and senior management
team and our ability to attract, hire, motivate and retain additional qualified
management personnel in the future. Our inability to recruit and retain such
additional personnel, or our loss of the services of any of our executive
officers, could have a material adverse impact on us.
LITIGATION MATTERS INCIDENTAL TO OUR BUSINESS COULD BE ADVERSELY DETERMINED
AGAINST US
The Company is involved from time to time in litigation incidental to its
business. Management believes that the outcome of current litigation will not
have a material adverse effect on our results of operations or financial
condition. Depending on the actual outcome of pending litigation, charges would
be recorded in the future that may have an adverse effect on our operating
results.
14
THE PRICE OF OUR STOCK MAY FLUCTUATE IN THE FUTURE
The market price of our common stock has fluctuated in the past and there can be
no assurance that the market price of our common stock will not continue to
fluctuate significantly. Future announcements or management discussions
concerning us or our competitors, sales and profitability results, quarterly
variations in operating results or comparable store net sales, changes in
earnings estimates by analysts or changes in accounting policies, among other
factors, could cause the market price of our common stock to fluctuate
substantially. In addition, stock markets have experienced extreme price and
volume volatility in recent years.
CONTROL BY OUR CHAIRMAN
We have two classes of common stock, common stock and Class A common stock. The
holders of our common stock are entitled to one vote per share, and the holders
of our Class A common stock are entitled to 10 votes for each share. As of March
31, 2002, Mr. Rowland Schaefer, our Chairman, President and Chief Executive
Officer, owns or has voting power over approximately 9% of our common stock and
approximately 63% of our Class A common stock and, as a result, controls
approximately 30% of our outstanding voting power on a combined basis. As a
result, our Chairman may substancially influence shareholder action,
including the election of our directors. This influence of us by our Chairman
may make us less attractive as a target for a takeover proposal. It may also
make it more difficult to discourage a merger proposal or proxy contest for the
removal of incumbent directors. As a result, this may deprive the holders of our
common stock of an opportunity they might otherwise have to sell their shares at
a premium over the prevailing market price in connection with a merger or
acquisition of us or with or by another company.
OUR WAGE EXPENSES MAY INCREASE AS A RESULT OF INCREASES IN FEDERAL MINIMUM WAGE
LAWS
Recent changes to Federal minimum wage laws have raised the mandatory minimum
wage. Various states, including states where we operate our business, have
enacted increases that are higher than the Federal minimum wage. Statutory
increases in Federal and state minimum wages above our current wages could
require corresponding increases in higher employee wage rates. Increases in wage
rates that are not offset by corresponding increases in sales would adversely
affect our results of operations.
We caution our investors that the risk factors described above could cause
actual results or outcomes to differ materially from those expressed in any
forward-looking statements made by or on behalf of us. Further, management
cannot assess the impact of each such factor on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
15
RESULTS OF CONTINUING OPERATIONS
The following table sets forth, for the periods indicated, percentages which
certain items reflected in the financial statements bear to our net sales:
FISCAL YEAR ENDED
---------------------------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
--------- --------- ---------
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales, occupancy and buying expenses 51.6 48.8 44.8
--------- --------- ---------
Gross Profit 48.4 51.2 55.2
Other expenses:
Selling, general and administrative 36.0 34.7 33.3
Depreciation and amortization 4.7 4.4 3.5
Interest expense (income), net 0.7 1.0 (0.5)
Gain on investments -- -- (0.5)
--------- --------- ---------
41.4 40.1 35.8
Income from continuing operations before
income taxes 7.0 11.1 19.4
Income taxes 2.6 3.9 7.0
--------- --------- ---------
Income from continuing operations 4.4 % 7.2 % 12.4 %
========= ========= =========
The operating results of Claire's Nippon Co., Ltd. (Nippon) are accounted for
under the equity method. As a result, any losses incurred by Nippon in excess of
our investment and advances are not reflected in our income statement because
the operations are not part of our consolidated group. Accordingly the operating
results of Nippon are not included in the following analysis. In addition, the
assets and liabilities of Nippon are not included in our consolidated balance
sheets. Under the equity method, our original investment in Nippon was recorded
at cost and had been adjusted periodically to recognize our proportionate share
of earnings or losses from Nippon since the acquisition date. As of February 2,
2002 and February 3, 2001, our investment in Nippon was carried at zero on our
consolidated balance sheet.
Our fiscal years end on the Saturday closest to January 31. As a result, our
Fiscal 2002 results consisted of 52 weeks, our Fiscal 2001 results consisted of
53 weeks and our Fiscal 2000 results consisted of 52 weeks.
FISCAL 2002 COMPARED TO FISCAL 2001
Net sales decreased by $28 million, or 3%, to $918.7 million in Fiscal 2002
compared to $946.7 million for the year ended February 3, 2001, which is
referred to as Fiscal 2001. This decrease resulted primarily from same-store
sales decreases of 2% for the year. During Fiscal 2002, our sales in North
America decreased 3%, while our international sales increased 1% on a same-store
sales basis. The same-store sales decrease in North America was primarily a
result of fewer transactions per store, partially offset by an increase in the
average retail per transaction.
Cost of sales, occupancy and buying expenses increased by $12.2 million, or 3%,
to $473.8 million in Fiscal 2002 compared to $461.6 million in Fiscal 2001. As a
percentage of net sales, these expenses increased to 51.6% for Fiscal 2002
compared to 48.8% for Fiscal 2001. This increase of 2.8% was primarily the
result of additional merchandise markdowns required due to excessive inventory
levels compared to sales trends in North America. These markdowns were recorded
in the second quarter of Fiscal 2002 in North America. These markdowns helped us
reduce inventory levels to be in line with planned sales for future periods. In
addition, the decline in same-store sales discussed above resulted in the lack
of leverage on fixed occupancy costs.
16
Selling, general and administrative expenses increased by $2.6 million, or 1% to
$331 million in Fiscal 2002 from $328.4 million in Fiscal 2001. The increase was
caused by inflationary cost increases, partially offset by cost savings achieved
in store payroll by reducing hours worked to correspond with lower sales
patterns. As a percentage of net sales, these expenses increased to
approximately 36% in Fiscal 2002 compared to 34.7% in Fiscal 2001. The increase
was primarily caused by lack of leverage on fixed costs. It has been our
objective to close a number of under-performing or duplicative acquired
Afterthoughts stores. As of February 2, 2002, 313 Afterthoughts stores had been
closed or leases not renewed and 18 stores had been opened resulting in 476
stores remaining. We expect to not renew the leases for approximately 50 stores
in Fiscal 2003. During Fiscal 2002, we continued to eliminate redundant field
operations and review under-performing stores. As a result of our review, we
recorded a $2.2 million non-cash charge to write off the assets whose carrying
value had been impaired.
Depreciation and amortization increased by $892,000, or 2%, to $42.9 million in
Fiscal 2002 from $42 million in Fiscal 2001. The increase was primarily due to
the increased depreciation from our international divisions, partially offset by
lower depreciation in North America.
Interest expense, net decreased from $9.9 million in Fiscal 2001 to $6.4 million
in Fiscal 2002. The net decrease of $3.5 million was primarily the result of
lower interest rates and lower borrowings on our credit facility.
Income taxes decreased by $13.5 million to $23.5 million in Fiscal 2002 compared
to $37 million in Fiscal 2001. As a percentage of pre-tax income, income taxes
increased to 36.3% in Fiscal 2002 from 35.3% in Fiscal 2001. The increase in the
effective tax rate from continuing operations was affected by the tax benefits
of losses in Mr. Rags being included in the loss from discontinued operations.
Our consolidated effective tax rate for Fiscal 2002 was 35%.
FISCAL 2001 COMPARED TO FISCAL 2000
Net sales increased by $181.9 million, or 24%, to $946.7 million in Fiscal 2001
compared to $764.8 million for the year ended January 29, 2000, which is
referred to as Fiscal 2000. This increase primarily resulted from the twelve
months of sales of the Afterthoughts stores, (as compared with the two months
included in the prior fiscal year), offset by same-store sales decreases of 3%
for the year. During Fiscal 2001, sales at our stores in North America decreased
4% while sales at our international stores decreased 1% on a same-store sales
basis. The same-store sales decrease was primarily a result of fewer
transactions per store, offset by an increase in the average unit retail price
of merchandise sold. The same-store sales results of the Afterthoughts stores
were significantly below those of the Claire's Accessories stores for the two
months ended February 3, 2001 due to a number of factors related primarily to
the difficult process of integrating Afterthoughts' operations into Claire's.
Cost of sales, occupancy and buying expenses increased by $118.7 million, or
35%, to $461.6 million in Fiscal 2001 compared to $342.9 million in Fiscal 2000.
As a percentage of net sales, these expenses increased to 48.8% for Fiscal 2001
compared to 44.8% for Fiscal 2000. This increase of 4% is the result of
additional merchandise markdowns, the expense of transitional services provided
by Venator to Claire's during its integration of the Afterthoughts stores and
lack of leverage on fixed costs. The markdowns were a result of lower than
expected sales and helped us reduce our inventory levels to be in line with
planned sales for future periods. In addition, the increase was caused by the
full year impact of the Afterthoughts stores who's occupancy cost as a
percentage of sales is higher than the Claire's stores. This is primarily due to
lower average store sales in the Afterthoughts stores as compared to the average
Claire's store.
Selling, general and administrative expenses increased by $73.2 million, or 23%,
to $328.4 million in Fiscal 2001 from the Fiscal 2000 level of $255.2 million.
The increase was primarily due to the increase in the cost of operating
additional stores. As a percentage of net sales, these expenses increased to
approximately 34.7% in Fiscal 2001 compared to 33.4% in Fiscal 2000. The
increase in SG&A as a percentage of sales was primarily attributable to certain
redundant operations related to the integration of the Afterthoughts division's
operations and the lack of leverage on corporate expenses due to negative
same-store sales. We have substantially completed our integration of
Afterthoughts as it relates to store operations, payroll and human resources,
merchandising, planning and distribution, accounting and finance, real estate
17
and construction, MIS, marketing, field operations and the communication of best
practices among divisions. Sales and SG&A were adversely affected as a result of
these integration efforts during Fiscal 2001. During Fiscal 2001, we had an
objective to close a number of under-performing or duplicative acquired
Afterthoughts stores. As of February 3, 2001, 203 Afterthoughts stores had been
closed or leases not renewed and 11 stores had been opened resulting in 579
stores remaining. This reorganization and our periodic review of asset
impairment caused us to record an $8.7 million ($5.5 million after tax, or $.11
per diluted share) non-cash charge to write off (included within selling,
general and administrative expenses in Fiscal 2000) the assets whose carrying
value had been impaired. We recognized no impairment charges in Fiscal 2001.
Depreciation and amortization increased by $14.9 million, or 55%, to $42 million
in Fiscal 2001 from $27.1 million in Fiscal 2000. The increase was primarily due
to the full year amortization of goodwill and depreciation on the Afterthoughts
stores.
In Fiscal 2000, we recognized a gain on investments of $3.9 million in
connection with the sale of certain equity securities. There were no gains or
losses on investments in Fiscal 2001.
Income taxes decreased by $17 million to $37 million in Fiscal 2001 compared to
$53.9 million in Fiscal 2000. Our effective tax rates declined slightly as a
result of increased profitable foreign operations which had lower effective tax
rates than the United States.
IMPACT OF INFLATION
Inflation impacts several of our operating costs including, but not limited to
cost of goods and supplies, occupancy costs and labor expenses. We seek to
mitigate these effects by passing along inflationary increases in costs through
increased sales prices or by increasing sales.
DISCONTINUED OPERATION
In January 2002, we announced our decision to discontinue the operations of Lux
Corp. (Mr. Rags), a wholly-owned subsidiary that previously represented our
apparel segment. Our disposal plan is to sell substantially all of the assets
and liabilities of Lux Corp. by the end of Fiscal 2003; however, the Board of
Directors has authorized the disposal by other means as well. The operations of
Mr. Rags have been accounted for as a discontinued operation in our consolidated
financial statements. Although our plan allows for the disposition by the end of
Fiscal 2003, management estimates that the plan will be completed within the
first six months of Fiscal 2003. We have used a six month period of time in
estimating its loss during the phase-out period. The assets of Lux Corp. consist
primarily of inventory, fixed assets and prepaids, while the liabilities include
trade payables, accrued expenses and deferred credits.
In connection with the discontinuation of Mr. Rags, the Company incurred a
charge of approximately $20.7 million before-tax, or $13 million after-tax, for
the loss on disposal of the segment for Fiscal 2002. Major components of the
loss include management's estimates of the excess of net assets over proceeds
expected from the sale, professional and credit facility fees expected to be
incurred in connection with the sale and approximately $4 million of expected
operating losses during the phase-out period. Actual amounts may differ from
these estimates. We also incurred $13.7 million before-tax, or $8.6 million
after-tax, loss from discontinued operations recorded through the measurement
date in Fiscal 2002. Included in this loss was a $1.3 million before-tax, or
$0.8 million after-tax non-cash charge to write off the assets of stores whose
carrying value had become impaired. At February 2, 2002, Claire's stores, our
parent company, was a guarantor of approximately $11.6 million of non-cancelable
operating leases of Mr. Rags.
In the event we do not complete the disposition of Mr. Rags by July 2002, we
will be required to include any additional losses or gains, if applicable, from
discontinued operations for the period after July 2002 in our financial
statements in the period incurred. Additionally, if we do not dispose of Mr.
Rags by January 2003, we may be required to reclassify our loss from
discontinued operations to continuing operations; or we may consider other
alternatives, such as liquidating the assets of Mr. Rags, which could result in
additional charges to our earnings.
18
LIQUIDITY AND CAPITAL RESOURCES
In connection with the acquisition of Afterthoughts, we entered into a credit
facility pursuant to which we financed $200 million of the purchase price for
Afterthoughts. The credit facility includes a $40 million revolving line of
credit which matures on December 1, 2004, and a $175 million five year term
loan, the first installment of which was paid on December 31, 2000, with future
installments, thereafter, payable on a quarterly basis through December 1, 2004.
The credit facility is prepayable without penalty and bears interest at a margin
of 125 basis points over the London Interbank Borrowing Rate. The margin is
adjusted periodically based on our performance as it relates to certain
financial covenants. On February 2, 2002 approximately $25 million was
outstanding on this line of credit, while $105 million was outstanding under the
term loan. Also, on February 2, 2002, the borrowings under this credit facility
were bearing interest at 3.5%, and we were in compliance with all debt
covenants. We cannot re-borrow amounts repaid under the term loan. As a result,
we have no future availability under the term loan. We can re-borrow amounts
repaid under the revolving line of credit, subject to the terms of the credit
facility. As of February 2, 2002, we had $15 million of availability under the
revolving line of credit. We also had $64,000 of issued letters of credit which
are supported by and considered drawn against our line of credit.
In January 2002, we amended the credit facility effective as of February 1,
2002. The amendment modified certain technical and financial covenants in
connection with the planned disposition of Mr. Rags (Lux Corp.). In connection
with the amendment, we prepaid $20 million towards our regularly scheduled term
loan payments due in Fiscal 2003.
We are required to maintain financial ratios under our credit facility. Required
financial ratios include fixed charge coverage ratio, consolidated leverage
ratio and current ratio. The credit facility also contains other restrictive
covenants which limit, among other things, our ability to make dividend
distributions. If these financial ratios and other restrictive covenants are not
maintained, our bank will have the option to require immediate repayment of all
amounts outstanding under the credit facility. The most likely result would
require us to either renegotiate certain terms of the credit agreement, obtain a
waiver from the bank, or obtain a new credit agreement with another bank, which
may contain different terms.
We finance certain leasehold improvements and equipment used in our stores
through transactions accounted for as non-cancelable operating leases. As a
result, the rental expense for these leasehold improvements and equipment is
recorded during the term of the lease contract in our consolidated financial
statements, generally over four to seven years. As of February 2, 2002, we had
future lease payment obligations under these operating leases of approximately
$38.6 million (which includes certain leases of Mr. Rags which were guaranteed
by us). In the event that any of the real property leases where leasehold
improvements or equipment is located that are subject to these non-cancelable
operating leases is terminated by us or our landlord prior to the scheduled
expiration date of the real property lease, we will be required to accrue all
future rent payments under these operating leases. At February 2, 2002, we had
$485,000 accrued related to future payment obligations on leasehold improvement
leases for closed stores. We are guarantor on approximately $11.6 million of
operating leases of Mr. Rags. We expect our minimum rental commitments under all
non-cancelable operating leases (which include retail locations) to be
approximately $143 million in Fiscal 2003. For details concerning our financial
commitments under these arrangements, see note 5 to our consolidated financial
statements.
We review the operating performance of our stores on an on-going basis to
determine which stores, if any, to expand, relocate or close. We closed 173
stores in Fiscal 2002 and anticipate closing approximately 50 stores in Fiscal
2003.
Our operations have historically provided a positive cash flow which, together
with our cash balances, provide adequate liquidity to meet our operational needs
and debt obligations. Cash and cash equivalents totaled $99.9 million at the end
of Fiscal 2002.
Net cash provided by operating activities from continuing operations was $92.9
million in Fiscal 2002 compared to $109.5 million in Fiscal 2001 and $110.8
million in Fiscal 2000. The primary sources of net cash provided by operating
activities from continuing operations was income from continuing operations,
adjusted for non-cash items. Our current ratio (current assets over current
liabilities) was 2.6:1.0 for Fiscal 2002 and 2.8:1.0 for Fiscal 2001.
19
At the end of Fiscal 2002, we decreased our investment in inventories to $78.6
million, or 16%, from the Fiscal 2001 balance of $93.8 million. During Fiscal
2002, inventory turnover increased to 2.9 times from 2.5 times for Fiscal 2001.
The decrease in inventories was due to conservative inventory management given
economic conditions and projected sales. In addition, inventories on a per
square foot basis decreased 16%.
Net cash used in investing activities of $49.2 million in Fiscal 2002 was
primarily capital expenditures of $47.7 million and the purchase of short-term
investments. During Fiscal 2002, we continued to expand and remodel our store
base. Significant capital projects included the opening of 180 new stores and
the remodeling of 120 stores. Funds expended for capital improvements in Fiscal
2002 totaled $47.7 million compared to $45.4 million in Fiscal 2001 and $48.9
million in Fiscal 2000. In Fiscal 2003, capital expenditures are expected to be
approximately $50 million as we continue to invest in expanding and remodeling
our store base and technology.
Net cash used in financing activities of $59 million in Fiscal 2002 was
primarily due to our payments on the credit facility of $51.5 million and
dividends paid of $7.6 million.
We have significant cash balances, a consistent ability to generate cash flow
from operations and available funds under our credit facilities. We believe that
we will be able to maintain our present financial condition and liquidity and be
able to finance our capital expenditure plans for Fiscal 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, Financial Accounting Standards Board, the FASB, issued Statement
No. 141, "Business Combinations", and Statement No. 142, "Goodwill and Other
Intangible Assets". Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
as well as all purchase method business combinations completed after June 30,
2001. Statement 141 also specifies criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of Statement
142. Statement 142 will also require that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to their
estimated residual values and reviewed for impairment in accordance with
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of".
We are required to adopt the provisions of Statement 141 immediately and
Statement 142 effective February 3, 2002. Furthermore, goodwill and intangible
assets determined to have an indefinite useful life acquired in a purchase
business combination completed after June 30, 2001, but before Statement 142 is
adopted in full will not be amortized, but will continue to be evaluated for
impairment in accordance with the appropriate pre-Statement 142 accounting
literature. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 will continue to be amortized and tested for
impairment in accordance with the appropriate pre-Statement 142 accounting
requirements prior to the adoption of Statement 142.
Statement 141 requires that upon adoption by us of Statement 142, that we
evaluate our existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition
separately from goodwill. Upon adoption of Statement 142, we will be required to
reassess the useful lives and residual values of all intangible assets acquired,
and make any necessary amortization period adjustments by the end of the first
interim period after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, we will be required to test the
intangible asset for impairment in accordance with the provisions of Statement
142 within the first interim period. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
In connection with Statement 142's transitional goodwill impairment evaluation,
the Statement will require us to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, we must identify its reporting units and determine the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the date
20
of adoption. We will then have up to six months from the date of adoption to
determine the fair value of each reporting unit and compare it to the reporting
unit's carrying amount. To the extent a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill may be
impaired and we must perform the second step of the transitional impairment
test. In the second step, we must compare the implied fair value of the
reporting unit's goodwill, determined by allocating the reporting unit's fair
value to all of it assets (recognized and unrecognized) and liabilities in a
manner similar to a purchase price allocation in accordance with Statement 141,
to its carrying amount, both of which would be measured as of the date of
adoption. This second step is required to be completed as soon as possible, but
no later than the end of the year of adoption. Any transitional impairment loss
will be recognized as the cumulative effect of a change in accounting principle
in our statement of operations
As of the date of adoption, we had unamortized goodwill in the amount of $193.1
million. Amortization expense related to goodwill was $8.7 million and $8.8
million for Fiscal 2002 and Fiscal 2001, respectively. Because of the extensive
effort needed to comply with adopting Statements 141 and 142, it is not
practicable to reasonably estimate the impact of adopting these Statements on
our financial statements at the date of this report, including whether it will
be required to recognize any transitional impairment losses as the cumulative
effect of a change in accounting principle.
On July 5, 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS". That standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard is
effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged. As a result, SFAS No. 143 will not be effective for
Fiscal 2003. Management has not determined the effect that SFAS No. 143 will
have on our consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS". This statement retains the requirements of SFAS
No. 121 to (a) recognize an impairment loss only if the carrying amount of a
long lived asset is not recoverable from its undiscounted cash flows and (b)
measure an impairment loss as the difference between the carrying amount and
fair value of the asset. This statement requires that a long-lived asset to be
abandoned, exchanged for a similar productive asset, or distributed to owners in
a spin-off be considered held and used until it is disposed of. This statement
requires that the depreciable life of a long-lived asset to be abandoned be
revised and that an impairment loss be recognized at the date a long-lived asset
is exchanged for a similar productive asset or distributed to owners in a
spin-off if the carrying amount of the asset exceeds its fair value. The
accounting model for long-lived assets to be disposed of by sale is used for all
long-lived assets, whether previously held and used or newly acquired. That
accounting model measures a long-lived asset classified as held for sale at the
lower of its carrying amount or fair value less cost to sell and requires
depreciation (amortization) to cease. Discontinued operations are no longer
measured on a net realizable value basis, and future operating losses are no
longer recognized before they occur. This statement retains the basic provisions
of Accounting Principles Board Opinion 30 for the presentation of discontinued
operations in the income statement but broadens that presentation to include a
component of an entity (rather than a segment of a business). A component of an
entity comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
A component of an entity that is classified as held for sale or that has been
disposed of is presented as a discontinued operation if the operations and cash
flows of the component will be (or have been) eliminated from the ongoing
operations of the entity and the entity will not have any significant continuing
involvement in the operations of the component.
The provisions of this statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years, with early application encouraged. The provisions of this
statement generally are to be applied prospectively. Management has not
determined the effect that the adoption of SFAS No. 144 will have on our
consolidated financial statements.
21
RELATED PARTY TRANSACTIONS
We have set forth below various transactions with certain of our executive
officers and directors. Although management believes that the transactions are
not material to our consolidated financial position or operating results, we
have included this information to provide our investors with a better
understanding of our financial statements.
LEASING TRANSACTIONS. We lease our executive offices located in Pembroke Pines,
Florida from Rowland Schaefer & Associates, a general partnership owned by two
corporate general partners. One corporate general partner is controlled by Mr.
Rowland Schaefer, our Chairman, and the other corporate general partner is
controlled by immediate family members of our Chairman, including Marla Schaefer
and E. Bonnie Schaefer, our two Co-Vice Chairpersons. Ira Kaplan, our Chief
Financial Officer, has an approximate 5% interest in one of the corporate
general partners. During Fiscal 2002, we paid Rowland Schaefer & Associates,
Inc. $608,000 for rent and $239,000 for real estate taxes and operating expenses
as required under the lease. The lease expires on July 31, 2005.
We lease retail space for a Claire's Boutiques store in New York City from 720
Lexington Realty LLC, a limited liability corporation that is controlled by
immediate family members of our Chairman, including our two Co-Vice Chairpersons
and another daughter of our Chairman. We entered into the lease with 720
Lexington Realty LLC in Fiscal 2002, which is when 720 Lexington Realty LLC
purchased the property from the prior owner. During Fiscal 2002, we paid
$255,000 of rent and $1,463 for percentage of sales rent to 720 Lexington Realty
LLC. The terms under our lease with 720 Lexington Realty LLC are the same terms
as were in effect when we leased the retail space from an unaffiliated third
party prior to the purchase by 720 Lexington Realty LLC. The lease expires on
January 31, 2005.
Management believes that these lease arrangements are on no less favorable terms
than we could obtain from unaffiliated third parties.
LOANS TO OFFICERS. We have outstanding loans to certain of our executive
officers. At February 2, 2002, we had an outstanding loan to our Chief Financial
Officer in the principal amount of $600,000, which represents the greatest
principal amount outstanding during Fiscal 2002. The loan bears interest at a
floating rate equal to the applicable minimum Federal rate, which was 2.71% per
annum as of February 2, 2002, is payable on demand, and was made for real estate
improvements. At February 2, 2002, we had an outstanding loan to Mark Smith, our
Chief Executive of Europe in the principal amount of 300,000 British pounds (or
approximately $513,300 at the current exchange rate), which represents the
greatest principal amount outstanding during Fiscal 2002. The loan bears no
interest, is payable on demand upon the occurrence of certain events, and was
made for real estate improvements. At February 2, 2002, we had an outstanding
loan to the wife of our Chairman in the principal amount of $250,000, which
represents the greatest principal amount outstanding during Fiscal 2002. The
loan to our Chairman's wife was made for personal expenses and was repaid in
April 2002. During the time the loan was outstanding, the loan bore interest at
a floating rate equal to the applicable Federal rate, which was 2.71% per annum
as of February 2, 2002, and was payable on demand. At February 2, 2002, we also
had two outstanding loans that were made to our former President and Chief
Operating Officer, Thomas Souza, in the aggregate principal amount of $551,000.
The loans bear interest at a rate of 8.5% per annum and are payable upon demand.
We have filed a suit against Mr. Souza for, among other things, repayment of
these loans. As part of this lawsuit, Mr. Souza is challenging the terms and
purposes for the loan.
OTHER ARRANGEMENTS WITH OUR CHAIRMAN. From time to time, we advance payments for
personal expenses on behalf of our Chairman. At February 2, 2002, we had
advanced approximately $433,000 of personal expenses for our Chairman. As of
April 30, 2002, our Chairman had reimbursed us for all of these expenses. These
advanced expenses, as well as the $250,000 loan to our Chairman's wife, were
repaid to us from the proceeds of a $750,000 loan made by us to our Chairman.
The loan was made in April 2002, bears interest at a rate of 4.6% per annum, and
matures in April 2004.
22
We have made discretionary annual payments (prorated for any partial year) of
$60,000 to the wife of our Chairman since her retirement in 1999. These
discretionary payments were terminated in April 2002 and were made in
consideration of her past services to us as a director and vice president.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY
We are exposed to market risk from foreign currency exchange rate fluctuations
on the U.S. dollar value of foreign currency denominated transactions and our
investment in foreign subsidiaries. We manage this exposure to market risk
through our regular operating and financing activities, but currently do not use
foreign currency purchased put options or foreign exchange forward contracts.
During Fiscal 2002, included in comprehensive income and stockholders' equity is
$9.5 million reflecting the unrealized loss on foreign currency translation.
Based on our average net currency positions in Fiscal 2002, the potential loss
due to a 10% adverse change on foreign currency exchange rates could be
significant to our operations.
INTEREST RATES
Our exposure to market risk for changes in interest rates is limited to our
cash, cash equivalents and debt. Based on our average invested cash balances and
outstanding debt during Fiscal 2002, a 10% increase in the average effective
interest rate in Fiscal 2002 would not have materially impacted our annual net
interest expense.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE NO.
------------
Independent Auditors' Report 24
Consolidated Balance Sheets as of February 2, 2002 and February 3, 2001 25
Consolidated Statements of Income and Comprehensive Income for the
three fiscal years ended February 2, 2002 26
Consolidated Statements of Changes in Stockholders' Equity for the three
fiscal years ended February 2, 2002 27
Consolidated Statements of Cash Flows for the three fiscal years ended
February 2, 2002` 28
Notes to Consolidated Financial Statements 29
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Claire's Stores, Inc.
We have audited the accompanying consolidated balance sheets of Claire's Stores,
Inc. and subsidiaries as of February 2, 2002 and February 3, 2001, and the
related consolidated statements of operations and comprehensive income, changes
in stockholders' equity and cash flows for the fiscal years ended February 2,
2002, February 3, 2001, and January 29, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Claire's Stores,
Inc. and subsidiaries as of February 2, 2002 and February 3, 2001, and the
results of their operations and their cash flows for the fiscal years ended
February 2, 2002, February 3, 2001, and January 29, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
- ------------------------
Fort Lauderdale, Florida
April 5, 2002
24
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEB. 2, FEB. 3,
2002 2001
--------- ---------
(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 99,912 $ 111,860
Short-term investments 1,563 --
Inventories 78,596 93,792
Net assets of discontinued operation -- 26,567
Prepaid expenses and other current assets 34,353 33,745
--------- ---------
Total current assets 214,424 265,964
--------- ---------
Property and equipment:
Land and building 17,984 17,765
Furniture, fixtures and equipment 187,565 168,814
Leasehold improvements 136,422 125,810
--------- ---------
341,971 312,389
Less accumulated depreciation and amortization (177,997) (153,614)
--------- ---------
163,974 158,775
--------- ---------
Goodwill, net 193,140 204,269
Other assets 40,037 31,253
--------- ---------
233,177 235,522
--------- ---------
Total Assets $ 611,575 $ 660,261
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 21,040 $ 31,263
Trade accounts payable 30,874 27,033
Income taxes payable 4,800 2,313
Dividends payable -- 1,916
Accrued expenses 25,822 31,927
--------- ---------
Total current liabilities 82,536 94,452
--------- ---------
Long term liabilities:
Long term debt 110,104 151,374
Deferred credits 14,747 14,735
--------- ---------
124,851 166,109
--------- ---------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock par value $1.00 per share; authorized
1,000,000 shares, issued and outstanding 0 shares -- --
Class A common stock par value $.05 per share;
authorized 20,000,000 shares, issued 2,830,819
shares and 2,846,354 shares 142 142
Common stock par value $.05 per share; authorized
150,000,000 shares, issued 45,949,647 shares and
45,930,363 shares 2,297 2,297
Additional paid-in capital 29,871 29,825
Accumulated other comprehensive loss (16,709) (7,221)
Retained earnings 389,039 375,109
--------- ---------
404,640 400,152
Treasury stock, at cost (109,882 shares) (452) (452)
--------- ---------
404,188 399,700
--------- ---------
Total Liabilities and Stockholders' Equity $ 611,575 $ 660,261
========= =========
See accompanying notes to consolidated financial statements
25
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FISCAL YEAR ENDED
-----------------------------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
--------- --------- ---------
(In thousands, except per share amounts)
Net sales $ 918,737 $ 946,715 $ 764,848
Cost of sales, occupancy and buying expenses 473,785 461,612 342,873
--------- --------- ---------
Gross profit 444,952 485,103 421,975
--------- --------- ---------
Other expenses:
Selling, general and administrative 330,993 328,418 255,173
Depreciation and amortization 42,931 42,039 27,100
Gain on investments -- -- (3,929)
Interest expense (income), net 6,432 9,923 (3,473)
--------- --------- ---------
380,356 380,380 274,871
--------- --------- ---------
Income from continuing operations before income taxes 64,596 104,723 147,104
Income taxes 23,470 36,951 53,901
--------- --------- ---------
Income from continuing operations 41,126 67,772 93,203
--------- --------- ---------
Discontinued operation:
Loss from discontinued operation of Lux Corp. to
February 2, 2002 less applicable income tax benefit
of ($5,152), ($1,678) and ($3,041), respectively 8,588 2,797 5,268
Loss on disposal of Lux Corp. including provision of
$4,044 for losses during the phase out period, less
income tax benefit of ($7,773) 12,955 -- --
--------- --------- ---------
Net loss from discontinued operations 21,543 2,797 5,268
--------- --------- ---------
Net income 19,583 64,975 87,935
Foreign currency translation adjustments (9,488) (6,993) 667
--------- --------- ---------
Comprehensive income $ 10,095 $ 57,982 $ 88,602
========= ========= =========
Net income (loss) per share:
Basic:
Income from continuing operations $ 0.84 $ 1.36 $ 1.83
--------- --------- ---------
Loss from operations of discontinued operation (0.18) (0.06) (0.11)
Loss from disposal of discontinued operation (0.26) -- --
--------- --------- ---------
Net loss from discontinued operation (0.44) (0.06) (0.11)
--------- --------- ---------
Net income per share $ 0.40 $ 1.30 $ 1.72
========= ========= =========
Diluted:
Income from continuing operations $ 0.84 $ 1.35 $ 1.82
--------- --------- ---------
Loss from operations of discontinued operation (0.18) (0.05) (0.11)
Loss from disposal of discontinued operation (0.26) -- --
--------- --------- ---------
Net loss from discontinued operation (0.44) (0.05) (0.11)
--------- --------- ---------
Net income per share $ 0.40 $ 1.30 $ 1.71
========= ========= =========
Weighted average number of shares outstanding:
Basic 48,671 49,931 50,985
========= ========= =========
Diluted 48,751 50,101 51,334
========= ========= =========
See accompanying notes to consolidated financial statements.
26
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Class A Additional Other
Common Common Paid-In Comprehensive Retained Treasury
Stock Stock Capital Loss Earnings Stock Total
--------- --------- --------- ------------ --------- --------- ---------
Balance January 30, 1999 $ 145 $ 2,401 $ 25,398 $ (895) $ 287,621 $ (452) $ 314,218
Net income -- -- -- -- 87,935 -- 87,935
Class A Common stock converted to
Common stock (2) 2 -- -- -- -- --
Stock options exercised -- 16 2,693 -- -- -- 2,709
Cash dividends ($.16 per Common
share and $.08 per Class A
Common share) -- -- -- -- (7,943) -- (7,943)
Tax benefit from exercised stock
options -- -- 1,200 -- -- -- 1,200
Foreign currency translation
adjustment -- -- -- 667 -- -- 667
--------- --------- --------- --------- --------- --------- ---------
Balance January 29, 2000 143 2,419 29,291 (228) 367,613 (452) 398,786
Net income -- -- -- -- 64,975 -- 64,975
Class A Common stock converted to
Common stock (1) 1 -- -- -- -- --
Purchase of treasury stock -- -- -- -- -- (49,913) (49,913)
Retirement of treasury stock -- (127) -- -- (49,786) 49,913 --
Stock options exercised -- 4 474 -- -- -- 478
Cash dividends ($.16 per Common
share and $.08 per Class A
Common share) -- -- -- -- (7,693) -- (7,693)
Tax benefit from exercised stock
options -- -- 60 -- -- -- 60
Foreign currency translation
adjustment -- -- -- (6,993) -- -- (6,993)
--------- --------- --------- --------- --------- --------- ---------
Balance February 3, 2001 142 2,297 29,825 (7,221) 375,109 (452) 399,700
Net income -- -- -- -- 19,583 -- 19,583
Stock options exercised -- -- 46 -- -- -- 46
Cash dividends ($.16 per Common
share and $.08 per Class A
Common share) -- -- -- -- (5,653) -- (5,653)
Foreign currency translation
adjustment -- -- -- (9,488) -- -- (9,488)
--------- --------- --------- --------- --------- --------- ---------
Balance February 2, 2002 $ 142 $ 2,297 $ 29,871 $ (16,709) $ 389,039 $ (452) $ 404,188
========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
27
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
--------------------------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
--------- --------- ---------
(In thousands)
Cash flows from operating activities:
Net income $ 19,583 $ 64,975 $ 87,935
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss from discontinued operations, net of tax benefit 8,588 2,797 5,268
Loss on disposal of discontinued operations, net of tax benefit 12,955 -- --
Depreciation and amortization 42,931 42,039 27,100
Deferred income taxes 3,858 8,049 704
Gain on investments -- -- (3,929)
Loss on retirement of property and equipment 1,763 1,874 570
Impairment of long-lived assets 2,220 -- 8,700
Increase (decrease) in -
Inventories 14,569 467 (5,266)
Prepaid expenses and other assets (14,474) 8,199 (27,332)
Increase (decrease) in -
Trade accounts payable 4,026 (5,646) 8,050
Income taxes payable 2,524 (14,659) 345
Accrued expenses (5,814) (534) 6,342
Deferred credits 130 1,903 2,321
--------- --------- ---------
Net cash provided by continuing operations 92,859 109,464 110,808
Net cash provided by (used in) discontinued operations 7,626 (5,739) (4,341)
--------- --------- ---------
Net cash provided by operating activities 100,485 103,725 106,467
--------- --------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (45,055) (43,405) (42,349)
Acquisition of business, net of cash acquired -- (9,548) (249,811)
Sale (purchase) of short-term investments (1,563) 3,455 36,231
Capital expenditures of discontinued operations (2,603) (2,054) (6,517)
Acquisition of minority interest in a foreign subsidiary -- -- (18,000)
--------- --------- ---------
Net cash used in investing activities (49,221) (51,552) (280,446)
--------- --------- ---------
Cash flows from financing activities:
Principal borrowings (payments) on debt (51,493) (20,082) 199,452
Purchase of treasury stock -- (49,913) --
Proceeds from stock options exercised 46 538 3,909
Dividends paid (7,569) (7,839) (7,929)
--------- --------- ---------
Net cash (used in) provided by financing activities (59,016) (77,296) 195,432
--------- --------- ---------
Effect of foreign currency exchange rate changes on cash
and cash equivalents (4,196) (2,537) 667
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (11,948) (27,660) 22,120
Cash and cash equivalents at beginning of period 111,860 139,520 117,400
--------- --------- ---------
Cash and cash equivalents at end of period $ 99,912 $ 111,860 $ 139,520
========= ========= =========
See accompanying notes to consolidated financial statements.
28
CLAIRE'S STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Claire's Stores, Inc., a Florida corporation, and
subsidiaries (collectively the "Company"), is a leading retailer of popular
priced fashion accessories targeted towards pre-teens and teenagers. The Company
operates stores throughout the United States, Canada, the Caribbean, United
Kingdom, Switzerland, Austria, Germany, France, Ireland and Japan.
REINCORPORATION - In June 2000, Claire's Stores, Inc. completed its
reincorporation from the State of Delaware to the State of Florida through a
merger transaction. In accordance with generally accepted accounting principles,
the merger and resulting reincorporation have been accounted for as a
reorganization of entities under common control at historical cost in a manner
similar to a pooling of interests. Under this accounting method, the assets and
liabilities of the combined entities have been carried forward at their recorded
historical book values.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. The Company's
investment in its Japanese joint venture is accounted for under the equity
method. All material intercompany balances and transactions have been eliminated
in consolidation. In January 2002, the Company adopted a plan to discontinue its
Mr. Rags (Lux Corp) Apparel division. The consolidated financial statements and
notes thereto have been restated and reclassified for all periods presented.
These statements have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require management to
make certain estimates and assumptions that affect amounts reported and
disclosed in the financial statements and related notes. The most significant
estimates include valuation of inventories, provisions for income taxes and the
recoverability of non-consolidated investments and long-lived assets. Actual
results could differ from these estimates. Periodically, the Company reviews all
significant estimates and assumptions affecting the financial statements
relative to current conditions and records the effect of any necessary
adjustments.
RECLASSIFICATIONS - The consolidated financial statements include certain
reclassifications of prior year amounts in order to conform to current year
presentation.
FISCAL YEAR - The Company's fiscal year ends on the Saturday closest to January
31. Fiscal year 2002 consisted of 52 weeks, Fiscal year 2001 consisted of 53
weeks and Fiscal year 2000 consisted of 52 weeks.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
SHORT-TERM INVESTMENTS - These investments consist of highly liquid debt
instruments purchased with a maturity greater than three months but less than
one year. The Company typically classified its debt securities as available for
sale. Available for sale securities are recorded at fair value. Unrealized
holding gains and losses, net of the related tax effect, on available for sale
securities are excluded from earnings and are reported as a separate component
of stockholders' equity until realized. Realized gains and losses from the sale
of available for sale securities are determined on a specific identification
basis.
A decline in the market value of any available for sale security below cost that
is deemed to be other than temporary results in a reduction in carrying amount
to fair value. The impairment is charged to earnings and a new cost basis for
the security is established. Dividend and interest income are recognized when
earned.
INVENTORIES - Merchandise inventories are stated at the lower of cost or market.
Cost is determined by the first-in, first-out basis using the retail method in
North America, while the international subsidiaries use average cost.
Approximately 25% and 14% of the Company's inventory was maintained using the
average cost method, in Fiscal 2002 and 2001, respectively.
29
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is computed on the straight-line method over the estimated useful
lives of the building and the furniture, fixtures and equipment, which range
from three to twenty-five years. Amortization of leasehold improvements is
computed on the straight-line method based upon the shorter of the estimated
useful lives of the assets or the terms of the respective leases. Maintenance
and repair costs are charged to earnings while expenditures for major renewals
and improvements are capitalized. Upon the disposition of property, plant and
equipment, the accumulated depreciation is deducted from the original cost and
any gain or loss is reflected in current earnings.
GOODWILL - In July 2001, the FASB issued Statement No. 141, "Business
Combinations", and Statement No. 142, "Goodwill and Other Intangible Assets".
Statement 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001. Statement 141 also
specifies criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 will
also require that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual values
and reviewed for impairment in accordance with Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of".
The Company is required to adopt the provisions of Statement 141 immediately and
Statement 142 effective February 3, 2002. Furthermore, goodwill and intangible
assets determined to have an indefinite useful life acquired in a purchase
business combination completed after June 30, 2001, but before Statement 142 is
adopted in full will not be amortized, but will continue to be evaluated for
impairment in accordance with the appropriate pre-Statement 142 accounting
literature. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 will continue to be amortized and tested for
impairment in accordance with the appropriate pre-Statement 142 accounting
requirements prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired,
and make any necessary amortization period adjustments by the end of the first
interim period after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
Statement 142 within the first interim period. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative effect of a
change in accounting principle in the first interim period.
In connection with Statement 142's transitional goodwill impairment evaluation,
the Statement will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting unit and compare
it to the reporting unit's carrying amount. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
operations.
30
As of the date of adoption, the Company had unamortized goodwill in the amount
of $193.1 million. Amortization expense related to goodwill was $8.7 million and
$8.8 million for the year ended February 2, 2002 and February 3, 2001,
respectively. Because of the extensive effort needed to comply with adopting
Statements 141 and 142, it is not practicable to reasonably estimate the impact
of adopting these Statements on the Company's financial statements at the date
of this report, including whether it will be required to recognize any
transitional impairment losses as the cumulative effect of a change in
accounting principle.
OTHER ASSETS - Other assets includes primarily the non-current portion of
prepaid lease payments on leasehold improvements and equipment financed under
non-cancelable operating leases. These prepaid expenses are amortized on a
straight line basis over the respective lease terms, typically ranging from 4 to
7 years.
Also included in Other Assets is the Company's investment in rent deposits made
to landlords in North America and landlords and former tenants internationally.
The rent deposits to landlords are typically collected upon the conclusion of a
lease, provided all contractual terms of the lease were satisfied. The rent
deposits to landlords internationally are sometimes amortized as additional rent
expense on a straight line basis, if there is no contractual obligation calling
for the repayment by the landlord. The rent deposits made by the Company to
former tenants internationally are considered intangible assets. The Company
periodically reviews the value of these intangibles and has determined that the
market value meets or exceeds their recorded values.
NET INCOME PER SHARE - Basic net income per share is based on the weighted
average number of shares of Class A Common Stock and Common Stock outstanding
during the period (48,671,000 shares in Fiscal 2002, 49,931,000 shares in Fiscal
2001 and 50,985,000 shares in Fiscal 2000). Diluted net income per share
includes the dilutive effect of stock options plus the number of shares included
in basic net income per share (48,751,000 shares in Fiscal 2002, 50,101,000
shares in Fiscal 2001 and 51,334,000 shares in Fiscal 2000). Options to purchase
1,156,510, 560,500 and 210,000 shares of common stock, at prices ranging from
$17.31 to $30.25 per share, $20.38 to $30.25 per share and $25.00 to $30.25 per
share, respectively, were outstanding for the years ended February 2, 2002,
February 3, 2001 and January 29, 2000, respectively, but were not included in
the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares for the
respective fiscal year.
INCOME TAXES - The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109 which generally
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are expected
to reverse. In addition, SFAS No. 109 requires the adjustment of previously
deferred income taxes for changes in tax rates under the liability method.
FOREIGN CURRENCY TRANSLATION - The financial statements of the Company's foreign
operations are translated into U.S. dollars. Assets and liabilities are
translated at current exchange rates while income and expense accounts are
translated at the average rates in effect during the year. Resulting translation
adjustments are accumulated as a component of other comprehensive income.
Foreign currency gains and losses resulting from transactions denominated in
foreign currencies, including intercompany transactions, except for intercompany
loans of a long-term investment nature, are included in results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist primarily of current assets, current liabilities and long term debt.
Current assets and liabilities approximate fair market value. Long term debt is
considered to approximate market value due to the interest rate being variable.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
31
IMPAIRMENT OF LONG-LIVED ASSETS - The Company accounts for long-lived assets in
accordance with the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
Statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
In December 1999, the Company began implementation of a reorganization plan to
eliminate redundant field operations and optimize square footage efficiency as a
result of the acquisition of Afterthoughts. As a result of the reorganization
and the Company's periodic review of impairment, the Company recorded a $2.2
million ($1.4 million after tax) and $8.7 million ($5.5 million after tax)
non-cash charge to write off the assets whose carrying value had been impaired
in Fiscal 2002 and 2000, respectively.
STOCK OPTIONS - Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock Based Compensation," allows entities to choose
between a fair value based method of accounting for employee stock options or
similar equity instruments and the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees." Entities electing to account for
employee stock options or similar equity instruments under APB No. 25 must make
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company has elected to apply the
provisions of APB No. 25 in the preparation of its consolidated financial
statements and provide pro forma disclosure of net income and earnings per share
as required under SFAS 123 in the notes to the consolidated financial
statements.
RECENT ACCOUNTING PRONOUNCEMENTS - On July 5, 2001, the FASB issued SFAS No.
143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS". That standard requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The standard is effective for fiscal years beginning after
June 15, 2002, with earlier application encouraged. As a result, SFAS No. 143
will not be effective for the Company's Fiscal 2003 financial statements.
Management has not determined the effect that SFAS No. 143 will have on the
Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS". This statement retains the requirements of SFAS
No. 121 to (a) recognize an impairment loss only if the carrying amount of a
long lived asset is not recoverable from its discounted cash flows and (b)
measure an impairment loss as the difference between the carrying amount and
fair value of the asset. This statement requires that a long-lived asset to be
abandoned, exchanged for a similar productive asset, or distributed to owners in
a spinoff be considered held and used until it is disposed of. This statement
requires that the depreciable life of a long-lived asset to be abandoned be
revised and that an impairment loss be recognized at the date a long-lived asset
is exchanged for a similar productive asset or distributed to owners in a
spin-off if the carrying amount of the asset exceeds its fair value. The
accounting model for long-lived assets to be disposed of by sale is used for all
long-lived assets, whether previously held and used or newly acquired. That
accounting model measures a long-lived asset classified as held for sale at the
lower of its carrying amount or fair value less cost to sell and requires
depreciation (amortization) to cease. Discontinued operations are no longer
measured on a net realizable value basis, and future operating losses are no
longer recognized before they occur. This statement retains the basic provisions
of Accounting Principles Board Opinion 30 for the presentation of discontinued
operations in the income statement but broadens that presentation to include a
component of an entity (rather than a segment of a business). A component of an
entity comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
A component of an entity that is classified as held for sale or that has been
disposed of is presented as a discontinued operation if the operations and cash
32
flows of the component will be (or have been) eliminated from the ongoing
operations of the entity and the entity will not have any significant continuing
involvement in the operations of the component. The provisions of this statement
are effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
application encouraged. The provisions of this statement generally are to be
applied prospectively. Management has not determined the effect that the
adoption of SFAS No. 144 will have on the Company's consolidated financial
statements.
2. ACQUISITIONS
In February 2000, the Company completed its acquisition of Claire's France, a
privately held 42 store fashion accessory chain with its headquarters in Paris,
France. The transaction was accounted for as a purchase. The purchase price was
approximately $11 million. Excess purchase price over fair market value of the
underlying assets, primarily fixed assets, rent deposits and inventory allocated
to goodwill, which was being amortized over twenty five years through the end of
Fiscal 2002. The Company's results of operations include Cleopatre's from the
date of acquisition of February 28, 2000. Operating results on a pro forma
basis, including Cleopatre as if the purchase had occurred at the beginning of
the periods presented, are not disclosed due to immateriality.
In February 1999, the Company paid $18,000,000 to the former owner of a foreign
subsidiary for the purchase of his minority interest and recorded this amount as
goodwill.
In December 1999, the Company completed the acquisition of Afterthoughts, a 768
store fashion accessory chain operated as a division of Venator Group, Inc.
("Venator"). The transaction was accounted for as a purchase. The purchase price
was $250 million, $200 million of which was financed through a credit facility.
Excess purchase price over fair market value of the underlying assets, primarily
fixed assets and inventory, was allocated primarily to goodwill, which was being
amortized over twenty five years through the end of Fiscal 2002. The Company's
results of operations include Afterthoughts from December 1, 1999 through
January 29, 2000.
The following table presents the fair value of assets acquired and the net cash
paid for the acquisition of Afterthoughts (in thousands):
Fair value of assets acquired $ 69,400
Allocated value of intangibles 180,600
---------
Cash paid for acquisition 250,000
Cash acquired in acquisition (189)
---------
Total cash paid in acquisition, net $ 249,811
=========
3. DISCONTINUED OPERATIONS
In January 2002, the Company announced its decision to discontinue the
operations of Lux Corp (Mr. Rags), a wholly-owned subsidiary that previously
represented its apparel segment. The Company's disposal plan is to sell
substantially all of the assets and liabilities of Lux Corp. by the end of
Fiscal 2003; however, the Board of Directors has authorized the disposal by
other means as well. The operations of Mr. Rags have been accounted for as a
discontinued operation in the Consolidated Financial Statements of the Company.
Although the Company's plan allows for the disposition by the end of Fiscal
2003, management estimates that the plan will be completed within the first six
months of Fiscal 2003. The Company has used a six month period of time in
estimating the loss during the phase-out period. The assets of Lux Corp. consist
primarily of inventory, fixed assets and prepaids, while the liabilities
primarily include trade payables, accrued expenses and deferred credits.
In connection with the discontinuation of Mr. Rags, the Company incurred a
charge of approximately $20.7 million before-tax, or $13 million after-tax, for
the loss on disposal of the segment in Fiscal 2002. Major components of the loss
include management's estimate of the excess of net assets over proceeds expected
33
from the sale, professional and credit facility fees expected to be incurred in
connection with the sale, and approximately $4 million of operating losses
during the phase-out period. Actual amounts may differ from these estimates. The
Company also incurred a charge of $13.7 million before-tax, or $8.6 million
after-tax, loss from discontinued operations recorded through the measurement
date in Fiscal 2002. This loss included a $1.3 million before-tax, or $0.8
million after-tax non-cash charge to write off the assets of stores whose
carrying value had become impaired. At February 2, 2002, the Company was a
guarantor on approximately $11.6 million of non-cancelable operating leases of
Mr. Rags.
4. CREDIT FACILITIES
In connection with the acquisition of Afterthoughts, the Company entered into a
credit facility pursuant to which the Company financed $200 million of the
purchase price for Afterthoughts. The credit facility includes a $40 million
revolving line of credit which matures on December 1, 2004, and a $175 million
five year term loan, the first installment of which was paid on December 31,
2000, with future installments, thereafter, payable on a quarterly basis
through December 1, 2004. The credit facility is prepayable without penalty and
bears interest at a margin of 125 basis points over the London Interbank
Borrowing Rate. The margin is adjusted periodically based on our performance as
it relates to certain financial covenants. On February 2, 2002 approximately
$25 million was outstanding on this line of credit, while $105 million was
outstanding under the term loan. The borrowings under this credit facility were
bearing interest at 3.5%, and the Company was in compliance with all debt
covenants at February 2, 2002. The Company cannot re-borrow amounts repaid
under the term loan. As a result, the Company has no future availability under
the term loan. The Company can re-borrow amounts repaid under the revolving
line of credit, subject to the terms of the credit facility. As of February 2,
2002, the Company had $15.0 million of availability under the revolving line of
credit. The Company also had $64,000 of issued letters of credit which are
supported and considered drawn against our line of credit.
In January 2002, the Company modified the credit facility terms through a First
Amendment and Consent dated as of February 1, 2002. The amendment modified
certain technical and financial covenants in connection with the planned
disposition of Mr. Rags (Lux Corp.) as a discontinued operation. In connection
with the amendment, the Company prepaid $20 million towards the regularly
scheduled term loan payments due in Fiscal 2003.
The Company's non-U.S. subsidiaries have credit facilities totaling
approximately $1.1 million with banks. The facilities are used for working
capital requirements, letters of credit and various guarantees. These credit
facilities have been arranged in accordance with customary lending practices in
their respective countries of operation. At February 2, 2002, the borrowings
totaled $1.1 million, bearing interest at rates at approximately 5%.
The scheduled maturity of the Company's credit facilities are as follows (in
thousands):
FISCAL YEAR:
2003 $21,040
2004 40,000
2005 70,104
Thereafter --
--------
$131,144
=========
34
5. COMMITMENTS AND CONTINGENCIES
The Company leases retail stores, offices and warehouse space and certain
equipment under operating leases which expire at various dates through the year
2027 with options to renew certain of such leases for additional periods. The
lease agreements covering retail store space provide for minimum rentals and/or
rentals based on a percentage of net sales. Rental expense for each of the three
fiscal years ended February 2, 2002 is set forth below:
FISCAL FISCAL FISCAL
2002 2001 2000
-------- -------- --------
(In thousands)
Minimum rentals $123,186 $122,356 $ 89,958
Rentals based on net sales 1,712 2,113 2,241
Other rental expense - equipment 22,788 21,140 16,473
-------- -------- --------
Rental expense from continuing operations $147,686 $145,609 $108,672
Rental expense from discontinued operations 13,752 13,200 9,682
-------- -------- --------
Total rental expense $161,438 $158,809 $118,354
======== ======== ========
Minimum aggregate rental commitments under non-cancelable operating leases are
summarized by fiscal year ending as follows (in thousands):
FROM FROM
CONTINUING DISCONTINUED
OPERATIONS OPERATIONS
------------ ------------
2003 $ 129,965 $ 13,195
2004 117,766 13,112
2005 105,423 11,679
2006 92,563 10,566
2007 82,875 9,698
Thereafter 276,206 22,208
------------ ------------
$ 804,798 $ 80,458
============ ============
Certain leases provide for payment of real estate taxes, insurance and other
operating expenses of the properties. In other leases, some of these costs are
included in the basic contractual rental payments. Certain leases contain
escalation clauses resulting from the pass-through of increases in operating
costs, property taxes and the effect on costs from changes in consumer price
indexes.
Approximately 36% of the merchandise purchased by the Company in North America
was manufactured in China. Any event causing a sudden disruption of imports from
China, or other foreign countries, could have a material adverse effect on the
Company's operations.
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK - The Company has authorized 1,000,000 shares of $1 par value
preferred stock, none of which has been issued. The rights and preferences of
such stock may be designated in the future by the Board of Directors.
CLASS A COMMON STOCK - The Class A common stock has only limited transferability
and is not traded on any stock exchange or any organized market. However, the
Class A common stock is convertible on a share-for-share basis into Common stock
and may be sold, as Common stock, in open market transactions. The Class A
common stock has ten votes per share. Dividends declared on the Class A common
stock are limited to 50% of the dividends declared on the Common stock.
35
TREASURY STOCK - Treasury stock acquired is recorded at cost. Occasionally, the
Company uses treasury stock to fulfill its obligations under its stock option
plans. When stock is issued pursuant to the stock option plans, the difference
between the cost of treasury stock issued and the option price is charged or
credited to additional paid-in capital.
STOCK REPURCHASE PROGRAM - In April 2000, the Company's Board of Directors
approved a $50 million stock repurchase program. In connection with this
program, the Company repurchased 2,546,200 shares at a cost of approximately $50
million. In December 2000, the Company retired these shares.
7. STOCK OPTIONS
In August 1996, the Board of Directors of the Company adopted, and on June 16,
1997 the Company's stockholders approved, the Claire's Stores, Inc. 1996 Stock
Option Plan and, then on June 8, 2000, the first amendment thereto (as amended,
the "1996 Plan"). The 1996 Plan replaced the Company's 1991 Stock Option Plan
(the "1991 Plan"), which had replaced the Company's 1982 Incentive Stock Option
Plan (the "1982 Plan") and the Company's 1985 Non-Qualified Stock Option Plan
(the "1985 Plan"), although options granted under the 1991 Plan remain
outstanding. Under the 1996 Plan, the Company may grant either incentive stock
options or non-qualified stock options to purchase up to 4,000,000 shares of
Common Stock, plus any shares unused or recaptured under the 1982 Plan, the 1985
Plan or the 1991 Plan. Incentive stock options granted under the 1996 Plan are
exercisable at prices equal to the fair market value of shares at the date of
grant, except that incentive stock options granted to any person holding 10% or
more of the total combined voting power or value of all classes of capital stock
of the Company, or any subsidiary of the Company, carry an exercise price equal
to 110% of the fair market value at the date of grant. The aggregate number of
shares granted to any one person may not exceed 500,000, and no stock option may
be exercised less than one year after the date granted. Each incentive stock
option or non-qualified stock option will terminate ten years after the date of
grant (or such shorter period as specified in the grant) and may not be
exercised thereafter.
Incentive stock options currently outstanding are exercisable at various rates
beginning one year from the date of grant, and expire five to ten years after
the date of grant. Non-qualified stock options currently outstanding are
exercisable at prices equal to the fair market value of the shares at the date
of grant and expire five to ten years after the date of grant.
Options to purchase an additional 738,149 shares were outstanding, but not yet
exercisable, at February 3, 2002 under the 1991 Plan and the 1996 Plan. There
were 3,939,773 shares of Common stock available for future option grants under
the 1996 Plan at February 2, 2002 (which includes shares recaptured from the
previous plans).
36
A summary of the activity in the Company's stock option plans is presented
below:
FISCAL 2002 FISCAL 2001 FISCAL 2000
--------------------------- ----------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------- ------------ --------------- ------------ --------------- ----------
Outstanding at beginning of period 1,360,264 $ 19.24 1,191,824 $ 18.21 1,222,291 $ 13.66
Options granted 40,000 $ 13.90 605,000 $ 17.82 536,000 $ 25.08
Options exercised (3,750) $ 12.17 (80,310) $ 5.95 (296,100) $ 8.28
Options canceled (111,537) $ 22.58 (356,250) $ 16.39 (270,367) $ 22.83
------------- --------------- ---------------
Outstanding at end of period 1,284,977 $ 18.80 1,360,264 $ 19.24 1,191,824 $ 18.21
============= =============== ===============
Exercisable at end of period 546,828 $ 17.56 432,665 $ 17.54 348,772 $ 14.81
============= =============== ===============
Weighted average fair value of options
granted during the period (see below) $ 7.70 $ 11.06 $ 24.92
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
FISCAL FISCAL FISCAL
2002 2001 2000
--------------------- -------------------- --------------------
Expected dividend yield 0.65% 0.65% 0.64%
Expected stock price volatility 50.00% 50.00% 37.65%
Risk-Free interest rate 2.97% 6.14% 6.00%
Expected life of options 4.5 and 9.5 years 4.5 and 9.5 years 4.5 and 9.5 years
The following table summarizes information about stock options outstanding at
February 2, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- --------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER AVERAGE
SHARES CONTRACTUAL EXERCISE OF EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE SHARES PRICE
- ------------------------- --------------- --------------- --------------- --------------- ---------------
$5.11 to $17.31 270,627 5.3 $11.57 122,396 $10.20
$17.75 to $17.75 4,450 6.0 $17.75 1,650 $17.75
$17.81 to $17.81 300,000 8.0 $17.81 60,000 $17.81
$17.92 to $20.38 415,000 5.9 $18.92 268,132 $18.17
$21.25 to $30.25 294,900 6.4 $26.29 94,650 $25.21
--------------- ---------------
$5.11 to $30.25 1,284,977 6.4 $18.80 546,828 $17.56
=============== ===============
37
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation",
issued in October 1995. As permitted under the provisions of SFAS No. 123, the
Company applies the principles of APB Opinion 25 and related Interpretations in
accounting for its stock option plans and, accordingly, does not recognize
compensation cost. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant date as prescribed by
SFAS No. 123, net income and earnings per share would have been reduced to the
pro forma amounts indicated in the table below (in thousands except per share
amounts):
FISCAL YEAR ENDED
-------------------------------------------
2002 2001 2000
------------ ----------- ------------
Net income - as reported $19,583 $64,975 $87,935
Net income - pro forma 18,509 63,847 87,217
Basic net income per share - as reported 0.40 1.30 1.72
Basic net income per share - proforma 0.38 1.28 1.71
Diluted net income per share - as reported 0.40 1.30 1.71
Diluted net income per share - pro forma 0.38 1.27 1.70
8. EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLAN
The Company has adopted a Profit Sharing Plan under Section 401(k) of the
Internal Revenue Code. This plan allows employees who serve more than 1,000
hours per year to defer up to 18% of their income through contributions to the
plan. In line with the provisions of the plan, for every dollar the employee
contributes the Company will contribute an additional $.50, up to 2% of the
employee's salary. In Fiscal 2002, Fiscal 2001 and Fiscal 2000, the cost of
Company matching contributions was $493,000, $439,000 and $435,000,
respectively.
DEFERRED COMPENSATION PLANS
In August 1999, the Company adopted a deferred compensation plan that enables
certain associates of the Company to defer a specified percentage of their cash
compensation. The plan generally provides for payments upon retirement, death,
or termination of employment. Participants may elect to defer a percentage of
their cash compensation while the Company contributes a specified percentage of
the participants' cash compensation based on the participants' number of years
of service. All contributions are immediately vested. The Company's obligations
under this plan are funded by making contributions to a rabbi trust. Assets held
under this plan are included in cash and cash equivalents on the Company's
balance sheet and totaled $1.2 million, $682,000 and $249,000 at February 2,
2002, February 3, 2001 and January 29, 2000 respectively. The obligations under
the plan are included in accrued expenses. Total Company contributions were
$194,000, $154,000 and $61,000 in Fiscal 2002, 2001 and 2000, respectively.
INCENTIVE COMPENSATION PLAN
In Fiscal 2001, the Company adopted, which was also approved by the Company's
shareholders, an incentive compensation plan for the Chairman of the Board.
Under this plan, a percentage equal to twice the percentage increase in the
consolidated pretax income of the Company over the prior fiscal year, will be
applied against the Chairman of the Board's base salary in determining the
amount of incentive compensation earned. No amounts were paid or accrued during
Fiscal 2002 or 2001 by the Company pursuant to this plan.
38
9. INCOME TAXES
Income before income taxes from continuing operations is as follows:
FISCAL YEAR
-------------------------------------------------------
2002 2001 2000
------------- ------------- --------------
(In thousands)
Domestic $48,449 $77,810 $123,271
Foreign 16,147 26,913 23,833
------------- ------------- --------------
$64,596 $104,723 $147,104
============= ============= ==============
The components of income tax expense (benefit) consist of the following:
FISCAL YEAR ENDED
-----------------------------------------------
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
------------ ------------- ------------
(In thousands)
Federal:
Current $14,547 $20,839 $39,872
Deferred 3,626 6,928 101
------------ ------------- ------------
18,173 27,767 39,973
------------ ------------- ------------
State:
Current 2,065 2,770 5,395
Deferred 432 714 33
------------ ------------- ------------
2,497 3,484 5,428
------------ ------------- ------------
Foreign:
Current 2,800 5,700 8,500
------------ ------------- ------------
Total income tax expense from continuing operations 23,470 36,951 53,901
Tax benefit of discontinued operations (12,925) (1,678) (3,041)
------------ ------------- ------------
Total income tax expense $10,545 $35,273 $50,860
============ ============= ============
39
The approximate tax effect on each type of significant components of the
Company's net deferred tax asset are as follows:
FISCAL YEAR ENDED
-----------------------
FEB. 2, FEB. 3,
2002 2001
-------- --------
(In thousands)
Deferred tax assets:
Depreciation $ 1,605 $ 1,994
Accrued expenses 1,754 2,010
Deferred rent 2,796 2,635
Discontinued operations 8,251 --
Other 2,092 995
Net operating loss carryforwards 1,324 1,565
-------- --------
Total gross deferred tax assets 17,822 9,199
Valuation allowance (1,324) (1,565)
-------- --------
Total deferred tax assets, net 16,498 7,634
Deferred tax liabilities:
Operating leases 4,441 2,925
Intangible amortization 6,230 2,828
Other 222 133
-------- --------
Total deferred tax liabilities 10,893 5,886
-------- --------
Net deferred tax asset $ 5,605 $ 1,748
======== ========
The provision for income taxes from continuing operations differs from an amount
computed at the statutory rates as follows:
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
-------- ------- ---------
U.S. income taxes at statutory rates 35.0% 35.0% 35.0%
Foreign income tax benefit at less than domestic rate (3.6) (3.6) (1.0)
State and local income taxes, net of federal tax benefit 2.6 2.6 2.6
Other 1.0 1.0 0.4
------ ------ ------
35.0% 35.0 % 37.0%
====== ====== ======
The Company believes that the realization of the net deferred tax assets is more
likely than not, based on the expectation that the Company will generate the
necessary taxable income in future periods. As of February 2, 2002, there are
accumulated unremitted earnings from the Company's foreign subsidiaries on which
deferred taxes have not been provided as the undistributed earnings of the
foreign subsidiaries are indefinitely reinvested. Based on the current United
States and foreign subsidiaries income tax rates, it is estimated that United
States taxes, net of foreign tax credits, of approximately $9.8 million would be
due upon repatriation.
As of February 2, 2002, foreign subsidiaries of the Company had available net
operating loss ("NOL") carryforwards of approximately $2.7 million for federal
income tax purposes, of which $2.2 million has an indefinite expiration. The
remaining $500 thousand expires between fiscal years 2003 and 2005.
Additionally, Lux Corporation had available state NOL carryforwards of $9.7
million for state income tax purposes. The state carryforwards are subject to
various expiration dates pursuant to the applicable statutes of the respective
taxing jurisdictions. Generally, a valuation allowance has been established for
these carryforwards because the ability to utilize them is uncertain. The change
40
in the valuation allowance of $241 thousand from Fiscal 2001 to Fiscal 2002 was
primarily the result of utilization, net of expiration of NOL carryforwards in
the Company's foreign subsidiaries, offset by additional valuation allowance
attributable to state NOL carryforwards of Lux Corp. The net change in the total
valuation allowance for the years ended fiscal 2002, 2001 and 2000 was a
(decrease) increase of $(241,000), $1,565,000 and $0, respectively.
10. STATEMENTS OF CASH FLOWS
Payments of income taxes were $15,006,000 in Fiscal 2002, $42,060,000 in Fiscal
2001 and $46,987,000 in Fiscal 2000. Payments of interest were $12,467,000 in
Fiscal 2002, $12,918,000 in Fiscal 2001 and $1,496,000 in Fiscal 2000.
11. RELATED PARTY TRANSACTIONS
LEASING TRANSACTIONS
The Company leases its executive offices located in Pembroke Pines, Florida from
Rowland Schaefer & Associates, a general partnership owned by two corporate
general partners. One corporate general partner is controlled by the Company's
Chairman, and the other corporate general partner is controlled by immediate
family members of the Company's Chairman, including the Company's two Co-Vice
Chairpersons. The Company's Chief Financial Officer has an approximate 5%
interest in one of the corporate general partners. During Fiscal 2002, the
Company paid Rowland Schaefer & Associates, Inc. $608,000 for rent and $239,000
for real estate taxes and operating expenses as required under the lease. The
lease expires on July 31, 2005.
The Company leases retail space for a Claire's Boutiques store in New York City
from 720 Lexington Realty LLC, a limited liability corporation that is
controlled by immediate family members of the Company's Chairman, including the
Company's two Co-Vice Chairpersons and another daughter of the Company's
Chairman. The Company entered into the lease with 720 Lexington Realty LLC in
Fiscal 2002, which is when 720 Lexington Realty LLC purchased the property from
the prior owner. During Fiscal 2002, the Company paid $255,000 of rent and
$1,463 for percentage of sales rent to 720 Lexington Realty LLC. The terms under
the lease with 720 Lexington Realty LLC are the same terms as were in effect
when the Company leased the retail space from an unaffiliated third party prior
to the purchase by 720 Lexington Realty LLC. The lease expires on January 31,
2005.
Management believes that these lease arrangements are on no less favorable terms
than we could obtain from unaffiliated third parties.
LOANS TO OFFICERS
The Company has outstanding loans to certain of its executive officers. At
February 2, 2002, the Company had an outstanding loan to its Chief Financial
Officer in the principal amount of $600,000, which represents the greatest
principal amount outstanding during Fiscal 2002. The loan bears interest at a
floating rate equal to the applicable minimum Federal rate, which was 2.71% per
annum as of February 2, 2002, is payable on demand, and was made for real estate
improvements. At February 2, 2002, the Company had an outstanding loan to Mark
Smith, its Chief Executive of Europe in the principal amount of 300,000 British
pounds (or approximately $513,300 at the current exchange rate), which
represents the greatest principal amount outstanding during Fiscal 2002. The
loan bears no interest, is payable on demand upon the occurrence of certain
events, and was made for real estate improvements. At February 2, 2002, the
Company had an outstanding loan to the wife of its Chairman in the principal
amount of $250,000, which represents the greatest principal amount outstanding
during Fiscal 2002. The loan to its Chairman's wife was made for personal
expenses and was repaid in April 2002. During the time the loan was outstanding,
the loan bore interest at a floating rate equal to the applicable Federal rate,
which was 2.71% per annum as of February 2, 2002, and was payable on demand. At
February 2, 2002, the Company also had two outstanding loans that were made to
its former President and Chief Operating Officer, Thomas Souza, in the aggregate
principal amount of $551,000. The loans bear interest at a rate of 8.5% per
annum and are payable upon demand. The Company has filed a suit against Mr.
Souza for, among other things, repayment of these loans. As part of this
lawsuit, Mr. Souza is challenging the terms and purposes for the loan.
41
OTHER ARRANGEMENTS WITH OUR CHAIRMAN
From time to time, the Company advances payments for personal expenses on behalf
of its Chairman. At February 2, 2002, the Company had advanced approximately
$433,000 of personal expenses for its Chairman. As of April 30, 2002, the
Chairman had reimbursed the Company for all of these expenses. These advanced
expenses, as well as the $250,000 loan to the Chairman's wife, were repaid to
the Company from the proceeds of a $750,000 loan made by the Company to its
Chairman. The loan was made in April 2002, bears interest at a rate of 4.6% per
annum and matures in April 2004.
The Company has made discretionary annual payments (prorated for any partial
year) of $60,000 to the wife of its Chairman since her retirement in 1999. These
discretionary payments were terminated in April 2002 and were made in
consideration of her past services to the Company as a director and vice
president.
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL YEAR ENDED FEBRUARY 2, 2002
-------------------------------------------------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR YEAR
----------- ----------- ----------- ----------- -----------
(In thousands except per share amounts)
Net sales $ 212,876 $ 221,312 $ 204,139 $ 280,410 $ 918,737
Gross profit 106,198 94,303 97,509 146,942 444,952
Income (loss) from continuing operations 9,227 (1,017) 3,105 29,811 41,126
Net income 7,748 (5,927) 2,380 15,382 19,583
Basic net income per share
Income (loss) from continuing operations $ 0.19 $ (0.02) $ 0.06 $ 0.61 $ 0.84
Loss from discontinued operations (0.03) (0.10) (0.01) (0.29) (0.44)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 0.16 $ (0.12) $ 0.05 $ 0.32 $ 0.40
=========== =========== =========== =========== ===========
Diluted net income per share
Income (loss) from continuing operations $ 0.19 $ (0.02) $ 0.07 $ 0.61 $ 0.84
Loss from discontinued operations (0.03) (0.10) (0.02) (0.29) (0.44)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 0.16 $ (0.12) $ 0.05 $ 0.32 $ 0.40
=========== =========== =========== =========== ===========
FISCAL YEAR ENDED FEBRUARY 3, 2001
-------------------------------------------------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR YEAR
----------- ----------- ----------- ----------- -----------
(In thousands except per share amounts)
Net sales $ 209,760 $ 227,474 $ 213,795 $ 295,686 $ 946,715
Gross profit 100,530 121,238 110,709 152,625 485,103
Income (loss) from continuing operations 6,282 18,250 12,888 30,352 67,772
Net income 3,993 17,112 13,844 30,026 64,975
Basic net income per share
Income (loss) from continuing operations $ 0.12 $ 0.36 $ 0.26 $ 0.62 $ 1.36
Loss from discontinued operations (0.04) (0.02) 0.02 (0.01) (0.06)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 0.08 $ 0.34 $ 0.28 $ 0.61 $ 1.30
=========== =========== =========== =========== ===========
Diluted net income per share
Income (loss) from continuing operations $ 0.12 $ 0.36 $ 0.26 $ 0.62 $ 1.35
Loss from discontinued operations (0.04) (0.02) 0.02 (0.01) (0.05)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 0.08 $ 0.34 $ 0.28 $ 0.61 $ 1.30
=========== =========== =========== =========== ===========
42
13. SEGMENT REPORTING
The Company is primarily organized based on the geographic markets in which it
operates. Under this organizational structure, the Company currently has three
reportable segments: North American Accessory, International Accessory and the
Apparel Stores (the Company has accounted for this segment as a discontinued
operation).
Information about the Company's operations by segment is as follows:
FISCAL YEAR ENDED
---------------------------------------
2002 2001 2000
--------- --------- ---------
(In thousands)
Net sales:
North American Accessory $ 711,299 $ 764,154 $ 625,652
International Accessory 207,438 182,561 139,196
--------- --------- ---------
Total net sales $ 918,737 $ 946,715 $ 764,848
========= ========= =========
Operating income:
North American Accessory $ 85,300 $ 124,023 $ 135,620
International Accessory 28,659 32,662 31,182
--------- --------- ---------
Total operating income $ 113,959 $ 156,685 $ 166,802
========= ========= =========
Depreciation and amortization:
North American Accessory $ 32,402 $ 34,039 $ 22,442
International Accessory 10,529 8,000 4,658
--------- --------- ---------
Total depreciation and amortization $ 42,931 $ 42,039 $ 27,100
========= ========= =========
Interest expense (income), net:
North American Accessory $ 7,987 $ 11,253 $ (2,398)
International Accessory (1,555) (1,330) (1,075)
--------- --------- ---------
Total interest expense (income), net $ 6,432 $ 9,923 $ (3,473)
========= ========= =========
Gain on investments $ -- $ -- $ (3,929)
========= ========= =========
Income from continuing operations before income taxes $ 64,596 $ 104,723 $ 147,104
========= ========= =========
Identifiable assets:
North American Accessory $ 187,074 $ 225,372 $ 442,234
International Accessory 125,315 128,934 93,057
Net Assets of Discontinued Operation -- 26,567 21,733
Corporate 299,186 279,388 138,268
--------- --------- ---------
Total assets $ 611,575 $ 660,261 $ 695,292
========= ========= =========
Capital expenditures:
North American Accessory $ 31,257 $ 25,004 $ 25,025
International Accessory 13,798 18,401 17,324
Discontinued Operation 2,603 2,054 6,517
--------- --------- ---------
Total capital expenditures $ 47,658 $ 45,459 $ 48,866
========= ========= =========
Identifiable assets are those assets that are identified with the operations of
each segment. Corporate assets consist mainly of cash and cash equivalents,
investments in affiliated companies and other assets. Operating income
represents gross profit less selling, general and administrative costs.
Approximately 18%, 15% and 15% of the Company's net sales were in the United
Kingdom for Fiscal Years' 2002, 2001 and 2000, respectively.
43
In addition, a significant amount of merchandise purchases come from China. Any
change in the political or trade relationship with the United States affecting
our ability to import goods in quantities or at prices similar to past practices
could have a material adverse affect on the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10,11,12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Items 10, 11, 12 and 13 will be contained in our
definitive Proxy Statement for our 2002 Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission no later than 120 days after
the end of our fiscal year covered by this report pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended, and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report.
1. FINANCIAL STATEMENTS
PAGE NO.
--------
Independent Auditors' Report 24
Consolidated Balance Sheets as of February 2, 2002 and
February 3, 2001 25
Consolidated Statements of Income and Comprehensive Income
for the three fiscal years ended February 2, 2002 26
Consolidated Statements of Changes in Stockholders'
Equity for the three fiscal years ended February 2, 2002 27
Consolidated statements of Cash Flows for the three fiscal
ended February 2, 2002 28
Notes to Consolidated Financial Statements 29
2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the required information is included in
the consolidated financial statements or the notes thereto, or the omitted
schedules are not applicable.
3. EXHIBITS
(2)(a) Agreement and Plan of Merger dated as of March 9, 1998 among the
Company, CSI Acquisition Corp., Lux Corporation, and David Shih, Eva
Shih, Daniel Shih, Douglas Shih, the Shih Irrevocable Trust and
Crestwood Partners LLC, as amended by letter amendment dated March
23, 1998 and addendum thereto dated March 24, 1998 (incorporated by
reference to exhibit 2 (a) to the Company's Annual Report on form
10-K for the fiscal year ended January 30, 1999).
44
(2)(b) Stock Purchase Agreement dated as of November 11, 1998 between the
Company and Peter Bossert, an individual, for any and all
shares/Company contributions of: Bijoux One AG, Zurich, Switzerland,
Bijoux One Trading AG, Zurich, Switzerland, Bijoux One Trading
GesmbH, Brunn am Gebirge, Austria and Bosco GmbH, Stuttgart, Germany
(omitted schedules will be furnished supplementally to the
Commission upon request (incorporated by reference to exhibit 2 (b)
to the Company's Annual Report on form 10-K for the fiscal year
ended January 30, 1999).
(2)(c) Asset Purchase Agreement, dated as of November 1, 1999, by and
between the Company, Venator Group, Inc., Venator Group Specialty,
Inc., Venator Group Canada, Inc., Afterthoughts Boutiques, Inc. and
Afterthoughts (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated December 1, 1999).
(2)(d) Agreement and Plan of Merger, dated as of April 28, 2000, by and
between Claire's Stores, Inc. and CSI Florida Acquisition, Inc.
(incorporated by reference to Appendix A to the Company's Proxy
Statement relating to the 2000 Annual Meeting of Stockholders).
(3)(a) Amended and Restated Articles of Incorporation of Claire's Stores,
Inc. (formerly known as CSI Florida Acquisition, Inc.) (incorporated
by reference to Exhibit 3.1 to the Company's Current Report on Form
8-K dated June 30, 2000).
(3)(b) Bylaws of Claire's Stores, Inc. (formerly known as CSI Florida
Acquisition, Inc.) (incorporated by reference to Exhibit 3.2 to the
Company's Current Report on Form 8-K dated June 30, 2000).
(10)(a) Credit Agreement, dated as of December 1, 1999, by and among, the
Company, the several banks and other financial institutions or
entities from time to time parties thereto, Bear Stearns & Co.,
Inc., as sole lead arranger and sole book manager, Bear Stearns
Corporate Lending, Inc., as syndication agent, Suntrust Banks South
Florida, N.A., as documentation agent (incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated
December 1, 1999).
(10)(b) Form of Note (incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K dated December 1, 1999).
(10)(c) Form of Guarantee (incorporated by reference to Exhibit 4.3 to the
Company's Current Report on Form 8-K dated December 1, 1999).
(10)(d) Incentive Stock Option Plan of the Company, as amended (incorporated
by reference to Exhibit 10(a) to the Company's Annual Report on Form
10-K for the fiscal year ended February 1, 1986).
(10)(e) Non-Qualified Stock Option Plan of the Company, as amended
(incorporated by reference to Exhibit 10(e) to the Company's Annual
Report on Form 10-K for the fiscal year ended February 1, 1986).
(10)(f) 1991 Stock Option Plan of the Company (incorporated by reference to
Appendix A to the Company's Proxy Statement relating to the 1991
Annual Meeting of Stockholders).
(10)(g) 1996 Stock Option Plan of the Company (incorporated by reference to
Appendix A to the Company's Proxy Statement relating to the 1997
Annual Meeting of Stockholders).
(10)(h) 401(k) Profit Sharing Plan, as amended (incorporated by reference to
Exhibit 10(e) to the Company's Annual Report on Form 10-K for the
fiscal year ended February 1, 1992).
45
(10)(i) Office Lease Agreement dated September 8, 1989 between the Company
and Two Centrum Plaza Associates (incorporated by reference to
Exhibit 10(h) to the Company's Annual Report on Form 10-K for the
fiscal year ended February 2, 1991).
(10)(j) Amendment of Office Lease Agreement dated July 31, 1990 between the
Company and Two Centrum Plaza Associates (incorporated by reference
to exhibit 10 (g) to the Company's Annual Report on form 10-K for
the fiscal year ended January 30, 1999).
(10)(k) Addendum to Office Lease dated September 8, 1989 between the Company
and Two Centrum Plaza Associates (incorporated by reference to
Exhibit 10(j) to the Company's Annual Report on Form 10-K for the
fiscal year ended February 2, 1991).
(10)(l) Second addendum to office lease dated January 30, 1997 between the
Company and Two Centrum Plaza Associates (incorporated by reference
to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the
fiscal year ended February 1, 1997).
(10)(m) Lease between Chancellory Commons I Limited Partnership and Claire's
Boutiques, Inc. dated August 31, 1990 (incorporated by reference to
Exhibit 10(i) to the Company's Annual Report on form 10-K for the
fiscal year ended February 1, 1992).
(10)(n) Consent and Waiver, dated as of June 13, 2000, to the Credit
Agreement, dated as of December 1, 1999, by and among the Company,
the several banks and other financial institutions or entities from
time to time parties thereto, Bear Stearns & Co., Inc., Bear Stearns
Corporate Lending, Inc., SunTrust Banks South Florida, N.A. and
Fleet National Bank (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarterly period
ended July 29, 2000).
(10)(o) First Amendment to 1996 Stock Option Plan of the Company
(incorporated by reference to Appendix D of the Company's Proxy
Statement relating to the 2000 Annual Meeting of Stockholders).
(10)(p) 2000 Incentive Compensation Plan for the Chairman of the Board of
the Company (incorporated by reference to Appendix E of the
Company's Proxy Statement relating to the 2000 Annual Meeting of
Stockholders).
(10)(q) Promissory Note dated January 23, 2002 in the principal amount of
$600,000 by the Company's Chief Financial Officer.
(10)(r) Deed (Promissory Note) dated December 1997 in the principal amount
of(pound)300,000 by the Company's Chief Executive of Europe.
(10)(s) Promissory Note dated January 23, 2002 in the Principal amount of
$250,000 by the wife of the Company's Chairman.
(10)(t) First Amendment and Consent, dated February 1, 2002, to the Credit
Agreement, dated as of December 1, 1999, by and among the Company,
the several banks and other financial institutions or entities from
time to time parties thereto, Bear Stearns & Co., Inc., Bear Stearns
Corporate Lending, Inc., SunTrust Banks South Florida, N.A. and
Fleet National Bank.
(21) Subsidiaries of the Company (incorporated by reference to Exhibit 21
to the Company's Annual Report on Form 10-K for the fiscal year
ended February 3, 2001).
(23) Consent of KPMG LLP.
46
(24) Power of Attorney (included on signature page).
Each management contract or compensatory plan or arrangement to be
filed as an exhibit to this report pursuant to Item 14(c) is listed
in exhibit nos. (10)(d), (10)(e), (10)(f), 10(g), 10(h), (10)(o) and
(10)(p).
47
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
CLAIRE'S STORES, INC.
By /s/ ROWLAND SCHAEFER
-----------------------------
Rowland Schaefer, Chief
Executive Officer, President
and Chairman of the Board of
Directors
May 2, 2002
POWER OF ATTORNEY
We, the undersigned, hereby constitute Ira D. Kaplan and Michael
Rabinovitch, or either of them, our true and lawful attorneys-in-fact with full
power to sign for us in our name and in the capacity indicated below any and all
amendments and supplements to this report, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact or their substitutes, each acting alone, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on April 13, 2002.
/s/ ROWLAND SCHAEFER
--------------------------------
Rowland Schaefer, Chief Executive
Officer, President and Chairman
of the Board of Directors
/s/ MARLA SCHAEFER
--------------------------------
Marla Schaefer, Vice Chairman of
the Board of Directors
/s/ EILEEN SCHAEFER
--------------------------------
Eileen B. Schaefer, Vice Chairman
of the Board of Directors
/s/ IRA KAPLAN
--------------------------------
Ira D. Kaplan, Senior Vice
President, Chief Financial
Officer and Director (Principal
Financial and Accounting Officer)
/s/ IRWIN KELLNER
--------------------------------
Irwin Kellner, Director
/s/ BRUCE G. MILLER
--------------------------------
Bruce G. Miller, Director
/s/ STEVEN TISHMAN
--------------------------------
Steven Tishman, Director
48