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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended May 5, 2018

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 Nos. 1-8899, 333-148108 and 333-175171

 

 

Claire’s Stores, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Florida   59-0940416

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2400 West Central Road,

Hoffman Estates, Illinois

  60192
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (847) 765-1100

 

 

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  ☐    No  ☒

Explanatory Note: While registrant is not subject to the filing requirements of Section 13 or 15(d) of the Exchange Act, it has filed all reports pursuant to Section 13 or 15(d) of the Exchange Act during the preceding 12 months.

Indicate by check mark whether registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files )    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of June 1, 2018, 100 shares of the Registrant’s common stock, $0.001 par value, were outstanding.

 

 

 


Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

INDEX

 

 
     PAGE NO.  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements (Debtor-in-Possession)

     3  

Unaudited Condensed Consolidated Balance Sheets as of May  5, 2018 and February 3, 2018

     3  

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended May 5, 2018 and April 29, 2017

     4  

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended May 5, 2018 and April 29, 2017

     5  

Notes to Unaudited Condensed Consolidated Financial Statements

     6  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     37  

Item 4. Controls and Procedures

     38  

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     39  

Item 1A. Risk Factors

     39  

Item 6. Exhibits

     39  

SIGNATURES

     41  

Ex-31.1 Section 302 Certification of CEO

  

Ex-31.2 Section 302 Certification of CFO

  

Ex-32.1 Section 906 Certification of CEO

  

Ex-32.2 Section 906 Certification of CFO

  

 

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Table of Contents

PART I. FINANCIAL INFORMATION

CLAIRE’S STORES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

     May 5, 2018     February 3, 2018  
     (In thousands, except share and per share amounts)  

ASSETS

    

Current assets:

    

Cash

   $ 56,082     $ 42,446  

Inventories

     134,545       134,690  

Prepaid expenses

     38,931       32,284  

Other current assets

     23,939       26,858  
  

 

 

   

 

 

 

Total current assets

     253,497       236,278  
  

 

 

   

 

 

 

Property and equipment:

    

Furniture, fixtures and equipment

     216,416       223,644  

Leasehold improvements

     291,016       301,338  
  

 

 

   

 

 

 
     507,432       524,982  

Accumulated depreciation and amortization

     (397,487     (405,284
  

 

 

   

 

 

 
     109,945       119,698  
  

 

 

   

 

 

 

Leased property under capital lease:

    

Land and building

     18,055       18,055  

Accumulated depreciation and amortization

     (7,442     (7,216
  

 

 

   

 

 

 
     10,613       10,839  
  

 

 

   

 

 

 

Goodwill

     1,132,575       1,132,575  

Intangible assets, net of accumulated amortization of $88,043 and $87,295, respectively

     452,822       457,078  

Other assets

     56,678       44,255  
  

 

 

   

 

 

 
     1,642,075       1,633,908  
  

 

 

   

 

 

 

Total assets

   $ 2,016,130     $ 2,000,723  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

    

Current liabilities:

    

Current portion of long-term debt, net

     87,298       1,894,039  

Debtor-in-possession term loan

     60,000       —    

Trade accounts payable

     44,997       62,965  

Income taxes payable

     7,290       4,049  

Accrued interest payable

     1,196       56,182  

Accrued expenses and other current liabilities

     92,737       94,934  
  

 

 

   

 

 

 

Total current liabilities

     293,518       2,112,169  
  

 

 

   

 

 

 

Long-term debt, net

     208,847       250,355  

Obligation under capital lease

     15,846       15,970  

Deferred tax liability

     30,537       32,614  

Deferred rent expense

     33,062       34,851  

Unfavorable lease obligations and other long-term liabilities

     —         10,040  
  

 

 

   

 

 

 
     288,292       343,830  
  

 

 

   

 

 

 

Liabilities subject to compromise

     1,910,230       —    

Commitments and contingencies

    

Stockholder’s deficit:

    

Common stock par value $0.001 per share; authorized 1,000 shares;
issued and outstanding 100 shares

     —         —    

Additional paid-in capital

     630,759       630,719  

Accumulated other comprehensive loss, net of tax

     (34,345     (25,302

Accumulated deficit

     (1,072,324     (1,060,693
  

 

 

   

 

 

 
     (475,910     (455,276
  

 

 

   

 

 

 

Total liabilities and stockholder’s deficit

   $ 2,016,130     $ 2,000,723  
  

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands)

 

     Three Months     Three Months  
     Ended     Ended  
     May 5, 2018     April 29, 2017  

Net sales

   $ 311,006     $ 299,621  

Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)

     155,648       151,788  
  

 

 

   

 

 

 

Gross profit

     155,358       147,833  
  

 

 

   

 

 

 

Other expenses (income):

    

Selling, general and administrative

     125,781       110,512  

Depreciation and amortization

     13,194       11,203  

Severance and transaction-related costs

     376       143  

Other income, net

     (4,006     (2,701
  

 

 

   

 

 

 
     135,345       119,157  
  

 

 

   

 

 

 

Operating income before interest, reorganization items and income taxes

     20,013       28,676  

Reorganization items, net

     10,009       —    

Interest expense, net

     24,889       43,580  
  

 

 

   

 

 

 

Loss before income tax benefit

     (14,885     (14,904

Income tax benefit

     (3,254     (8,146
  

 

 

   

 

 

 

Net loss

   $ (11,631   $ (6,758
  

 

 

   

 

 

 

Net loss

   $ (11,631   $ (6,758

Other comprehensive (loss) income:

    

Foreign currency translation adjustments

     (2,535     44  

Net (loss) gain on intra-entity foreign currency transactions, net of tax expense of $40 and $229

     (6,508     1,881  
  

 

 

   

 

 

 

Other comprehensive (loss) income

     (9,043     1,925  
  

 

 

   

 

 

 

Comprehensive loss

   $ (20,674   $ (4,833
  

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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CLAIRE’S STORES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Three Months
Ended

May 5, 2018
    Three Months
Ended
April 29, 2017
 

Cash flows from operating activities:

    

Net loss

   $ (11,631   $ (6,758

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     13,194       11,203  

Reorganization items, net

     10,009       —    

Amortization of lease rights and other assets

     1,669       1,069  

Amortization of debt issuance costs

     1,179       2,187  

Accretion of debt premium

     (360     (721

Non-cash pay-in-kind interest expense

     2,889       —    

Net unfavorable accretion of lease obligations

     9       (64

Loss on sale/retirement of property and equipment, net

     33       118  

Stock-based compensation expense

     40       62  

(Increase) decrease in:

    

Inventories

     (2,250     (9,694

Prepaid expenses

     (8,105     (1,371

Other assets

     (4,492     (1,434

Increase (decrease) in:

    

Trade accounts payable

     2,423       (1,069

Income taxes payable

     1,771       (962

Accrued interest payable

     18,068       (29,263

Accrued expenses and other liabilities

     (10,277     (10,834

Deferred income taxes

     (7,941     (7,597

Deferred rent expense

     (1,298     (525
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     4,930       (55,653
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisition of property and equipment

     (5,164     (3,365

Acquisition of intangible assets/lease rights

     (10     (28
  

 

 

   

 

 

 

Net cash used in investing activities

     (5,174     (3,393
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from debtor-in-possession credit facility

     57,000       —    

Repayments under debtor-in-possession credit facility

     (57,000     —    

Proceeds from debtor-in-possession term loans

     60,000       —    

Debt issuance costs related to debtor-in-possession financing

     (4,038     —    

Proceeds from revolving credit facilities

     43,000       69,000  

Payments on revolving credit facilities

     (74,000     (16,200

Payment on current portion of long-term debt

     (3,000     (18,420

Payments of unamortized interest related to long-term debt

     (5,321     (4,272

Payment of debt issuance costs

     (2     (347

Principal payments on capital lease

     (99     (76
  

 

 

   

 

 

 

Net cash provided by financing activities

     16,540       29,685  
  

 

 

   

 

 

 

Effect of foreign currency exchange rate changes on cash and cash equivalents

     (2,660     (694
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     13,636       (30,055

Cash and cash equivalents, at beginning of period

     42,446       55,792  
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 56,082     $ 25,737  
  

 

 

   

 

 

 
Supplemental disclosure of cash flow information:     

Interest paid

   $ 11,334     $ 71,159  

Income taxes paid

     1,647       1,642  

Non-cash supplemental financing activities:

    

Increase in term loans due 2021 from pay-in-kind interest

   $ 2,976     $ —    

Decrease in adjustment to carrying value

     2,976       —    

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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CLAIRE’S STORES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements of Claire’s Stores, Inc. (the “Company”) have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the results for the interim periods presented have been included. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended February 3, 2018 filed with the Securities and Exchange Commission, including Note 2 to the Consolidated Financial Statements included therein, which discusses principles of consolidation and summary of significant accounting policies.

The Unaudited Condensed Consolidated Financial 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 about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures regarding contingent assets and liabilities and reported amounts of revenues and expenses. Such estimates include, but are not limited to, the value of inventories, goodwill, intangible assets and other long-lived assets, legal contingencies and assumptions used in the calculation of income taxes, stock-based compensation, residual values and other items. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, and energy markets and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates will be reflected in the financial statements in those future periods when the changes occur.

Due to the seasonal nature of the retail industry and the Company’s business, the results of operations for interim periods of the year are not necessarily indicative of the results of operations for future quarters or on an annualized basis.

As discussed further in Note 2 entitled “Bankruptcy filing,” on March 19, 2018 (the “Commencement Date”), the Company and certain of its domestic subsidiaries (collectively with the Company, the “Debtors”), commenced voluntary chapter 11 cases (the “Chapter 11 Cases”) by filing voluntary petitions for reorganization under chapter 11 of title 11 (“Chapter 11”) of the United States Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Debtors are authorized to continue to operate their businesses and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.

Ability to Continue as a Going Concern—The accompanying Condensed Consolidated Financial Statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The Company’s ability to continue as a going concern is contingent upon its ability to comply with the financial and other covenants contained in the debtor-in-possession credit facility (the “DIP Facility”) described in Note 2 – Bankruptcy Filing, the Bankruptcy Court’s approval of its Chapter 11 plan of reorganization, its ability to successfully implement a restructuring plan, and obtain new financing, among other factors. The Company has significant indebtedness. The Company’s level of indebtedness has adversely impacted and

 

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is continuing to adversely impact its financial condition. The Company’s financial condition, the defaults under its debt agreements, and the risks and uncertainties surrounding our Chapter 11 proceedings, raise substantial doubt as to the Company’s ability to continue as a going concern.

As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty. The filing of the Chapter 11 petitions constituted an event of default with respect to certain of the Company’s existing debt obligations. While operating as debtors-in-possession under Chapter 11, the Company may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business and subject to restrictions contained in the DIP Credit Agreement (see Note – 5 Debt) and applicable orders of the Bankruptcy Court, for amounts other than those reflected in the accompanying Condensed Consolidated Financial Statements. Further, the Company’s restructuring plan, to the extent confirmed by the Bankruptcy Court, could materially impact the amounts and classifications of assets and liabilities reported in its Condensed Consolidated Financial Statements.

The Company plans to emerge from its Chapter 11 Cases after it obtains approval from the Bankruptcy Court for the Company’s Chapter 11 plan of reorganization. Among other things, a Chapter 11 plan of reorganization will determine the rights and satisfy the claims of the Company’s creditors and security holders. The terms and conditions of a Chapter 11 plan of reorganization will be determined through negotiations with the Company’s stakeholders and decisions made by the Bankruptcy Court.

 

2. Bankruptcy Filing

Chapter 11 Proceedings

On the Commencement Date, the Debtors, commenced the Chapter 11 Cases by filing voluntary petitions for reorganization under Chapter 11 with the Bankruptcy Court. Pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure, the Debtors’ Chapter 11 Cases are being jointly administered for procedural purposes only under the caption In re Claires Stores, Inc., et al., Case No. 18-10584 (MFW). Documents filed on the docket of and other information related to the Chapter 11 Cases are available free of charge online at https://cases.primeclerk.com/claires/.

Significant Bankruptcy Court Actions

Following the Commencement Date, the Bankruptcy Court entered certain interim and final orders facilitating the Debtors’ operational transition into Chapter 11. These orders authorized the Debtors to, among other things, pay certain pre-petition employee expenses and benefits, use their existing cash management system, maintain and administer customer programs, pay certain critical and foreign vendors, honor insurance-related obligations, and pay certain pre-petition taxes and related fees on a final basis, and approved the DIP Facility on a final basis.

Debtor-In-Possession Facility

See Note – 5 Debt for further discussion of the DIP Facility which provides up to $135.0 million in senior secured super-priority financing under a $75.0 million DIP ABL Loan and a $60.0 million DIP Term Loan.

Financial Reporting in Reorganization

Effective on March 19, 2018, the Company began to apply ASC, No. 852, “Reorganizations,” which is applicable to companies under Chapter 11 bankruptcy protection. It requires the financial statements for periods subsequent to the Chapter 11 filing to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Expenses, realized gains and losses, and provisions for losses that are directly associated with reorganization proceedings must be reported separately as reorganization items, net in the Condensed Consolidated Statements of Operations. In addition, the balance sheet must distinguish debtor pre-petition liabilities subject to compromise (“LSTC”) from liabilities of non-Debtor entities, pre-petition liabilities that are not subject to compromise and from

 

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post-petition liabilities in the accompanying Condensed Consolidated Balance Sheet. LSTC are pre-petition obligations that are not fully secured and have at least a possibility of not being repaid at the full claim amount. Where there is uncertainty about whether a secured claim will be paid or impaired under the Chapter 11 proceedings, the Company has classified the entire amount of the claim as a LSTC.

Liabilities Subject to Compromise

As a result of the Chapter 11 filing, the payment of pre-petition liabilities is generally subject to compromise pursuant to a plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors’ business and assets. Among other things, the Bankruptcy Court authorized, but not required, the Debtors to pay certain pre-petition claims relating to employee wages and benefits, taxes, critical vendors and debt.

Pre-petition liabilities that are subject to compromise are required to be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts classified as LSTC may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determination of secured status of certain claims, the determination as to the value of any collateral securing claims, proof of claims or other events.

Liabilities Subject to Compromise as of May 5, 2018 included the following components (in thousands):

 

     May 5, 2018  

Debt (1)

   $ 1,806,363  

Accrued interest on debt subject to compromise

     73,054  

Accounts payable, accrued expense and other liabilities

     30,813  
  

 

 

 

Total liabilities subject to compromise

   $ 1,910,230  
  

 

 

 
(1) See Note 5 – Debt for details of pre-petition debt reported as liabilities subject to compromise.

Reorganization Items, Net

Reorganization items, net represent amounts incurred after the Commencement Date as a direct result of the Bankruptcy and are comprised of the following for the three months ended May 5, 2018 (in thousands):

 

     Three Months
Ended

May 5, 2018
 

Professional fees

   $ 10,953  

Debtor-in-possession financing costs

     4,038  

Write-off of pre-petition debt issuance costs, debt premium, and adjustment in carrying value

     (4,982
  

 

 

 

Total reorganization items, net

   $ 10,009  
  

 

 

 

 

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3. Recent Accounting Pronouncements

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The update eliminates the exception for an intra-entity transfer of an asset other than inventory, which aligns the recognition of income tax consequences for inter-entity transfers of assets other than inventory by requiring the recognition of current and deferred income taxes resulting from an intra-entity transfer of such an asset when the transfer occurs rather than when it is sold to an external party. The Company adopted ASU 2016-16 as of the first day of Fiscal 2018 and it did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flow.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The amendments in this update address how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The Company adopted ASU 2016-15 as of the first day of Fiscal 2018 and it did not have a material impact on the Company’s cash flows.

In March 2016, the FASB issued ASU 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20), Recognition of Breakage for Certain Prepaid Stored-Value Products. The new guidance addresses diversity in practice related to the derecognition of a prepaid stored-value product liability. ASU 2016-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The amended standard may be adopted on either a modified retrospective or a retrospective basis. The Company adopted ASU 2016-04 as of the first day of Fiscal 2018 in connection with ASU 2014-09 and it did not have a material impact on its consolidated financial position, results of operations, or cash flows.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for substantially all leases. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of income. The new standard is effective for years beginning after December 15, 2018, including interim periods within those years. The Company is currently quantifying the amount of lease assets and lease liabilities that it will recognize on its balance sheet. The Company’s review of the requirements of Topic 842 is ongoing, and believes that the impact on its balance sheet, while not currently calculated, will be significant.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in evaluating whether it controls the good or the service before it is transferred to the customer. The new revenue recognition standard will be effective for public entities for annual reporting periods beginning after December 15, 2017, and interim periods therein, that is, the first quarter of 2018. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company adopted ASU 2014-09 as of the first day of Fiscal 2018 using the modified retrospective method. There were no changes to the consolidated financial position, results of operations, or cash flows as a result of the adoption and the timing and amount of its revenue recognition remained substantially unchanged under this new guidance. The Company has included additional disclosures in Note 11 – Segment Information showing disaggregation by revenue channel.

Accounting policies as a result of recently adopted accounting pronouncements

Revenue Recognition – Net sales is comprised of company-operated store sales, and other sales, which includes sales from concession, e-commerce and franchise. The Company excludes sales taxes collected from customers from “Net sales” in its Consolidated Statements of Operations and Comprehensive Income (Loss). Net Sales is presented net of an allowance for estimated returns, which is based on historic experience. The estimated liability for sales returns is based on the historical return levels, which is included in “Accrued expenses and other current liabilities.”

Revenue is recognized when performance obligations are satisfied through the transfer of control of promised goods to the Company’s customers. Control transfers once a customer has the ability to direct the use of, and obtain substantially all of the benefits from, the product. This includes the transfer of legal title, physical possession, the risks and rewards of ownership, and customer acceptance. Revenue from company-operated stores is recognized as the customer takes possession of the merchandise. Revenue from concessions is recognized as the customer takes possession of the merchandise. Revenue from e-commerce is recognized when merchandise is shipped to the customer. Revenue from franchisees is recognized when merchandise is shipped from Company. The Company accounts for the merchandise it sells to third parties under franchising and licensing agreement within “Net Sales” and “Cost of sales, occupancy and buying expenses” in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). The franchise fees the Company charges under the franchising agreements are reported in “Other income, net” in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).

Shipping fees billed to customers are recorded as revenue, and shipping costs are recognized within cost of sales in the same period the related revenue is recognized.

Upon purchase of a gift card or gift certificate, a liability is established for the cash value. The liability is included in “Accrued expenses and other current liabilities.” Revenue from gift card and gift certificate sales is recognized at the time of redemption. Unredeemed gift card and gift certificate breakage income is recorded as a reduction of “Selling, general and administrative” expenses. The Company records breakage income when the probability of redemption, based upon historical redemption patterns, is remote.

 

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4. Fair Value Measurements

ASC 820, Fair Value Measurement Disclosures, defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Disclosures of the fair value of certain financial instruments are required, whether or not recognized in the Unaudited Condensed Consolidated Balance Sheets. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. There is a three-level valuation hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company does not have any assets (liabilities) measured at fair value on a recurring basis.

Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis

The Company’s non-financial assets, which include goodwill, intangible assets, and long-lived tangible assets, are not adjusted to fair value on a recurring basis. Fair value measures of non-financial assets are primarily used in the impairment analysis of these assets. Any resulting asset impairment would require that the non-financial asset be recorded at its fair value. The Company reviews goodwill and indefinite-lived intangible assets for impairment annually, during the fourth quarter of each fiscal year, or as circumstances indicate the possibility of impairment. The Company monitors the carrying value of definite-lived intangible assets and long-lived tangible assets for impairment whenever events or changes in circumstances indicate its carrying amount may not be recoverable.

Financial Instruments Not Measured at Fair Value

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, current liabilities and long-term debt. Cash and cash equivalents, accounts receivable and current liabilities approximate fair market value due to the relatively short maturity of these financial instruments.

The Company considers all investments with a maturity of three months or less when acquired to be cash equivalents. The Company’s cash equivalent instruments are valued using quoted market prices and are primarily U.S. Treasury securities. The revolving credit facilities approximate fair value due to the variable component of the interest rate. Excluding unamortized debt issuance costs, the estimated fair value of the Company’s long-term debt (including current portion) was approximately $1.07 billion as of May 5, 2018, compared to a carrying value of $2.10 billion at that date. Excluding unamortized debt issuance costs, the estimated fair value of the Company’s long-term debt (including current portion) was approximately $1.28 billion as of February 3, 2018, compared to a carrying value of $2.12 billion at that date. For publicly-traded debt, the fair value (estimated market value) is based on quoted market prices in less active markets. For non-publicly traded debt, fair value is estimated based on quoted prices for similar instruments. If measured at fair value in the financial statements, long-term debt excluding term loans would be classified as Level 2 in the fair value hierarchy, while term loans would be classified as Level 3 in the fair value hierarchy.

 

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5. Debt

Debt as of May 5, 2018 and February 3, 2018 included the following components (in thousands):

 

     May 5, 2018      February 3,
2018
 

Short-term borrowings:

     

Debtor-in-possession facility

   $ 60,000      $ —    

Current portion of long-term debt:

     

Claire’s Gibraltar Intermediate secured term loan due 2019

   $ 51,500      $ 51,500  

Claire’s Gibraltar unsecured term loan due 2019

     37,000        —    

9.0% Senior secured first lien notes due 2019

     —          1,125,000  

8.875% Senior secured second lien notes due 2019

     —          222,300  

6.125% Senior secured first lien notes due 2020

     —          210,000  

7.75% Senior notes due 2020

     —          216,742  

9.0% Claire’s Stores term loan due 2021

     —          31,804  

U.S. asset based lending credit facility due 2019

     —          31,000  

Unamortized premium (1)

     —          3,642  

Adjustment to carrying value (1)

     —          12,483  

Unamortized debt issuance cost (1)

     (1,202      (10,432
  

 

 

    

 

 

 

Total current portion of long-term debt, net (1)

   $ 87,298      $ 1,894,039  
  

 

 

    

 

 

 

Debt subject to compromise:

     

9.0% Senior secured first lien notes due 2019

   $ 1,125,000      $ —    

8.875% Senior secured second lien notes due 2019

     222,300        —    

6.125% Senior secured first lien notes due 2020

     210,000        —    

7.75% Senior notes due 2020

     216,742        —    

9.0% Claire’s Stores term loan due 2021

     32,321        —    
  

 

 

    

 

 

 

Total debt subject to compromise

   $ 1,806,363      $ —    
  

 

 

    

 

 

 

Long-term debt:

     

Claire’s Gibraltar unsecured term loan due 2019

   $ —        $ 40,000  

9.0% CLSIP term loan due 2021

     107,926        103,356  

9.0% Claire’s Gibraltar term loans due 2021

     48,477        47,701  

Adjustment to carrying value

     52,444        59,298  
  

 

 

    

 

 

 

Total long-term debt, net

   $ 208,847      $ 250,355  
  

 

 

    

 

 

 

Obligation under capital lease (including current portion)

   $ 16,289      $ 16,388  
  

 

 

    

 

 

 

 

(1) LSTC must be reported at the amounts expected to be allowed by the Bankruptcy Court. The carrying value of the debt will be adjusted as claims are approved. As of May 5, 2018, the Company wrote off $5.0 million of debt issuance costs, debt premium to present the debt at the outstanding face value and the adjustment to carrying value. The write-offs are included within reorganization items, net in the Condensed Consolidated Statements of Operations. See Note 2 – Bankruptcy Filing for additional details.

Debtor-In-Possession Facility

On March 22, 2018, the Company, pursuant to a commitment letter dated as of March 11, 2018 and previously disclosed on the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 19, 2018, and in connection with the Chapter 11 Cases and as a debtor-in possession pursuant to the Bankruptcy Code, entered into a Credit Agreement (the “DIP Credit Agreement”) among the Company, Claire’s Inc., a Delaware corporation (“Parent”), certain of the Company’s subsidiaries (as

 

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described below), the lenders from time to time party thereto (the “Lenders”) and Citibank, N.A., as administrative agent and collateral agent for the Lenders (in such capacities, the “Administrative Agent”), pursuant to which, among other things, the Lenders have provided (i) a senior secured superpriority non-amortizing asset-based revolving facility in an aggregate principal amount of $75,000,000 (the “DIP ABL Loan”), with up to $10,000,000 of such DIP ABL Loan available for the issuance of standby letters of credit and (ii) a superpriority senior secured last-out term facility in an aggregate principal amount of $60,000,000 (the “DIP Term Loan” and together with the DIP ABL Loan, the “DIP Facility”). The DIP Facility is guaranteed on a joint and several basis by Parent, and certain of the Company’s subsidiaries, including BMS Distributing Corp., a Delaware corporation, CBI Distributing Corp., a Delaware corporation, Claire’s Boutiques, Inc., a Colorado corporation, Claire’s Canada Corp., a Delaware corporation, Claire’s Puerto Rico Corp., a Delaware corporation and CSI Canada LLC, a Delaware limited liability company.

The proceeds of the DIP ABL Loan extended on the DIP Closing Date were used to refinance all outstanding obligations and replace commitments under the ABL Credit Facility (described below), including cash collateralization of certain letters of credit previously issued, outstanding and undrawn as of March 22, 2018, the closing date of the DIP Facility (the “DIP Closing Date”), and to pay fees, costs and expenses incurred in connection with the DIP Facility. The proceeds of the DIP Facility will also be used for working capital and general corporate purposes and to fund certain fees payable to professional service providers in connection with the Chapter 11 Cases.

The DIP Facility will mature, subject to the satisfaction of certain conditions, on the earliest of (i) the one year anniversary of the DIP Closing Date, (ii) the effective date of a plan of reorganization, (iii) the date of closing of a sale of all or substantially all of the Company’s assets pursuant to Section 363 of the Bankruptcy Code, (iv) the date on which acceleration of the outstanding loans, and the terminations of the commitments, occurs under the DIP Facility and (v) certain dates specified in connection with the Chapter 11 Cases and orders issued in connection therewith.

As of May 5, 2018, the Company had $65.6 million of availability under the DIP ABL Loan, net of applicable reserves.

Contractual interest on debt subject to compromise

Effective as of the Commencement Date, the Company ceased recording interest expense on outstanding pre-petition debt subject to compromise. Contractual interest expense represents amounts due under the contractual terms of outstanding pre-petition debt classified as LSTC. For the quarter ended May 5, 2018, contractual interest expense of $20.2 million related to LSTC has not been recorded in the financial statements.

ABL Credit Facility

In March 2018, the Company paid an aggregate amount of $71.0 million and, in addition, the related accrued interest associated with the extinguishment of the ABL Credit Facility.

Debt Covenants

The Company’s debt agreements contain certain covenants that, among other things, subject to certain exceptions and other basket amounts, restrict our ability and the ability of our subsidiaries to:

 

    incur additional indebtedness;

 

    pay dividends or distributions on our capital stock, repurchase or retire our capital stock and redeem, repurchase or defease any subordinated indebtedness;

 

    make certain investments;

 

    create or incur certain liens;

 

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    create restrictions on the payment of dividends or other distributions to us from the Company’s subsidiaries;

 

    transfer or sell assets;

 

    engage in certain transactions with its affiliates; and

 

    merge or consolidate with other companies or transfer all or substantially all of its assets.

Certain of these covenants in the indentures governing the Company’s note indebtedness, such as limitations on the Company’s ability to make certain payments such as dividends, or incur debt, will no longer apply if the notes have investment grade ratings from both of the rating agencies of Moody’s Investor Services, Inc. (“Moody’s”) and Standard & Poor’s Ratings Group (“S&P”) and no event of default has occurred. Since the date of issuance of the notes, the notes have not received investment grade ratings from Moody’s or S&P. Accordingly, all of the covenants under the notes currently apply to the Company. None of the covenants under the notes, however, require the Company to maintain any particular financial ratio or other measure of financial performance.

See Note 4 – Fair Value Measurements for related fair value disclosure on debt.

Europe Bank Credit Facilities

The Company’s non-U.S. subsidiaries have bank credit facilities totaling approximately $1.9 million. 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 the respective country of operation. As of May 5, 2018, there was a reduction of $1.8 million for outstanding bank guarantees, which reduces the borrowing availability to $0.1 million as of that date.

 

6. Commitments and Contingencies

The Company is, from time to time, involved in litigation incidental to the conduct of its business, including personal injury litigation, litigation regarding merchandise sold, including product and safety concerns regarding heavy metal and chemical content in merchandise, litigation with respect to various employment matters, including litigation with present and former employees, wage and hour litigation and litigation regarding intellectual property rights.

The Company believes that current pending litigation will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.

 

7. Accumulated Other Comprehensive Loss

The following summary sets forth the components of accumulated other comprehensive loss, net of tax as follows (in thousands, net of tax):

 

     Total (1)  

Balance as of February 3, 2018

   $ (25,302

Other comprehensive loss

     (9,043
  

 

 

 

Balance as of May 5, 2018

   $ (34,345
  

 

 

 

 

(1) Represents foreign currency items and $5.7 million of other income associated with expired derivative instruments.

 

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8. Stock Options and Stock-Based Compensation

The following is a summary of activity in the Company’s stock option plan for the three months ended May 5, 2018:

 

     Number of
Shares
     Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term (Years)
 

Outstanding as of February 3, 2018

     3,224,326      $ 5.18     

Options granted

     —          

Options exercised

     —          

Options forfeited

     (3,138    $ 5.25     

Options expired

     (148,862    $ 9.49     
  

 

 

       

Outstanding as of May 5, 2018

     3,072,326      $ 4.97        3.8  
  

 

 

       

Options vested and expected to vest as of May 5, 2018

     2,934,436      $ 5.12        3.8  
  

 

 

       

Exercisable as of May 5, 2018

     1,666,599      $ 6.72        3.1  
  

 

 

       

There were no options granted during the three months ended May 5, 2018. The weighted average grant date fair value of options granted during the three months ended April 29, 2017 was $0.41.

Stock-based compensation benefit is recorded in “Selling, general and administrative” expenses in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

9. Income Taxes

The effective income tax rate was 21.9% for the three months ended May 5, 2018. This effective income tax rate differed from the statutory federal income tax rate of 21% primarily from U.S. income recognition of foreign deemed dividend distributions per Subpart F of the Internal Revenue Code including Global Intangible Low-Taxed Income (“GILTI”).

The effective income tax rate was 54.7% for the three months ended April 29, 2017. This effective income tax rate differed from the statutory federal income tax rate of 35% primarily from U.S. income recognition of foreign deemed dividend distributions and foreign tax rate differentials as compared to the U.S. statutory rate.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017. The Tax Act instituted fundamental changes to the US tax system. Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, Management calculated their best estimate of the impact of the Act in the 2017 year-end income tax provision in accordance with their understanding of the Act and available guidance. Also pursuant to SAB 118, certain additional impacts of the Act remain open during the measurement period to include other indirect correlative impacts of the Act, the Company’s position with regards to the one-time mandatory transition tax and the state tax impacts of the Act. As of the close of the first quarter, the Company continues to analyze the Act in its entirety and refine its calculations, which could potentially impact the measurement of recorded tax balances. Any subsequent adjustment to the tax balances resulting from the analysis of the Tax Act, will be recorded to income tax expense in the fiscal quarter of 2018 when the analysis is completed.

 

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10. Related Party Transactions

Indebtedness

As of May 5, 2018 and February 3, 2018, Parent and affiliates held $68.6 million and $65.6 million of the Company’s indebtedness and the Company had accrued interest payable associated with the indebtedness in the amounts of $0.0 million and $0.0 million, respectively. For the three months ended May 5, 2018 and April 29, 2017, the Company recognized interest expense related to the indebtedness held by Parent and affiliates of $0.0 million and $0.0 million, respectively. Interest on the debt held as of May 5, 2018 is payable in kind.

Management Services Agreement

On June 6, 2017, the Company and Parent entered into an Amended and Restated Management Services Agreement (the “Management Services Agreement”) with Apollo Management VI, L.P. (“Apollo”), Cowen & Co., LLC, as successor to Tri-Artisan Capital Partners, LLC (“TACP”), (“Cowen”, and together with Apollo, the “Managers”) and TACP Investments – Claire’s LLC (“TACPI”). The Management Services Agreement supersedes, amends and entirely restates the Management Services Agreement, dated as of May 29, 2007 by and among the Company, Parent, Apollo, TACP and TACPI (“the Original Agreement”). Under the Management Service Agreement, the Managers have agreed to provide to the Company certain investment banking, management, consulting and financial planning services on an ongoing basis. The Managers will receive no fee for these services, but will be reimbursed by the Company for their out-of-pocket expenses. In the prior Management Services Agreement, the Managers were paid a $3.0 million fee annually. In addition, under the Management Services Agreement, the Managers have agreed to provide to the Company certain financial advisory and investment banking services from time-to-time in connection with major financial transactions that may be undertaken by the Company or its subsidiaries in exchange for normal and customary fees as agreed by the Managers (or their affiliates) and the Company and Parent, taking into consideration all relevant factors. Under the Management Services Agreement, the Company and Parent have also agreed to provide the Managers (and their affiliates) with customary indemnification. The Management Services Agreement will terminate upon the earliest to occur of May 29, 2025 or the occurrence of certain termination events specified therein. The Company has not made any payments on account of the Management Services Agreement since commencing the Chapter 11 Cases.

In addition, on June 6, 2017, the Company and Cowen entered into a letter agreement (the “Cowen Management Agreement”) pursuant to which Cowen agreed to provide the Company with certain financial advisory and investment banking services on a month-to-month basis. In return for such services, the Company agreed to pay Cowen a monthly cash fee of $32,000, payable at the beginning of each month, and in addition, to reimburse Cowen for all reasonable out-of-pocket expenses. The Company also agreed to provide Cowen (and its affiliates) with a customary indemnification. Both Cowen and the Company had the right to terminate the Cowen Management Agreement at any time during its term on 30 days prior written notice. While in effect, the terms of the Cowen Management Agreement were to govern in the event of any conflict between the Cowen Management Agreement and the terms of the Management Services Agreement referred to above. On September 1, 2017, the Company elected to terminate the Cowen Management Agreement effective as of September 30, 2017.

 

11. Segment Information

The Company is organized based on the geographic markets in which it operates. Under this structure, the Company currently has two reportable segments: North America and Europe. The Company accounts for the goods it sells to third parties under franchising and licensing agreements within “Net sales” and “Cost of sales, occupancy and buying expenses” in the Company’s Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income within its North America segment. The franchise fees the Company charges under the franchising agreements are reported in “Other income, net” in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income within its Europe segment. Substantially all of the interest expense on the Company’s outstanding debt is recorded in the Company’s North America segment.

 

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Net sales, depreciation and amortization and operating income for the three months ended May 5, 2018 and April 29, 2017 are as follows (in thousands):

 

     Three Months
Ended
May 5, 2018
     Three Months
Ended
April 29, 2017
 

Net sales:

     

North America

   $ 206,934      $ 195,960  

Europe

     104,072        103,661  
  

 

 

    

 

 

 

Total net sales

     311,006        299,621  
  

 

 

    

 

 

 

Depreciation and amortization:

     

North America

     8,653        7,102  

Europe

     4,541        4,101  
  

 

 

    

 

 

 

Total depreciation and amortization

     13,194        11,203  
  

 

 

    

 

 

 

Operating income (loss) for reportable segments:

     

North America

     26,628        25,710  

Europe

     (6,239      3,109  
  

 

 

    

 

 

 

Total operating income for reportable segments

     20,389        28,819  

Severance and transaction-related costs

     376        143  
  

 

 

    

 

 

 

Consolidated operating income

     20,013        28,676  

Reorganization items, net

     10,009        —    

Interest expense, net

     24,889        43,580  
  

 

 

    

 

 

 

Consolidated loss before income tax benefit

   $ (14,885    $ (14,904
  

 

 

    

 

 

 

Excluded from operating income for the North America segment are severance and transaction-related costs of approximately $0.1 million and $0.0 million for the three months ended May 5, 2018 and April 29, 2017, respectively.

Excluded from operating loss for the Europe segment are severance and transaction-related costs of approximately $0.3 million and $0.1 million for the three months ended May 5, 2018 and April 29, 2017, respectively.

Net sales by channel type and by segment for the three months ended May 5, 2018 are as follows (in thousands):

 

     Revenue by Channel and Segment  
     North America      Europe      Total  

Company-operated sales

   $ 189,935      $ 96,670      $ 286,605  

Other sales

     16,999        7,402        24,401  
  

 

 

    

 

 

    

 

 

 

Total net sales

   $ 206,934      $ 104,072      $ 311,006  
  

 

 

    

 

 

    

 

 

 

 

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12. Condensed Combined Debtor-In-Possession Financial Information

The financial statements below represent the condensed combined financial statements of the Debtors. For the three months ended May 5, 2018, the results of the Company’s subsidiaries that are not part of the Chapter 11 Cases, are not included in these condensed combined financial statements.

Intercompany transactions among the Debtors have been eliminated in the financial statements contained herein. Intercompany transactions among the Debtors and the subsidiaries that are not part of the Chapter 11 Cases have not been eliminated in the Debtors’ financial statements.

Debtors Condensed Combined Balance Sheet

May 5, 2018

(in thousands)

 

ASSETS

  

Current assets:

  

Cash

   $ 34,705  

Inventories

     77,760  

Prepaid expenses

     22,281  

Other current assets

     11,772  
  

 

 

 

Total current assets

     146,518  
  

 

 

 

Property and equipment:

  

Furniture, fixtures and equipment

     133,459  

Leasehold improvements

     173,927  
  

 

 

 
     307,386  

Accumulated depreciation and amortization

     (246,027
  

 

 

 
     61,359  
  

 

 

 

Leased property under capital lease:

  

Land and building

     18,055  

Accumulated depreciation and amortization

     (7,442
  

 

 

 
     10,613  
  

 

 

 

Investment in non-filing entities

     409,355  

Goodwill

     987,517  

Intangible assets, net

     188,229  

Other assets

     12,683  
  

 

 

 
     1,597,784  
  

 

 

 

Total assets

   $ 1,816,274  
  

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

  

Current liabilities:

  

Debtor-in-possession term loan

   $ 60,000  

Trade accounts payable

     12,314  

Income taxes payable

     4,765  

Accrued interest payable

     402  

Accrued expenses and other current liabilities

     53,950  
  

 

 

 

Total current liabilities

     131,431  
  

 

 

 

Intercompany payables

     183,783  

Obligation under capital lease

     15,846  

Deferred tax liability

     26,310  

Deferred rent expense

     21,695  
  

 

 

 
     247,634  
  

 

 

 

Liabilities subject to compromise

     1,910,230  

Stockholder’s deficit:

  

Common stock

     —    

Additional paid in capital

     630,759  

Accumulated other comprehensive loss, net of tax

     (34,345

Accumulated deficit

     (1,069,435
  

 

 

 
     (473,021
  

 

 

 

Total liabilities and stockholder’s deficit

   $ 1,816,274  
  

 

 

 

 

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Debtors Condensed Combined Statement of Operations and Comprehensive Income

For The Three Months Ended May 5, 2018

(in thousands)

 

Net sales

   $ 192,454  

Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)

     90,265  
  

 

 

 

Gross profit

     102,189  
  

 

 

 

Other expenses:

  

Selling, general and administrative

     73,632  

Depreciation and amortization

     8,187  

Severance and transaction-related costs

     84  

Other income

     (6,413
  

 

 

 
     75,490  
  

 

 

 

Operating income

     26,699  

Reorganization items, net

     10,009  

Interest expense, net

     19,532  
  

 

 

 

Loss before income taxes

     (2,842

Income tax expense

     4,927  
  

 

 

 

Loss from continuing operations

     (7,769

Equity in earnings of subsidiaries

     27,092  

Equity in earnings of non-filing entities

     (973
  

 

 

 

Net income

     18,350  

Foreign currency translation adjustments

     (2,961

Net loss on intra-entity foreign currency transactions, net of tax

     (7,308
  

 

 

 

Other comprehensive loss

     (10,269
  

 

 

 

Comprehensive income

   $ 8,081  
  

 

 

 

 

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Debtors Condensed Combined Statement of Cash Flows

Three Months Ended May 5, 2018

(in thousands)

 

Cash flows from operating activities:

  

Net income

   $ 18,350  

Adjustments to reconcile net income to net cash

  

used in operating activities:

  

Equity in earnings of subsidiaries

     (27,092

Equity in earnings of non-filing entities

     973  

Depreciation and amortization

     8,187  

Reorganization items, net

     10,009  

Amortization of debt issuance costs

     898  

Accretion of debt premium

     (360

Net accretion of unfavorable lease obligations

     7  

Loss on sale/retirement of property and equipment, net

     31  

Stock-based compensation expense

     36  

(Increase) decrease in:

  

Inventories

     (1,291

Prepaid expenses

     (5,903

Other assets

     (5,235

Increase (decrease) in:

  

Trade accounts payable

     6,635  

Income taxes payable

     4,242  

Accrued interest payable

     17,649  

Accrued expenses and other liabilities

     (8,232

Deferred income taxes

     346  

Deferred rent expense

     (1,139
  

 

 

 

Net cash provided by operating activities

     18,111  
  

 

 

 

Cash flows from investing activities:

  

Acquisition of property and equipment

     (3,576

Acquisition of intangible assets/lease rights

     ( 10
  

 

 

 

Net cash used in investing activities

     (3,586
  

 

 

 

Cash flows from financing activities:

  

Proceeds from debtor-in-possession credit facility

     57,000  

Repayments under debtor-in-possession credit facility

     (57,000

Proceeds from debtor-in-possession term loans

     60,000  

Debt issuance costs related to debtor-in-possession financing

     (4,038

Proceeds from revolving credit facilities

     43,000  

Payments on revolving credit facilities

     (74,000

Payments of unamortized interest related to long-term debt

     (925

Principal payments on capital lease

     (99

Intercompany activity, net

     (9,447
  

 

 

 

Net cash provided by financing activities

     14,491  
  

 

 

 

Effect of foreign currency exchange rate changes on cash and cash equivalents

     (1,658
  

 

 

 

Net increase in cash and cash equivalents

     27,358  

Cash and cash equivalents, at beginning of period

     7,347  
  

 

 

 

Cash and cash equivalents, at end of period

     34,705  
  

 

 

 

 

19


Table of Contents
13. Supplemental Financial Information

On March 4, 2011, Claire’s Stores, Inc. (referred to in this Note 13 as the “Issuer”), issued the Second Lien Notes. On February 28, 2012, March 12, 2012 and September 20, 2012, the Issuer issued the 9.0% Senior Secured First Lien Notes. On March 15, 2013, the Issuer issued the 6.125% Senior Secured First Lien Notes and on May 14, 2013, the Issuer issued the Unsecured Notes. The Second Lien Notes are irrevocably and unconditionally guaranteed, jointly and severally, by all wholly-owned domestic current and future subsidiaries of Claire’s Stores, Inc. that guarantee the Company’s ABL Credit Facility and U.S. Credit Facility. The First Lien Notes are unconditionally guaranteed, jointly and severally, by all wholly-owned domestic current and future subsidiaries of Claire’s Stores, Inc. (subject to certain exceptions, including CLSIP LLC and CLSIP Holdings LLC). As of May 5, 2018, Claire’s Stores, Inc. owned 100% of its domestic subsidiaries that guarantee the Notes. All guarantors are collectively referred to as the “Guarantors.” The Company’s other subsidiaries, principally its international subsidiaries including its European, Canadian and Asian subsidiaries (the “Non-Guarantors”), are not guarantors of these Notes.

The tables in the following pages present the condensed consolidating financial information for the Issuer, the Guarantors and the Non-Guarantors, together with eliminations, as of and for the periods indicated. The consolidating financial information may not necessarily be indicative of the financial position, results of operations or cash flows had the Issuer, Guarantors and Non-Guarantors operated as independent entities.

 

20


Table of Contents

Condensed Consolidating Balance Sheet

May 5, 2018

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash

   $ 31,487     $ 3,718     $ 20,877     $ —       $ 56,082  

Inventories

     —         77,760       56,785       —         134,545  

Prepaid expenses

     8,984       13,297       16,650       —         38,931  

Other current assets

     338       11,434       12,167       —         23,939  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     40,809       106,209       106,479       —         253,497  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

          

Furniture, fixtures and equipment

     3,183       130,276       82,957       —         216,416  

Leasehold improvements

     1,315       172,612       117,089       —         291,016  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     4,498       302,888       200,046       —         507,432  

Accumulated depreciation and amortization

     (3,739     (242,288     (151,460     —         (397,487
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     759       60,600       48,586       —         109,945  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

          

Land and building

     —         18,055       —         —         18,055  

Accumulated depreciation and amortization

     —         (7,442     —         —         (7,442
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —         10,613       —         —         10,613  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

     —         346,950       108,262       (455,212     —    

Investment in subsidiaries

     1,704,986       (41,753     —         (1,663,233     —    

Goodwill

     —         987,517       145,058       —         1,132,575  

Intangible assets, net

     188,100       149,663       199,693       (84,634     452,822  

Other assets

     7,900       4,783       43,995       —         56,678  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,900,986       1,447,160       497,008       (2,203,079     1,642,075  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,942,554     $ 1,624,582     $ 652,073     $ (2,203,079   $ 2,016,130  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

          

Current liabilities:

          

Current portion of long-term debt, net

   $ —       $ —       $ 87,298     $ —       $ 87,298  

Debtor-in-possession term loan

     60,000       —         —         —         60,000  

Trade accounts payable

     2,227       10,087       32,683       —         44,997  

Income taxes payable

     —         4,765       2,525       —         7,290  

Accrued interest payable

     402       —         794       —         1,196  

Accrued expenses and other current liabilities

     20,415       33,535       38,787       —         92,737  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     83,044       48,387       162,087       —         293,518  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

     455,212       —         —         (455,212     —    

Long-term debt, net

     —         143,810       65,037       —         208,847  

Revolving credit facility, net

     —         —         —         —         —    

Obligation under capital lease

     —         15,846       —         —         15,846  

Deferred tax liability

     —         26,310       4,227       —         30,537  

Deferred rent expense

     —         21,695       11,367       —         33,062  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     455,212       207,661       80,631       (455,212     288,292  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities subject to compromise

     1,880,208       30,022       —         —         1,910,230  

Stockholder’s equity (deficit):

          

Common stock

     —         367       2       (369     —    

Additional paid in capital

     630,759       1,520,543       766,993       (2,287,536     630,759  

Accumulated other comprehensive income (loss), net of tax

     (34,345     (4,382     (30,715     35,097       (34,345

Accumulated deficit

     (1,072,324     (178,016     (326,925     504,941       (1,072,324
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (475,910     1,338,512       409,355       (1,747,867     (475,910
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

   $ 1,942,554     $ 1,624,582     $ 652,073     $ (2,203,079   $ 2,016,130  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

Condensed Consolidating Balance Sheet

February 3, 2018

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 4,203     $ 9,644     $ 28,599     $ —       $ 42,446  

Inventories

     —         76,469       58,221       —         134,690  

Prepaid expenses

     2,638       13,740       15,906       —         32,284  

Other current assets

     1,281       13,111       12,466       —         26,858  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     8,122       112,964       115,192       —         236,278  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

          

Furniture, fixtures and equipment

     3,075       133,664       86,905       —         223,644  

Leasehold improvements

     1,315       177,520       122,503       —         301,338  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     4,390       311,184       209,408       —         524,982  

Accumulated depreciation and amortization

     (3,640     (245,778     (155,866     —         (405,284
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     750       65,406       53,542       —         119,698  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

          

Land and building

     —         18,055       —         —         18,055  

Accumulated depreciation and amortization

     —         (7,216     —         —         (7,216
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —         10,839       —         —         10,839  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

     —         299,768       121,143       (420,911     —    

Investment in subsidiaries

     1,688,098       (42,369     —         (1,645,729     —    

Goodwill

     —         987,517       145,058       —         1,132,575  

Intangible assets, net

     188,100       149,678       203,934       (84,634     457,078  

Other assets

     1,140       3,647       39,468       —         44,255  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,877,338       1,398,241       509,603       (2,151,274     1,633,908  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,886,210     $ 1,587,450     $ 678,337     $ (2,151,274   $ 2,000,723  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

          

Current liabilities:

          

Current portion of long-term debt, net

   $ 1,843,582     $ —       $ 50,457     $ —       $ 1,894,039  

Trade accounts payable

     3,231       21,090       38,644       —         62,965  

Income taxes payable

     —         484       3,565       —         4,049  

Accrued interest payable

     55,808       —         374       —         56,182  

Accrued expenses and other current liabilities

     17,954       34,494       42,486       —         94,934  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     1,920,575       56,068       135,526       —         2,112,169  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

     420,911       —         —         (420,911     —    

Long-term debt, net

     —         143,929       106,426       —         250,355  

Obligation under capital lease

     —         15,970       —         —         15,970  

Deferred tax liability

     —         25,963       6,651       —         32,614  

Deferred rent expense

     —         22,834       12,017       —         34,851  

Unfavorable lease obligations and other long-term

liabilities

     —         10,040       —         —         10,040  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     420,911       218,736       125,094       (420,911     343,830  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity (deficit):

          

Common stock

     —         367       2       (369     —    

Additional paid in capital

     630,719       1,520,543       766,993       (2,287,536     630,719  

Accumulated other comprehensive income (loss), net of tax

     (25,302     (3,156     (23,326     26,482       (25,302

Accumulated deficit

     (1,060,693     (205,108     (325,952     531,060       (1,060,693
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (455,276     1,312,646       417,717       (1,730,363     (455,276
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

   $ 1,886,210     $ 1,587,450     $ 678,337     $ (2,151,274   $ 2,000,723  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Three Months Ended May 5, 2018

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —       $ 192,454     $ 118,552     $ —       $ 311,006  

Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)

     3,814       86,451       65,383       —         155,648  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (3,814     106,003       53,169       —         155,358  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     15,400       58,232       52,149       —         125,781  

Depreciation and amortization

     98       8,089       5,007       —         13,194  

Severance and transaction-related costs

     —         84       292       —         376  

Other (income) expense

     (10,780     4,367       2,407       —         (4,006
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     4,718       70,772       59,855       —         135,345  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (8,532     35,231       (6,686     —         20,013  

Reorganization items, net

     10,009       —         —         —         10,009  

Interest expense, net

     19,024       3,397       2,468       —         24,889  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (37,565     31,834       (9,154     —         (14,885

Income tax benefit

     —         4,927       (8,181     —         (3,254
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (37,565     26,907       (973     —         (11,631

Equity in earnings (loss) of subsidiaries

     25,934       185       —         (26,119     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (11,631     27,092       (973     (26,119     (11,631

Foreign currency translation adjustments

     (2,535     (426     (884     1,310       (2,535

Net gain (loss) on intra-entity foreign currency transactions, net of tax

     (6,508     (800     (6,505     7,305       (6,508
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (9,043     (1,226     (7,389     8,615       (9,043
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (20,674   $ 25,866     $ (8,362   $ (17,504   $ (20,674
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Three Months Ended April 29, 2017

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Net sales

   $ —       $ 182,070     $ 117,551     $ —       $ 299,621  

Cost of sales, occupancy and buying expenses (exclusive of depreciation and amortization shown separately below)

     3,162       86,199       62,427       —         151,788  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (3,162     95,871       55,124       —         147,833  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     5,753       57,285       47,474       —         110,512  

Depreciation and amortization

     191       6,326       4,686       —         11,203  

Severance and transaction-related costs

     —         57       86       —         143  

Other (income) expense

     (1,937     (192     (572     —         (2,701
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     4,007       63,476       51,674       —         119,157  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (7,169     32,395       3,450       —         28,676  

Interest expense, net

     40,270       526       2,784       —         43,580  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (47,439     31,869       666       —         (14,904

Income tax benefit

     —         (1,064     (7,082     —         (8,146
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (47,439     32,933       7,748       —         (6,758

Equity in earnings (loss) of subsidiaries

     40,681       46       —         (40,727     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (6,758     32,979       7,748       (40,727     (6,758

Foreign currency translation adjustments

     44       (412     1,837       (1,425     44  

Net gain (loss) on intra-entity foreign currency transactions, net of tax

     1,881       (856     1,883       (1,027     1,881  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     1,925       (1,268     3,720       (2,452     1,925  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (4,833   $ 31,711     $ 11,468     $ (43,179   $ (4,833
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

Condensed Consolidating Statement of Cash Flows

Three Months Ended May 5, 2018

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (11,631   $ 27,092     $ (973   $ (26,119   $ (11,631

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

          

Loss (equity) in earnings of subsidiaries

     (25,934     (185     —         26,119       —    

Depreciation and amortization

     98       8,089       5,007       —         13,194  

Reorganization items, net

     10,009       —         —         —         10,009  

Amortization of lease rights and other assets

     —         —         1,669       —         1,669  

Amortization of debt issuance costs

     898       —         281       —         1,179  

Accretion of debt premium

     (360     —         —         —         (360

Non-cash pay-in-kind interest expense

     —         2,889       —         —         2,889  

Net accretion of unfavorable lease obligations

     —         7       2       —         9  

Loss on sale/retirement of property and equipment, net

     —         31       2       —         33  

Stock-based compensation expense

     36       —         4       —         40  

(Increase) decrease in:

          

Inventories

     —         (1,291     (959     —         (2,250

Prepaid expenses

     (6,346     443       (2,202     —         (8,105

Other assets

     (5,816     581       743       —         (4,492

Increase (decrease) in:

          

Trade accounts payable

     (2,518     9,153       (4,212     —         2,423  

Income taxes payable

     —         4,242       (2,471     —         1,771  

Accrued interest payable

     17,649       —         419       —         18,068  

Accrued expenses and other liabilities

     (7,473     (759     (2,045     —         (10,277

Deferred income taxes

     —         346       (8,287     —         (7,941

Deferred rent expense

     —         (1,139     (159     —         (1,298
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (31,388     49,499       (13,181     —         4,930  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment

     (108     (3,468     (1,588     —         (5,164

Acquisition of intangible assets/lease rights

     —         (10     —         —         (10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (108     (3,478     (1,588     —         (5,174
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from debtor-in-possession credit facility

     57,000       —         —         —         57,000  

Repayments under debtor-in-possession credit facility

     (57,000     —         —         —         (57,000

Proceeds from debtor-in-possession term loans

     60,000       —         —         —         60,000  

Debt issuance costs related to debtor-in-possession financing

     (4,038     —         —         —         (4,038

Proceeds from revolving credit facilities

     43,000       —         —         —         43,000  

Payments on revolving credit facilities

     (74,000     —         —         —         (74,000

Payment on current portion of long-term debt

     —         —         (3,000     —         (3,000

Payments of unamortized interest related to long-term debt

     (925     (3,008     (1,388     —         (5,321

Payment of debt issuance costs

     —         —         (2     —         (2

Principal payments on capital lease

     —         (99     —         —         (99

Intercompany activity, net

     34,743       (47,182     12,439       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     58,780       (50,289     8,049       —         16,540  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of foreign currency exchange rate changes on cash and cash equivalents

     —         (1,658     (1,002     —         (2,660
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     27,284       (5,926     (7,722     —         13,636  

Cash and cash equivalents, at beginning of period

     4,203       9,644       28,599       —         42,446  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

     31,487       3,718       20,877       —         56,082  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Cash Flows

Three Months Ended April 29, 2017

(in thousands)

 

     Issuer     Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (6,758   $ 32,979     $ 7,748     $ (40,727   $ (6,758

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

          

Loss (equity) in earnings of subsidiaries

     (40,681     (46     —         40,727       —    

Depreciation and amortization

     191       6,326       4,686       —         11,203  

Amortization of lease rights and other assets

     —         —         1,069       —         1,069  

Amortization of debt issuance costs

     1,899       —         288       —         2,187  

Accretion of debt premium

     (721     —         —         —         (721

Net accretion of unfavorable lease obligations

     —         (63     (1     —         (64

Loss on sale/retirement of property and equipment, net

     —         118       —         —         118  

Stock-based compensation expense

     58       —         4       —         62  

(Increase) decrease in:

          

Inventories

     —         (4,719     (4,975     —         (9,694

Prepaid expenses

     (850     142       (663     —         (1,371

Other assets

     (158     (993     (283     —         (1,434

Increase (decrease) in:

          

Trade accounts payable

     (646     2,380       (2,803     —         (1,069

Income taxes payable

     —         367       (1,329     —         (962

Accrued interest payable

     (29,345     —         82       —         (29,263

Accrued expenses and other liabilities

     (3,184     (3,479     (4,171     —         (10,834

Deferred income taxes

     —         —         (7,597     —         (7,597

Deferred rent expense

     —         (280     (245     —         (525
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (80,195     32,732       (8,190     —         (55,653
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment

     —         (1,855     (1,510     —         (3,365

Acquisition of intangible assets/lease rights

     —         (28     —         —         (28
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —         (1,883     (1,510     —         (3,393
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from revolving credit facilities

     69,000       —         —         —         69,000  

Payments on revolving credit facilities

     (16,200     —         —         —         (16,200

Payment on current portion of long-term debt

     (18,420     —         —         —         (18,420

Payments of unamortized interest related to long-term debt

     (743     (2,415     (1,114     —         (4,272

Payment of debt issuance costs

     —         —         (347     —         (347

Principal payments on capital lease

     —         (76     —         —         (76

Intercompany activity, net

     47,693       (25,629     (22,064     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     81,330       (28,120     (23,525     —         29,685  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of foreign currency exchange rate changes on cash and cash equivalents

     —         (1,796     1,102       —         (694
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     1,135       933       (32,123     —         (30,055

Cash and cash equivalents, at beginning of period

     3,038       3,005       49,749       —         55,792  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

     4,173       3,938       17,626       —         25,737  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide the reader of the financial statements with a narrative on our results of operations, financial position and liquidity, risk management activities, and significant accounting policies and critical estimates. Management’s Discussion and Analysis should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and related notes thereto contained elsewhere in this document.

We include a store in the calculation of same store sales once it has been in operation sixty weeks after its initial opening and we include sales from e-commerce. A store which is temporarily closed, such as for remodeling, is removed from the same store sales computation if it is closed for one week or more. The removal is effective prospectively upon the completion of the first fiscal week of closure. A store which is closed permanently, such as upon termination of the lease, is immediately removed from the same store sales computation. We compute same store sales on a local currency basis, which eliminates any impact for changes in foreign currency rates.

Voluntary Reorganization under Chapter 11

On March 19, 2018 (the “Commencement Date”), the Company and certain of its domestic subsidiaries (collectively with the Company, the “Debtors”), commenced voluntary chapter 11 cases (the “Chapter 11 Cases”) by filing voluntary petitions for reorganization under chapter 11 of title 11 (“Chapter 11”) of the United States Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Debtors are authorized to continue to operate their businesses and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. Pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy Procedure, the Debtors’ Chapter 11 Cases are being jointly administered for procedural purposes only under the caption In re Claire’s Stores, Inc., et al., Case No. 18-10584. Documents filed on the docket of and other information related to the Chapter 11 Cases are available free of charge online at https://cases.primeclerk.com/claires/.

We are currently operating our business as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. After we filed our Chapter 11 petitions, the Bankruptcy Court granted certain relief requested by the Debtors enabling us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to pay employee wages and benefits, to pay taxes and certain governmental fees and charges, to continue to operate our cash management system in the ordinary course, and to pay the pre-petition claims of certain of our vendors. For goods and services provided following the Commencement Date, we intend to pay vendors in full under normal terms.

Subject to certain exceptions, under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the Commencement Date. Accordingly, although the filing of the Bankruptcy Petitions triggered defaults under the Debtors’ funded debt obligations, creditors are stayed from taking any actions against the Debtors as a result of such defaults, subject to certain limited exceptions permitted by the Bankruptcy Code. Absent an order of the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code.

For the duration of the Company’s Chapter 11 proceedings, the Company’s operations and ability to develop and execute its business plan are subject to the risks and uncertainties associated with the Chapter 11 process. As a result of these risks and uncertainties, the amount and composition of the Company’s assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 proceedings, and the description of the Company’s operations, properties and liquidity and capital resources included in this quarterly report may not accurately reflect its operations, properties and liquidity and capital resources following the Chapter 11 process.

 

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In particular, subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, assume and assign or reject executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors of performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach subject, in the case of the rejection of unexpired leases of real property, to certain caps on damages. Counterparties to such rejected contracts or leases may assert unsecured claims in the Bankruptcy Court against the applicable Debtor’s estate for such damages. Generally, the assumption or assumption and assignment of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance thereunder. Accordingly, any description of an executory contract or unexpired lease with the Debtor in this quarterly report, including where applicable a quantification of the Company’s obligations under any such executory contract or unexpired lease with the Debtor is qualified by any overriding rejection rights the Company has under the Bankruptcy Code. Further, nothing herein is or shall be deemed an admission with respect to any claim amounts or calculations arising from the rejection of any executory contract or unexpired lease and the Debtors expressly preserve all of their rights with respect thereto.

Ability to Continue as a Going Concern

The Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The Condensed Consolidated Financial Statements do not reflect any adjustments that might result from the outcome of our Chapter 11 proceedings. We have significant indebtedness. Our level of indebtedness has adversely impacted and is continuing to adversely impact our financial condition. Our financial condition including operating results, the defaults under our debt agreements, and the risks and uncertainties surrounding our Chapter 11 proceedings, raise substantial doubt as to the Company’s ability to continue as a going concern.

Results of Consolidated Operations

Management Overview

We are one of the world’s leading specialty retailers of fashionable jewelry and accessories for young women, teens, tweens, and kids. Our vision is to be the emporium of choice for all girls (in age or attitude) across the world. We deliver this by offering a range of innovative, fun and affordable products and services that cater to all of her activities, as she grows up, whenever and wherever. Our broad and dynamic selection of merchandise is unique. We are organized into two operating segments: North America and Europe. We identify our operating segments by how we manage and evaluate our business activities. We operate our stores under two brand names: Claire’s® and Icing®. As of May 5, 2018, we operated a total of 2,534 company-operated stores of which 1,516 were located in all 50 states of the United States, Puerto Rico, Canada and the U.S. Virgin Islands (North America segment) and 1,018 stores were located in the United Kingdom, Switzerland, Austria, Germany, France, Ireland, Spain, Portugal, Netherlands, Belgium, Poland, Czech Republic, Hungary, Italy and Luxembourg (Europe segment). As of May 5, 2018, we also had a total of 5,230 concession stores, of which 4,788 were located in the United States and Canada (North America segment) and 442 stores were located in the United Kingdom, France, Spain, Austria, Germany, Italy, Portugal, Switzerland, Hungary and Poland (Europe segment).

As of May 5, 2018, we also franchised 714 stores in Japan, the Middle East, Greece, Guatemala, Malta, India, Dominican Republic, El Salvador, Panama, Costa Rica, Serbia, Sweden, Romania, Martinique, Pakistan, Thailand, South Africa and Russia. We account for the goods we sell to third parties under franchising agreements within “Net sales” and “Cost of sales, occupancy and buying expenses” in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. The franchise fees we charge under the franchising agreements are reported in “Other income, net” in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

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Claire’s® is our primary global brand that we operate through company-operated, concession stores, or franchise stores. Claire’s® offers a differentiated and fun store experience with a “treasure hunt” setting that encourages our customer to visit often to explore and find merchandise that appeals to her. We believe by maintaining a highly relevant merchandise assortment and offering a compelling value proposition, Claire’s® has universal appeal to teens, pre-teens and kids. Claire’s® target customer is a girl between 3-18 years old for whom we create three distinct ranges: 3 to 6, 6 to 12 and 12 to 18.

Icing® is our second brand which we currently operate in North America through company-operated stores and in the Middle East through franchised stores. Icing® offers an inspiring merchandise assortment of fashionable products that helps a young woman to say something about herself, whatever the occasion. Our Icing® brand targets a young woman in the 18-35 year age group with a focus on our core 21-25 year olds who have recently entered the workforce. This customer is independent, fashion-conscious, and has enhanced spending ability.

We provide our target customer groups with a significant selection of fashionable merchandise across a wide range of categories, all with a compelling value proposition. Our major categories of business are:

 

    Jewelry: Includes earrings as well as our ear piercing service, necklaces, bracelets, body jewelry and rings; and

 

    Accessories: Includes hairgoods; beauty products; room decor; personal, fashion, and seasonal accessories, including tech accessories such as phone cases, jewelry holders, stationery, key rings, attitude glasses, headwear, legwear, armwear, and sunglasses; and handbags and small leather goods.

In North America, our company-operated stores are located primarily in shopping malls. The differentiation of our Claire’s® and Icing® brands allows us to operate multiple stores within a single location. In Europe, our company-operated stores are located primarily on high streets, in shopping malls and in high traffic urban areas.

Financial activity for the three months ended May 5, 2018 includes the following:

 

    Net sales increase of 3.8%;

 

    Same store sales percentages;

 

     Three Months
Ended
May 5, 2018
 

Consolidated

     (0.4 )% 

North America

     5.4

Europe

     (9.9 )% 

 

    Gross profit percentage increase of 70 basis points; and

 

    Operating income margin of 9.2%, excluding non-recurring pre-Chapter 11 consulting expense.

 

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Operational activity for the three months ended May 5, 2018 includes the following:

 

Store Activity Openings (Closings):

   Three Months
Ended
May 5, 2018
 
     Opened      Closed(1)  

Company-operated

     —          (60

Concession

     4,373        (112

Franchise

     15        (23
  

 

 

    

 

 

 

Total

     4,388        (195
  

 

 

    

 

 

 

 

(1) Due to underperformance or lease renewal terms of company-operated stores that did not meet our criteria and the cessation of business with certain concession and franchise partners.

A summary of our consolidated results of operations for the three months ended May 5, 2018 and April 29, 2017 are as follows (dollars in thousands):

 

     Three Months
Ended

May 5, 2018
    Three Months
Ended
April 29, 2017
 

Net sales

   $ 311,006     $ 299,621  

(Decrease) increase in same store sales

     (0.4 )%      4.4

Gross profit percentage

     50.0     49.3

Selling, general and administrative expenses as a percentage of net sales (1)

     40.4     36.9

Depreciation and amortization as a percentage of net sales

     4.2     3.7

Operating income

   $ 20,013     $ 28,676  

Net loss

   $ (11,631   $ (6,758

Number of company-operated stores at the end of the period

     2,534       2,680  

Number of concession stores at the end of the period

     5,230       901  

 

(1) Includes non-recurring pre-Chapter 11 consulting expense of $8.6 million.

Net sales

Net sales for the three months ended May 5, 2018 increased $11.4 million, or 3.8%, as compared to the three months ended April 29, 2017. Net sales were affected by a favorable foreign currency translation effect of our non-U.S. net sales of $14.4 million, an increase in new concession and company-operated store sales of $2.9 million and increased franchisees sales of $0.4 million, partially offset by the effect of store closures of $4.9 million and a decrease in same store sales of $1.4 million. Net sales would have decreased 1.0% excluding the impact of foreign currency exchange rate changes.

For the three months ended May 5, 2018, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 6.3%, partially offset by an increase in average transaction value of 8.6%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

The following table compares our sales of each product category for each of the periods presented:

 

     Percentage of Total  

Product Category

   Three Months
Ended

May 5, 2018
     Three Months
Ended
April 29, 2017
 

Jewelry

     48.6        48.9  

Accessories

     51.4        51.1  
  

 

 

    

 

 

 
     100.0        100.0  
  

 

 

    

 

 

 

 

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Table of Contents

Gross profit

In calculating gross profit and gross profit percentages, we exclude the costs related to our distribution center and depreciation and amortization expense. These costs are included instead in “Selling, general and administrative” expenses in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. Other retail companies may include these costs in cost of sales, so our gross profit percentages may not be comparable to those retailers.

During the three months ended May 5, 2018, gross profit percentage increased 70 basis points to 50.0% compared to 49.3% during the three months ended April 29, 2017. The increase in gross profit percentage consisted of a 100 basis point decrease in occupancy costs, partially offset by a 20 basis point increase in buying and buying-related costs and by a 10 basis point decrease in merchandise margin. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from the leveraging effect of an increase in total net sales.

Selling, general and administrative expenses

During the three months ended May 5, 2018, selling, general and administrative expenses increased $15.3 million, or 13.8%, compared to the three months ended April 29, 2017. As a percentage of net sales, selling, general and administrative expenses increased 350 basis points compared to the three months ended April 29, 2017. Excluding an unfavorable $6.0 million foreign currency translation effect and non-recurring pre-Chapter 11 consulting expense of $8.6 million, selling, general, and administrative expenses would have increased by $0.7 million. Excluding the foreign currency translation effect and non-recurring pre-Chapter 11 consulting expense of $8.6 million, the increase was primarily due to increased compensation-related expense, including store incentive compensation, and concession store commission expense.

Depreciation and amortization expense

During the three months ended May 5, 2018, depreciation and amortization expense increased $2.0 million to $13.2 million compared to $11.2 million for the three months ended April 29, 2017. Excluding an unfavorable $0.5 million foreign currency translation effect, the decrease in depreciation and amortization expense would have been $1.5 million.

Other income, net

The following is a summary of other income activity for the three months ended May 5, 2018 and April 29, 2017 (in thousands):

 

     Three Months
Ended May 5,
2018
     Three Months
Ended
April 29, 2017
 

Royalty income

   $ (2,470    $ (2,344

Foreign currency exchange gain, net

     (1,536      (357
  

 

 

    

 

 

 
   $ (4,006    $ (2,701
  

 

 

    

 

 

 

 

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Reorganization items, net

Reorganization items, net represent amounts incurred after the Commencement Date as a direct result of the Bankruptcy and are comprised of the following for the three months ended May 5, 2018 (in thousands):

 

     Three Months
Ended

May 5, 2018
 

Professional fees

   $ 10,953  

Debtor-in-possession financing costs

     4,038  

Write-off of pre-petition debt issuance costs, debt premium, and adjustment in carrying value

     (4,982
  

 

 

 

Total reorganization items, net

   $ 10,009  
  

 

 

 

Interest expense, net

During the three months ended May 5, 2018, net interest expense aggregated $24.9 million compared to $43.6 million for the three months ended April 29, 2017. The decrease is primarily due to the cessation of recording interest expense on outstanding debt subject to compromise.

Income taxes

The effective income tax rate for the three months ended May 5, 2018 was 21.9% compared to 54.7% for the three months ended April 29, 2017. This effective income tax rate differed from the statutory federal income tax rate of 21% primarily from U.S. income recognition of foreign deemed dividend distributions per Subpart F of the Internal Revenue Code including Global Intangible Low-Taxed Income (“GILTI”).

Segment Operations

We have two reportable segments – North America and Europe. The following is a discussion of results of operations by reportable segment.

North America

Key statistics and results of operations for our North America segment are as follows (dollars in thousands):

 

     Three Months
Ended

May 5, 2018
    Three Months
Ended
April 29, 2017
 

Net sales

   $ 206,934     $ 195,960  

Increase in same store sales

     5.4     0.3

Gross profit percentage

     53.0     50.9

Number of company-operated stores at the end of the period

     1,516       1,630  

Number of concession stores at the end of the period

     4,788       333  

During the three months ended May 5, 2018, net sales in North America increased $11.0 million, or 5.6%, from the three months ended April 29, 2017. The increase was attributable to an increase in same store sales of $10.1 million, an increase in new concession and company-operated store sales of $3.6 million, a favorable foreign currency translation effect of our non-U.S. net sales of $0.5 million and increased franchisee sales of $0.4 million, offset by the effect of store closures of $3.6 million. Sales would have increased 5.3% excluding the impact from foreign currency exchange rate changes.

For the three months ended May 5, 2018, the increase in same store sales was primarily attributable to an increase in average transaction value of 4.9% and an increase in average number of transactions per store of 2.3%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

 

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During the three months ended May 5, 2018, gross profit percentage increased 210 basis points to 53.0% compared to 50.9% during the three months ended April 29, 2017. The increase in gross profit percentage consisted of a 270 basis point decrease in occupancy costs, partially offset by a 30 basis point increase in buying and buying-related costs and by a 30 basis point decrease in merchandise margin. The decrease in merchandise margin percentage resulted primarily from lower trade discounts and higher markdowns, partially offset by higher initial markups. Markdowns fluctuate based upon many factors, including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from the leveraging effect of an increase in same store sales. The increase in buying and buying-related costs, as a percentage of net sales, resulted primarily from increased compensation costs and buying-related costs.

The following table compares our sales of each product category in North America for each of the periods presented:

 

     Percentage of Total  

Product Category

   Three Months
Ended

May 5, 2018
     Three Months
Ended
April 29, 2017
 

Jewelry

     53.4        55.5  

Accessories

     46.6        44.5  
  

 

 

    

 

 

 
     100.0        100.0  
  

 

 

    

 

 

 

Europe

Key statistics and results of operations for our Europe segment are as follows (dollars in thousands):

 

     Three Months
Ended

May 5, 2018
    Three Months
Ended
April 29, 2017
 

Net sales

   $ 104,072     $ 103,661  

(Decrease) increase in same store sales

     (9.9 )%      13.0

Gross profit percentage

     43.8     46.4

Number of company-operated stores at the end of the period

     1,018       1,050  

Number of concession stores at the end of the period

     442       568  

During the three months ended May 5, 2018, net sales in Europe increased $0.4 million, or 0.4%, from the three months ended April 29, 2017. The increase was attributable to a favorable foreign currency translation effect of our non-U.S. net sales of $13.9 million, offset by a decrease in same stores sales of $11.5 million, by the effect of store closures of $1.3 million and a decrease in concession store sales of $0.7 million. Sales would have decreased 11.5% excluding the impact from foreign currency exchange rate changes.

For the three months ended May 5, 2018, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 15.9%, partially offset by an increase in average transaction value of 10.0%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

During the three months ended May 5, 2018, gross profit percentage decreased 260 basis points to 43.8% compared to 46.4% during the three months ended April 29, 2017. The decrease in gross profit percentage consisted of a 280 basis point increase in occupancy costs, partially offset by a 20 basis point increase in merchandise margin. The increase in occupancy costs, as a percentage of net sales, resulted primarily from the deleveraging effect of a decrease in same store sales. The increase in merchandise margin percentage resulted primarily from a favorable foreign currency translation effect, partially offset by lower initial

 

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markups and higher markdowns. Markdowns fluctuate based upon many factors, including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin.

The following table compares our sales of each product category in Europe for each of the periods presented:

 

     Percentage of Total  

Product Category

   Three Months
Ended

May 5, 2018
     Three Months
Ended
April 29, 2017
 

Jewelry

     39.4        36.8  

Accessories

     60.6        63.2  
  

 

 

    

 

 

 
     100.0        100.0  
  

 

 

    

 

 

 

Liquidity and Capital Resources

On March 22, 2018, the Company, entered into a Credit Agreement (the “DIP Credit Agreement”) among the Company, Claire’s Inc., a Delaware corporation (“Parent”), certain of the Company’s subsidiaries, the lenders from time to time party thereto (the “Lenders”) and Citibank, N.A., as administrative agent and collateral agent for the Lenders (in such capacities, the “Administrative Agent”), pursuant to which, among other things, the Lenders have provided (i) a senior secured superpriority non-amortizing asset-based revolving facility in an aggregate principal amount of $75,000,000 (the “DIP ABL Loan”), with up to $10,000,000 of such DIP ABL Loan available for the issuance of standby letters of credit and (ii) a superpriority senior secured last-out term facility in an aggregate principal amount of $60,000,000 (the “DIP Term Loan” and together with the DIP ABL Loan, the “DIP Facility”).

The proceeds of the DIP ABL Loan were used to refinance all outstanding obligations and replace commitments under the ABL Credit Facility, including cash collateralization of certain letters of credit prior issued, outstanding and undrawn as of March 22, 2018, the closing date of the DIP Facility (the “DIP Closing Date”), and to pay fees, costs and expenses incurred in connection with the DIP Facility. The proceeds of the DIP Facility will also be used for working capital and general corporate purposes and to fund certain fees payable to professional service providers in connection with prosecuting the Chapter 11 Cases.

The Bankruptcy Court has approved payment of certain pre-petition employee expenses and benefits, use their existing cash management system, maintain and administer customer programs, pay certain critical and foreign vendors, honor insurance-related obligations, and pay certain pre-petition taxes and related fees.

Despite the liquidity provided by our existing cash on hand, our ability to maintain normal credit terms with our suppliers may become impaired. We may be required to pay cash in advance to certain vendors and may experience restrictions on the availability of trade credit, which would further reduce our liquidity. If liquidity problems persist, our suppliers could refuse to provide key products and services in the future. In addition, due to the public perception of our financial condition and results of operations, in particular with regard to our potential failure to meet our debt obligations, some vendors could be reluctant to enter into long-term agreements with us.

In addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with our Chapter 11 proceedings and expect that we will continue to incur significant professional fees and costs throughout our Chapter 11 proceedings.

Although the Company has obtained financing under the DIP Facility, we cannot state with certainty that our liquidity will be sufficient to allow us to satisfy our obligations related to the Chapter 11 cases or that we will be able to confirm a Chapter 11 plan of reorganization and allow us to emerge from bankruptcy. In addition, we must comply with the covenants of our DIP Facility in order to continue to access our borrowings thereunder. These covenants include, among other things, a minimum EBITDA covenant, restrictions on our ability to, among other things , incur or assume additional debt or provide guarantees in respect of obligations of other persons prepay, redeem or repurchase subordinated debt, make loans and investments, incur certain liens, impose limitations on dividends, loans or asset transfers from subsidiaries, sell or otherwise dispose of assets, including capital stock of subsidiaries, consolidate or merge with or into, or sell substantially all of its assets to another person and enter into transactions with affiliate, provide financial information, budgets and other information, in each case except as permitted by the applicable agreements governing our DIP Facility. We cannot state with certainty that we will be able to comply with the covenants of our DIP Facility or secure additional interim financing or exit financing sufficient to meet our liquidity needs or, if sufficient funds are available, offered to us on acceptable terms.

Our ability to maintain adequate liquidity through the reorganization process and beyond depends on successful operation of our business, and appropriate management of operating expenses and capital spending. Our anticipated liquidity needs are highly sensitive to changes in each of these and other factors.

As of May 5, 2018, we had $65.6 million of availability under the DIP ABL Loan, net of applicable reserves.

Our independent registered public accountants’ report dated as of April 20, 2018, includes an other matter paragraph regarding the Company’s ability to continue as a going concern. This other matter paragraph constitutes an event of default under the CLSIP Term Loan Agreement that would otherwise permit the

 

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lenders under the CLSIP Term Loan to cause such indebtedness to become immediately due and payable. CLSIP Holdings, CLSIP, Wilmington Trust, N.A., as Administrative Agent and Collateral Agent under the CLSIP Term Loan Agreement, and certain of the lenders constituting Required Lenders (as that term is defined by the CLSIP Term Loan Agreement) under the CLSIP Term Loan have entered into a forbearance agreement dated as of April 19, 2018 (the “CLSIP Forbearance”) providing that, among other things, such lenders will forbear from causing the CLSIP Term Loan to become immediately due and payable and from exercising remedies arising from such event of default or other events of default that may arise on account of the commencement of the Chapter 11 Cases and/or any other transaction and/or agreement contemplated by the Restructuring Agreement (“RSA”). As a result of the CLSIP Forbearance, the CLSIP Term Loan is classified as long-term debt.

Certain indebtedness of our European subsidiaries in an aggregate principal amount of $91.5 million matures in early 2019, as follows (dollars in millions):

 

Facility

   Outstanding Amount      Maturity  

Claire’s Gibraltar Credit Facility

   $ 40.0        February 4, 2019  

Europe Credit Agreement

   $ 51.5        January 31, 2019  

We currently anticipate that our European subsidiaries should be able to refinance this existing indebtedness as it matures, but this will depend on market and other conditions. In addition, efforts to reach agreements on a restructuring of our U.S. debt may impact our ability to refinance the European debt.

A summary of cash flows provided by (used in) operating, investing and financing activities for the three months ended May 5, 2018 and April 29, 2017 is outlined in the table below (in thousands):

 

     Three Months
Ended

May 5, 2018
     Three Months
Ended
April 29, 2017
 

Operating activities

   $ 4,930      $ (55,653

Investing activities

     (5,174      (3,393

Financing activities

     16,540        29,685  

Cash flows from operating activities

For the three months ended May 5, 2018, cash provided by operations increased $60.6 million compared to the prior year period. The primary reason for the increase provided by operations was an increase in operating income and net other items of $53.7 million and an increase in working capital of $6.9 million, excluding cash equivalents. For the three months ended April 29, 2017, cash used in operations decreased $31.1 million compared to the prior year period. The primary reason for the decrease in cash used in operations was an increase in operating income and net other items of $18.6 million and a decrease in working capital of $12.5 million, excluding cash equivalents.

Cash flows from investing activities

For the three months ended May 5, 2018, cash used in investing activities was $5.2 million and consisted of $5.2 million for capital expenditures.

Cash flows from financing activities

For the three months ended May 5, 2018, cash provided by financing activities was $16.5 million, which consisted primarily of proceeds from the issuance of our $60.0 million DIP term loan, partially offset by net payments of $31.0 million under our ABL Credit Facility, payment of $5.4 million for unamortized interest related to long-term debt, payment of $4.0 million in financing costs, payment of $3.0 million for current portion of long-term debt and payment of $0.1 million for capital lease. For the three months ended

 

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April 29, 2017, cash provided by financing activities was $29.7 million, which consisted primarily of net borrowings of $52.8 million under our ABL Credit Facility, partially offset by payment of $18.4 million for the extinguishment of the Senior Subordinated Notes, payment of $4.3 million for long-term debt, payment of $0.3 million in financing costs and payment of $0.1 million for capital lease.

We or our affiliates have purchased and may, from time to time, purchase portions of our indebtedness. All of our purchases have been open market transactions.

Cash Position

As of May 5, 2018, we had cash of $56.1 million.

In addition, as of May 5, 2018, our foreign subsidiaries held cash and cash equivalents of $20.9 million. During the three months ended May 5, 2018, we transferred certain cash held by foreign subsidiaries to the U.S. to meet certain liquidity needs.

ABL Credit Facility

In March 2018, the Company paid an aggregate amount of $71.0 million and, in addition, the related accrued interest associated with the extinguishment of the ABL Credit Facility. As a result, the Company discharged all obligations with respect to the Company’s ABL Credit Facility.

Debt Covenants

Our debt agreements also contain various covenants that limit our ability to engage in specified types of transactions. These covenants, subject to certain exceptions and other basket amounts, limit our and our subsidiaries’ ability to, among other things:

 

    incur additional indebtedness;

 

    pay dividends or distributions on our capital stock, repurchase or retire our capital stock and redeem, repurchase or defease any subordinated indebtedness;

 

    make certain investments;

 

    create or incur certain liens;

 

    create restrictions on the payment of dividends or other distributions to us from our subsidiaries;

 

    transfer or sell assets;

 

    engage in certain transactions with our affiliates; and

 

    merge or consolidate with other companies or transfer all or substantially all of our assets.

For a description of our existing debt and debt agreements, see Note 5 – Debt, in the Unaudited Condensed Consolidated Financial Statements. As of May 5, 2018, we were in compliance with the covenants in under all existing debt agreements for debt not subject to compromise.

See Note 4 – Fair Value Measurements for related fair value disclosure on debt.

Europe Bank Credit Facilities

Our non-U.S. subsidiaries have bank credit facilities totaling $1.9 million. These 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. As of May 5, 2018, we had a reduction of $1.8 million for outstanding bank guarantees, which reduces the borrowing availability to $0.1 million as of that date.

Management Services Agreement

See Note 10 – Related Party Transactions, in the Unaudited Condensed Consolidated Financial Statements.

 

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Critical Accounting Policies and Estimates

Our Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Fiscal 2017 Annual Report on Form 10-K, filed on April 20, 2018, in the Notes to Consolidated Financial Statements, Note 2 – Summary of Significant Accounting Policies, and the Critical Accounting Policies and Estimates section contained in the Management’s Discussion and Analysis of Financial Condition and Results of Operations therein.

Goodwill and indefinite-lived intangible assets are subject to impairment assessments at least annually (or more frequently when events or circumstances indicate that an impairment may have occurred) by applying a fair-value test. These fair value estimates require significant management judgment and are based on the best information available at the time of the analysis. Our principal intangible assets, other than goodwill, are tradenames, franchise agreements, and leases that existed as of the date that the Company was acquired in May 2007, which had terms that were favorable to market at that date. Our impairment testing for Fiscal 2017 resulted in the recognition of a non-cash impairment charge of $1.1 million relating to long-lived assets. We expect to next perform our annual impairment analysis during the fourth fiscal quarter of Fiscal 2018, and we may be required to recognize additional impairment charges at that time or in the future.

Recent Accounting Pronouncements

See Note 3 – Recent Accounting Pronouncements, in the Notes to the Unaudited Condensed Consolidated Financial Statements.

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

We and our representatives may from time to time make written or oral 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 stockholders. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to our future financial performance, business strategy, planned capital expenditures, ability to service our debt, and new store openings for future fiscal years, are forward-looking statements. 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. The forward-looking statements may use the words “expect,” “anticipate,” “plan,” “intend,” “project,” “may,” “believe,” “forecast,” and similar expressions. Forward-looking statements involve known or unknown risks, uncertainties and other factors, including changes in estimates and judgments discussed under “Critical Accounting Policies and Estimates” 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. Some of these risks, uncertainties and other factors are as follows: our level of indebtedness; general economic conditions; changes in consumer preferences and consumer spending; unwillingness of vendors and service providers to supply goods or services pursuant to historical customary credit arrangements; competition; general political and social conditions such as war, political unrest and terrorism; natural disasters or severe weather events; currency fluctuations and exchange rate adjustments; failure to maintain our favorable brand recognition; failure to successfully market our products through other channels, such as e-commerce; uncertainties generally associated with the specialty retailing business, such as decreases in mall traffic; disruptions in our supply of inventory; inability to increase same store sales; inability to renew, replace or enter into new store leases on favorable terms; increase in our cost of merchandise; significant increases in our merchandise markdowns; inability to grow our company-operated store base, expand our international store base through franchise or similar licensing arrangements, or expand our store base through concession stores; inability to design and implement new information systems; data security breaches of confidential information or other cyber-attacks; delays in anticipated store openings or renovations; results from any future asset impairment analysis, changes in applicable laws, rules and regulations, including laws and regulations governing the sale of our products, particularly regulations relating to heavy metal and chemical content in our products; changes in anti-bribery laws; changes in employment laws, including law relating

 

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to overtime pay, tax laws and import laws; product recalls; loss of key members of management; increases in the costs of healthcare for our employees; increases in the cost of labor; labor disputes; increases in the cost of borrowings; unavailability of additional debt or equity capital; and the impact of our substantial indebtedness on our operating income and our ability to grow. In addition, we typically earn a disproportionate share of our operating income in the fourth quarter due to seasonal buying patterns, which are difficult to forecast with certainty. Risks and uncertainties relating to any capital restructuring initiative include: risks and uncertainties relating to the Chapter 11 Cases, including but not limited to, the Company’s ability to obtain Bankruptcy Court approval with respect to motions filed in the Chapter 11 Cases, the effects of the Chapter 11 Cases on the Company and on the interests of various constituents, Bankruptcy Court rulings in the Chapter 11 Cases and the outcome of the Chapter 11 Cases in general, the length of time the Company will operate as a debtor in possession in Chapter 11, risks associated with motions filed and relief sought by third parties in the Chapter 11 Cases, the potential adverse effects of the Chapter 11 Cases on the Company’s liquidity or results of operations or business prospects and increased legal and other professional costs necessary to execute the Company’s reorganization; risks and uncertainties associated with the transactions contemplated in the DIP Credit Agreement, Backstop Agreement and RSA, including satisfaction of the condition thereto are subject to certain conditions, which conditions may not be satisfied for various reasons, including for reasons outside of the Company’s control, including the negotiation of terms, conditions and provisions related thereto; the ability of the Company to obtain requisite support for the restructuring and a Chapter 11 plan of reorganization from various stakeholders; the ability of the Company to continue as a going concern; the ability of the Company and its Debtor affiliates to confirm a Chapter 11 plan of reorganization; and the effects of disruption from the Chapter 11 Cases and any restructuring transactions pursued or consummated in connection therewith or relating thereto, making it more difficult to maintain business, financing and operational relationships, to obtain and maintain normal terms with customers, suppliers and service providers and to retain key executives and to maintain various licenses and approvals necessary for the Company to conduct its business. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. Additional discussion of these and other risks and uncertainties is contained elsewhere in this Item 2, in Item 3, “Quantitative and Qualitative Disclosures About Market Risk” and in our Form 10-K for Fiscal 2017 under “Statement Regarding Forward-Looking Disclosures” and “Risk Factors.”

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Cash

We have significant amounts of cash at financial institutions that are in excess of federally insured limits. We cannot be assured that we will not experience losses on our deposits. We mitigate this risk by maintaining bank accounts with a group of credit worthy financial institutions.

Interest Rates

As of May 5, 2018, we had fixed rate debt of $2,063.7 million and variable rate debt of $100.0 million. Based on our variable rate balance as of May 5, 2018, a 1% change in interest rates would increase or decrease our annual interest expense by approximately $1.0 million.

Foreign Currency

We are exposed to market risk from foreign currency exchange rate fluctuations on the United States dollar (“USD” or “dollar”) value of foreign currency denominated transactions and our investments in foreign subsidiaries. We manage this exposure to market risk through our regular operating and financing activities, and may from time to time, use foreign currency hedges. Exposure to market risk for changes in foreign currency exchange rates relates primarily to our foreign operations’ buying, selling, and financing in currencies other than local currencies and to the carrying value of net investments in foreign subsidiaries.

 

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As of May 5, 2018, we maintained no foreign currency options. We generally do not hedge the translation exposure related to our net investment in foreign subsidiaries. Included in “Comprehensive loss” are $(9.0) million and $1.9 million, net of tax, reflecting the unrealized gain on foreign currency translations and intra-entity foreign currency transactions during the three months ended May 5, 2018 and April 29, 2017, respectively.

Certain of our subsidiaries make significant USD purchases from Asian suppliers, particularly in China. Until July 2005, the Chinese government pegged its currency, the yuan renminbi (“RMB”), to the USD, adjusting the relative value only slightly and on infrequent occasion. Many people viewed this practice as leading to a substantial undervaluation of the RMB relative to the USD and other major currencies, providing China with a competitive advantage in international trade. China now allows the RMB to float to a limited degree against a basket of major international currencies, including the USD, the euro and the Japanese yen. The official exchange rate has historically remained stable; however, there are no assurances that this currency exchange rate will continue to be as stable in the future due to the Chinese government’s adoption of a floating rate with respect to the value of the RMB against foreign currencies. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on China to adopt an even more flexible and more market-oriented currency policy that allows a greater fluctuation in the exchange rate between the RMB and the USD. This floating exchange rate, and any appreciation of the RMB that may result from such rate, could have various effects on our business, which include making our purchases of Chinese products more expensive. If we are unable to negotiate commensurate price decreases from our Chinese suppliers, these higher prices would eventually translate into higher costs of sales, which could have a material adverse effect on our results of operations.

The results of operations of our foreign subsidiaries, when translated into U.S. dollars, reflect the average foreign currency exchange rates for the months that comprise the periods presented. As a result, if foreign currency exchange rates fluctuate significantly from one period to the next, results in local currency can vary significantly upon translation into U.S. dollars. Accordingly, fluctuations in foreign currency exchange rates, most notably the strengthening of the dollar against the euro, could have a material impact on our revenue growth in future periods.

General Market Risk

Our competitors include department stores, specialty stores, mass merchandisers, discount stores and other retail and internet channels. Our operations are impacted by consumer spending levels, which are affected by general economic conditions, consumer confidence, employment levels, availability of consumer credit and interest rates on credit, consumer debt levels, consumption of consumer staples including food and energy, consumption of other goods, adverse weather conditions and other factors over which we have little or no control. The increase in costs of such staple items has reduced the amount of discretionary funds that consumers are willing and able to spend for other goods, including our merchandise. Should there be continued volatility in food and energy costs, recession in the United States and Europe, rising unemployment and continued declines in discretionary income, our revenue and margins could be significantly affected in the future. We cannot predict whether, when or the manner in which the economic conditions described above will change. See also “Cautionary Note Regarding Forward Looking Statements and Risk Factors.”

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this Quarterly Report. Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including each of such officers as appropriate to allow timely decisions regarding required disclosure.

 

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Changes in Internal Controls over Financial Reporting

No changes in our internal control over financial reporting have been made during the quarter ended May 5, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

We are, from time to time, involved in routine litigation incidental to the conduct of our business, including litigation instituted by persons injured upon premises under our control; litigation regarding the merchandise that we sell, including product and safety concerns regarding heavy metal and chemical content in our merchandise; litigation with respect to various employment matters, including wage and hour litigation; litigation with present or former employees; and litigation regarding intellectual property rights. Although litigation is routine and incidental to the conduct of our business, like any business of our size which employs a significant number of employees and sells a significant amount of merchandise, such litigation can result in large monetary awards when judges, juries or other finders of facts do not agree with management’s evaluation of possible liability or outcome of litigation. In the opinion of management, we believe that current pending litigation will not have a material adverse effect on our consolidated financial results.

See Note 2 – Bankruptcy Filing for a description of the Chapter 11 Cases.

Notwithstanding the foregoing, any litigation pending against the Company or any of the Debtors as of the Commencement Date and any claims that could be asserted against the Company or any of the Debtors that arose prior to the Commencement Date are automatically stayed as a result of the commencement of the Chapter 11 Cases pursuant to section 362 of the Bankruptcy Code, subject to certain statutory exceptions. These matters will be subject to resolution in accordance with the Bankruptcy Code and applicable orders of the Bankruptcy Court.

 

Item 1A. Risk Factors

There have been no material changes in our risk factors disclosed in our Annual Report on Form 10-K for the year ended February 3, 2018.

 

Item 6. Exhibits

 

31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). (1)
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). (1)
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)
101.INS    XBRL Instance Document

 

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101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

(1)  Filed herewith.

Items 2, 3, 4 and 5 of Part II are not applicable and have been omitted.

 

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SIGNATURES

Pursuant to the requirements 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.
June 15, 2018     By:   /s/ Ron Marshall
      Ron Marshall, Chief Executive Officer (principal executive officer)
June 15, 2018     By:   /s/ Scott Huckins
      Scott Huckins, Executive Vice President and Chief Financial Officer (principal financial officer)

 

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INDEX TO EXHIBITS

 

EXHIBIT NO.    DESCRIPTION
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
32.1    Certification of Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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