10-Q 1 doc1.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) ( X ) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended August 3, 2002 ---------------------------------------------- OR ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ----- --------------------------------------- Commission file number 1-8899 ------------- ------------------------------------- CLAIRE'S STORES, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Florida 59-0940416 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3 S.W. 129th Avenue Pembroke Pines, Florida 33027 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (954) 433-3900 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X. No . --- --- The number of shares of the registrant's Common Stock and Class A Common Stock outstanding as of August 30, 2002 was 45,957,810 and 2,822,656, respectively, excluding treasury shares.
CLAIRE'S STORES, INC. AND SUBSIDIARIES INDEX PAGE NO. -------- PART I. FINANCIAL INFORMATION -------------------------------- ITEM 1. FINANCIAL STATEMENTS Unaudited Condensed Consolidated Balance Sheets at August 3, 2002 and February 2, 2002. 3 Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended August 3, 2002 and August 4, 2001. 4 Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 3, 2002 and August 4, 2001. 5 Notes to Unaudited Condensed Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14 PART II. OTHER INFORMATION --------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
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PART I. FINANCIAL INFORMATION CLAIRE'S STORES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS AUG. 3, FEB. 2, 2002 2002 ---------- ---------- (In thousands, except share and per share amounts) ASSETS Current assets: Cash and cash equivalents $ 117,420 $ 99,912 Short-term investments - 1,563 Inventories 83,470 78,596 Prepaid expenses and other current assets 52,913 34,353 ---------- ---------- Total current assets 253,803 214,424 ---------- ---------- Property and equipment: Land and building 17,984 17,984 Furniture, fixtures and equipment 198,545 187,565 Leasehold improvements 144,017 136,422 ---------- ---------- 360,546 341,971 Less accumulated depreciation and amortization (194,195) (177,997) ---------- ---------- 166,351 163,974 ---------- ---------- Goodwill, net 196,074 193,140 Other assets 46,152 40,037 ---------- ---------- 242,226 233,177 ---------- ---------- Total Assets $ 662,380 $ 611,575 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 27,811 $ 21,040 Trade accounts payable 37,127 30,874 Income taxes payable 5,172 4,800 Accrued expenses 33,666 25,822 ---------- ---------- Total current liabilities 103,776 82,536 ---------- ---------- Long term liabilities: Long term debt 103,443 110,104 Deferred credits 15,265 14,747 ---------- ---------- 118,708 124,851 ---------- ---------- Commitments and contingencies - - Stockholders' equity: Preferred stock par value $1.00 per share; authorized 1,000,000 shares, issued and outstanding 0 shares - - Class A common stock par value $.05 per share; authorized 20,000,000 shares, issued 2,823,392 shares and 2,830,819 shares, respectively 141 142 Common stock par value $.05 per share; authorized 150,000,000 shares, issued 45,957,074 shares and 45,949,647 shares, respectively 2,298 2,297 Additional paid-in capital 29,871 29,871 Accumulated other comprehensive loss (2,370) (16,709) Retained earnings 410,408 389,039 ---------- ---------- 440,348 404,640 Treasury stock, at cost (109,882 shares) (452) (452) ---------- ---------- 439,896 404,188 ---------- ---------- Total Liabilities and Stockholders' Equity $ 662,380 $ 611,575 ========== ========== See accompanying notes to unaudited condensed consolidated financial statements.
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CLAIRE'S STORES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) THREE MONTHS ENDED SIX MONTHS ENDED -------------------- ------------------- AUG. 3, AUG. 4, AUG. 3, AUG. 4, 2002 2001 2002 2001 --------- --------- --------- --------- (In thousands, except per share amounts) Net sales $238,740 $221,312 $449,101 $434,189 Cost of sales, occupancy and buying expenses 121,110 127,009 228,890 233,687 --------- --------- --------- --------- Gross profit 117,630 94,303 220,211 200,502 --------- --------- --------- --------- Other expenses: Selling, general and administrative 84,505 83,050 164,906 162,242 Depreciation and amortization 9,295 10,592 18,097 21,103 Interest expense, net 744 1,925 1,374 4,119 --------- --------- --------- --------- 94,544 95,567 184,377 187,464 --------- --------- --------- --------- Income (loss) from continuing operations before income taxes 23,086 (1,264) 35,834 13,038 Income tax expense (benefit) 8,008 (246) 12,475 4,828 --------- --------- --------- --------- Income (loss) from continuing operations 15,078 (1,018) 23,359 8,210 --------- --------- --------- --------- Discontinued operation: (Loss) from discontinued operation of Lux Corp., less applicable income tax benefit of $0, $2,946, $0 and $3,833, respectively - (4,910) - (6,389) Gain on disposal of Lux Corp., less applicable income taxes of $(1,078), $0, $(1,078) and $0, respectively 1,796 - 1,796 - --------- --------- --------- --------- Net gain (loss) from discontinued operation 1,796 (4,910) 1,796 (6,389) --------- --------- --------- --------- Net income (loss) 16,874 (5,928) 25,155 1,821 Foreign currency translation adjustments 10,604 (1,397) 14,339 (7,475) --------- --------- --------- --------- Comprehensive income (loss) $ 27,478 $ (7,325) $ 39,494 $ (5,654) ========= ========= ========= ========= Net income (loss) per share: Basic: Income (loss) from continuing operations $ 0.31 $ (0.02) $ 0.48 $ 0.17 --------- --------- --------- --------- (Loss) from operations of discontinued operation - (0.10) - (0.13) Gain from disposal of discontinued operation 0.04 - 0.04 - --------- --------- --------- --------- Net gain (loss) from discontinued operation 0.04 (0.10) 0.04 (0.13) --------- --------- --------- --------- Net income (loss) per share $ 0.35 $ (0.12) $ 0.52 $ 0.04 ========= ========= ========= ========= Diluted: Income (loss) from continuing operations $ 0.31 $ (0.02) $ 0.48 $ 0.17 --------- --------- --------- --------- (Loss) from operations of discontinued operation - (0.10) - (0.13) Gain from disposal of discontinued operation 0.04 - 0.04 - --------- --------- --------- --------- Net gain (loss) from discontinued operation 0.04 (0.10) 0.04 (0.13) --------- --------- --------- --------- Net income (loss) per share $ 0.35 $ (0.12) $ 0.52 $ 0.04 ========= ========= ========= ========= Weighted average number of shares outstanding: Basic 48,671 48,671 48,671 48,670 ========= ========= ========= ========= Diluted 48,821 48,671 48,817 48,766 ========= ========= ========= ========= See accompanying notes to unaudited condensed consolidated financial statements.
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CLAIRE'S STORES, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED -------------------- AUG. 3, AUG. 4, 2002 2001 --------- --------- (In thousands) Cash flows from operating activities: Net income $ 25,155 $ 1,821 Adjustments to reconcile net income to net cash provided by operating activities: Loss from discontinued operation, net of tax benefit - 6,389 Gain on disposal of discontinued operation, net of tax expense (1,796) - Depreciation and amortization 18,097 21,103 Loss on retirement of property and equipment 1,377 855 (Increase) decrease in - Inventories (2,989) 7,904 Prepaid expenses and other assets (20,637) (12,279) Increase (decrease) in - Trade accounts payable 4,821 9,581 Income taxes payable 3,118 (2,057) Accrued expenses 6,777 (2,360) Deferred credits 256 (599) --------- --------- Net cash provided by continuing operations 34,179 30,358 Net cash provided by (used in) discontinued operations 2,147 (2,833) --------- --------- Net cash provided by operating activities 36,326 27,525 --------- --------- Cash flows from investing activities: Acquisition of property and equipment (16,988) (16,390) Sale of short-term investments 1,563 - Capital expenditures of discontinued operations (352) (591) --------- --------- Net cash used in investing activities: (15,777) (16,981) --------- --------- Cash flows from financing activities: Principal borrowings on lines of credit 111 9,379 Principal payments on term loan - (5,000) Proceeds from stock options exercised - 45 Dividends paid (3,785) (3,784) --------- --------- Net cash (used in) provided by financing activities (3,674) 640 --------- --------- Effect of foreign currency exchange rate changes on cash and cash equivalents 633 (3,259) --------- --------- Net increase in cash and cash equivalents 17,508 7,925 Cash and cash equivalents at beginning of period 99,912 111,860 --------- --------- Cash and cash equivalents at end of period $117,420 $119,785 ========= ========= See accompanying notes to unaudited condensed consolidated financial statements.
5 CLAIRE'S STORES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared by the Company without audit, in accordance with the instructions to Form 10-Q, and therefore do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation 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 2, 2002 filed with the Securities and Exchange Commission, including Note 1 to the consolidated financial statements included therein which discusses consolidation and financial statement presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of gain and loss contingencies at the date of the financial statements. Actual results could differ from those estimates and assumptions. Due to the seasonal nature of the Company's business, the results of operations for the first six months of the year are not indicative of the results of operations on an annualized basis. Certain prior period amounts have been reclassified to conform to the current period presentation. See Note 4. 2. EARNINGS PER SHARE Basic net income per share is computed based on the weighted average number of shares of Class A Common Stock and Common Stock outstanding during the period presented, while diluted net income per share includes the dilutive effect of stock options. Options to purchase 450,500 shares and 524,870 shares of common stock, at prices ranging from $20.38 to $30.25 per share and $18.63 to $30.25 per share, respectively, were outstanding for the quarters ended August 3, 2002 and August 4, 2001, respectively, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares for the respective fiscal quarter. Options to purchase 451,419 shares and 532,120 shares of common stock, at prices ranging from $20.38 to $30.25 per share and $18.63 to $30.25 per share, respectively, were outstanding for the six months ended August 3, 2002 and August 4, 2001, respectively, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares for the respective six month period. 3. NEW ACCOUNTING PRONOUNCEMENTS Effective February 3, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." In accordance with SFAS 142, the Company ceased amortizing its goodwill effective February 3, 2002. The Company recorded $2.2 million and $4.4 million of amortization during the second quarter and six months ended August 4, 2001, respectively, and would have recorded $2.2 million and $4.4 million of amortization during the second quarter and six months ended August 3, 2002, respectively. Net (loss) income for the three and six months ended August 4, 2001 would have been $(4.5) million and $4.7 million or ($0.09) and $0.10 per diluted share, respectively, without goodwill amortization expense during those periods. The Company had $196.1 and $193.1 million of unamortized goodwill at August 3, 2002 and February 2, 2002, respectively. 6 SFAS 142 required the Company upon its adoption to reassess the value of, and useful lives assigned to, intangible assets including goodwill to determine whether the value of one or more intangible assets is impaired. The first step of this impairment test required the Company, within the first six months of Fiscal 2003, to determine the fair value of the reporting unit, as defined by SFAS 142, and compare it to the carrying value of the net assets allocated to the reporting unit. If this fair value exceeded the carrying value, no further analysis was required. If the fair value of the reporting unit was less than the carrying value of the net assets, the Company was required to perform step two of the impairment test, which required the Company to allocate the implied fair value of the reporting unit to all underlying assets and liabilities, including both recognized and unrecognized tangible and intangible assets, based on their fair value. The Company performed a transitional goodwill impairment test as required and has determined that no goodwill impairment existed at February 3, 2002. The Company has also evaluated the lives of all of its intangible assets. As a result of this evaluation, the Company has determined that none of its intangible assets, other than goodwill, have indefinite lives and that the existing useful lives are appropriate. SFAS 142 also requires the Company to perform a goodwill impairment test on an annual basis. Any impairment charges resulting from the application of this test in the future would be immediately recorded as a charge to earnings in the Company's statement of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement retains the requirements of SFAS No. 121 to (a) recognize an impairment loss only if the carrying amount of a long lived asset is not recoverable from its discounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value of the asset. This statement requires that a long-lived asset to be abandoned, exchanged for a similar productive asset, or distributed to owners in a spin-off be considered held and used until it is disposed of. This statement requires that the depreciable life of a long-lived asset to be abandoned be revised and that an impairment loss be recognized at the date a long-lived asset is exchanged for a similar productive asset or distributed to owners in a spin-off if the carrying amount of the asset exceeds its fair value. The accounting model for long-lived assets to be disposed of by sale is used for all long-lived assets, whether previously held and used or newly acquired. That accounting model measures a long-lived asset classified as held for sale at the lower of its carrying amount or fair value less cost to sell and requires depreciation (amortization) to cease. Discontinued operations are no longer measured on a net realizable value basis, and future operating losses are no longer recognized before they occur. This statement retains the basic provisions of Accounting Principles Board Opinion 30 for the presentation of discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. A component of an entity that is classified as held for sale or that has been disposed of is presented as a discontinued operation if the operations and cash flows of the component will be (or have been) eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations of the component. The Company adopted SFAS 144 on February 3, 2002. Management has determined that the adoption of SFAS 144 did not have a material effect on the Company's financial statements. In June 2002, the FASB issued Statement No. 146 ("Costs Associated with Exit or Disposal Activities"). This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred compared to prior literature, which recognized a liability when the entity committed to an exit plan. Management believes that this Statement will not have a material impact on the Company's financial statements; however, the Statement will result in a change in accounting policy associated with the recognition of liabilities in connection with future restructuring charges. 7 4. DISCONTINUED OPERATION In January 2002, the Company's Board of Directors authorized the disposition of the Mr. Rags stores, which represented the Company's apparel segment. In connection with the plan to dispose of Mr. Rags, the Company recorded a loss on disposal of Lux Corp., net of tax of $12.9 million in the consolidated financial statements as of February 2, 2002. Included in the loss on disposal was an estimate of proceeds from the sale of closing date inventory of $4.4 million, net of tax and an estimate of operating losses of Mr. Rags during the six month phase out period of $2.5 million, net of tax. On May 17, 2002, the Company sold the stock of Lux Corporation, d/b/a Mr. Rags for (i) an initial payment of $5 million, (ii) deferred payments to be paid aggregating $10 million payable as 1% of net sales during the first year and 2% of net sales thereafter, and (iii) an amount to be paid equal to approximately 48% of the gross sales of the inventory of Mr. Rags as of the closing date. Through the date of disposition, the operations of Mr. Rags were accounted for as a discontinued operation in the Company's unaudited condensed consolidated financial statements. The deferred payments aggregating $10 million were not included in the Company's estimate of loss on disposition as the timing and amount could not be reasonably estimated due to the uncertainty of the financial condition of the acquired business. In order to conform to the separate presentation of the net assets and operating results of Mr. Rags as a discontinued operation, certain prior period amounts have been reclassified to conform to current period presentation. During the three months ended August 3, 2002, the Company recorded approximately $1.8 million, net of tax, gain on disposal of Mr. Rags. This gain represents proceeds in excess of the Company's original estimates for the sale of the closing date inventory of Mr. Rags of $1.3 million, net of tax, and $ .5 million net of tax, of operating losses of Mr. Rags during the phase out period below the Company's original estimates The Company remains as a guarantor on 12 operating leases for store locations and $5.7 million in gross future lease payments on operating leases for equipment and leasehold improvements of Lux Corp. The Company has also entered into a service agreement with the new owner of Mr. Rags under which the Company will perform certain administrative services for the benefit of Mr. Rags, for an initial period of one year. The agreement can be cancelled by either party upon written notice in accordance with the terms of the service agreement. As of August 3, 2002, the Company has received approximately $500,000 for these services and has included them in its statement of operations as a reduction of selling, general and administrative expenses. 5. SEGMENT INFORMATION The Company is primarily organized based on the geographic markets in which it operates. Under this organizational structure, the Company currently has two reportable segments: North America and International. Net sales from continuing operations for the periods presented were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ------------------- AUG. 3, AUG. 4, AUG. 3, AUG. 4, 2002 2001 2002 2001 --------- --------- --------- -------- North America $177,014 $170,796 $339,968 $343,343 International 61,726 50,516 109,133 90,846 --------- --------- --------- --------- Total $238,740 $221,312 $449,101 $434,189 ========= ========= ========= =========
8 Income (loss) from continuing operations for the periods presented were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------- ------------------- AUG. 3, AUG. 4, AUG. 3, AUG. 4, 2002 2001 2002 2001 --------- --------- --------- --------- North America $ 10,601 $ (6,858) $ 18,925 $ 477 International 4,477 5,840 4,434 7,733 --------- --------- --------- --------- Total $ 15,078 $ (1,018) $ 23,359 $ 8,210 ========= ========= ========= =========
6. STATEMENTS OF CASH FLOWS Payments of income taxes were $12.8 million and $12.0 million for the six months ended August 3, 2002 and August 4, 2001, respectively. Payments of interest were $2.0 million and $6.8 million for the six months ended August 3, 2002 and August 4, 2001, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. We are a leading mall-based retailer of popular-priced fashion accessories for pre-teens and teenagers through our wholly-owned subsidiaries, Claire's Boutiques, Inc., which also operates through its Icing by Claire's stores (formerly Afterthoughts), Claire's Puerto Rico Corp., Claire's Canada Corp., Claire's Accessories UK Ltd., Bijoux One Trading AG (Bijoux), Claire's France and through our 50%-owned joint venture Claire's Nippon Co., Ltd. We are primarily organized based on our geographic markets, which include our North American operations and our international operations. As of August 3, 2002, we operated a total of 2,893 stores in all 50 states of the United States, Canada, the Caribbean, the United Kingdom, Switzerland, Austria, Germany, France, Ireland and Japan. The stores are operated mainly under the trade names "Claire's Boutiques", "Claire's Accessories", "Afterthoughts", "The Icing", "Icing by Claire's", and "Bijoux One". We are in the process of transitioning our "Afterthoughts" stores to "Icing by Claire's" stores to capitalize on the Claire's brand name. Annually, our fiscal year ends on the Saturday closest to January 31. As a result, both our current and prior fiscal years consist of four 13-week quarters. We refer to the prior fiscal year ended February 2, 2002 as Fiscal 2002, and the current fiscal year ending February 1, 2003 as Fiscal 2003. The following discussion and analysis provides information that management believes is useful in understanding our operating results, cash flows, and financial condition. The discussion should be read in conjunction with, and is qualified in its entirety by reference to, the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q. The discussions in Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under "Forward- Looking Statements" in this section, as well as estimates and judgments used in preparing our financial statements. 9 The following table sets forth, for the periods indicated, percentages which certain items reflected in the financial statements bear to our net sales:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ------------------ AUG. 3, AUG. 4, AUG. 3, AUG. 4, 2002 2001 2002 2001 -------- -------- -------- -------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales, occupancy and buying expenses 50.7 57.4 51.0 53.8 -------- -------- -------- -------- Gross profit 49.3 42.6 49.0 46.2 -------- -------- -------- -------- Other expenses: Selling, general and administrative 35.4 37.5 36.7 37.4 Depreciation and amortization 3.9 4.8 4.0 4.9 Interest expense, net 0.3 0.9 0.3 0.9 -------- -------- -------- -------- 39.6 43.2 41.1 43.2 -------- -------- -------- -------- Income (loss) from continuing operations before income taxes 9.7 (0.6) 8.0 3.0 Income taxes 3.4 (0.1) 2.8 1.1 -------- -------- -------- -------- Income (loss) from continuing operations 6.3 (0.5) 5.2 1.9 ======== ======== ======== ========
RESULTS OF OPERATIONS The operating results of Claire's Nippon Co., Ltd. (Nippon) are accounted for under the equity method. As a result, any losses incurred by Nippon in excess of our investment and advances are not reflected in our income statement because the operations are not part of our consolidated group. Accordingly the operating results of Nippon are not included in the following analysis. In addition, the assets and liabilities of Nippon are not included in our condensed consolidated balance sheets. Under the equity method, our original investment in Nippon was recorded at cost and had been adjusted periodically to recognize our proportionate share of earnings or losses from Nippon since the acquisition date. In May 2002, we made an additional investment in Nippon of approximately $ .8 million. Net sales for the three months ended August 3, 2002 increased approximately 8%, or $17.4 million, over the comparable period ended August 4, 2001. The increase for the period resulted primarily from a same-store sales increase during the period of 4% and an increase in average sales per store for new stores. The average sales per store in new stores increased during the quarter primarily due to a higher percentage of our new stores being located in Europe, which typically generate higher sales per store than our stores in North America. Net sales for the six months ended August 3, 2002 increased approximately 3%, or $14.9 million, over the comparable period ended August 4, 2001. The increase for the period resulted primarily from a same-store sales increase of 1% and an increase in average sales per store for new stores. Gross profit for the three months ended August 3, 2002 increased 6.7% as a percentage of sales, or $23.3 million, compared to the three months ended August 4, 2001. The increase as a percentage of sales was primarily caused by higher merchandise margins. The higher merchandise margins were achieved by taking fewer markdowns during the quarter as we maintained inventory levels in line with expected customer demand. During the three months ended August 4, 2001, we incurred approximately $15 million, at cost, of merchandise markdowns due to slow moving inventory. Gross profit for the six months ended August 3, 2002 increased 2.8% as a percentage of sales, or $19.7 million, compared to the comparable period ended August 4, 2001. The increase as a percentage of sales was primarily caused by higher merchandise margins, resulting from fewer markdowns during the six months ended August 3, 2002 as discussed above. 10 Selling, general and administrative expenses for the three months ended August 3, 2002 decreased 2.1% as a percentage of sales, compared to the three months ended August 4, 2001. The decrease as a percentage of sales was caused primarily by the effect of positive same-store sales during the quarter on our corporate overhead. Selling, general and administrative expenses increased $1.5 million, or 2% over the comparable period. We achieved this limited increase primarily as a result of expense management controls employed during the quarter in areas such as store payroll and advertising partially offset by a non-tax deductible bonus of $1 million paid to our chairman related to the disposition of Mr. Rags. Selling, general and administrative expenses for the six months ended August 3, 2002 decreased .7% as a percentage of sales, compared to the comparable period ended August 4, 2001. These expenses increased by $2.7 million, or 1.6% over the comparable period. We achieved this limited increase primarily as a result of expense management controls in areas such as store payroll and advertising. Depreciation and amortization for the three months ended August 3, 2002 was $9.3 million as compared to $10.6 million for the three months ended August 4, 2001 The decrease of $1.3 million was due to goodwill no longer being amortized in accordance with the provisions of SFAS No. 142, offset by additional depreciation on capital expenditures since August 4, 2001. We recorded $2.2 million of amortization of goodwill during the three months ended August 4, 2001. Our net loss would have been $4.5 million or $ .09 per diluted share without goodwill amortization expense during that period. Depreciation and amortization for the six months ended August 3, 2002 was $18.1 million as compared to $21.1 million for the six months ended August 4, 2001. The decrease of $3.0 million was due to goodwill no longer being amortized, offset by additional depreciation on capital expenditures made since August 4, 2001. Our net income would have been $4.7 million, or $.10 per diluted share without goodwill amortization expense during that period. Interest expense, net was $ .7 million and $1.4 million for the three and six months ended August 3, 2002, respectively, as compared to $1.9 million and $4.1 million for the three and six months ended August 4, 2001, respectively. The $1.2 million and $2.7 million decrease in interest expense, net was due primarily to lower interest rates on our credit facilities and lower outstanding debt balances during the period. Our effective tax rate was 35% during the periods ended August 3, 2002 and August 4, 2001. In January 2002, we announced our decision to discontinue the operations of Lux Corp. (Mr. Rags), which represented our apparel segment. In connection with the plan to dispose of Mr. Rags, we recorded a loss, net of tax of $12.9 million in our consolidated financial statements as of February 2, 2002. Included in our loss on disposal was an estimate of proceeds from the sale of closing date inventory of $4.4 million, net of tax and an estimate of operating losses of Mr. Rags during the six month phase out period of $2.5 million, net of tax. On May 17, 2002, we completed the sale of Mr. Rags for (i) an initial payment of $5 million, (ii) deferred payments to be paid aggregating $10 million payable as 1% of net sales during the first year and 2% of net sales thereafter, and (iii) an amount to be paid equal to approximately 48% of the gross sales of the inventory of Mr. Rags as of the closing date. Through the date of sale, the operations of Mr. Rags were accounted for as a discontinued operation in our unaudited condensed consolidated financial statements. The deferred payments aggregating $10 million were not included in our estimate of loss on sale as the timing and amount could not be reasonably estimated due to the uncertainty of the financial condition of the acquired business. We recorded a net loss from the operation of Mr. Rags of approximately $4.9 million, net of tax, for the three months ended August 4, 2001. See Note 4 to our Condensed Consolidated Financial Statements. During the three months ended August 3, 2002, we recorded approximately $1.8 million, net of tax, gain on disposal of Mr. Rags. This gain represents proceeds in excess of our original estimates for the sale of the closing date inventory of Mr. Rags of $1.3 million, net of tax, and $ .5 million net of tax, of operating losses of Mr. Rags during the phase out period below our original estimates. 11 We remain as a guarantor on 12 operating leases for store locations and $5.7 million in gross future lease payments on operating leases for equipment and leasehold improvements of Mr. Rags. We have also entered into a service agreement with the new owner of Mr. Rags under which we will perform certain administrative services for the benefit of Mr. Rags, for an initial period of one year. The agreement can be cancelled by either party upon written notice in accordance with the terms of the service agreement. As of August 3, 2002, we have received approximately $500,000 for these services and have included them in our statement of operations as a reduction of selling, general and administrative expenses. QUARTERLY INFORMATION AND SEASONALITY The specialty retail industry is seasonal in nature and a disproportionately higher level of our revenues and earnings are generated in the fall and holiday selling seasons. Our working capital requirements and inventories increase substantially in the third quarter in anticipation of the holiday selling season. LIQUIDITY AND CAPITAL RESOURCES In connection with the acquisition of Afterthoughts in December of 1999, we entered into a credit facility pursuant to which we financed $200 million of the purchase price for Afterthoughts. The credit facility includes a $40 million revolving line of credit which matures on December 1, 2004, and a $175 million five year term loan, the first installment of which was paid on December 31, 2000, with future installments, thereafter, payable on a quarterly basis through December 1, 2004. The credit facility is prepayable without penalty and bears interest at a margin of 125 basis points over the London Interbank Borrowing Rate. The margin is adjusted periodically based on our performance as it relates to certain financial covenants. On August 3, 2002, approximately $25 million was outstanding on this line of credit, while $105 million was outstanding under the term loan. Also, on August 3, 2002, the borrowings under this credit facility were in compliance with all debt covenants. We cannot re-borrow amounts repaid under the term loan. As a result, we have no future availability under the term loan. We can re-borrow amounts repaid under the revolving line of credit, subject to the terms of the credit facility. As of August 3, 2002, we had $14 million of availability under the revolving line of credit. We are required to maintain financial ratios under our credit facility. Required financial ratios include fixed charge coverage ratio, consolidated leverage ratio and current ratio. The credit facility also contains other restrictive covenants which limit, among other things, our ability to make dividend distributions and repurchase shares of our Common stock. If these financial ratios and other restrictive covenants are not maintained, our bank will have the option to require immediate repayment of all amounts outstanding under the credit facility. The most likely result would require us to either renegotiate certain terms of the credit agreement, obtain a waiver from the bank, or obtain a new credit agreement with another bank, which may contain different terms. Our cash flow from operations, together with our cash balances, provides adequate liquidity to meet our operational needs and debt obligations. Cash and cash equivalents totaled $117.4 million at August 3, 2002. Net cash provided by operating activities from continuing operations was $34.2 million for the six months ended August 3, 2002 compared to $30.4 million for the six months ended August 4, 2001. The primary sources of net cash provided by operating activities from continuing operations was income from continuing operations, adjusted for non-cash items. Included within net cash provided by operating activities for the period was $20.6 million of cash used to fund an increase in prepaid and other assets primarily due to the timing of rent and property tax payments internationally. 12 Inventory at August 3, 2002 increased 6% compared to the inventory balance at the end of our February 2, 2002 fiscal year. This increase is primarily a result of the seasonally adjusted levels of inventory that we carry to meet expected future sales demand. Net cash used in investing activities of $15.8 million for the six months ended August 3, 2002 was primarily as a result of capital expenditures of $17.3 million offset by the sale of short-term investments Net cash used in financing activities was $3.7 million for the six months ended August 3, 2002 as compared to $.6 million provided by financing activities for the six months ended August 4, 2001. The cash used in financing activities during the first six months of Fiscal 2003 was to fund dividends on our Class A and Common stock. Included within the $.6 million during the first six months of Fiscal 2002 was approximately $5.0 million of debt re-payments offset by $9.4 million of additional borrowings on our existing credit lines, in addition to the dividends paid during that period. For the six months ended August 3, 2002, we opened 91 stores and closed 73 stores ending the quarter with 2,893 stores. We believe that our significant cash balances, consistent ability to generate cash flow from operations and available funds under our credit facility will be sufficient to fund our operations, debt and currently anticipated capital expenditure plans for Fiscal 2003. During the six months ended August 3, 2002, the U.S. dollar weakened against the major currencies included in our consolidated financial statements. As a result, the cumulative foreign currency translation adjustment increased shareholders' equity by $14.3 million for the six months ended August 3, 2002. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995, or the Act, provides a safe harbor for "forward-looking statements" made by or on our behalf. We and our representatives may from time to time make written or verbal forward-looking statements, including statements contained in this and other filings with the Securities and Exchange Commission and in our press releases and reports to shareholders. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to new store openings, customer demand and future operating results, are forward-looking statements within the meaning of the Act and as defined in Section 21E of the Securities Exchange Act of 1934, as amended. These statements may also be identified by their use of forward-looking terminology, such as "believes," "expects," "may," "should," "would," "will," "intends," "plans," "estimates," and "anticipates." Forward-looking statements are and will be based on management's then current views and assumptions regarding future events and operating performance, and we assume no obligation to update any forward-looking statement. Forward-looking statements involve known or unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include but are not limited to: fluctuations in sales and same-store sales results, fashion trends, dependence on foreign suppliers, competition from other retailers, relationships with mall developers and operators, general economic conditions, success of joint ventures and relationships with and reliance upon third parties, and uncertainties generally associated with specialty retailing. Additional information concerning these risks and uncertainties is contained in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended February 2, 2002. 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency ----------------- We are exposed to market risk from foreign currency exchange rate fluctuations on the U.S. dollar value of foreign currency denominated transactions and our investment in foreign subsidiaries. We manage this exposure to market risk through our regular operating and financing activities, but currently do not use foreign currency purchased put options or foreign exchange forward contracts. During the first six months of Fiscal 2003, included in comprehensive income and stockholders' equity is $14.3 million reflecting the unrealized gain on foreign currency translation. Based on our average net currency positions at August 3, 2002, the potential gain or loss due to a 10% adverse change on foreign currency exchange rates could be significant to our operations. Interest Rates --------------- Our exposure to market risk for changes in interest rates is limited to our cash, cash equivalents and debt. Based on our average invested cash balances and outstanding debt during the first six months of Fiscal 2003, a 10% increase in the average effective interest rate during the remainder of Fiscal 2003 would not have materially impacted our annual net interest expense. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's 2002 Annual Meeting of Shareholders (the "Annual Meeting") was held on June 27, 2002 in New York City to act on the election of seven directors to serve, each for a one-year term. Proxies for the Annual Meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and there was no solicitation in opposition to the Company's solicitation. At the Annual Meeting, each holder of record of Common Stock, $.05 par value (the "Common Stock") and Class A Common Stock, $.05 par value (the "Class A Common Stock"), of the Company at the close of business on April 26, 2002 (the "Record Date") was entitled to vote, in person or by proxy, one vote for each share of Common Stock and ten votes for each share of Class A Common Stock, as the case may be, held by such holder. As of the Record Date, the Company had outstanding 45,952,920 shares of Common Stock and 2,824,637 shares of Class A Common Stock, which in the aggregate were entitled to 74,199,290 votes The holders of record of shares of Common Stock and Class A Common Stock entitled to 65,591,394 votes were either present in person or represented by proxy, and constituted a quorum for the transaction of business at the Annual Meeting. All of the Company's nominees for directors were elected to serve a one-year term by more than the required plurality of affirmative votes of the holders of Common Stock (one vote per share) and Class A Common Stock (ten votes per share), voting together as a single class:
DIRECTOR NOMINEE VOTES FOR VOTES WITHHELD ---------------- ---------- -------------- Rowland Schaefer 58,844,381 6,747,013 Ira D. Kaplan 58,881,266 6,710,128 Bruce G. Miller 63,583,380 2,008,014 Irwin L. Kellner, Ph.D. 64,139,245 1,452,149 Steven H. Tishman 64,147,588 1,443,806 Marla L. Schaefer 58,821,529 6,769,865 E. Bonnie Schaefer 59,158,521 6,432,873
14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K 1. Form 8-K filed with the Securities and Exchange Commission on June 3, 2002 to report an Item 2 event (Acquisition or Disposition of Assets) relating to the sale of stock of Lux Corp. 2. Form 8-K filed with the Securities and Exchange Commission on June 27, 2002 to report an Item 9 event (Regulation FD Disclosure). 3. Form 8-K filed with the Securities and Exchange Commission on July 22, 2002 to report an Item 9 event (Regulation FD Disclosure). ITEMS 1, 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 15 SIGNATURE --------- 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. ----------------------- (Registrant) Date: September 13, 2002 /s/ Ira D. Kaplan -------------------- Ira D. Kaplan Senior Vice President and Chief Financial Officer CERTIFICATION I, Rowland Schaefer, Chief Executive Officer of Claire's Stores, Inc. (the "Company"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report. Date: September 13, 2002 /S/ ROWLAND SCHAEFER ---------------------- Rowland Schaefer Chief Executive Officer CERTIFICATION I, Ira D. Kaplan, Chief Financial Officer of Claire's Stores, Inc. (the "Company"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report. Date: September 13, 2002 /S/ IRA D. KAPLAN -------------------- Ira D. Kaplan Chief Financial Officer EXPLANATORY NOTE REGARDING CERTIFICATIONS: Representations 4, 5 and 6 of the Certifications as set forth in this quarterly report have been omitted, consistent with the Transition Provisions of SEC Exchange Act Release No. 34-46427. 16