SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-8899
CLAIRE'S STORES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 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)
Registrant's telephone number, including area code: (954) 433-3900
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
----------------------------- ----------------------------
Common Stock, $.05 par value New York Stock Exchange,Inc.
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
-----------------------------
Class A Common Stock, $.05 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 31, 2000, the aggregate market value of the 44,725,313 shares of
voting stock held by non-affiliates of the registrant was $897,301,592.
At March 31, 2000 there were outstanding 48,387,659 shares of registrant's
Common Stock, $.05 par value, and 2,863,384 shares of the registrant's Class A
Common Stock, $.05 par value, including Treasury Shares.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the 2000 Annual Meeting of Stockholders, to be filed
no later than 120 days after the end of the Registrant's fiscal year covered by
this report, is incorporated by reference into Part III.
<PAGE>
TABLE OF CONTENTS
PART I
ITEM PAGE NO.
---- --------
1. Business 3
2. Properties 5
3. Legal Proceedings 6
4. Submission of Matters to a Vote of Security Holders 6
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 7
6. Selected Financial Data 8
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
7A. Quantitative and Qualitative Disclosures About
Market Risks 13
8. Financial Statements and Supplementary Data 14-30
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 30
PART III
10. Directors and Executive Officers of the Registrant 31
11. Executive Compensation 31
12. Security Ownership of Certain Beneficial Owners
and Management 31
13. Certain Relationships and Related Transactions 31
PART IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 31-33
2
<PAGE>
PART I
ITEM 1. BUSINESS
General
- -------
Claire's Stores, Inc. (the "Company"), through its wholly-owned subsidiaries,
Claire's Boutiques, Inc. ("Claire's"), which also operates through its
Afterthoughts division ("Afterthoughts"), Claire's Puerto Rico Corp. ("CPRC"),
Claire's Canada Corp. ("CCC"), Claire's Accessories UK Ltd. ("CUK"), Bijoux One
Trading AG ("Bijoux"), Cleopatre S.A. ("Cleopatre"), Lux Corporation ("Lux") and
its 50%-owned joint venture Claire's Nippon Co., Ltd. ("Nippon"), is a leading
mall-based retailer of popular-priced fashion accessories and apparel for
pre-teens and teenagers. As of March 31, 2000, the Company operated a total of
3,054 such stores in 50 states, Canada, the Caribbean, the United Kingdom,
Switzerland, Austria, Germany, France and Japan. The stores are operated mainly
under the trade names "Claire's Boutiques" or "Claire's Accessories",
"Afterthoughts", "The Icing", "Claire's Etc.", "Bow Bangles", "Bijoux One" and
"Cleopatre" (collectively the "Fashion Accessory Stores") and "Mr. Rags"(the
"Apparel Stores").
In December 1999, the Company completed its acquisition of Afterthoughts, a 768
store fashion accessory chain operating as a division of the Venator Group, Inc.
The transaction was accounted for as a purchase. The purchase price was $250
million, $200 million of which was financed through a credit facility. Excess
purchase price over fair market value of the underlying assets was allocated
primarily to goodwill, which will be amortized over twenty-five years.
The Fashion Accessory Stores specialize in selling popular-priced fashion
accessories designed to predominantly appeal to pre-teen and teenage females.
Merchandise in the Fashion Accessory Stores typically ranges in price between $2
and $20, with the average product priced at about $4. The Fashion Accessory
Stores are similar in format and the different trade names give the Company the
ability to have multiple store locations in malls. Although the Company faces
competition from a number of small specialty store chains and others selling
fashion accessories, the Company believes that its Fashion Accessory Stores
comprise the largest and most successful chain of specialty retail stores in the
world devoted to the sale of popular-priced pre-teens' and teens' fashion
accessories.
The Apparel Stores are operated by Lux under the trade name "Mr. Rags". These
stores sell casual lifestyle, skater/urban fashion apparel and accessories for
the male teenage market. The market for Lux is highly competitive. There are
numerous specialty retail chains that target male teenagers, many of whom are
much larger than Lux. The Company believes Lux can successfully compete due to
its superior store design and merchandise focus.
The Company's operations are divided into three principal product categories.
Jewelry consists of costume jewelry, including earrings and ear piercing
services, while Accessories consists of other fashion accessories, hair
ornaments, totebags and novelty items. Apparel includes name-brand as well as
private label shirts and pants. The following table compares sales of each
product category of merchandise sold by the Company for the last three fiscal
years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
JAN. 29, JAN. 30, JAN. 31,
2000 1999 1998
------- ------- --------
(In thousands)
--------------
<S> <C> <C> <C> <C> <C> <C>
Jewelry $360,812 42.6% $288,053 43.5% $241,955 45.1%
Accessories 397,325 46.9 314,135 47.5 256,647 47.8
Apparel 88,761 10.5 59,668 9.0 38,152 7.1
- ----------- -------- ------ -------- ------ -------- ------
$846,898 100.0% $661,856 100.0% $536,754 100.0%
======== ====== ======== ====== ======== ======
</TABLE>
Sales of each category of merchandise vary from period to period depending on
current fashion trends. The Company experiences the traditional retail pattern
of peak sales during the Christmas, Easter and back-to-school periods. Sales,
as a percentage of total sales in each of the four quarters of the fiscal year
ended January 29, 2000 ("Fiscal 2000") were 20%, 22%, 22% and 36% in the first,
second, third and fourth quarters, respectively.
3
<PAGE>
At March 31, 2000, the Company had approximately 16,300 employees, 53% of whom
were part-time. Part-time employees typically work up to 20 hours per week.
The Company has no collective bargaining agreements with any labor unions and
considers its employee relations to be good.
Recent Developments
- --------------------
In February 2000, the Company completed its acquisition of Cleopatre, a
privately held 42 store fashion accessory chain. Cleopatre, headquartered in
Paris, France, became a wholly-owned subsidiary of CUK. The transaction has
been accounted for as a purchase. The purchase price was approximately $11
million. Excess purchase price over fair market value of the underlying assets
was allocated to goodwill, which will be amortized over twenty-five years.
Fashion Accessory Stores
- --------------------------
The Fashion Accessory Stores are located primarily in enclosed shopping malls.
The stores operated in North America under the names Claire's Boutiques,
Claire's Accessories and Afterthoughts average approximately 1,000 square feet
while those stores operating under the names "The Icing" and "Claire's Etc."
average 1,400 square feet. The stores operated in the United Kingdom, Europe
and Japan average 600 square feet and are located in enclosed shopping malls and
central business districts. Each store uses Company-designed displays which
permit the presentation of a wide variety of items in a relatively small space.
The stores are distinctively designed for customer identification, ease of
shopping and quantity of selection. Store hours are dictated by the mall
operators and the stores are typically open from 10:00 A.M. to 9:00 P.M., Monday
through Saturday, and, where permitted by law, from Noon to 5:00 P.M. on Sunday.
80% of sales are made in cash, with the balance made by credit cards. The
Company permits, with restrictions on certain items, returns for exchange or
refund.
The Company purchases its merchandise from approximately 650 suppliers. The
Company is not dependent on an individual vendor for merchandise purchased.
Substantially all of the costume jewelry and fashion accessories sold are
purchased from importers or imported directly. All merchandise is shipped from
the suppliers to the Company's distribution facility in Hoffman Estates,
Illinois, a suburb of Chicago, which services the North American and Japanese
stores or the distribution facility in Birmingham, England, which services the
stores in the United Kingdom and France, or the distribution facilities in
Zurich, Switzerland or Vienna, Austria, which service the stores in those
respective countries. After inspection, merchandise is shipped via common
carrier to the individual stores. Stores typically receive three to five
shipments a week.
Except as stated below, responsibility for managing the Fashion Accessory Stores
in North America rests with the President and Chief Operating Officer of
Claire's, who reports to the President of the Company. The Company currently
employs a total of 218 District Managers, each of whom oversees approximately 11
stores in his or her respective geographic area and reports to one of 18
Regional Managers. Each Regional Manager reports to one of five Territorial
Vice Presidents, who in turn report to the Senior Vice President of store
operations. Each store is staffed by a Manager, an Assistant Manager and one or
more part-time employees. A majority of the District Managers have been
promoted from within the organization, while a majority of the Regional Managers
were hired externally. All of the Territorial Vice Presidents were promoted
from within the organization. The reporting structure for the Fashion Accessory
Stores in the United Kingdom and Europe are similar to the reporting structure
in North America. The President of CUK and Bijoux reports to the President of
the Company.
In Fiscal 2000, the Company continued to expand its international operations by
opening 98 Fashion Accessory stores in the United Kingdom, bringing the total
number of stores operating there to 282, and by opening 4 stores in Continental
Europe. The Company plans to open approximately 100 stores in North America, 70
stores in the United Kingdom and 20 stores in Continental Europe in the fiscal
year ending February 3, 2001 ("Fiscal 2001"). Store expansion continued in
Japan as the Company, with its joint venture partner, Jusco Co., Ltd., a
Japanese Company, opened a net 19 stores in Fiscal 2000, bringing the total
number of stores operating in Japan to 83. Current plans call for opening up to
40 additional stores in Japan in Fiscal 2001.
4
<PAGE>
Apparel Stores
- ---------------
The Apparel Stores are located in enclosed shopping malls. The Apparel Stores
range in size from approximately 1,500 to 2,400 square feet with an average size
of 2,000 square feet.
The representative price range for merchandise is $2 to $200, with an average
sale of approximately $45. Cash and major credit cards are accepted for
payment.
The stores are distinctively designed and well lit, with merchandise displayed
in a manner to create visual excitement. Marketing is aimed at the male
teenager.
The Apparel Stores conduct merchandise purchasing from offices in Seattle,
Washington. Distribution operations are conducted from the Company's
distribution facility in Hoffman Estates, Illinois. The merchandise is shipped
via common carrier to the stores, as required.
The President of Lux is responsible for managing the Apparel Stores. The
President of Lux reports to the President of the Company. The field
organization of Lux is similar in structure to that of Claire's. Supervision of
the stores rests with three Regional Sales Managers who supervise 18 district
managers who, in turn, are responsible for overseeing approximately 8 stores in
his or her geographic areas. Each store is staffed by a Manager, Assistant
Manager and part-time employees, as required.
ITEM 2. PROPERTIES
The Company's 3,054 stores operating as of March 31, 2000 are located in 50
states, Puerto Rico, Canada, the United Kingdom, Switzerland, Austria, Germany,
France, the Caribbean and Japan. The Company leases all of its store
locations, generally for terms of seven to ten years (up to 25 years in the
United Kingdom and Europe). Under the leases, the Company pays a fixed minimum
rent and/or rentals based on gross sales in excess of specified amounts. The
Company also pays certain other expenses (e.g., common area maintenance charges
and real estate taxes) under the leases. The internal layout and fixtures of
each store are designed by management and constructed under contracts with third
parties.
Most of the Company's stores are located in enclosed shopping malls, while some
stores are located within central business districts and others are located in
"open-air" outlet malls or "strip centers". The Company actively seeks
locations that meet its criteria and opens new stores when opportunities are
found within its budget for expansion. Criteria include geographic location and
demographic aspects of communities surrounding the store site, acceptable anchor
tenants, suitable location within a mall, appropriate space availability and
proposed rental rates. The Company believes that sufficient desirable locations
are available to accommodate its expansion plans. The Company refurbishes its
existing stores on a regular basis.
The Company has closed 178 stores in the last three fiscal years, primarily due
to certain locations not meeting Company established profit benchmarks or the
unwillingness of the landlord to renew the lease on terms acceptable to the
Company. The Company has not experienced any substantial difficulty in renewing
desired store leases and has no reason to expect any such difficulty in the
future. For each of the last three fiscal years, no individual store accounted
for more than one percent of total sales.
In December 1999, the Company began implementation of a reorganization plan to
eliminate redundant field operations and optimize square footage efficiency as a
result of the acquisition of Afterthoughts. In connection with this plan, the
Company expects to close or not renew approximately 320 store locations.
The Company opened or acquired 1,068 stores during Fiscal 2000 and 77 stores in
the first two months of Fiscal 2001. The Company plans to continue opening
stores when suitable locations are found and satisfactory lease negotiations are
concluded. The Company's initial investment in new stores opened during the
last fiscal year, including leasehold improvements and fixtures, but excluding
inventories, averaged approximately $100,600 and $113,500 per store for a
Fashion Accessory Store and an Apparel Store, respectively.
5
<PAGE>
The offices of Claire's and the distribution center for the Company's stores in
North America and Japan are located in Hoffman Estates, Illinois. This
Company-owned facility is located on 24.8 acres and consists of 520,000 total
square feet with 404,000 square feet devoted to receiving and distribution and
116,000 square feet for office space.
In January 2000, CUK relocated its distribution facility and office space to
accommodate the growth in the business in the United Kingdom and to temporarily
service the stores in France. The Cleopatre stores are currently serviced by a
distribution center in Angers, France and offices in Paris. The Company intends
to discontinue use of the facility in Angers, France and establish a
distribution facility in Paris, France to service the Cleopatre stores. The
new lease in the United Kingdom commenced in December 1999 and terminates in
December 2024. CUK has the right to assign or sublet this lease at any time
during the term of the lease. The new facility, located in Birmingham, England,
consists of 25,000 square feet of office space and 60,000 square feet of
distribution space. CUK intends to assign or sublet the old lease and does not
anticipate any difficulties. All costs associated with closing this facility
have been accrued for as of the end of Fiscal 2000.
The Bijoux stores are serviced by distribution centers and offices in Zurich,
Switzerland and Vienna, Austria. The facility maintained in Zurich, Switzerland
consists of 11,600 square feet devoted to distribution and 5,400 square feet
devoted to offices. The lease for this location expires on December 31, 2001.
In Vienna, Austria, the facility consists of 11,000 square feet devoted to
distribution and 3,000 square feet devoted to offices. The lease on this
facility does not have an expiration date but can be terminated by Bijoux with
notice to the landlord at any time.
In August 1990, Claire's entered into a lease which expires on July 31, 2001 for
40,000 square feet of office space in Wood Dale, Illinois. Under the terms of
the lease, Claire's is required to pay taxes, utilities, insurance costs and
maintenance costs. The space is not needed by Claire's and has been subleased
to unrelated third parties. The subleases' terms run parallel to the original
lease.
The Company leases from Rowland Schaefer & Associates (formerly Two Centrum
Plaza Associates) approximately 33,000 square feet in Pembroke Pines, Florida,
where it maintains its executive, accounting and finance offices. Rowland
Schaefer & Associates is a general partnership of two corporate general partners
which are owned by immediate family members of the Chairman of the Board and
President of the Company, two of whom are Co-Vice Chairmen of the Company. The
lease provides for the payment by the Company of annual base rent of
approximately $557,000, which is subject to annual cost-of-living increases, and
a proportionate share of all taxes and operating expenses of the building. The
Company exercised a five year option under the lease. The expiration date under
the option period is July 31, 2005.
The Company also owns 10,000 square feet of warehouse space in Miami, Florida.
The property is being utilized as a storage facility. The Company also leases
executive office space in New York City and is the beneficial owner of a
cooperative apartment in New York City.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company or any of
its subsidiaries is a party or of which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of Fiscal 2000.
6
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company has two classes of Common Stock, par value $.05 per share,
outstanding: Common Stock having one vote per share and Class A Common Stock
having ten votes per share. The Common Stock is traded on the New York Stock
Exchange, Inc. ("NYSE") under the symbol CLE. The Class A Common Stock has only
limited transferability and is not traded on any stock exchange or in any
organized market. However, the Class A Common Stock is convertible on a
share-for-share basis into Common Stock and may be sold, as Common Stock, in
open market transactions. The following table sets forth, for each full
quarterly period within the last two fiscal years, the high and low closing
prices of the Common Stock on the NYSE Composite Tape and the per share
dividends declared on the Common Stock and the Class A Common Stock. At March
31, 2000, the approximate number of record holders of shares of Common Stock and
Class A Common Stock was 1,890 and 672, respectively.
<TABLE>
<CAPTION>
CLOSING DIVIDENDS DIVIDENDS
OF ON ON CLASS
COMMON STOCK COMMON STOCK COMMON STOCK
------------ ------------ ------------
HIGH LOW
------ ------
Year Ended January 29, 2000
- ---------------------------
<S> <C> <C> <C> <C>
First Quarter $30.19 $18.63 $0.04 $0.02
Second Quarter 33.81 25.63 0.04 0.02
Third Quarter 24.56 16.25 0.04 0.02
Fourth Quarter 24.44 16.88 0.04 0.02
Year Ended January 30, 1999
- ---------------------------
First Quarter $24.13 $14.94 $0.04 $0.02
Second Quarter 23.50 16.94 0.04 0.02
Third Quarter 21.31 14.75 0.04 0.02
Fourth Quarter 22.75 16.19 0.04 0.02
</TABLE>
In 1985, the Board of Directors instituted a quarterly dividend on the Common
Stock of $.011 per share. In February 1994, the Board of Directors increased
the quarterly dividend to $.013 per share and in July 1994 declared a quarterly
dividend of $.007 per share on the Class A Common Stock. In January 1996, the
Board of Directors increased the quarterly dividend to $.02 per share on the
Common Stock and $.01 per share on the Class A Common Stock. In October 1996,
the Board of Directors increased the quarterly dividend to $.03 per share on the
Common Stock and $.015 per share on the Class A Common Stock. The Board of
Directors again increased the quarterly dividend to $.04 per share on the Common
Stock and $.02 per share on the Class A Common Stock in April 1998. The Company
expects to continue paying dividends; however, there is no assurance in this
regard since the declaration and payment of dividends are within the discretion
of the Board of Directors and are subject to a variety of contingencies such as
the earnings and the financial condition of the Company.
7
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------------
JAN. 29, JAN. 30, JAN. 31, FEB. 1, FEB. 3,
2000 1999 (4)(5) 1998 (4) 1997 (2)(4) 1996 (1)(2)(4)
--------- ------------ ---------- ------------ ---------------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating Statement Data:
Net Sales $ 846,898 $ 661,856 $ 536,754 $ 466,300 $ 364,347
Income from continuing operations 87,935 71,652 59,595 45,932 31,767
Net Income 87,935 62,280 59,595 45,932 31,767
Income Per Share (3):
Basic:
From continuing operations $ 1.72 $ 1.41 $ 1.19 $ 0.92 $ 0.65
Net income 1.72 1.23 1.19 0.92 0.65
Diluted:
From continuing operations $ 1.71 $ 1.40 $ 1.17 $ 0.90 $ 0.64
Net income 1.71 1.22 1.17 0.90 0.64
Cash Dividends
Share:
Common stock $ 0.16 $ 0.16 $ 0.12 $ 0.10 $ 0.053
Class A Common stock 0.08 0.08 0.06 0.05 0.027
Balance Sheet Data:
Current assets $ 290,018 $ 239,618 $ 204,198 $ 157,089 $ 108,315
Current liabilities 96,855 69,091 51,264 45,906 32,196
Working capital 193,163 170,527 152,934 111,183 76,119
Total assets 702,099 394,272 317,067 252,237 194,780
Long-term obligations 206,458 10,963 8,545 5,787 4,325
Stockholders' equity 398,786 314,218 257,258 200,544 158,259
<FN>
(1) Consists of 53 weeks.
(2) Adjusted to give effect to the three-for-two Stock splits effective February 21, 1996 and August
29, 1996
(3) In Fiscal 1998, the Company adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share" which established new guidelines for the calculation of earnings per
share. Basic earnings per share have been computed by dividing net income by the weighted average number
of shares outstanding during the year. Diluted earnings per share have been computed assuming the exercise
of stock options, as well as their related income tax effects. Earnings per share for all periods have
been restated to reflect the provisions of this Statement.
(4) In April 1998, the Company acquired Lux through the exchange of 2,070,286 shares of the Company's
common stock for all of the outstanding common stock of Lux. The acquisition was accounted for as a
pooling of interests and accordingly, the accompanying selected financial data has been retroactively
adjusted to include the operations of Lux for all periods prior to the acquisition.
(5) The Company adopted a plan to discontinue the operation of its Just Nikki catalog segment in
January 1999 (see Note 4 to the Consolidated Financial Statements for additional information).
</TABLE>
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth, for the periods indicated, percentages which
certain items reflected in the financial statements bear to net sales of the
Company:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------
JAN. 29, JAN. 30, JAN. 31,
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales, occupancy and buying expenses 48.4 48.2 48.1
- ---------------------------------------------- --------- --------- ---------
Gross Profit 51.6 51.8 51.9
- ---------------------------------------------- --------- --------- ---------
Other expenses:
Selling, general and administrative 31.7 31.5 32.1
Depreciation and amortization 3.4 3.3 3.4
Interest income, net (0.4) (0.9) (0.9)
(Gain) loss on investments (0.5) 0.7 (0.4)
Impairment of long-lived assets 1.0 - -
--------- --------- ---------
35.2 34.6 34.2
--------- --------- ---------
Income from continuing operations before
income taxes 16.4 17.2 17.8
Income taxes 6.0 6.4 6.7
--------- --------- ---------
Income from continuing operations 10.4 10.8 11.1
--------- --------- ---------
Discontinued operations, net of income taxes:
Loss from discontinued operations - 0.9 -
Loss on disposal of discontinued operations - 0.5 -
--------- --------- ---------
Net loss from discontinued operations - 1.4 -
--------- --------- ---------
Net income 10.4% 9.4% 11.1%
========= ========= =========
</TABLE>
RESULTS OF CONTINUING OPERATIONS
- -----------------------------------
From the fiscal year ended January 31, 1998 ("Fiscal 1998") to January 29, 2000
("Fiscal 2000"), the Company's net sales increased at a compound annual rate of
26%. Income from continuing operations increased from $59,595,000 in Fiscal
1998 to $87,935,000 in Fiscal 2000. The operating results of Claire's Nippon
Co., Ltd., which are accounted for under the equity method, are not part of the
consolidated group of Claire's Stores, Inc. and therefore not included in the
following analysis. Fiscal 1998 balances have been restated to reflect the
accounts of Lux as if the Companies had combined at the beginning of that
period.
FISCAL 2000 COMPARED TO FISCAL 1999
- ----------------------------------------
Net sales increased by $185,042,000, or 28%, to $846,898,000 in Fiscal 2000
compared to $661,856,000 for the year ended January 30, 1999 ("Fiscal 1999").
This increase resulted primarily from the net addition of 1,006 stores,
including the acquisition of Afterthoughts effective December 1,1999 and
same-store sales increases of 5%. The same-store sales increases were mainly
attributable to an increase in the average unit retail price of merchandise sold
in Fiscal 2000 compared to Fiscal 1999 and an increase in the number of overall
transactions per store.
Cost of sales, occupancy and buying expenses increased by $90,785,000, or 28%,
to $409,852,000 in Fiscal 2000 compared to $319,067,000 in Fiscal 1999.
Principal reasons for this increase were the rise in the number of stores and
the volume of merchandise sold. As a percentage of net sales, these expenses
increased slightly to 48.4% for Fiscal 2000 compared to 48.2% for Fiscal 1999.
This increase of 20 basis points is the result of decreased product margins due
to increased sales from the Apparel Stores.
9
<PAGE>
Selling, general and administrative ("SG&A") expenses increased by $59,477,000,
or 29%, to $268,108,000 in Fiscal 2000 from the Fiscal 1999 level of
$208,631,000. The increase noted was due to the increase in the cost of
operating the additional stores. As a percentage of net sales, these expenses
increased to approximately 31.7% in Fiscal 2000 compared to 31.5% in Fiscal
1999. The increase in SG&A as a percentage of sales is primarily attributable
to certain redundant operations related to the Afterthoughts acquisition.
Depreciation and amortization increased by $6,963,000, or 32%, to $28,841,000 in
Fiscal 2000 from the Fiscal 1999 level of $21,878,000. The increase was
primarily due to the investment in 1,006 new and acquired stores and remodeling
of approximately 100 stores.
Due to the balance in cash, cash equivalents and short-term investments and the
absence of long-term debt for most of the year, interest income exceeded
interest expense in Fiscal 2000. As a percentage of sales, interest income, net
was .4% for Fiscal 2000 compared to .9% in Fiscal 1999. This decrease in net
interest income was caused by interest expense incurred on the debt facility
entered into on December 1, 1999 and lost interest income on the approximately
$55 million of cash used related to the Afterthoughts acquisition. The cash and
cash equivalents, and short-term investments balance during Fiscal 2000 averaged
approximately $138,642,000 compared to approximately $149,561,000 in Fiscal
1999.
In Fiscal 2000, the Company recognized a gain on investments of $3,929,000
compared to a loss on investments of $4,800,000 in Fiscal 1999. The Fiscal 1999
loss did not result from the sale of investments but rather from the write-down
of investments, in accordance with Generally Accepted Accounting Principles, to
better reflect the current economic value of the investments.
In December 1999, the Company began implementation of a reorganization plan to
eliminate redundant field operations and optimize square footage efficiency as a
result of the acquisition of Afterthoughts. As a result of the reorganization
and the Company's periodic review of impairment, the Company recorded an $8.7
million ($5.5 million after tax, or $.11 per diluted share) non-cash charge to
write off the assets whose carrying value had been impaired.
Income taxes increased by $8,776,000 to $50,860,000 in Fiscal 2000 compared to
$42,084,000 in Fiscal 1999. The Company's effective tax rates declined slightly
as a result of increased profitable foreign operations which have lower
effective tax rates than the United States.
FISCAL 1999 COMPARED TO FISCAL 1998
- ----------------------------------------
Net sales increased by $125,102,000, or 23%, to $661,856,000 in Fiscal 1999
compared to $536,754,000 for the year ended January 31, 1998 ("Fiscal 1998").
This increase resulted primarily from the net addition of 235 stores and
same-store sales increases of 7%. The same-store sales increases were mainly
attributable to an increase in the average unit retail price of merchandise sold
in Fiscal 1999 compared to Fiscal 1998 and an increase in the number of overall
transactions per store.
Cost of sales, occupancy and buying expenses increased by $60,954,000, or 24%,
to $319,067,000 in Fiscal 1999 compared to $258,113,000 in Fiscal 1998.
Principal reasons for this increase were the rise in the number of stores and
the volume of merchandise sold. As a percentage of net sales, these expenses
increased slightly to 48.2% for Fiscal 1999 compared to 48.1% for Fiscal 1998.
This increase of 10 basis points is the net result of decreased product margins
(60 basis points) due to changes in merchandise mix offset by increased leverage
of occupancy and buying expenses (50 basis points) which are relatively fixed in
nature.
SG&A expenses increased by $36,343,000, or 21%, to $208,631,000 in Fiscal 1999
from the Fiscal 1998 level of $172,288,000. The increase noted was due to the
increase in the cost of operating the additional stores. As a percentage of net
sales, these expenses decreased to approximately 31.5% in Fiscal 1999 compared
to 32.1% in Fiscal 1998. The decrease in SG&A as a percentage of sales is
primarily attributable to the increase in same-store sales as previously
discussed and the leveraging of fixed corporate expenses with the addition of a
net 235 stores.
10
<PAGE>
Depreciation and amortization increased by $3,876,000, or 22%, to $21,878,000 in
Fiscal 1999 from the Fiscal 1998 level of $18,002,000. The increase was
primarily due to the investment in 286 new and acquired stores, the remodeling
of approximately 100 stores and the completion of the Company's expansion of its
distribution facility in Hoffman Estates, Illinois in Fiscal 1999.
Due to the increase in cash and short-term investment levels and the absence of
long-term debt, interest income exceeded interest expense in Fiscal 1999. As a
percentage of sales, interest income, net was .9% for Fiscal 1999 which was
comparable to Fiscal 1998. The cash and cash equivalents, and short-term
investments balance during Fiscal 1999 averaged approximately $149,561,000
compared to approximately $103,117,000 in Fiscal 1998.
Income taxes increased by $796,000 to $36,553,000 in Fiscal 1999 compared to
$35,757,000 in Fiscal 1998. The Company's effective tax rates declined slightly
as a result of increased profitable foreign operations which have lower
effective tax rates than the United States.
In Fiscal 1999, the Company recognized a loss on investments of $4,800,000
compared to a gain on investments of $2,099,000 in Fiscal 1998. The Fiscal 1999
loss did not result from the sale of investments but rather from the write-down
of investments, in accordance with Generally Accepted Accounting Principles, to
better reflect the current economic value of the investments.
DISCONTINUED OPERATIONS
- ------------------------
In January 1999, the Company announced its decision to discontinue the
operations of Just Nikki, Inc. ("Nikki"), a wholly-owned subsidiary representing
its catalog segment. The operations of Nikki have been accounted for as a
discontinued operation in the Fiscal 1999 consolidated financial statements.
Nikki had no significant operations prior to Fiscal 1999. The Company has
completed liquidating Nikki's inventory and remaining assets during the first
half of Fiscal 2000.
IMPACT OF INFLATION
- ---------------------
Inflation has not affected the Company, as it has generally been able to pass
along inflationary increases in its costs through increased sales prices.
YEAR 2000
- ----------
As previously reported, over the past several years the Company developed and
implemented a plan to address the anticipated impacts of the so-called Year 2000
problem on our information technology ("IT") systems and on non-IT systems. We
also surveyed selected third parties to determine the status of their Year 2000
compliance programs. In addition, we developed contingency plans specifying
what the Company would do if we or important third parties experienced
disruptions to critical business activities as a result of the Year 2000
problems.
The Company's Year 2000 plan was completed in all material respects prior to the
anticipated Year 2000 failure dates. As of March 31, 2000, the Company has not
experienced any materially important business disruptions or system failures as
a result of Year 2000 issues, nor is it aware of any Year 2000 issues that have
impacted its suppliers or other significant third parties to an extent
significant to the Company. However, Year 2000 compliance has many elements and
potential consequences, some of which may not be foreseeable or may be realized
in future periods. Consequently, there can be no assurance that unforeseen
circumstances may not arise, or that the Company will not in the future identify
equipment or systems which are not Year 2000 compliant.
As of January 29, 2000, the Company's total incremental costs (historical plus
estimated future costs) of addressing Year 2000 issues are estimated to be
approximately $350,000, of which nearly all has been incurred to date. These
costs were funded through operating cash flow.
For further information regarding Year 2000 matters, refer to disclosures under
Forward-Looking Statements below.
11
<PAGE>
FORWARD-LOOKING STATEMENTS
- ---------------------------
The Private Securities Litigation Reform Act of 1995 ("the Act") provides a safe
harbor for forward-looking statements made by or on behalf of the Company. The
Company and its representatives may from time to time make written or verbal
forward-looking statements, including statements contained in this and other
Company filings with the Securities and Exchange Commission and in our 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 sales growth and earnings per share growth or statements
expressing general optimism about future operating results, are forward-looking
statements within the meaning of the Act. The forward-looking statements are
and will be based on management's then current views and assumptions regarding
future events and operating performance.
The following are some of the factors that could cause actual results to differ
materially from estimates contained in the Company's forward-looking statements:
$ The ability to generate sufficient cash flows to support capital expansion
plans and general operating activities.
$ Competitive product and pricing pressures. While we believe our
opportunities for sustained, profitable growth are considerable, unanticipated
actions of competitors could impact our earnings and sales growth.
$ Changes in laws and regulations, including changes in accounting
standards, taxation requirements (including tax rate changes, new tax laws and
revised tax law interpretation) and laws in domestic or foreign jurisdictions.
$ Fluctuations in the cost and availability of raw materials to the
Company's vendors and the ability to maintain favorable supplier arrangements
and relationships.
$ The ability to achieve earnings forecasts, which are generated based on
projected sales of many product types, some of which are more profitable than
others. There can be no assurance that we will achieve the projected level or
mix of product sales.
$ The ability to penetrate new markets, which also depends on economic and
political conditions.
$ The ability of the Company to successfully integrate the operations of
Afterthoughts.
$ The effectiveness of our marketing and promotional programs.
$ The uncertainties of litigation, as well as other risks and uncertainties
detailed from time to time in the Company's Securities and Exchange Commission
filings.
$ Adverse weather conditions, which could affect customer shopping patterns.
$ The ability of the Company and its suppliers to replace, modify or upgrade
computer programs in ways that adequately address the Year 2000 issue.
$ Changes in consumer preferences for pre-teen and teen apparel and fashion
accessories.
The foregoing list of important factors is not exclusive.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
In connection with the acquisition of Afterthoughts, the Company entered into
the Credit Facility pursuant to which it financed $200 million of the purchase
price. 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 is due and payable beginning 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
for an initial six months at 125 basis points margin over the London Interbank
Borrowing Rate. The margin is then adjusted periodically based on the Company's
performance as it relates to certain financial measurements.
Company operations have historically provided a strong, positive cash flow
which, together with the Company's credit facilities, provides adequate
liquidity to meet the Company's operational needs. Cash and cash equivalents,
including short-term investments, totaled $140,870,000 at the end of Fiscal
2000.
Net cash provided by operating activities amounted to $104,215,000 in Fiscal
2000 compared to $85,816,000 in Fiscal 1999 and $76,954,000 in Fiscal 1998. The
Company's current ratio (current assets over current liabilities) was 3.0:1.0
for Fiscal 2000 and 3.5:1.0 for Fiscal 1999.
12
<PAGE>
At the end of Fiscal 2000, the Company increased its investment in inventories
to $109,464,000, or 73%, from the Fiscal 1999 balance of $63,334,000. During
this period inventory turnover increased to 3.3X from 3.0X for Fiscal 1999. The
increase in inventories is due to the Company operating 1,006 additional stores
at the end of Fiscal 2000 compared to Fiscal 1999 - a 50% increase. In
addition, inventories on a per square foot basis increased 12.6%. Management
believes inventories are appropriate given the increase in the number of stores
and the level of sales currently being achieved.
During Fiscal 2000, the Company continued to expand and remodel its store base.
Significant capital projects included the opening and purchase, through
acquisition, of 1,068 new stores and the remodeling of approximately 100 stores.
Funds expended for capital improvements in Fiscal 2000 totaled $48,866,000
compared to $45,211,000 in Fiscal 1999 and $36,306,000 in Fiscal 1998. In
Fiscal 2001, capital expenditures are expected to be approximately $49,000,000
as the Company continues to invest in its store base and technology.
The Company has significant cash balances, a consistent ability to generate cash
flow from operations and available funds under its credit facilities. The
Company believes that it will be able to maintain its present financial
condition and liquidity and be able to finance its capital expenditure plans and
other foreseeable future needs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency
- -----------------
The Company is exposed to foreign currency exchange rate fluctuations on the
U.S. dollar value of foreign currency denominated transactions. Based on the
Company's average net currency positions in Fiscal 2000, the potential loss due
to a 10% adverse change on foreign currency exchange rates would be expected to
be immaterial.
Interest Rates
- ---------------
The Company's exposure to market risk for changes in interest rates is limited
to its cash, cash equivalents, debt and short-term investment portfolio. Based
on the Company's average invested cash balances and outstanding debt during
Fiscal 2000, a 10% decrease in the average effective interest rate in Fiscal
2000 would not have materially impacted the Company's annual net interest income
earned.
Recent Accounting Pronouncements
- ----------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." The new statement requires all
derivatives to be recorded on the balance sheet at fair value and establishes
new accounting rules for hedging instruments. In June 1999, the FASB deferred
the effective date of SFAS No. 133 for one year until fiscal years beginning
after June 15, 2000. We believe the impact that SFAS No. 133 will not have a
material effect on our Consolidated Financial Statements.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE NO.
---------
Independent Auditors' Report 15
Consolidated Balance Sheets as of January 29, 2000
and January 30, 1999 16
Consolidated Statements of Income and Comprehensive Income
for the three fiscal years ended January 29, 2000 17
Consolidated Statements of Changes in Stockholders' Equity
for the three fiscal years ended January 29, 2000 18
Consolidated Statements of Cash Flows for the three fiscal
years ended January 29, 2000 19
Notes to Consolidated Financial Statements 20-30
Selected Quarterly Financial Data (Unaudited) 30
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Claire's Stores, Inc.
We have audited the accompanying consolidated balance sheets of Claire's Stores,
Inc. and subsidiaries as of January 29, 2000 and January 30, 1999, and the
related consolidated statements of income and comprehensive income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended January 29, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Claire's Stores,
Inc. and subsidiaries as of January 29, 2000 and January 30, 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 29, 2000 in conformity with generally accepted
accounting principles.
/S/KPMG LLP
Fort Lauderdale, Florida
April 7, 2000
15
<PAGE>
<TABLE>
<CAPTION>
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JAN. 29, JAN 30,
2000 1999
---------- ----------
<S> <C> <C>
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 137,414 $ 117,546
Short-term investments 3,456 35,758
Inventories 109,464 63,334
Prepaid expenses and other current assets 39,684 22,980
---------- ----------
Total current assets 290,018 239,618
---------- ----------
Property and equipment:
Land and building 17,568 15,969
Furniture, fixtures and equipment 156,688 123,390
Leasehold improvements 129,767 94,421
---------- ----------
304,023 233,780
Less accumulated depreciation and amortization (137,244) (118,272)
---------- ----------
166,779 115,508
---------- ----------
Goodwill, net 211,982 9,000
Other assets 33,320 30,146
---------- ----------
$ 702,099 $ 394,272
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable to bank $ 8,759 $ 893
Trade accounts payable 35,911 23,165
Income taxes payable 17,149 16,803
Dividends payable 2,045 2,031
Accrued expenses 32,991 26,199
---------- ----------
Total current liabilities 96,855 69,091
---------- ----------
Long Term Liabilities
Long-term debt 192,000 -
Deferred credits 14,458 10,963
---------- ----------
206,458 10,963
---------- ----------
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 2,868,380
shares and 2,891,024 shares 143 145
Common stock par value $.05 per share; authorized
150,000,000 shares, issued 48,374,226 shares and
48,024,707 shares 2,419 2,401
Additional paid-in capital 29,291 25,398
Accumulated other comprehensive income (228) (895)
Retained earnings 367,613 287,621
---------- ----------
399,238 314,670
Treasury stock, at cost, (109,882 shares) (452) (452)
---------- ----------
398,786 314,218
---------- ----------
Commitments and contingencies
$ 702,099 $ 394,272
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FISCAL YEAR ENDED
----------------------------------
JAN. 29, JAN. 30, JAN. 31,
2000 1999 1998
--------- ---------- ----------
(In thousands except per share amounts)
<S> <C> <C> <C>
Net sales $ 846,898 $ 661,856 $ 536,754
Cost of sales, occupancy and buying expenses 409,852 319,067 258,113
Gross profit 437,046 342,789 278,641
---------- ---------- ----------
Other expenses:
Selling, general and administrative 268,108 208,631 172,288
Depreciation and amortization 28,841 21,878 18,002
Interest income, net (3,469) (6,256) (4,902)
(Gain) loss on investments (3,929) 4,800 (2,099)
Impairment of long-lived assets 8,700 - -
---------- ---------- ----------
298,251 229,053 183,289
----------- ---------- ----------
Income from continuing operations before
income taxes 138,795 113,736 95,352
Income taxes 50,860 42,084 35,757
---------- ---------- ----------
Income from continuing operations 87,935 71,652 59,595
---------- ---------- ----------
Discontinued operations:
Loss from discontinued operations (less
applicable income taxes) - 6,285 -
Loss on disposal of discontinued
operations (less applicable income
taxes) - 3,087 -
---------- ---------- ----------
Net loss from discontinued operations - 9,372 -
---------- ---------- ----------
Net income 87,935 62,280 59,595
Other comprehensive income:
Foreign currency translation adjustments 667 (337) (619)
---------- ---------- ----------
Comprehensive income $ 88,602 $ 61,943 $ 58,976
========== ========== ==========
Net income (loss) per share:
Basic:
From continuing operations $ 1.72 $ 1.41 $ 1.19
From discontinued operations - (0.18) -
---------- ---------- ----------
Net income $ 1.72 $ 1.23 $ 1.19
========== ========== ==========
Diluted:
From continuing operations $ 1.71 $ 1.40 $ 1.17
From discontinued operations - (0.18) -
---------- ---------- ----------
Net income $ 1.71 $ 1.22 $ 1.17
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
CLASS A ADDITIONAL OTHER
COMMON COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY
STOCK STOCK CAPITAL INCOME EARNINGS STOCK TOTAL
------- ------- --------- ------------- ---------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
February 1, 1997 $ 146 $2,364 $ 16,948 $ 61 $ 181,477 $ (452) $ 200,544
Net income - - - - 59,595 - 59,595
Class A Common Stock converted to Common Stock (1) 1 - - - - -
Stock options exercised - 17 1,705 - - - 1,722
Cash dividends ($.12 per Common share and
$.06 per Class A Common share) - - - - (5,622) - (5,622)
Distributions to former shareholders of
pooled entities - - - - (1,762) - (1,762)
Tax benefit from exercised stock options - - 3,400 - - - 3,400
Foreign currency translation adjustment - - - (619) - - (619)
------- ------- --------- ------------- ---------- --------- -----------
Balance
January 31, 1998 145 2,382 22,053 (558) 233,688 (452) 257,258
Net income - - - - 62,280 - 62,280
Issued shares for acquisition - 5 1,876 - - - 1,881
Stock options exercised - 14 419 - - - 433
Cash dividends ($.16) per Common share and
.08 per Class A Common share) - - - - (7,892) - (7,892)
Distributions to former shareholders of pooled
entity - - - - (455) - (455)
Tax benefit from exercised stock options - - 1,050 - - - 1,050
Foreign currency translation adjustment - - - (337) - - (337)
------ ------- -------- ------------ ---------- --------- -----------
Balance
January 30, 1999
Net income - - - - 87,935 - 87,935
Class A Common stock converted to Common stock (2) 2 - - - - -
Stock options exercised - 16 2,693 - - - 2,709
Cash dividends ($.16 per Common share and
$.08 per Class A Common share) - - - - (7,943) - (7,943)
Tax benefit from exercised stock options - - 1,200 - - - 1,200
Foreign currency translation adjustment - - - 667 - - 667
------- ------- -------- ------------- ---------- --------- -----------
Balance
January 29, 2000 $ 143 $2,419 $ 29,291 $ (228) $ 367,613 $ (452) $ 398,786
======= ======= ========= ============== ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
CLAIRE'S STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
----------------------------------
JAN. 29, JAN. 30, JAN. 31,
2000 1999 1998
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 87,935 $ 62,280 $ 59,595
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss from discontinued operations, net of tax benefit - 6,285 -
Loss on disposal of discontinued operations, net of tax benefit - 3,087 -
Depreciation and amortization 28,841 21,878 18,002
Deferred income taxes 704 (1,484) 213
(Gain) loss on investments (3,929) 4,800 -
Loss on retirement of property and equipment 576 1,703 1,671
Impairment of long-lived assets 8,700 - -
Increase in -
Inventories (11,268) (9,711) (4,380)
Prepaid expenses and other assets (29,155) (12,719) (5,624)
Increase in -
Trade accounts payable 11,693 2,441 1,448
Income taxes payable 345 6,103 860
Accrued expenses 6,278 6,578 2,411
Deferred credits 3,495 2,418 2,758
---------- ---------- ----------
Net cash provided by continuing operations 104,215 93,659 76,954
Net cash used by discontinued operations - (7,843) -
---------- ---------- ----------
Net cash provided by operating activities 104,215 85,816 76,954
---------- ---------- ----------
Cash flows from investing activities:
Acquisition of property and equipment, net or retirement
proceeds (48,866) (45,211) (36,306)
Acquisition of business, net of cash acquired (249,811) - -
Sale (purchase) of short-term investments, net 36,231 (28,842) (290)
Capital expenditures of discontinued operations - (185) -
Acquisition of minority interest in a foreign subsidiary (18,000) (7,815) -
---------- ---------- ----------
Net cash used in investing activities (280,446) (82,053) (36,596)
Cash flows from financing activities:
Principal borrowings (payments) on debt 199,452 (1,617) 1,600
Proceeds from stock options exercised 3,909 1,482 5,087
Distribution to former shareholders of pooled entity - (455) (2,739)
Dividends paid (7,929) (7,781) (5,606)
---------- ---------- ----------
Net cash provided by (used in) financing activities 195,432 (8,371) (1,658)
---------- ---------- ----------
Effect of foreign currency exchange rate changes on cash
and cash equivalents 667 (337) (619)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 19,868 (4,945) 38,081
Cash and cash equivalents at beginning of year 117,546 122,491 84,410
---------- ---------- ----------
Cash and cash equivalents at end of year $ 137,414 $ 117,546 $ 122,491
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
CLAIRE'S STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Claire's Stores, Inc., a Delaware Corporation, and
- ----------------------
subsidiaries (collectively the "Company"), is a leading retailer of popular
priced fashion accessories and apparel targeted towards teenagers. The Company
operates stores throughout the United States, Canada, the Caribbean, United
Kingdom, Switzerland, Austria, Germany and Japan.
Principles of Consolidation/Reclassifications - The consolidated financial
- -----------------------------------------------
statements include the accounts of the Company and its wholly owned
subsidiaries. The Company's investment in its Japanese joint venture is
accounted for under the equity method. All material intercompany balances and
transactions have been eliminated in consolidation. In January 1999, the
Company adopted a plan to discontinue its Just Nikki Inc. ("Nikki") catalog
segment. In April 1998, the Company completed its acquisition of Lux
Corporation ("Lux"), which was accounted for as a pooling-of-interest business
combination. As a result of these two transactions, the consolidated financial
statements and notes thereto have been restated and reclassified for all periods
presented.
Fiscal Year - The Company's fiscal year ends on the Saturday closest to January
- ------------
31. Fiscal years 2000, 1999 and 1998 each consisted of 52 weeks.
Cash and Cash Equivalents - The Company considers all highly liquid debt
- ----------------------------
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Short-term Investments - These investments consist of highly liquid debt
- -----------------------
instruments purchased with a maturity greater than three months but less than
one year and equity securities. At January 29, 2000, the Company classified its
debt and equity securities as available for sale. Available for sale securities
are recorded at fair value. Unrealized holding gains and losses, net of the
related tax effect, on available for sale securities are excluded from earnings
and are reported as a separate component of stockholders' equity until realized.
Realized gains and losses from the sale of available for sale securities are
determined on a specific identification basis.
A decline in the market value of any available for sale security below cost that
is deemed to be other than temporary results in a reduction in carrying amount
to fair value. The impairment is charged to earnings and a new cost basis for
the security is established. Dividend and interest income are recognized when
earned.
Inventories - Merchandise inventories are stated at the lower of cost or market.
- -----------
Cost is determined by the first-in, first-out basis using the retail method.
Approximately 9% of the Company's inventory is maintained using the average cost
method in a foreign subsidiary.
Property and Equipment - Property and equipment are recorded at cost.
- ------------------------
Depreciation is computed on the straight-line method over the estimated useful
lives of the building and the furniture, fixtures and equipment, which range
from three to twenty-five years. Amortization of leasehold improvements is
computed on the straight-line method based upon the shorter of the estimated
useful lives of the assets or the terms of the respective leases.
Goodwill - Goodwill represents the excess of purchase price over the fair value
- --------
of net assets acquired. It is amortized on a straight-line basis over the
expected periods to be benefitted, generally twenty-five years. The Company
assesses the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation. The
amount of goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds. Accumulated amortization was $1,655,000 and $190,000 at
January 29, 2000 and January 30, 1999, respectively.
20
<PAGE>
Net Income Per Share - Basic net income per share is based on the weighted
- -----------------------
average number of shares of Class A Common Stock and Common Stock outstanding
during the period (50,985,000 shares in Fiscal 2000, 50,649,000 shares in Fiscal
1999 and 50,222,000 shares in Fiscal 1998). Diluted net income per share
includes the dilutive effect of stock options (51,334,000 shares in Fiscal 2000,
51,108,000 shares in Fiscal 1999 and 51,132,000 shares in Fiscal 1998). Options
to purchase 210,000, 161,000 and 124,000 shares of common stock, at prices
ranging from $25.00 to $30.25 per share, $19.73 to $22.88 per share and $19.73
to $22.88 per share, respectively, were outstanding for the years ended January
29, 2000, January 30,1999 and January 31, 1998, respectively, but were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the common shares
for the respective fiscal year.
Income Taxes - The Company accounts for income taxes under the provisions of
- -------------
Statement of Financial Accounting Standards ("SFAS") No. 109 which generally
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statements and tax bases of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse. In
addition, SFAS No. 109 requires the adjustment of previously deferred income
taxes for changes in tax rates under the liability method.
Foreign Currency Translation - The financial statements of the Company's
- ------------------------------
foreign operations are translated into U.S. dollars. Assets and liabilities are
translated at current exchange rates while income and expense accounts are
translated at the average rates in effect during the year. Resulting
translation adjustments are accumulated as a component of stockholders' equity.
Foreign currency gains and losses resulting from transactions denominated in
foreign currencies, including intercompany transactions, except for intercompany
loans of a long-term investment nature, are included in results of operations.
Fair Value of Financial Instruments - The Company's financial instruments
- ---------------------------------------
consist primarily of current assets, current liabilities and long term debt.
Current assets and liabilities are stated at fair market value. Long term debt
is considered to approximate market value due to the interest rate being
adjustable.
Use of Estimates - The preparation of financial statements in conformity with
- ------------------
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets - The Company accounts for long-lived assets in
- --------------------------------
accordance with the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
Statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
In December 1999, the Company began implementation of a reorganization plan to
eliminate redundant field operations and optimize square footage efficiency as a
result of the acquisition of Afterthoughts. As a result of the reorganization
and the Company's periodic review of impairment, the Company recorded an $8.7
million ($5.5 million after tax, or $.11 per diluted share) non-cash charge to
write off the assets whose carrying value had been impaired.
Stock Options
- --------------
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock Based Compensation," allows entities to choose between a fair value
based method of accounting for employee stock options or similar equity
instruments and the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees." Entities electing to account for employee stock options
or similar equity instruments under APB No. 25 must make pro forma disclosures
of net income and earnings per share as if the fair value method of accounting
had been applied. The Company has elected to apply the provisions of APB No. 25
in the preparation of its consolidated financial statements and provide pro
forma disclosure of net income and earnings per share as required under SFAS 123
in the notes to the consolidated financial statements.
21
<PAGE>
Recent Accounting Pronouncements
- ----------------------------------
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting of the Costs of Start-up
Activities." SOP 98-5 is effective for financial statements issued for years
beginning after December 15, 1998; therefore, the Company adopted its provisions
in the first quarter of Fiscal 2000. SOP 98-5 requires that pre-opening costs
be expensed as incurred. Adoption of this statement did not have a material
impact on the Company's financial position, results of operations or cash flows.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." The new statement requires all
derivatives to be recorded on the balance sheet at fair value and establishes
new accounting rules for hedging instruments. In June 1999, the FASB deferred
the effective date of SFAS No. 133 for one year until fiscal years beginning
after June 15, 2000. We beleive the impact that SFAS No. 133 will not have a
material effect on our Consolidated Financial Statements.
2. ACQUISITIONS
In December 1999, the Company completed the acquisition of Afterthoughts, a 768
store fashion accessory chain operated as a division of Venator Group, Inc.
("Venator"). The transaction was accounted for as a purchase. The purchase
price was $250 million, $200 million of which was financed through a credit
facility. Excess purchase price over fair market value of the underlying
assets, primarily fixed assets and inventory, was allocated primarily to
goodwill, which will be amortized over twenty-five years. The Company's results
of operations include Afterthoughts from December 1, 1999 through January 29,
2000.
The following table presents the fair value of assets acquired and the net cash
paid for the acquisition (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $ 69,400
Allocated value of intangibles 180,600
---------
Cash paid for acquisition 250,000
Cash acquired in acquisition (189)
=========
Total cash paid in acquisition, net $249,811
</TABLE>
In April 1998, the Company completed its acquisition of Lux, a closely held
specialty apparel chain operating under the name of "Mr. Rags," in a
stock-for-stock merger. The stores specialize in selling clothing and
accessories to the male teen market. In connection with the merger, the Company
issued 2,070,286 shares of common stock in exchange for all the outstanding
common stock of Lux. The merger has been accounted for as a pooling of
interests business combination. Accordingly, the accompanying consolidated
financial statements have been restated to include the accounts of Lux as if the
companies had combined at the beginning of the first period presented. Prior to
the merger, Lux's fiscal year ended on November 30. In recording the business
combination, Lux's prior year financial statements have been restated to conform
with the Company's fiscal year end. Net sales and net income of the separate
entities for the periods preceding the merger are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS FISCAL YEAR
ENDED ENDED
MAY 2, 1998 1998
------------ -----------
<S> <C> <C>
Net sales:
Claire's Stores, Inc. and subsidiaries $ 123,775 $ 500,152
Lux Corporation 9,187 36,602
------------- ------------
Combined $ 132,962 $ 536,754
============= ============
Net income:
Claire's Stores, Inc. and subsidiaries $ 9,584 $ 58,189
Lux Corporation 357 1,406
------------- ------------
Combined $ 9,941 $ 59,595
============= ============
</TABLE>
22
<PAGE>
In November 1998, the Company completed its acquisition of Bijoux One Trading AG
("Bijoux"), a privately held 53-store fashion accessory chain. Bijoux,
headquartered in Zurich, Switzerland, became a wholly-owned subsidiary of the
Company. The transaction has been accounted for as a purchase and, accordingly,
Bijoux's operations have been consolidated with the Company as of November 1,
1998. The $9.4 million purchase price was comprised of cash and the issuance of
100,000 shares of the Company's stock, valued at $1.9 million. Excess purchase
price over fair market value of the underlying assets was allocated to goodwill,
which will be amortized over twenty-five years. Operating results on a pro
forma basis, including Bijoux as if the purchase had occurred at the beginning
of the periods presented, are not disclosed due to immateriality.
3. UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information gives effect to the
acquisition of Afterthoughts as if it had occurred on February 1, 1998. This
unaudited pro forma financial information includes the effects of (a)
amortization of goodwill; (b) the interest income, net impact of the funds used
and borrowed to consummate the acquisition and (c) the federal and state income
taxes relating to the other adjustments at a combined statutory rate of 38%.
Prior to the acquisition, Afterthoughts operated as a division of Venator and
certain overhead costs and other expenses were allocated to Afterthoughts by
Venator. Accordingly, the unaudited pro forma financial information includes
such overhead costs and other expenses.
The unaudited pro forma financial information may not be comparable to and may
not be indicative of the Company's results of operations subsequent to the
acquisition because Afterthoughts was not under common control or management and
had different capital structures during the periods presented.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
2000 1999
---------- --------
(In thousands, except for share data)
<S> <C> <C>
Net Sales $1,009,554 $856,442
Income before taxes 127,362 91,544
Net income 80,658 57,836
Earnings per common share, basic 1.58 1.14
Earnings per common share, diluted 1.57 1.13
</TABLE>
4. DISCONTINUED OPERATIONS
In January 1999, the Company announced its decision to discontinue the
operations of Nikki, a wholly-owned subsidiary representing its catalog segment.
The operations of Nikki have been accounted for as a discontinued operation in
the Fiscal 1999 consolidated financial statements. Nikki had no significant
operations prior to Fiscal 1999. The Company liquidated Nikki's inventory and
sold or disposed of all the remaining assets during the first half of Fiscal
2000. Nikki's net sales during Fiscal 1999 were $14,717,000.
5. CREDIT FACILITIES
In connection with the acquisition of Afterthoughts, the Company entered into a
$215 million senior credit facility (the "Credit Facility") pursuant to which it
financed $200 million of the purchase price. 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 is due and payable
beginning 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 for an initial six months at 125 basis points
margin over the London Interbank Borrowing Rate plus a 25 basis point unused
line of credit fee. The margin is then adjusted periodically based on the
Company's performance as it relates to certain financial measurements. At
January 29, 2000, $200 million was outstanding under this facility, bearing
interest at 7.5%.
23
<PAGE>
The Credit Facility contains covenants including, but not limited to,
limitations on investments, dividends and other restricted payments, incurrence
of additional debt and acquisitions, as well as various financial covenants
customary for transactions of this type. These financial covenants include
current ratio, fixed charge coverage ratio and current leverage ratio. The
Company was in compliance with these covenants at January 29, 2000.
The Company's non-U.S. subsidiaries have credit facilities totaling
approximately $2,225,000 with a bank. The facilities are used for working
capital requirements, letters of credit and various guarantees. These credit
facilities have been arranged in accordance with customary lending practices in
their respective countries of operation. At January 29, 2000, the borrowings
totaled $759,000, bear interest at rates ranging from 4.5% to 4.75% and mature
within five months.
The scheduled maturities of the debt are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
2001 $ 8,759
2002 30,000
2003 40,000
2004 40,000
2005 82,000
-------
$200,759
========
</TABLE>
6. COMMITMENTS
The Company leases retail stores, offices and warehouse space and certain
equipment under operating leases which expire at various dates through the year
2025 with options to renew certain of such leases for additional periods. The
lease agreements covering retail store space provide for minimum rentals and/or
rentals based on a percentage of net sales. Rental expense for each of the
three fiscal years ended January 29, 2000 was as follows:
<TABLE>
<CAPTION>
2,000 1,999 1998
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Minimum rentals $ 97,646 $75,749 $62,362
Rentals based on net sales 2,406 1,975 1,641
Other rental expense - equipment 18,302 13,565 10,534
-------- ------- -------
Total rental expense $118,354 $91,289 $74,537
======== ======= =======
</TABLE>
Minimum aggregate rental commitments under non-cancelable operating leases are
summarized by fiscal year ending as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
2001 $133,773
2002 129,497
2003 115,889
2004 104,789
2005 95,142
Thereafter 403,902
- ----------- --------
$982,992
========
</TABLE>
Certain leases provide for payment of real estate taxes, insurance and other
operating expenses of the properties. In other leases, some of these costs are
included in the basic contractual rental payments.
24
<PAGE>
7. STOCKHOLDERS' EQUITY
Preferred Stock - The Company has authorized 1,000,000 shares of $1 par value
- ----------------
preferred stock, none of which has been issued. The rights and preferences of
such stock may be designated in the future by the Board of Directors.
Class A Common Stock - The Class A common stock has only limited transferability
- --------------------
and is not traded on any stock exchange or any organized market. However, the
Class A common stock is convertible on a share-for-share basis into Common stock
and may be sold, as Common stock, in open market transactions. The Class A
common stock has ten votes per share. Dividends declared on the Class A common
stock are limited to 50% of the dividends declared on the Common stock.
Treasury Stock - Treasury stock acquired is recorded at cost. Occasionally, the
- ---------------
Company uses treasury stock to fulfill its obligations under its stock option
plans. When stock is issued pursuant to the stock option plans, the difference
between the cost of treasury stock issued and the option price is charged or
credited to additional paid-in capital.
In May 1996, the Company entered into an agreement (the "agreement") with the
former sole shareholder of one of the Company's subsidiaries. The agreement
provided the individual with the right to purchase up to 20% of the outstanding
shares, (the "shares") of the subsidiary at a specified price. In February
1999, the individual exercised the right to purchase the shares pursuant to the
agreement. In February 1999, the Company paid $18,000,000 to the individual for
the purchase of the minority interest in the shares and recorded this amount as
goodwill.
8. STOCK OPTIONS
In August 1996, the Board of Directors of the Company adopted, and on June 16,
1997 the Company's stockholders approved, the Claire's Stores, Inc. 1996 Stock
Option Plan (the "1996 Plan"). The 1996 Plan replaced the Company's 1991 Stock
Option Plan (the "1991 Plan"), which had replaced the Company's 1982 Incentive
Stock Option Plan (the "1982 Plan") and the Company's 1985 Non-Qualified Stock
Option Plan (the "1985 Plan"), although options granted under the 1991 Plan
remain outstanding. Under the 1996 Plan, the Company may grant either incentive
stock options or non-qualified stock options to purchase up to 3,000,000 shares
of Common Stock, plus any shares unused or recaptured under the 1982 Plan, the
1985 Plan or the 1991 Plan. Incentive stock options granted under the 1996 Plan
are exercisable at prices equal to the fair market value of shares at the date
of grant, except that incentive stock options granted to any person holding 10%
or more of the total combined voting power or value of all classes of capital
stock of the Company, or any subsidiary of the Company, carry an exercise price
equal to 110% of the fair market value at the date of grant. The aggregate
number of shares granted to any one person may not exceed 500,000, and no stock
option may be exercised less than one year after the date granted. Each
incentive stock option or non-qualified stock option will terminate ten years
after the date of grant (or such shorter period as specified in the grant) and
may not be exercised thereafter.
Incentive stock options currently outstanding are exercisable at various rates
beginning one year from the date of grant, and expire five to ten years after
the date of grant. Non-qualified stock options currently outstanding are
exercisable at prices equal to the fair market value of the shares at the date
of grant and expire five to ten years after the date of grant.
Options to purchase an additional 843,601 shares were outstanding, but not yet
exercisable, at January 29, 2000 under the 1991 Plan and the1996 Plan. There
were 3,142,423 shares of Common stock available for future option grants under
the 1996 Plan at January 29, 2000.
25
<PAGE>
A summary of the activity in the Company's stock option plans is presented
below:
<TABLE>
<CAPTION>
FISCAL 2000 FISCAL 1999 FISCAL 1998
------------------- ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- --------- ----------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 1,222,291 $ 13.66 1,466,144 $ 10.81 2,207,414 $ 9.54
Options granted 536,000 $ 25.08 455,000 $ 19.27 65,000 $ 21.64
Options exercised (295,551) $ 8.28 (331,313) $ 6.02 (300,531) $ 5.09
Options canceled (270,367) $ 22.83 (367,540) $ 16.37 (505,739) $ 10.39
---------- ---------- ----------
Outstanding at end of period 1,192,373 $ 18.22 1,222,291 $ 13.66 1,466,144 $ 10.81
========== ========== ==========
Exercisable at end of period 348,772 $ 14.81 484,987 $ 10.69 567,775 $ 8.10
========== ========== ==========
Weighted average fair value of options
granted during the period (see below) $ 24.92 $ 19.27 $ 21.64
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Expected dividend yield 0.64% 0.72% 0.62%
Expected stock price volatility 37.65% 36.62% 36.21%
Risk-Free interest rate 6.00% 5.50% 6.00%
Expected life of options 4.5 and 9.5 years 4.5 and 9.5 years 4.5 and 9.5 years
</TABLE>
The following table summarizes information about stock options outstanding at
January 29, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER AVERAGE
SHARES CONTRACTUAL EXERCISE OF EXERCISE
Range of Exercise Prices OUTSTANDING LIFE PRICE SHARES PRICE
- ------------------------- ----------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
5.11 to $8.00 253,125 5.0 $ 6.56 98,437 $ 6.79
8.72 to $12.17 11,248 1.0 $ 10.11 8,437 $ 9.87
16.44 to $21.75 718,000 7.5 $ 19.22 241,898 $ 18.24
25.00 to $30.25 210,000 8.5 $ 29.29 - -
---------- -------
5.11 to $30.25 1,192,373 7.0 $ 18.22 348,772 $ 14.81
=========== =========== ========= ======= =========
</TABLE>
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation",
issued in October 1995. As permitted under the provisions of SFAS No. 123, the
Company applies the principles of APB Opinion 25 and related Interpretations in
accounting for its stock option plans and, accordingly, does not recognize
compensation cost. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant date as prescribed by
SFAS No. 123, net income and earnings per share would have been reduced to the
pro forma amounts indicated in the table below (in thousands except per share
amounts):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Net income - as reported $87,935 $62,280 $59,595
Net income - pro forma 87,217 61,971 59,227
Diluted net income per share - as reported 1.71 1.22 1.17
Diluted net income per share - pro forma 1.70 1.21 1.16
</TABLE>
26
<PAGE>
9. EMPLOYEE BENEFIT PLANS
The Company has adopted a Profit Sharing Plan under Section 401(k) of the
Internal Revenue Code. This plan allows employees who serve more than 1,000
hours per year to defer up to 18% of their income through contributions to the
plan. In line with the provisions of the plan, for every dollar the employee
contributes the Company will contribute an additional $.50, up to 2% of the
employee's salary. In Fiscal 2000, Fiscal 1999 and Fiscal 1998, the cost of
Company matching contributions was $435,000, $378,000 and $381,000,
respectively.
Prior to the Lux merger (see Note 2), Lux had a profit sharing plan covering all
employees over 21 years old with over one year of service. Lux's contributions
to the plan were discretionary. The Company discontinued this plan during
Fiscal 2000.
10. INCOME TAXES
Income before income taxes from continuing operations is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------
2000 1999 1998
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Domestic $114,962 $ 92,461 $85,159
Foreign 23,833 21,275 10,193
-------- -------- -------
$138,795 $113,736 $95,352
======== ======== =======
</TABLE>
The components of income tax expense (benefit) consist of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------
JAN. 29, JAN. 30, JAN. 31,
2000 1999 1998
--------- ---------- ---------
<S> <C> <C> <C>
(In thousands)
Federal:
Current $ 36,507 $ 32,095 $ 28,385
Deferred 631 (1,266) 191
--------- ---------- ---------
37,138 30,829 28,576
--------- ---------- ---------
State:
Current 5,149 4,473 3,659
Deferred 73 (218) 22
--------- ---------- ---------
5,222 4,255 3,681
--------- ---------- ---------
Foreign:
Current 8,500 7,000 3,500
--------- ---------- ---------
Total income tax expense from continuing operations 50,860 42,084 35,757
Tax benefit of discontinued operations - (5,531) -
--------- ---------- ---------
Total income tax expense $ 50,860 $ 36,553 $ 35,757
========= ========== =========
</TABLE>
27
<PAGE>
The approximate tax effect on each type of significant components of the
Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------
JAN. 29, JAN. 30,
2000 1999
---------- ----------
(In thousands)
<S> <C> <C>
Depreciation $ 4,888 $ 3,151
Accrued expenses 2,815 4,073
Deferred rent 2,690 2,009
Loss on investments - 1,286
Operating leases (906) (1,109)
Inventory reserves 68 543
Other 242 547
---------- ----------
Net deferred tax asset $ 9,797 $ 10,500
========== ==========
</TABLE>
The Company believes that the realization of the deferred tax assets is more
likely than not, based on the expectation that the Company will generate the
necessary taxable income in future periods.
The provision for income taxes from continuing operations differs from an amount
computed at the statutory rates as follows:
<TABLE>
<CAPTION>
JAN. 29, JAN. 30, JAN. 31,
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
U.S. income taxes at statutory rates 35% 35% 35%
Foreign income tax benefit at less than domestic rate (1) (1) -
State and local income taxes, net of federal tax benefit 3 3 3
--------- --------- ---------
37% 37% 38%
========= ========= =========
</TABLE>
As of January 29, 2000, there are accumulated unremitted earnings from the
Company's United Kingdom subsidiary on which deferred taxes have not been
provided as the undistributed earnings of the foreign subsidiary are
indefinitely reinvested. Based on the current United States and United Kingdom
income tax rates, it is estimated that United States taxes, net of foreign tax
credits, of approximately $800,000 would be due.
11. STATEMENTS OF CASH FLOWS
Payments of income taxes were $46,987,000 in Fiscal 2000, $33,299,000 in Fiscal
1999 and $30,441,000 in Fiscal 1998. Payments of interest were $1,496,000 in
Fiscal 2000, $67,000 in Fiscal 1999 and $270,000 in Fiscal 1998.
12. RELATED PARTY TRANSACTIONS
The Company leases from Rowland Schaefer & Associates (formerly Two Centrum
Plaza Associates) approximately 33,000 square feet of office space in a building
where it maintains its executive and accounting and finance offices. The lease
for this space expires on July 31, 2000 and may be extended at the option of the
Company for an additional five-year term. Rowland Schaefer & Associates is a
general partnership of two corporate general partnerships which are owned by
immediate family members of the Chairman of the Board and President of the
Company, two of whom are Co-Vice Chairmen of the Company. The lease provides
for the payment by the Company of annual base rent of approximately $557,000,
which is subject to annual cost-of-living increases, and a proportionate share
of all taxes and operating expenses of the building. The Company believes that
the terms of the lease are no less favorable to the Company than those which
could have been obtained from an unrelated third party.
28
<PAGE>
13. SEGMENT REPORTING
The Company is primarily organized based on the geographic markets in which it
operates. Under this organizational structure, the Company currently has three
reportable segments: North America, United Kingdom and Europe. The Company's
reportable segments are managed separately because each geographic market
requires different marketing strategies and maintains separate local offices and
distribution centers.
Information about the Company's operations by segment is as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales:
North America $707,702 $579,442 $503,202
United Kingdom 117,593 76,900 33,552
Europe 21,603 5,514 -
--------- --------- ---------
Total net sales $846,898 $661,856 $536,754
========= ========= =========
Operating income:
North America $137,756 $113,831 $ 99,101
United Kingdom 28,455 19,687 7,252
Europe 2,727 640 -
--------- --------- ---------
Total operating income $168,938 $134,158 $106,353
========= ========= =========
Depreciation and amortization:
North America $ 24,183 $ 19,469 $ 17,466
United Kingdom 4,020 2,270 536
Europe 638 139 -
--------- --------- ---------
Total depreciation and amortization $ 28,841 $ 21,878 $ 18,002
========= ========= =========
Interest income, net:
North America $ (2,325) $ (5,939) $ (4,646)
United Kingdom (1,110) (374) (256)
Europe (34) 57 -
--------- --------- ---------
Total interest income, net $ (3,469) $ (6,256) $ (4,902)
========= ========= =========
Loss (gain) on investments $ (3,929) $ 4,800 $ (2,099)
========= ========= =========
Impairment of long-lived assets $ 8,700 $ - $ -
========= ========= =========
Income from continuing operations before income taxes $138,795 $113,736 $ 95,352
========= ========= =========
Identifiable assets:
North America $470,774 $205,423 $166,657
United Kingdom 82,480 42,748 17,896
Europe 10,577 6,998 -
Corporate 138,268 139,103 132,514
--------- --------- ---------
Total assets $702,099 $394,272 $317,067
========= ========= =========
Capital expenditures:
North America $ 31,542 $ 34,632 $ 28,637
United Kingdom 15,055 10,579 7,669
Europe 2,269 - -
--------- --------- ---------
$ 48,866 $ 45,211 $ 36,306
========= ========= =========
</TABLE>
29
<PAGE>
Identifiable assets are those assets that are identified with the operations of
each segment. Corporate assets consist mainly of cash and cash equivalents,
investments in affiliated companies and other assets. Operating income
represents gross profit less selling, general and administrative costs.
14. SUBSEQUENT EVENTS
In February 2000, the Company completed its acquisition of Cleopatre S.A.
("Cleopatre"), a privately held 42 store fashion accessory chain. Cleopatre,
headquartered in Paris, France, became a wholly-owned subsidiary of the Company.
The transaction has been accounted for as a purchase. The purchase price was
approximately $11 million. Excess purchase price over fair market value of the
underlying assets was allocated to goodwill, which will be amortized over
twenty-five years.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 29, 2000
-----------------------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR YEAR
--------- --------- --------- --------- ---------
(In thousands except per share amounts)
- -----------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $170,663 $186,090 $182,750 $307,395 $846,898
Gross profit 85,670 94,487 90,092 166,797 437,046
Net income 13,800 20,320 12,726 41,089 87,935
Basic net income per share: $ 0.27 $ 0.40 $ 0.25 $ 0.80 $ 1.72
Diluted net income per share: $ 0.27 $ 0.40 $ 0.25 $ 0.80 $ 1.71
FISCAL YEAR ENDED JANUARY 30,1999
-----------------------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR YEAR
--------- --------- --------- --------- ---------
Net sales $131,492 $148,482 $157,089 $224,793 $661,856
Gross profit 66,046 74,738 77,369 124,636 342,789
Income (loss) from:
Continuing operations 10,451 14,612 12,716 33,873 71,652
Discontinued operation (510) (1,881) (2,023) (4,958) (9,372)
--------- --------- --------- --------- ---------
Net income $ 9,941 $ 12,731 $ 10,693 $ 28,915 $ 62,280
========= ========= ========= ========= =========
Basic net income (loss) per share from:
Continuing operations $ 0.21 $ 0.29 $ 0.25 $ 0.67 $ 1.41
Discontinued operations (0.01) (0.04) (0.04) (0.10) (0.18)
--------- --------- --------- --------- ---------
Net income $ 0.20 $ 0.25 $ 0.21 $ 0.57 $ 1.23
========= ========= ========= ========= =========
Diluted net income (loss) per share from
Continuing operations $ 0.20 $ 0.29 $ 0.25 $ 0.66 $ 1.40
Discontinued operations (0.01) (0.04) (0.04) (0.10) (0.18)
--------- --------- --------- --------- ---------
Net income $ 0.19 $ 0.25 $ 0.21 $ 0.56 $ 1.22
========= ========= ========= ========= =========
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<PAGE>
PART III
ITEMS 10,11,12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Items 10, 11, 12 and 13 will be contained in the
Company's definitive Proxy Statement for its 2000 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange Commission no later
than 120 days after the end of the Company's fiscal year covered by this report
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report.
Page No.
1. FINANCIAL STATEMENTS
Independent Auditors' Report 15
Consolidated Balance Sheets as of
January 29, 2000 and January 30, 1999 16
Consolidated Statements of Income and Comprehensive
Income for the three fiscal years ended
January 29, 2000 17
Consolidated Statements of Changes in Stockholders'
Equity for the three fiscal years ended
January 29, 2000 18
Consolidated Statements of Cash Flows for the
three fiscal years ended January 29, 2000 19
Notes to Consolidated Financial Statements 20-30
2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted since the required information is included in
the consolidated financial statements or the notes thereto, or the omitted
schedules are not applicable.
3. EXHIBITS
(2)(a) Agreement and Plan of Merger dated as of March 9, 1998 among the
Company, CSI Acquisition Corp., Lux Corporation, and David Shih, Eva Shih,
Daniel Shih, Douglas Shih, the Shih Irrevocable Trust and Crestwood Partners
LLC, as amended by letter amendment dated March 23, 1998 and addendum thereto
dated March 24, 1998 (incorporated by reference to exhibit 2 (a) to the
Company's Annual Report on form 10-K for the fiscal year ended January 30,
1999).
(2)(b) Stock Purchase Agreement dated as of November 11, 1998 between the
Company and Peter Bossert, an individual, for any and all shares/Company
contributions of: Bijoux One AG, Zurich, Switzerland, Bijoux One Trading AG,
Zurich, Switzerland, Bijoux One Trading GesmbH, Brunn am Gebirge, Austria and
Bosco GmbH, Stuttgart, Germany (omitted schedules will be furnished
supplementally to the Commission upon request (incorporated by reference to
exhibit 2 (b) to the Company's Annual Report on form 10-K for the fiscal year
ended January 30, 1999).
31
<PAGE>
(2)(c) Asset Purchase Agreement, dated as of November 1, 1999, by and
between the Company, Venator Group, Inc., Venator Group Specialty, Inc., Venator
Group Canada, Inc., Afterthoughts Boutiques, Inc. and Afterthoughts
(incorporated by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated December 1, 1999).
(3)(a) Restated Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3(a) to the Company's Annual Report on
form 10-K for the fiscal year ended February 1, 1992).
(3)(b) Certificate of Amendment of the Restated Certificate of Incorporation
of the Company (incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-3 (Registration No. 333-58549 (the
"Registration Statement")).
(3)(c) Certificate of Amendment of the Restated Certificate of Incorporation
of the Company (incorporated by reference to Exhibit 4.3 to the Registration
Statement).
(3)(d) Amended By-laws of the Company (incorporated by reference to Exhibit
3(b) to the Company's Annual Report on form 10-K for the fiscal year ended
January 28, 1995).
(10)(a) Credit Agreement, dated as of December 1, 1999, by and among, the
Company, the several banks and other financial institutions or entities from
time to time parties thereto, Bear Stearns & Co., Inc., as sole lead arranger
and sole book manager, Bear Stearns Corporate Lending, Inc., as syndication
agent, Suntrust Banks South Florida, N.A., as documentation agent (incorporated
by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated
December 1, 1999).
(10)(b) Form of Note (incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K dated December 1, 1999).
(10)(c) Form of Guarantee (incorporated by reference to Exhibit 4.3 to the
Company's Current Report on Form 8-K dated December 1, 1999).
(10)(d) Incentive Stock Option Plan of the Company, as amended (incorporated
by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for
the fiscal year ended February 1, 1986).
(10)(e) Non-Qualified Stock Option Plan of the Company, as amended
(incorporated by reference to Exhibit 10(e) to the Company's Annual Report on
Form 10-K for the fiscal year ended February 1, 1986).
(10)(f) 1991 Stock Option Plan of the Company (incorporated by reference to
Appendix A to the Company's Proxy Statement relating to the 1991 Annual Meeting
of Stockholders, Commission File No. 1-8899).
(10)(g) 1996 Stock Option Plan of the Company (incorporated by reference to
Appendix A to the Company's Proxy Statement relating to the 1997 Annual meeting
of stockholders, Commission File No. 1-8899).
(10)(h) 401(k) Profit Sharing Plan, as amended (incorporated by reference to
Exhibit 10(e) to the Company's Annual Report on Form 10-K for the fiscal year
ended February 1, 1992).
(10)(i) Office Lease Agreement dated September 8, 1989 between the Company
and Two Centrum Plaza Associates (incorporated by reference to Exhibit 10(h) to
the Company's Annual Report on Form 10-K for the fiscal year ended February 2,
1991).
32
<PAGE>
(10)(j) Amendment of Office Lease Agreement dated July 31, 1990 between the
Company and Two Centrum Plaza Associates (incorporated by reference to exhibit
10 (g) to the Company's Annual Report on form 10-K for the fiscal year ended
January 30, 1999).
(10)(k) Addendum to Office Lease dated September 8, 1989 between the Company
and Two Centrum Plaza Associates (incorporated by reference to Exhibit 10(j) to
the Company's Annual Report on Form 10-K for the fiscal year ended February 2,
1991).
(10)(l) Second addendum to office lease dated January 30, 1997 between the
Company and Two Centrum Plaza Associates (incorporated by reference to Exhibit
10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended
February 1, 1997).
(10)(m) Lease between Chancellory Commons I Limited Partnership and Claire's
Boutiques, Inc. dated August 31, 1990 (incorporated by reference to Exhibit
10(i) to the Company's Annual Report on form 10-K for the fiscal year ended
February 1, 1992).
(21) Subsidiaries of the Company.
(23) Consent of KPMG LLP relating to the Company's Registration Statements
on Form S-8 (registration No. 333-42027) and Form S-3 (registration No.
333-58549).
(27) Financial Data Schedule of the Company.
Each management contract or compensatory plan or arrangement to be filed as an
exhibit to this report pursuant to Item 14(c) is listed in exhibit nos. 10(d),
10(e), 10(f), 10(g) and 10(h).
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the last quarter of the
period covered by this report:
Date of Report Items Financial Statements
---------------- ----- ---------------------
December 1, 1999 2, 7 None
December 1, 1999 7 Audited and unaudited financial statements
and pro forma financial information
relative to the acquired business.
33
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
CLAIRE'S STORES, INC.
By /S/Rowland Schaefer
--------------------
Rowland Schaefer
President and Chairman
of the Board of Directors
April 26, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on April 25, 1999.
/S/ Rowland Schaefer President and
- ---------------------- Chairman of the Board of Directors
Rowland Schaefer (Principal Executive Officer)
/S/ Marla Schaefer Vice Chairman of the Board of
- -------------------- Directors
Marla Schaefer
/S/ Eileen B. Schaefer Vice Chairman of the Board of
- ------------------------- Directors
Eileen B. Schaefer
/S/ Ira D. Kaplan Senior Vice President, Chief
- -------------------- Financial Officer and Director
Ira D. Kaplan (Principal Financial and Accounting
Officer)
/S/ Irwin Kellner Director
- -------------------
Irwin Kellner
/S/ Bruce G. Miller Director
- ----------------------
Bruce G. Miller
/S/ Steven Tishman Director
- --------------------
Steven Tishman
34
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
CLAIRE'S STORES, INC.
By
Rowland Schaefer
President and Chairman
of the Board of Directors
April 26, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on April 25, 1999.
President and
Rowland Schaefer Chairman of the Board of Directors
(Principal Executive Officer)
Vice Chairman of the Board of
Marla Schaefer Directors
Vice Chairman of the Board of
Eileen B. Schaefer Directors
Senior Vice President, Chief
Ira D. Kaplan Financial Officer and Director
(Principal Financial and Accounting
Officer)
Director
Irwin Kellner
Director
Bruce G. Miller
Director
Steven Tishman
35
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT (21)
CLAIRE'S STORES, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
NAME STATE/COUNTRY OF INCORPORATION
---- --------------------------------
<S> <C>
Claire's Boutiques, Inc. Delaware
CSL, Inc. Delaware
CBI Distributing Corp. Delaware
RSI International Limited Hong Kong
Claire's Puerto Rico Corp. Delaware
Claire's Canada Corp. Delaware
Claire=s Accessories UK, Ltd. United Kingdom
Just Nikki, Inc. Delaware
Sassy Doo!, Inc. Delaware
Lux Corporation Washington
Bijoux One Trading AG Switzerland
Bijoux One AG Switzerland
Bosco GmbH Germany
Bijoux One Trading GesmbH Austria
Modewaren Femina Handelsgesell -
Schaft m.b.H. Austria
Modewaren Femina Handelsgesell -
Schaft m.b.H. & Co. KG Austria
</TABLE>
EXHIBIT (23)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Claire's Stores, Inc.
We consent to the incorporation by reference in the Registration Statement of
Claire's Stores, Inc., on Form S-3(No. 333-58549) and Form S-8(No. 333-42027) of
our report, dated April 7, 2000, relating to the consolidated balance sheets of
Claire's Stores, Inc. and subsidiaries as of January 29, 2000 and January 30,
1999, and the related consolidated statements of income and comprehensive
income, changes in stockholders' equity and cash flows for each of the years in
the three year period ended January 29, 2000 which report appears in the January
29, 2000 Annual Report on Form 10-K of Claire's Stores, Inc.
/S/KPMG LLP
Fort Lauderdale
April 21, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JAN-29-2000
<CASH> 137414
<SECURITIES> 3456
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 109464
<CURRENT-ASSETS> 290018
<PP&E> 304023
<DEPRECIATION> 137244
<TOTAL-ASSETS> 702099
<CURRENT-LIABILITIES> 96855
<BONDS> 0
0
0
<COMMON> 2526
<OTHER-SE> 396224
<TOTAL-LIABILITY-AND-EQUITY> 702099
<SALES> 846898
<TOTAL-REVENUES> 846898
<CGS> 0
<TOTAL-COSTS> 409852
<OTHER-EXPENSES> 298251
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 138795
<INCOME-TAX> 50860
<INCOME-CONTINUING> 87935
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87935
<EPS-BASIC> 1.72
<EPS-DILUTED> 1.71
</TABLE>
