Company Quick10K Filing
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Claires Stores
10-Q 2018-08-04 Quarter: 2018-08-04
10-Q 2018-05-05 Quarter: 2018-05-05
10-K 2018-02-03 Annual: 2018-02-03
10-Q 2017-10-28 Quarter: 2017-10-28
10-Q 2017-07-29 Quarter: 2017-07-29
10-Q 2017-04-29 Quarter: 2017-04-29
10-K 2017-01-28 Annual: 2017-01-28
10-Q 2016-10-29 Quarter: 2016-10-29
10-Q 2016-07-30 Quarter: 2016-07-30
10-Q 2016-04-30 Quarter: 2016-04-30
10-K 2016-01-30 Annual: 2016-01-30
10-Q 2015-10-31 Quarter: 2015-10-31
10-Q 2015-08-01 Quarter: 2015-08-01
10-Q 2015-05-02 Quarter: 2015-05-02
10-K 2015-01-31 Annual: 2015-01-31
10-Q 2014-11-01 Quarter: 2014-11-01
10-Q 2014-08-02 Quarter: 2014-08-02
10-Q 2014-05-03 Quarter: 2014-05-03
10-K 2014-02-01 Annual: 2014-02-01
8-K 2018-10-12 Other Events, Exhibits
8-K 2018-09-14 Regulation FD, Exhibits
8-K 2018-09-11 Earnings, Exhibits
8-K 2018-08-31 Regulation FD
8-K 2018-06-15 Regulation FD, Exhibits
8-K 2018-06-13 Earnings, Exhibits
8-K 2018-04-17 Earnings, Exhibits
8-K 2018-03-22 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-03-19 Enter Agreement, Bankruptcy, Earnings, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2018-02-05 Officers
FB Facebook 538,500
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MNK Mallinckrodt 1,370
CHCT Community Healthcare Trust 685
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ATIF ATIF Holdings 165
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CSA TH Merger Company 35
HEBT Hebron Technology 14
CLE 2018-08-04
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-10.1 d595904dex101.htm
EX-31.1 d595904dex311.htm
EX-31.2 d595904dex312.htm
EX-32.1 d595904dex321.htm
EX-32.2 d595904dex322.htm

Claires Stores Earnings 2018-08-04

CLE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d595904d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended August 4, 2018

OR

 

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

For the transition period from                     to                     

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

Claire’s Stores, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Florida   59-0940416

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2400 West Central Road,

Hoffman Estates, Illinois

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

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

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☐    No  ☒

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

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

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

 

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

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

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

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

 

 

 


Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

INDEX

 

 
     PAGE NO.  

PART I. FINANCIAL INFORMATION

  

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

     3  

Unaudited Condensed Consolidated Balance Sheets as of August  4, 2018 and February 3, 2018

     3  

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended August 4, 2018 and July 29, 2017

     4  

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 4, 2018 and July 29, 2017

     5  

Notes to Unaudited Condensed Consolidated Financial Statements

     6  

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

     31  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     45  

Item 4. Controls and Procedures

     46  

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     46  

Item 1A. Risk Factors

     47  

Item 6. Exhibits

     47  

SIGNATURES

     48  

Ex-31.1 Section 302 Certification of CEO

  

Ex-31.2 Section 302 Certification of CFO

  

Ex-32.1 Section 906 Certification of CEO

  

Ex-32.2 Section 906 Certification of CFO

  

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

CLAIRE’S STORES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

     August 4, 2018     February 3, 2018  
     (In thousands, except share and per share amounts)  

ASSETS

    

Current assets:

    

Cash

   $ 69,445     $ 42,446  

Inventories

     148,331       134,690  

Prepaid expenses

     36,889       32,284  

Other current assets

     21,737       26,858  
  

 

 

   

 

 

 

Total current assets

     276,402       236,278  
  

 

 

   

 

 

 

Property and equipment:

    

Furniture, fixtures and equipment

     208,288       223,644  

Leasehold improvements

     279,104       301,338  
  

 

 

   

 

 

 
     487,392       524,982  

Accumulated depreciation and amortization

     (387,631     (405,284
  

 

 

   

 

 

 
     99,761       119,698  
  

 

 

   

 

 

 

Leased property under capital lease:

    

Land and building

     18,055       18,055  

Accumulated depreciation and amortization

     (7,667     (7,216
  

 

 

   

 

 

 
     10,388       10,839  
  

 

 

   

 

 

 

Goodwill

     1,132,575       1,132,575  

Intangible assets, net of accumulated amortization of $88,005 and $87,295, respectively

     450,145       457,078  

Other assets

     61,107       44,255  
  

 

 

   

 

 

 
     1,643,827       1,633,908  
  

 

 

   

 

 

 

Total assets

   $ 2,030,378     $ 2,000,723  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

    

Current liabilities:

    

Current portion of long-term debt, net

   $ 84,732     $ 1,894,039  

Debtor-in-possession term loan

     60,000       —    

Trade accounts payable

     55,272       62,965  

Income taxes payable

     14,096       4,049  

Accrued interest payable

     1,083       56,182  

Accrued expenses and other current liabilities

     101,216       94,934  
  

 

 

   

 

 

 

Total current liabilities

     316,399       2,112,169  
  

 

 

   

 

 

 

Long-term debt, net

     208,847       250,355  

Obligation under capital lease

     15,718       15,970  

Deferred tax liability

     29,179       32,614  

Deferred rent expense

     31,557       34,851  

Unfavorable lease obligations and other long-term liabilities

     8,646       10,040  
  

 

 

   

 

 

 
     293,947       343,830  
  

 

 

   

 

 

 

Liabilities subject to compromise

     1,905,215       —    

Commitments and contingencies

    

Stockholder’s deficit:

    

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

     —         —    

Additional paid-in capital

     630,794       630,719  

Accumulated other comprehensive loss, net of tax

     (40,364     (25,302

Accumulated deficit

     (1,075,613     (1,060,693
  

 

 

   

 

 

 
     (485,183     (455,276
  

 

 

   

 

 

 

Total liabilities and stockholder’s deficit

   $ 2,030,378     $ 2,000,723  
  

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

3


Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands)

 

     Three Months
Ended
August 4, 2018
    Three Months
Ended

July 29, 2017
    Six Months
Ended
August 4, 2018
    Six Months
Ended
July 29, 2017
 

Net sales

   $ 314,448     $ 316,637     $ 625,454     $ 616,258  

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

     154,723       161,583       310,371       313,371  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     159,725       155,054       315,083       302,887  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses (income):

        

Selling, general and administrative

     111,459       112,774       237,240       223,286  

Depreciation and amortization

     13,709       10,890       26,903       22,093  

Severance and transaction-related costs

     629       389       1,005       532  

Other income, net

     (3,348     (2,171     (7,354     (4,872
  

 

 

   

 

 

   

 

 

   

 

 

 
     122,449       121,882       257,794       241,039  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income before interest, reorganization items and income taxes

     37,276       33,172       57,289       61,848  

Reorganization items, net

     30,453       —         40,462       —    

Interest expense, net

     5,072       43,394       29,961       86,974  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense

     1,751       (10,222     (13,134     (25,126

Income tax expense

     5,040       10,266       1,786       2,120  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (3,289   $ (20,488   $ (14,920   $ (27,246
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (3,289   $ (20,488   $ (14,920   $ (27,246

Other comprehensive (loss) income:

        

Foreign currency translation adjustments

     (1,067     4,523       (3,602     4,567  

Net (loss) gain on intra-entity foreign currency transactions, net of tax (benefit) expense of $(35), $714, $5 and $944

     (4,952     7,593       (11,460     9,474  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (6,019     12,116       (15,062     14,041  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (9,308   $ (8,372   $ (29,982   $ (13,205
  

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

4


Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Six Months
Ended
August 4, 2018
    Six Months
Ended
July 29, 2017
 

Cash flows from operating activities:

    

Net loss

   $ (14,920   $ (27,246

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

    

Depreciation and amortization

     26,903       22,093  

Reorganization items, net

     40,462       —    

Amortization of lease rights and other assets

     2,517       1,862  

Amortization of debt issuance costs

     1,613       4,312  

Accretion of debt premium

     (360     (1,457

Non-cash pay-in-kind interest expense

     2,889       750  

Net unfavorable accretion of lease obligations

     9       (55

Loss on sale/retirement of property and equipment, net

     46       128  

Stock-based compensation expense

     75       156  

(Increase) decrease in:

    

Inventories

     (17,945     (22,083

Prepaid expenses

     (7,130     (1,926

Other assets

     (6,461     (75

Increase (decrease) in:

    

Trade accounts payable

     (7,122     (709

Income taxes payable

     12,249       (279

Accrued interest payable

     17,955       (155

Accrued expenses and other liabilities

     (6,128     (6,994

Deferred income taxes

     (15,287     (359

Deferred rent expense

     (2,460     (1,196
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     26,905       (33,233
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisition of property and equipment

     (9,027     (8,101

Acquisition of intangible assets/lease rights

     (100     (38
  

 

 

   

 

 

 

Net cash used in investing activities

     (9,127     (8,139
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from debtor-in-possession credit facility

     57,000       —    

Repayments under debtor-in-possession credit facility

     (57,000     —    

Proceeds from debtor-in-possession term loans

     60,000       —    

Debt issuance costs related to debtor-in-possession financing

     (4,470     —    

Proceeds from revolving credit facilities

     43,000       81,000  

Payments on revolving credit facilities

     (74,000     (41,200

Payment on current portion of long-term debt

     (6,000     (18,420

Payments of unamortized interest related to long-term debt

     (5,321     (4,272

Payment of debt issuance costs

     (2     (386

Principal payments on capital lease

     (200     (156
  

 

 

   

 

 

 

Net cash provided by financing activities

     13,007       16,566  
  

 

 

   

 

 

 

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

     (3,786     203  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     26,999       (24,603

Cash and cash equivalents, at beginning of period

     42,446       55,792  
  

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 69,445     $ 31,189  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    
    

Interest paid

   $ 13,002     $ 87,454  

Income taxes paid

     2,112       3,927  
Non-cash supplemental financing activities:     

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

   $ 2,976     $ 2,207  

Decrease in adjustment to carrying value

     2,976       2,207  

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

CLAIRE’S STORES, INC. AND SUBSIDIARIES

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

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

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

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

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

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

 

6


Table of Contents

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

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

The Company plans to emerge from its Chapter 11 Cases after it obtains an order from the Bankruptcy Court confirming the Company’s Proposed Plan (as defined below). Among other things, confirmation of the Proposed Plan will determine the rights and satisfy the claims of the Company’s creditors and security holders in accordance with the terms of the Proposed Plan. A copy of the Debtors’ Proposed Plan is available free of charge online at https://cases.primeclerk.com/claires/.

2. Bankruptcy Filing

Chapter 11 Proceedings

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

In connection with the commencement of the Chapter 11 Cases, the Debtors entered into a Restructuring Support Agreement (the “Restructuring Support Agreement”), dated as of March 19, 2018, with Apollo Global Management, LLC, the Debtors’ equity sponsor (the “Sponsor”) and certain unaffiliated holders of first lien debt issued by the Company (each, an “Ad Hoc First Lien Holder” and, collectively, the “Ad Hoc First Lien Group” or the “Initial Consenting Holders”). On July 7, 2018, the Debtors and the Ad Hoc First Lien Group amended the Restructuring Support Agreement to permit the Debtors to solicit alternative proposals for (i) plans of reorganization or liquidation or (ii) the purchase of some or all of the Debtors’ assets, and to modify certain milestones with respect to the Debtors’ restructuring process.

Pursuant to the Restructuring Support Agreement, the Ad Hoc First Lien Group and Apollo agreed to support the pre-negotiated plan of reorganization that the Debtors seek to confirm. In accordance with the Restructuring Support Agreement, the Debtors filed the plan of reorganization (as amended, modified, or supplemented, the “Proposed Plan”) and related disclosure statement (as amended, modified, or supplemented the “Disclosure Statement”) with the Bankruptcy Court on April 12, 2018. The Debtors then amended the Proposed Plan on July 7, 2018 and again on July 16, 2018. On July 26, 2018, the Bankruptcy Court entered an order approving the Disclosure Statement, finding that the Disclosure Statement contained adequate information as required by the Bankruptcy Code. Additionally, the Bankruptcy Court approved solicitation and confirmation procedures for the Proposed Plan and scheduled a hearing (the “Confirmation Hearing”) for September 17, 2018 to consider confirmation of the Proposed Plan.

 

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Significant Bankruptcy Court Actions

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

Global Plan Settlement

On July 15, 2018, the Debtors, the official committee of unsecured creditors appointed in the Chapter 11 Cases (the “Creditors’ Committee”), the indenture trustee under the Company’s Unsecured Notes (the “Unsecured Notes Trustee”), and the Ad Hoc First Lien Group entered into a settlement agreement (the “Global Plan Settlement”). Pursuant to the Global Plan Settlement, the Debtors resolved the formal and informal objections of the Creditors’ Committee and the Unsecured Notes Trustee with respect to the Proposed Plan and the Debtors’ restructuring, including with respect to (i) the enterprise value for the Debtors, together with their non-Debtor affiliates; (ii) value attributable to the Debtors’ unencumbered assets; (iii) junior creditor recoveries; (iv) the treatment of intercompany claims and interests; (v) the releases and exculpations contemplated by the Proposed Plan, including with respect to the Sponsor and claims or causes of action arising from or related to the exchange transaction effectuated by the Company in 2016 (the “2016 Exchange”); (vi) the terms of the new capital to be invested in the Company by the Ad Hoc First Lien Group; (vii) the allocation of assets and liabilities among the Debtors’ Estates; and (vii) prospective lien challenges, claims, or causes of action that might be brought by or on behalf of the Debtors’ Chapter 11 estates, including on account of the 2016 Exchange. The Bankruptcy Court will consider approval of the Global Plan Settlement at the Confirmation Hearing.

Settlement with FFI

On August 31, 2018, the Debtors, FFI Fund Ltd., FYI Ltd. and their affiliates (collectively, the “FFI Parties”), holders of the Company’s Unsecured Notes, and certain signatories to the Restructuring Support Agreement (the “Requisite Consenting Creditors”) entered into a Plan Support Agreement (the “PSA”), whereby the FFI Parties agreed to settle any and all potential objections they may have to the Proposed Plan and to support and vote all claims and interests held by the FFI Parties to accept the Proposed Plan and grant the releases provided for in the PSA. Pursuant to the PSA, the Debtors modified the Proposed Plan to increase the recoveries of holders of the Company’s Unsecured Notes. The PSA became effective and binding on each of the Parties upon the execution and delivery of the PSA by each of (a) the Debtors, (b) the Requisite Consenting Creditors, and (c) the FFI Parties; provided that the PSA shall not be effective as to the Debtors until approved by the Bankruptcy Court upon confirmation of the Proposed Plan.

Oaktree’s Standing Motion

On July 19, 2018, Oaktree Capital Management, L.P. (“Oaktree”), the majority holder of the Company’s Second Lien Notes, filed a motion in the Chapter 11 Cases seeking derivative standing to pursue certain avoidance actions with respect to the 2016 Exchange (the “Standing Motion”). The Debtors object to Oaktree’s Standing Motion on the grounds that, among other things, Oaktree is prohibited from bringing such avoidance actions by virtue of its intercreditor obligations, Oaktree’s Standing Motion is a premature objection to the approval of the Global Plan Settlement, and Oaktree cannot assert colorable claims with respect to such avoidance actions. The Bankruptcy Court will hold a hearing on Oaktree’s Standing Motion on September 17, 2018.

 

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Executory Contracts

Subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach.

The Debtors have filed motions and received Bankruptcy Court approval for the rejection of 140 leases. As of August 4, 2018, the Debtors have rejected 83 leases. On August 24, 2018, the Debtors filed with the Bankruptcy Court a Rejected Executory Contracts and Unexpired Leases Schedule and Assumed Executory Contracts and Unexpired Leases Schedule with respect to those executory contracts and unexpired leases that either will be assumed or rejected pursuant to the Proposed Plan. Copies of these schedules are available free of charge online at https://cases.primeclerk.com/claires/.

Key Employee Incentive and Retention Programs

On May 5, 2018, the Debtors filed with the Bankruptcy Court a motion (the “KEIP/KERP Motion”) seeking authority to implement a key employee incentive plan (the “KEIP”) and a key employee retention program (the “KERP”).    The KEIP provides performance metrics for senior members of the Debtors’ management team to achieve in furtherance of the Debtors’ business goals and, upon the achievement of those performance metrics, provides for maximum payments of up to approximately $1.5 million in the aggregate per quarter through the end of the fourth quarter of Fiscal 2018. The KERP identifies valuable, hard-to-replace non-senior members of the Debtors’ management team that play important roles in the Debtors’ restructuring efforts, each performing crucial tasks to ensure a seamless transition into and an efficient emergence from Chapter 11. The KERP provides for payments of up to approximately $1.5 million in the aggregate. The KERP participants would receive awards on the earlier of thirty days following the effective date of a Chapter 11 plan of reorganization and December 31, 2018, with the payment of such awards conditioned on the KERP participants’ continued employment with the Company. The KEIP/KERP Motion was approved by the Bankruptcy Court on June 13, 2018.

Debtor-In-Possession Facility

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

Marketing Process

On June 22, 2018, the Bankruptcy Court entered an order requiring the Debtors to solicit bids with respect to a sale or disposition by the Debtors of the Company’s assets or an investment and/or sponsorship of a Chapter 11 plan of reorganization or liquidation. Additionally, the Bankruptcy Court established certain procedures (the “Bid Procedures”) regarding the submission of certain bids (each, a “Qualified Bid” as defined in the Bid Procedures) with respect to some, all, or substantially all of the Company’s assets or an investment in, and/or sponsorship of, a Chapter 11 plan of reorganization or liquidation. The deadline for the submission of Qualified Bids was August 31, 2018. The Debtors, in consultation with the Creditors’ Committee, have determined that the Debtors have not received any Qualified Bids.

 

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Financial Reporting in Reorganization

Effective on March 19, 2018, the Company began to apply ASC, No. 852, “Reorganizations,” which is applicable to companies under Chapter 11 bankruptcy protection. It requires the financial statements for periods subsequent to the Chapter 11 filing to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Expenses, realized gains and losses, and provisions for losses that are directly associated with reorganization proceedings must be reported separately as reorganization items, net in the Unaudited Condensed Consolidated Statements of Operations. In addition, the balance sheet must distinguish debtor pre-petition liabilities subject to compromise (“LSTC”) from liabilities of non-Debtor entities, pre-petition liabilities that are not subject to compromise and from post-petition liabilities in the accompanying Unaudited Condensed Consolidated Balance Sheet. LSTC are pre-petition obligations that are not fully secured and have at least a possibility of not being repaid at the full claim amount. Where there is uncertainty about whether a secured claim will be paid or impaired pursuant to the Chapter 11 Cases, the Company has classified the entire amount of the claim as a LSTC.

Liabilities Subject to Compromise

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

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

Liabilities Subject to Compromise as of August 4, 2018 included the following components (in thousands):

 

     August 4, 2018  

Debt (1)

   $ 1,806,363  

Accrued interest on debt subject to compromise

     73,054  

Accounts payable, accrued expense and other liabilities

     25,798  
  

 

 

 

Total liabilities subject to compromise

   $ 1,905,215  
  

 

 

 

 

(1)

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

Reorganization Items, Net

Reorganization items, net represent amounts incurred after the Commencement Date as a direct result of the Bankruptcy and are comprised of the following for the three and six months ended August 4, 2018 (in thousands):

 

     Three Months
Ended
August 4, 2018
     Six Months
Ended
August 4, 2018
 

Professional fees

   $ 22,744      $ 33,697  

Rejection of leases and other

     7,277        7,277  

Debtor-in-possession financing costs

     432        4,470  

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

     —          (4,982
  

 

 

    

 

 

 

Total reorganization items, net

   $ 30,453      $ 40,462  
  

 

 

    

 

 

 

 

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3. Recent Accounting Pronouncements

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

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

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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for substantially all leases. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of income. The new standard is effective for years beginning after December 15, 2018, including interim periods within those years. In July 2018, the FASB issued ASU 2018-11 which provided additional transition methods. The Company is currently quantifying the amount of lease assets and lease liabilities that it will recognize on its balance sheet. The Company’s review of the requirements of Topic 842 is ongoing, and believes that the impact on its balance sheet, while not currently calculated, will be significant.

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

 

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Accounting policies as a result of recently adopted accounting pronouncements

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

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

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

Upon purchase of a gift card or gift certificate, a liability is established for the cash value. The liability is included in “Accrued expenses and other current liabilities.” Revenue from gift card and gift certificate sales is recognized at the time of redemption. Unredeemed gift card and gift certificate breakage income is recorded as a reduction of “Selling, general and administrative” expenses. The Company records breakage income when the probability of redemption, based upon historical redemption patterns, is remote as there is currently no basis for estimating breakage income.

4. Fair Value Measurements

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

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

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

 

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

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

Financial Instruments Not Measured at Fair Value

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

The Company considers all investments with a maturity of three months or less when acquired to be cash equivalents. The Company’s cash equivalent instruments are valued using quoted market prices and are primarily U.S. Treasury securities. The revolving credit facilities approximate fair value due to the variable component of the interest rate. Excluding unamortized debt issuance costs, the estimated fair value of the Company’s long-term debt (including current portion) was approximately $1.12 billion as of August 4, 2018, compared to a carrying value of $2.10 billion at that date. Excluding unamortized debt issuance costs, the estimated fair value of the Company’s long-term debt (including current portion) was approximately $1.28 billion as of February 3, 2018, compared to a carrying value of $2.12 billion at that date. For publicly-traded debt, the fair value (estimated market value) is based on quoted market prices in less active markets. For non-publicly traded debt, fair value is estimated based on quoted prices for similar instruments. If measured at fair value in the financial statements, long-term debt excluding term loans would be classified as Level 2 in the fair value hierarchy, while term loans would be classified as Level 3 in the fair value hierarchy.

5. Debt

Debt as of August 4, 2018 and February 3, 2018 included the following components (in thousands):

 

     August 4, 2018      February 3, 2018  

Short-term borrowings:

     

Debtor-in-possession facility

   $ 60,000      $ —    

Current portion of long-term debt:

     

Claire’s Gibraltar Intermediate secured term loan due 2019

   $ 51,500      $ 51,500  

Claire’s Gibraltar unsecured term loan due 2019

     34,000        —    

9.0% Senior secured first lien notes due 2019

     —          1,125,000  

8.875% Senior secured second lien notes due 2019

     —          222,300  

6.125% Senior secured first lien notes due 2020

     —          210,000  

7.75% Senior notes due 2020

     —          216,742  

9.0% Claire’s Stores term loan due 2021

     —          31,804  

U.S. asset based lending credit facility due 2019

     —          31,000  

Unamortized premium (1)

     —          3,642  

Adjustment to carrying value (1)

     —          12,483  

Unamortized debt issuance cost (1)

     (768      (10,432
  

 

 

    

 

 

 

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

   $ 84,732      $ 1,894,039  
  

 

 

    

 

 

 

 

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     August 4, 2018      February 3, 2018  

Debt subject to compromise:

     

9.0% Senior secured first lien notes due 2019

   $ 1,125,000      $ —    

8.875% Senior secured second lien notes due 2019

     222,300        —    

6.125% Senior secured first lien notes due 2020

     210,000        —    

7.75% Senior notes due 2020

     216,742        —    

9.0% Claire’s Stores term loan due 2021

     32,321        —    
  

 

 

    

 

 

 

Total debt subject to compromise

   $ 1,806,363      $ —    
  

 

 

    

 

 

 

Long-term debt:

     

Claire’s Gibraltar unsecured term loan due 2019

   $ —        $ 40,000  

11.0% CLSIP term loan due 2021 (2)

     107,926        103,356  

9.0% Claire’s Gibraltar term loans due 2021

     48,477        47,701  

Adjustment to carrying value

     52,444        59,298  
  

 

 

    

 

 

 

Total long-term debt, net

   $ 208,847      $ 250,355  
  

 

 

    

 

 

 

Obligation under capital lease (including current portion)

   $ 16,188      $ 16,388  
  

 

 

    

 

 

 

 

(1)

LSTC must be reported at the amounts expected to be allowed by the Bankruptcy Court. The carrying value of the debt will be adjusted as claims are approved. As of August 4, 2018, the Company wrote off $5.0 million of debt issuance costs, debt premium, and the adjustment to carrying value to present the debt at the outstanding face value. The write-offs are included within reorganization items, net in the Unaudited Condensed Consolidated Statements of Operations. See Note 2 – Bankruptcy Filing for additional details.

 

(2)

See CLSIP Forbearance Agreement below for discussion of increased interest rate.

Debtor-In-Possession Facility

On March 22, 2018, the Company, pursuant to a commitment letter dated as of March 11, 2018 and previously disclosed on the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 19, 2018, and in connection with the Chapter 11 Cases and as a debtor in possession pursuant to the Bankruptcy Code, entered into a Credit Agreement (the “DIP Credit Agreement”) among the Company, Claire’s Inc., a Delaware corporation (“Parent”), certain of the Company’s subsidiaries (as described below), the lenders from time to time party thereto (the “Lenders”) and Citibank, N.A., as administrative agent and collateral agent for the Lenders (in such capacities, the “Administrative Agent”), pursuant to which, among other things, the Lenders have provided (i) a senior secured superpriority non-amortizing asset-based revolving facility in an aggregate principal amount of $75,000,000 (the “DIP ABL Loan”), with up to $10,000,000 of such DIP ABL Loan available for the issuance of standby letters of credit and (ii) a superpriority senior secured last-out term facility in an aggregate principal amount of $60,000,000 (the “DIP Term Loan” and together with the DIP ABL Loan, the “DIP Facility”). The DIP Facility is guaranteed on a joint and several basis by Parent, and certain of the Company’s subsidiaries, including BMS Distributing Corp., a Delaware corporation, CBI Distributing Corp., a Delaware corporation, Claire’s Boutiques, Inc., a Colorado corporation, Claire’s Canada Corp., a Delaware corporation, Claire’s Puerto Rico Corp., a Delaware corporation and CSI Canada LLC, a Delaware limited liability company.

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

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

As of August 4, 2018, the Company had $65.6 million of availability under the DIP ABL Loan, net of applicable reserves.

 

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Contractual interest on debt subject to compromise

Effective as of the Commencement Date, the Company ceased recording interest expense on outstanding pre-petition debt subject to compromise. Contractual interest expense represents amounts due under the contractual terms of outstanding pre-petition debt classified as LSTC. For the quarter ended August 4, 2018, contractual interest expense of $58.5 million related to LSTC has not been recorded in the financial statements.

ABL Credit Facility

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

CLSIP Forbearance Agreement

CLSIP Holdings, CLSIP, Wilmington Trust, N.A., as Administrative Agent and Collateral Agent under the CLSIP Term Loan Agreement, and certain of the lenders constituting Required Lenders (as that term is defined by the CLSIP Term Loan Agreement) under the CLSIP Term Loan entered into a forbearance agreement dated as of April 19, 2018 (the “CLSIP Forbearance”) providing that, among other things, such lenders will forbear from causing the CLSIP Term Loan to become immediately due and payable and from exercising remedies arising from such event of default or other events of default that may arise on account of the commencement of the Chapter 11 Cases and/or any other transaction and/or agreement contemplated by the Restructuring Support Agreement. The CLSIP Forbearance also increased the interest rate of the CLSIP Term Loan to bear 11.0% per annum. As a result of the CLSIP Forbearance, the CLSIP Term Loan is classified as long-term debt.

Debt Covenants

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

 

   

incur additional indebtedness;

 

   

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

 

   

make certain investments;

 

   

create or incur certain liens;

 

   

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

 

   

transfer or sell assets;

 

   

engage in certain transactions with its affiliates; and

 

   

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

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

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

 

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Europe Bank Credit Facilities

The Company’s non-U.S. subsidiaries have bank credit facilities totaling approximately $1.9 million. The facilities are used for working capital requirements, letters of credit and various guarantees. These credit facilities have been arranged in accordance with customary lending practices in the respective country of operation. As of August 4, 2018, there was a reduction of $1.7 million for outstanding bank guarantees, which reduces the borrowing availability to $0.2 million as of that date.

6. Commitments and Contingencies

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

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

7. Accumulated Other Comprehensive Loss

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

 

     Total (1)  

Balance as of February 3, 2018

   $ (25,302

Other comprehensive loss

     (15,062
  

 

 

 

Balance as of August 4, 2018

   $ (40,364
  

 

 

 

 

(1)

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

8. Stock Options and Stock-Based Compensation

The following is a summary of activity in the Company’s stock option plan for the six months ended August 4, 2018:

 

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

Outstanding as of February 3, 2018

     3,224,326     $ 5.18     

Options granted

     —         

Options exercised

           

Options forfeited

     (17,511   $ 2.83     

Options expired

     (154,887   $ 9.48     
  

 

 

      

Outstanding as of August 4, 2018

     3,051,928     $ 4.98        3.6  
  

 

 

      

Options vested and expected to vest as of August 4, 2018

     2,938,253     $ 5.10        3.5  
  

 

 

      

Exercisable as of August 4, 2018

     1,892,324     $ 6.09        3.1  
  

 

 

      

 

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There were no options granted during the six months ended August 4, 2018. The weighted average grant date fair value of options granted during the six months ended July 29, 2017 was $0.39.

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

9. Income Taxes

The effective income tax rate was 287.8% and (13.6)% for the three and six months ended August 4, 2018. This effective income tax rate differed from the statutory federal income tax rate of 21.0% primarily due to foreign losses with no associated income tax benefit and changes in valuation allowances.

The effective income tax rate was (100.4)% and (8.4)% for the three and six months ended July 29, 2017. This effective income tax rate differed from the statutory federal income tax rate of 35.0% primarily due to foreign tax rate differentials as compared to the U.S. statutory rate, changes in the valuation allowance and the correction of an immaterial error in the three months ended July 29, 2017.

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

10. Related Party Transactions

Indebtedness

As of August 4, 2018 and February 3, 2018, Parent and affiliates held $68.6 million and $65.6 million of the Company’s indebtedness and the Company had no accrued interest payable associated with the indebtedness. For the three and six months ended August 4, 2018 and July 29, 2017, the Company recognized no interest expense related to the indebtedness held by Parent and affiliates as a result of the 2016 debt exchange whereby all future interest to be paid through maturity date was recorded at the time of the exchange.

Management Services Agreement

On June 6, 2017, the Company and Parent entered into an Amended and Restated Management Services Agreement (the “Management Services Agreement”) with Apollo Management VI, L.P. (“Apollo”), Cowen & Co., LLC, as successor to Tri-Artisan Capital Partners, LLC (“TACP”), (“Cowen”, and together with Apollo, the “Managers”) and TACP Investments – Claire’s LLC (“TACPI”). The Management Services Agreement supersedes, amends and entirely restates the Management Services Agreement, dated as of May 29, 2007 by and among the Company, Parent, Apollo, TACP and TACPI (“the Original Agreement”). Under the Management Service Agreement, the Managers have agreed to provide to the Company certain investment banking, management, consulting and financial planning services on an ongoing basis. The Managers will receive no fee for these services, but will be reimbursed by the Company for their out-of-pocket expenses. In the prior Management Services Agreement, the Managers were paid a $3.0 million fee annually. In addition, under the Management Services Agreement, the Managers have agreed to provide to the Company certain financial advisory and investment banking

 

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services from time-to-time in connection with major financial transactions that may be undertaken by the Company or its subsidiaries in exchange for normal and customary fees as agreed by the Managers (or their affiliates) and the Company and Parent, taking into consideration all relevant factors. Under the Management Services Agreement, the Company and Parent have also agreed to provide the Managers (and their affiliates) with customary indemnification. The Management Services Agreement will terminate upon the earliest to occur of May 29, 2025 or the occurrence of certain termination events specified therein.    The Company has not made any payments on account of the Management Services Agreement since commencing the Chapter 11 Cases.

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

11. Segment Information

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

 

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Table of Contents

Net sales, depreciation and amortization and operating income for the three and six months ended August 4, 2018 and July 29, 2017 are as follows (in thousands):

 

     Three Months
Ended
August 4, 2018
     Three Months
Ended
July 29, 2017
     Six Months
Ended
August 4, 2018
     Six Months
Ended
July 29, 2017
 

Net sales:

           

North America

   $ 199,454      $ 196,033      $ 406,388      $ 391,993  

Europe

     114,994        120,604        219,066        224,265  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

     314,448        316,637        625,454        616,258  
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and amortization:

           

North America

     9,623        7,028        18,276        14,130  

Europe

     4,086        3,862        8,627        7,963  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation and amortization

     13,709        10,890        26,903        22,093  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income for reportable segments:

           

North America

     28,511        16,306        55,139        42,016  

Europe

     9,394        17,255        3,155        20,364  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating income for reportable segments

     37,905        33,561        58,294        62,380  

Severance and transaction-related costs

     629        389        1,005        532  
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated operating income

     37,276        33,172        57,289        61,848  

Reorganization items, net

     30,453        —          40,462        —    

Interest expense, net

     5,072        43,394        29,961        86,974  
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated income (loss) before income tax expense

   $ 1,751      $ (10,222    $ (13,134    $ (25,126
  

 

 

    

 

 

    

 

 

    

 

 

 

Excluded from operating income for the North America segment are severance and transaction-related costs of approximately $0.3 million and $0.3 million for the three months ended August 4, 2018 and July 29, 2017, respectively, and $0.4 million and $0.3 million for the six months ended August 4, 2018 and July 29, 2017, respectively.

Excluded from operating income for the Europe segment are severance and transaction-related costs of approximately $0.3 million and $0.1 million for the three months ended August 4, 2018 and July 29, 2017, respectively and $0.6 million and $0.2 million for the six months ended August 4, 2018 and July 29, 2017, respectively.

 

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Table of Contents

Net sales by channel type and by segment for the three and six months ended August 4, 2018 are as follows (in thousands):

 

     Three Months
Ended
August 4, 2018
     Six Months
Ended
August 4, 2018
 

North America:

     

Company-operated net sales

   $ 186,518      $ 376,453  

Other net sales

     12,936        29,935  
  

 

 

    

 

 

 

Total net sales

     199,454        406,388  
  

 

 

    

 

 

 

Europe:

     

Company-operated net sales

     108,419        205,089  

Other net sales

     6,575        13,977  
  

 

 

    

 

 

 

Total net sales

     114,994        219,066  
  

 

 

    

 

 

 

Consolidated:

     

Company-operated net sales

     294,937        581,542  

Other net sales

     19,511        43,912  
  

 

 

    

 

 

 

Total net sales

   $ 314,448      $ 625,454  
  

 

 

    

 

 

 

 

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Table of Contents

12. Condensed Combined Debtor-In-Possession Financial Information

The financial statements below represent the unaudited condensed combined financial statements of the Debtors. As of and for the three and six months ended August 4, 2018, the results of the Company’s subsidiaries that are not part of the Chapter 11 Cases, are not included in these condensed combined financial statements.

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

Debtors Unaudited Condensed Combined Balance Sheet

August 4, 2018

(in thousands)

 

 

ASSETS

  

Current assets:

  

Cash

   $ 27,825  

Inventories

     88,422  

Prepaid expenses

     20,935  

Other current assets

     13,400  
  

 

 

 

Total current assets

     150,582  
  

 

 

 

Property and equipment:

  

Furniture, fixtures and equipment

     128,307  

Leasehold improvements

     167,133  
  

 

 

 
     295,440  

Accumulated depreciation and amortization

     (240,023
  

 

 

 
     55,417  
  

 

 

 

Leased property under capital lease:

  

Land and building

     18,055  

Accumulated depreciation and amortization

     (7,667
  

 

 

 
     10,388  
  

 

 

 

Investment in non-filing entities

     409,863  

Goodwill

     987,517  

Intangible assets, net

     188,223  

Other assets

     14,169  
  

 

 

 
     1,599,772  
  

 

 

 

Total assets

   $ 1,816,159  
  

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

  

Current liabilities:

  

Debtor-in-possession term loan

   $ 60,000  

Trade accounts payable

     18,549  

Income taxes payable

     7,849  

Accrued interest payable

     140  

Accrued expenses and other current liabilities

     61,907  
  

 

 

 

Total current liabilities

     148,445  
  

 

 

 

Intercompany payables

     174,547  

Obligation under capital lease

     15,718  

Deferred tax liability

     24,795  

Deferred rent expense

     20,692  

Other long-term liabilities

     8,646  
  

 

 

 
     244,398  
  

 

 

 

Liabilities subject to compromise

     1,905,215  

Stockholder’s deficit:

  

Common stock

     —    

Additional paid in capital

     630,794  

Accumulated other comprehensive loss, net of tax

     (40,364

Accumulated deficit

     (1,072,329
  

 

 

 
     (481,899
  

 

 

 

Total liabilities and stockholder’s deficit

   $ 1,816,159  
  

 

 

 

 

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Table of Contents

Debtors Unaudited Condensed Combined Statement of Operations and Comprehensive Income

(in thousands)

 

 

     Three Months
Ended

August 4, 2018
    Six Months
Ended

August 4, 2018
 

Net sales

   $ 184,157     $ 376,611  

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

     89,654       179,919  
  

 

 

   

 

 

 

Gross profit

     94,503       196,692  
  

 

 

   

 

 

 

Other expenses:

    

Selling, general and administrative

     62,921       136,553  

Depreciation and amortization

     9,202       17,389  

Severance and transaction-related costs

     264       348  

Other income

     (4,351     (10,764
  

 

 

   

 

 

 
     68,036       143,526  
  

 

 

   

 

 

 

Operating income

     26,467       53,166  

Reorganization items, net

     30,453       40,462  

Interest expense, net

     1,940       21,472  
  

 

 

   

 

 

 

Loss before income taxes

     (5,926     (8,768

Income tax expense

     2,945       7,872  
  

 

 

   

 

 

 

Loss from continuing operations

     (8,871     (16,640

Equity in earnings of subsidiaries

     24,836       51,928  

Equity in earnings of non-filing entities

     5,977       5,004  
  

 

 

   

 

 

 

Net income

     21,942       40,292  

Foreign currency translation adjustments

     (1,207     (4,168

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

     (5,214     (12,522
  

 

 

   

 

 

 

Other comprehensive loss

     (6,421     (16,690
  

 

 

   

 

 

 

Comprehensive income

   $ 15,521     $ 23,602  
  

 

 

   

 

 

 

 

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Table of Contents

Debtors Unaudited Condensed Combined Statement of Cash Flows

Six Months Ended August 4, 2018

(in thousands)

 

 

Cash flows from operating activities:

  

Net income

   $ 40,292  

Adjustments to reconcile net income to net cash used in operating activities:

  

Equity in earnings of subsidiaries

     (51,928

Equity in earnings of non-filing entities

     (5,004

Depreciation and amortization

     17,389  

Reorganization items, net

     40,462  

Amortization of debt issuance costs

     898  

Accretion of debt premium

     (360

Net accretion of unfavorable lease obligations

     7  

Loss on sale/retirement of property and equipment, net

     44  

Stock-based compensation expense

     70  

(Increase) decrease in:

  

Inventories

     (11,953

Prepaid expenses

     (4,557

Other assets

     (6,947

Increase (decrease) in:

  

Trade accounts payable

     (8,076

Income taxes payable

     7,340  

Accrued interest payable

     17,386  

Accrued expenses and other liabilities

     (5,802

Deferred income taxes

     (2,586

Deferred rent expense

     (2,142
  

 

 

 

Net cash provided by operating activities

     24,533  
  

 

 

 

Cash flows from investing activities:

  

Acquisition of property and equipment

     (6,553

Acquisition of intangible assets/lease rights

     (20
  

 

 

 

Net cash used in investing activities

     (6,573
  

 

 

 

Cash flows from financing activities:

  

Proceeds from debtor-in-possession credit facility

     57,000  

Repayments under debtor-in-possession credit facility

     (57,000

Proceeds from debtor-in-possession term loans

     60,000  

Debt issuance costs related to debtor-in-possession financing

     (4,470

Proceeds from revolving credit facilities

     43,000  

Payments on revolving credit facilities

     (74,000

Payments of unamortized interest related to long-term debt

     (925

Principal payments on capital lease

     (200

Intercompany activity, net

     (18,680
  

 

 

 

Net cash provided by financing activities

     4,725  
  

 

 

 

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

     (2,207
  

 

 

 

Net increase in cash and cash equivalents

     20,478  

Cash and cash equivalents, at beginning of period

     7,347  
  

 

 

 

Cash and cash equivalents, at end of period

     27,825  
  

 

 

 

 

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Table of Contents

13. Supplemental Financial Information

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

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

 

24


Table of Contents

Unaudited Condensed Consolidating Balance Sheet

August 4, 2018

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash

   $ 23,551     $ 10,774     $ 35,120     $ —       $ 69,445  

Inventories

     —         88,422       59,909       —         148,331  

Prepaid expenses

     8,300       12,635       15,954       —         36,889  

Other current assets

     418       12,982       8,337       —         21,737  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     32,269       124,813       119,320       —         276,402  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

          

Furniture, fixtures and equipment

     3,239       125,068       79,981       —         208,288  

Leasehold improvements

     1,315       165,818       111,971       —         279,104  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     4,554       290,886       191,952       —         487,392  

Accumulated depreciation and amortization

     (3,834     (236,189     (147,608     —         (387,631
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     720       54,697       44,344       —         99,761  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

          

Land and building

     —         18,055       —         —         18,055  

Accumulated depreciation and amortization

     —         (7,667     —         —         (7,667
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —         10,388       —         —         10,388  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

     —         368,135       105,026       (473,161     —    

Investment in subsidiaries

     1,729,045       (40,870     —         (1,688,175     —    

Goodwill

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

Intangible assets, net

     188,100       149,657       197,022       (84,634     450,145  

Other assets

     8,000       6,169       46,938       —         61,107  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,925,145       1,470,608       494,044       (2,245,970     1,643,827  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,958,134     $ 1,660,506     $ 657,708     $ (2,245,970   $ 2,030,378  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

          

Current liabilities:

          

Current portion of long-term debt, net

   $ —       $ —       $ 84,732     $ —       $ 84,732  

Debtor-in-possession term loan

     60,000       —         —         —         60,000  

Trade accounts payable

     2,323       16,226       36,723       —         55,272  

Income taxes payable

     —         7,849       6,247       —         14,096  

Accrued interest payable

     140       395       548       —         1,083  

Accrued expenses and other current liabilities

     27,113       34,794       39,309       —         101,216  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     89,576       59,264       167,559       —         316,399  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

     473,161       —         —         (473,161     —    

Long-term debt, net

     —         143,810       65,037       —         208,847  

Revolving credit facility, net

     —         —         —         —         —    

Obligation under capital lease

     —         15,718       —         —         15,718  

Deferred tax liability

     —         24,795       4,384       —         29,179  

Deferred rent expense

     —         20,692       10,865       —         31,557  

Other long-term liabilities

     —         8,646       —         —         8,646  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     473,161       213,661       80,286       (473,161     293,947  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities subject to compromise

     1,880,580       24,635       —         —         1,905,215  

Stockholder’s equity (deficit):

          

Common stock

     —         367       2       (369     —    

Additional paid in capital

     630,794       1,520,543       766,993       (2,287,536     630,794  

Accumulated other comprehensive income (loss),

net of tax

     (40,364     (4,784     (36,187     40,971       (40,364

Accumulated deficit

     (1,075,613     (153,180     (320,945     474,125       (1,075,613
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (485,183     1,362,946       409,863       (1,772,809     (485,183
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

   $ 1,958,134     $ 1,660,506     $ 657,708     $ (2,245,970   $ 2,030,378  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Unaudited Condensed Consolidating Balance Sheet

February 3, 2018

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

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

Inventories

     —         76,469       58,221       —         134,690  

Prepaid expenses

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

Other current assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

          

Furniture, fixtures and equipment

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

Leasehold improvements

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Accumulated depreciation and amortization

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     750       65,406       53,542       —         119,698  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Leased property under capital lease:

          

Land and building

     —         18,055       —         —         18,055  

Accumulated depreciation and amortization

     —         (7,216     —         —         (7,216
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     —         10,839       —         —         10,839  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany receivables

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

Investment in subsidiaries

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

Goodwill

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

Intangible assets, net

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

Other assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

          

Current liabilities:

          

Current portion of long-term debt, net

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

Trade accounts payable

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

Income taxes payable

     —         484       3,565       —         4,049  

Accrued interest payable

     55,808       —         374       —         56,182  

Accrued expenses and other current liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Intercompany payables

     420,911       —         —         (420,911     —    

Long-term debt, net

     —         143,929       106,426       —         250,355  

Obligation under capital lease

     —         15,970       —         —         15,970  

Deferred tax liability

     —         25,963       6,651       —         32,614  

Deferred rent expense

     —         22,834       12,017       —         34,851  

Unfavorable lease obligations and other long-term

liabilities

     —         10,040       —         —         10,040  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity (deficit):

          

Common stock

     —         367       2       (369     —    

Additional paid in capital

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

Accumulated other comprehensive income (loss), net of tax

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

Accumulated deficit

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholder’s equity (deficit)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

Unaudited Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Three Months Ended August 4, 2018

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —       $ 184,157     $ 130,291     $ —       $ 314,448  

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

     2,828       86,826       65,069       —         154,723  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (2,828     97,331       65,222       —         159,725  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     5,536       57,385       48,538       —         111,459  

Depreciation and amortization

     96       9,106       4,507       —         13,709  

Severance and transaction-related costs

     209       55       365       —         629  

Other (income) expense

     (1,541     (2,810     1,003       —         (3,348
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     4,300       63,736       54,413       —         122,449  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (7,128     33,595       10,809       —         37,276  

Reorganization items, net

     24,832       5,621       —         —         30,453  

Interest expense, net

     1,406       929       2,737       —         5,072  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (33,366     27,045       8,072       —         1,751  

Income tax expense

     —         2,945       2,095       —         5,040  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (33,366     24,100       5,977       —         (3,289

Equity in earnings (loss) of subsidiaries

     30,077       736       —         (30,813     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (3,289     24,836       5,977       (30,813     (3,289

Foreign currency translation adjustments

     (1,067     (140     (520     660       (1,067

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

     (4,952     (262     (4,952     5,214       (4,952
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (6,019     (402     (5,472     5,874       (6,019
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (9,308   $ 24,434     $ 505     $ (24,939   $ (9,308
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unaudited Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Three Months Ended July 29, 2017

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —       $ 180,868     $ 135,769     $ —       $ 316,637  

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

     3,017       89,864       68,702       —         161,583  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross (deficit) profit

     (3,017     91,004       67,067       —         155,054  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     5,967       58,717       48,090       —         112,774  

Depreciation and amortization

     181       6,379       4,330       —         10,890  

Severance and transaction-related costs

     234       16       139       —         389  

Other income, net

     (918     (112     (1,141     —         (2,171
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     5,464       65,000       51,418       —         121,882  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (8,481     26,004       15,649       —         33,172  

Interest expense, net

     40,071       535       2,788       —         43,394  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (48,552     25,469       12,861       —         (10,222

Income tax expense

     —         121       10,145       —         10,266  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (48,552     25,348       2,716       —         (20,488

Equity in earnings (loss) of subsidiaries

     28,064       (2,203     —         (25,861     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (20,488     23,145       2,716       (25,861     (20,488

Foreign currency translation adjustments

     4,523       1,080       (196     (884     4,523  

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

     7,593       2,199       7,588       (9,787     7,593  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     12,116       3,279       7,392       (10,671     12,116  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (8,372   $ 26,424     $ 10,108     $ (36,532   $ (8,372
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

Unaudited Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Six Months Ended August 4, 2018

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —       $ 376,611     $ 248,843     $ —       $ 625,454  

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

     6,642       173,277       130,452       —         310,371  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (6,642     203,334       118,391       —         315,083  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     20,936       115,617       100,687       —         237,240  

Depreciation and amortization

     194       17,195       9,514       —         26,903  

Severance and transaction-related costs

     209       139       657       —         1,005  

Other (income) expense

     (12,321     1,557       3,410       —         (7,354
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     9,018       134,508       114,268       —         257,794  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (15,660     68,826       4,123       —         57,289  

Reorganization items, net

     34,841       5,621       —         —         40,462  

Interest expense, net

     20,430       4,326       5,205       —         29,961  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (70,931     58,879       (1,082     —         (13,134

Income tax benefit

     —         7,872       (6,086     —         1,786  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (70,931     51,007       5,004       —         (14,920

Equity in earnings (loss) of subsidiaries

     56,011       921       —         (56,932     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (14,920     51,928       5,004       (56,932     (14,920

Foreign currency translation adjustments

     (3,602     (566     (1,404     1,970       (3,602

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

     (11,460     (1,062     (11,457     12,519       (11,460
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (15,062     (1,628     (12,861     14,489       (15,062
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (29,982   $ 50,300     $ (7,857   $ (42,443   $ (29,982
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unaudited Condensed Consolidating Statement of Operations and Comprehensive Loss

For The Six Months Ended July 29, 2017

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —       $ 362,938     $ 253,320     $ —       $ 616,258  

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

     6,179       176,063       131,129       —         313,371  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (deficit)

     (6,179     186,875       122,191       —         302,887  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

          

Selling, general and administrative

     11,720       116,002       95,564       —         223,286  

Depreciation and amortization

     372       12,705       9,016       —         22,093  

Severance and transaction-related costs

     234       73       225       —         532  

Other income, net

     (2,855     (304     (1,713     —         (4,872
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     9,471       128,476       103,092       —         241,039  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (15,650     58,399       19,099       —         61,848  

Interest expense, net

     80,341       1,061       5,572       —         86,974  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (95,991     57,338       13,527       —         (25,126

Income tax expense (benefit)

     —         (943     3,063       —         2,120  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (95,991     58,281       10,464       —         (27,246

Equity in earnings (loss) of subsidiaries

     68,745       (2,157     —         (66,588     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (27,246     56,124       10,464       (66,588     (27,246

Foreign currency translation adjustments

     4,567       668       1,641       (2,309     4,567  

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

     9,474       1,343       9,471       (10,814     9,474  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     14,041       2,011       11,112       (13,123     14,041  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (13,205   $ 58,135     $ 21,576     $ (79,711   $ (13,205
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

Unaudited Condensed Consolidating Statement of Cash Flows

Six Months Ended August 4, 2018

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (14,920   $ 51,928     $ 5,004     $ (56,932   $ (14,920

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

          

Loss (equity) in earnings of subsidiaries

     (56,011     (921     —         56,932       —    

Depreciation and amortization

     194       17,195       9,514       —         26,903  

Reorganization items, net

     34,841       5,621       —         —         40,462  

Amortization of lease rights and other assets

     —         —         2,517       —         2,517  

Amortization of debt issuance costs

     898       —         715       —         1,613  

Accretion of debt premium

     (360     —         —         —         (360

Non-cash pay-in-kind interest expense

     —         2,889       —         —         2,889  

Net accretion of unfavorable lease obligations

     —         7       2       —         9  

Loss on sale/retirement of property and equipment, net

     —         44       2       —         46  

Stock-based compensation expense

     70       —         5       —         75  

(Increase) decrease in:

          

Inventories

     —         (11,953     (5,992     —         (17,945

Prepaid expenses

     (5,662     1,105       (2,573     —         (7,130

Other assets

     (5,998     (949     486       —         (6,461

Increase (decrease) in:

          

Trade accounts payable

     (19,578     11,502       954       —         (7,122

Income taxes payable

     —         7,340       4,909       —         12,249  

Accrued interest payable

     17,386       395       174       —         17,955  

Accrued expenses and other liabilities

     (7,648     1,846       (326     —         (6,128

Deferred income taxes

     —         (2,586     (12,701     —         (15,287

Deferred rent expense

     —         (2,142     (318     —         (2,460
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (56,788     81,321       2,372       —         26,905  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment

     (164     (6,389     (2,474     —         (9,027

Acquisition of intangible assets/lease rights

     —         (20     (80     —         (100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (164     (6,409     (2,544     —         (9,127
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from debtor-in-possession credit facility

     57,000       —         —         —         57,000  

Repayments under debtor-in-possession credit facility

     (57,000     —         —         —         (57,000

Proceeds from debtor-in-possession term loans

     60,000       —         —         —         60,000  

Debt issuance costs related to debtor-in-possession financing

     (4,470     —         —         —         (4,470

Proceeds from revolving credit facilities

     43,000       —         —         —         43,000  

Payments on revolving credit facilities

     (74,000     —         —         —         (74,000

Payment on current portion of long-term debt

     —         —         (6,000     —         (6,000

Payments of unamortized interest related to long-term debt

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

Payment of debt issuance costs

     —         —         (2     —         (2

Principal payments on capital lease

     —         (200     —         —         (200

Intercompany activity, net

     52,695       (68,367     15,672       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     76,300       (71,575     8,282       —         13,007  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     —         (2,207     (1,579     —         (3,786
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     19,348       1,130       6,521       —         26,999  

Cash and cash equivalents, at beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

     23,551       10,774       35,120       —         69,445  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Unaudited Condensed Consolidating Statement of Cash Flows

Six Months Ended July 29, 2017

(in thousands)

 

 

                 Non-              
     Issuer     Guarantors     Guarantors     Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ (27,246   $ 56,124     $ 10,464     $ (66,588   $ (27,246

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

          

Loss (equity) in earnings of subsidiaries

     (68,745     2,157       —         66,588       —    

Depreciation and amortization

     372       12,705       9,016       —         22,093  

Amortization of lease rights and other assets

     —         —         1,862       —         1,862  

Amortization of debt issuance costs

     3,781       —         531       —         4,312  

Accretion of debt premium

     (1,457     —         —         —         (1,457

Non-cash pay-in-kind interest expense

     —         —         750       —         750  

Net accretion of unfavorable lease obligations

     —         (56     1       —         (55

Loss on sale/retirement of property and equipment, net

     —         126       2       —         128  

Stock-based compensation expense

     139       —         17       —         156  

(Increase) decrease in:

          

Inventories

     —         (12,077     (10,006     —         (22,083

Prepaid expenses

     (675     (84     (1,167     —         (1,926

Other assets

     (268     (23     216       —         (75

Increase (decrease) in:

          

Trade accounts payable

     (912     2,811       (2,608     —         (709

Income taxes payable

     —         (967     688       —         (279

Accrued interest payable

     73       —         (228     —         (155

Accrued expenses and other liabilities

     (2,683     (365     (3,946     —         (6,994

Deferred income taxes

     —         —         (359     —         (359

Deferred rent expense

     —         (712     (484     —         (1,196
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (97,621     59,639       4,749       —         (33,233
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisition of property and equipment

     —         (5,111     (2,990     —         (8,101

Acquisition of intangible assets/lease rights

     —         (38     —         —         (38
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     —         (5,149     (2,990     —         (8,139
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Proceeds from revolving credit facilities

     81,000       —         —         —         81,000  

Payments on revolving credit facilities

     (41,200     —         —         —         (41,200

Payment on current portion of long-term debt

     (18,420     —         —         —         (18,420

Payments of unamortized interest related to long-term debt

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

Payment of debt issuance costs

     —         —         (386     —         (386

Principal payments on capital lease

     —         (156     —         —         (156

Intercompany activity, net

     79,605       (53,034     (26,571     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     100,242       (55,605     (28,071     —         16,566  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     —         2,928       (2,725     —         203  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     2,621       1,813       (29,037     —         (24,603

Cash and cash equivalents, at beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, at end of period

   $ 5,659     $ 4,818     $ 20,712     $ —       $ 31,189  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

We include a store in the calculation of same store sales once it has been in operation sixty weeks after its initial opening and we include sales from e-commerce. A store which is temporarily closed, such as for remodeling, is removed from the same store sales computation if it is closed for one week or more. The removal is effective prospectively upon the completion of the first fiscal week of closure. A store which is closed permanently, such as upon termination of the lease, is immediately removed from the same store sales computation. We compute same store sales on a local currency basis, which eliminates any impact for changes in foreign currency rates. Our calculation of same store sales may not be comparable to other retailers.

Voluntary Reorganization under Chapter 11

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

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

Subject to certain exceptions, under the Bankruptcy Code, the commencement of the Chapter 11 Cases automatically enjoined, or stayed, the continuation of most judicial or administrative proceedings or filing of other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the Commencement Date. Accordingly, although the filing of the commencement of the Chapter 11 Cases triggered defaults under the Debtors’ funded debt obligations, creditors are stayed from taking any actions against the Debtors as a result of such defaults, subject to certain limited exceptions permitted by the Bankruptcy Code. Absent an order of the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code.

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

 

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

See Note 2 – Bankruptcy Filing for further information regarding the Chapter 11 Cases.

Ability to Continue as a Going Concern

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

Results of Consolidated Operations

Management Overview

We are one of the world’s leading specialty retailers of fashionable jewelry and accessories for young women, teens, tweens, and kids. Our vision is to be the emporium of choice for all girls (in age or attitude) across the world. We deliver this by offering a range of innovative, fun and affordable products and services that cater to all of her activities, as she grows up, whenever and wherever. Our broad and dynamic selection of merchandise is unique. We are organized into two operating segments: North America and Europe. We identify our operating segments by how we manage and evaluate our business activities. We operate our stores under two brand names: Claire’s® and Icing®. As of August 4, 2018, we operated a total of 2,471 company-operated stores of which 1,466 were located in all 50 states of the United States, Puerto Rico, Canada and the U.S. Virgin Islands (North America segment) and 1,005 stores were located in the United Kingdom, Switzerland, Austria, Germany, France, Ireland, Spain, Portugal, Netherlands, Belgium, Poland, Czech Republic, Hungary, Italy and Luxembourg (Europe segment).

As of August 4, 2018, we also had a total of 6,631 concession stores, of which 6,190 were located in the United States and Canada (North America segment) and 441 stores were located in the United Kingdom, France, Spain, Austria, Germany, Italy, Portugal, Switzerland, Hungary and Poland (Europe segment).

 

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As of August 4, 2018, we also franchised 687 stores in Japan, the Middle East, Greece, Guatemala, Malta, India, Dominican Republic, El Salvador, Panama, Costa Rica, Romania, Martinique, Pakistan, Thailand, Southern Africa, Russia, Ecuador, Curacao, Chile and Paraguay. We account for the goods we sell to third parties under franchising agreements within “Net sales” and “Cost of sales, occupancy and buying expenses” in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss. The franchise fees we charge under the franchising agreements are reported in “Other income, net” in our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss.

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

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

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

 

   

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

 

   

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

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

Financial activity for the three and six months ended August 4, 2018 includes the following:

 

   

Net sales decrease of 0.7% and increase of 1.5%; respectively;

 

   

Same store sales percentages;

 

     Three Months
Ended
August 4, 2018
    Six Months
Ended
August 4, 2018
 

Consolidated

     0.1     (0.2 )% 

North America

     4.4     4.9

Europe

     (6.3 )%      (8.1 )% 

 

   

Gross profit percentage increase of 180 basis points and 130 basis points, respectively; and

 

   

Operating income margin of 11.9% and 10.5%, respectively; excluding $8.6 million of non-recurring pre-Chapter 11 consulting expense.

 

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Operational activity for the three and six months ended August 4, 2018 includes the following:

 

Store Activity Openings (Closings):

   Three Months
Ended
August 4, 2018
     Six Months
Ended
August 4, 2018
 
     Opened      Closed(1)      Opened      Closed(1)  

Company-operated

     2        (65      2        (125

Concession

     1,746        (345      6,119        (458

Franchise

     3        (30      18        (53
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,751        (440      6,139        (636
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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

A summary of our consolidated results of operations for the three and six months ended August 4, 2018 and July 29, 2017 are as follows (dollars in thousands):

 

     Three Months
Ended
August 4, 2018
    Three Months
Ended
July 29, 2017
 

Net sales

   $ 314,448     $ 316,637  

Increase in same store sales

     0.1     2.8

Gross profit percentage

     50.8     49.0

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

     35.4     35.6

Depreciation and amortization as a percentage of net sales

     4.4     3.4

Operating income

   $ 37,276     $ 33,172  

Net loss

   $ (3,289   $ (20,488

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

     2,471       2,660  

Number of concession stores at the end of the period

     6,631       860  
     Six Months
Ended
August 4, 2018
    Six Months
Ended
July 29, 2017
 

Net sales

   $ 625,454     $ 616,258  

(Decrease) increase in same store sales

     (0.2 )%      3.6

Gross profit percentage

     50.4     49.1

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

     37.9     36.2

Depreciation and amortization as a percentage of net sales

     4.3     3.6

Operating income

   $ 57,289     $ 61,848  

Net loss

   $ (14,920   $ (27,246

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

     2,471       2,660  

Number of concession stores at the end of the period

     6,631       860  

 

(1)

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

Net sales

Net sales for the three months ended August 4, 2018 decreased $2.2 million, or 0.7%, as compared to the three months ended July 29, 2017. Net sales were affected by the effect of company-operated and concession store closures of $7.9 million, partially offset by a favorable foreign currency translation effect of our non-U.S. net sales of $3.8 million, an increase in new and same store company-operated sales of $1.2 million and increased franchisees sales of $0.7 million. Net sales would have decreased 1.9% excluding the impact of foreign currency exchange rate changes.

Net sales for the six months ended August 4, 2018 increased $9.2 million, or 1.5%, as compared to the six months ended July 29, 2017. Net sales were affected by a favorable foreign currency translation effect of our non-U.S. net sales of $18.2 million, an increase in new concession and company-operated store sales of $2.0 million and increased franchisees sales of $1.1 million, partially offset by the effect of store closures of $10.9 million and a decrease in same store sales of $1.2 million. Net sales would have decreased 1.4% excluding the impact of foreign currency exchange rate changes.

 

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Table of Contents

For the three months ended August 4, 2018, the increase in same store sales was primarily attributable to an increase in average transaction value of 9.7%, partially offset by a decrease in average number of transactions per store of 5.3%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

For the six months ended August 4, 2018, the decrease in same store sales was primarily attributable a decrease in average number of transactions per store of 5.9%, partially offset by an increase in average transaction value of 9.1%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

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

 

     Percentage of Total      Percentage of Total  

Product Category

   Three Months
Ended
August 4, 2018
     Three Months
Ended
July 29, 2017
     Six Months
Ended
August 4, 2018
     Six Months
Ended
July 29, 2017
 

Jewelry

     49.3        48.5        49.0        48.7  

Accessories

     50.7        51.5        51.0        51.3  
  

 

 

    

 

 

    

 

 

    

 

 

 
     100.0        100.0        100.0        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

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

During the three months ended August 4, 2018, gross profit percentage increased 180 basis points to 50.8% compared to 49.0% during the three months ended July 29, 2017. The increase in gross profit percentage consisted of a 100 basis point decrease in occupancy costs and by an 80 basis point increase in merchandise margin. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from cost reductions associated with store closures. The increase in merchandise margin percentage resulted primarily from a favorable foreign currency translation effect.

During the six months ended August 4, 2018, gross profit percentage increased 130 basis points to 50.4% compared to 49.1% during the six months ended July 29, 2017. The increase in gross profit percentage consisted of a 110 basis point decrease in occupancy costs and a 30 basis point increase in merchandise margin, partially offset by a 10 basis point increase in buying and buying-related costs. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from cost reductions associated with store closures. The increase in merchandise margin percentage resulted primarily from a favorable foreign currency translation effect, partially offset by higher markdowns. Markdowns fluctuate based upon many factors, including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin.

Selling, general and administrative expenses

During the three months ended August 4, 2018, selling, general and administrative expenses decreased $1.3 million, or 1.2%, compared to the three months ended July 29, 2017. As a percentage of net sales, selling, general and administrative expenses decreased 20 basis points compared to the three months ended July 29, 2017. Excluding an unfavorable $1.4 million foreign currency translation effect, selling, general, and administrative expenses would have decreased by $2.7 million. Excluding the foreign currency translation effect, the decrease was primarily due to decreased compensation-related expense, including concession store commission expense.

 

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Table of Contents

During the six months ended August 4, 2018, selling, general and administrative expenses increased $14.0 million, or 6.2%, compared to the six months ended July 29, 2017. As a percentage of net sales, selling, general and administrative expenses increased 170 basis points compared to the six months ended July 29, 2017. Excluding an unfavorable $7.4 million foreign currency translation effect and non-recurring pre-Chapter 11 consulting expense of $8.6 million, selling, general, and administrative expenses would have decreased by $2.0 million. Excluding the foreign currency translation effect and non-recurring pre-Chapter 11 consulting expense of $8.6 million, the decrease was primarily due to decreased compensation-related expense, including concession store commission expense.

Depreciation and amortization expense

During the three months ended August 4, 2018, depreciation and amortization expense increased $2.8 million to $13.7 million compared to $10.9 million for the three months ended July 29, 2017. Excluding an unfavorable $0.1 million foreign currency translation effect, the increase in depreciation and amortization expense would have been $2.7 million.

During the six months ended August 4, 2018, depreciation and amortization expense increased $4.8 million to $26.9 million compared to $22.1 million for the six months ended July 29, 2017. Excluding an unfavorable $0.6 million foreign currency translation effect, the increase in depreciation and amortization expense would have been $4.2 million.

Other (income) expense, net

The following is a summary of other income activity for the three and six months ended August 4, 2018 and July 29, 2017 (in thousands):

 

     Three Months
Ended
August 4, 2018
     Three Months
Ended
July 29, 2017
     Six Months
Ended
August 4, 2018
     Six Months
Ended
July 29, 2017
 

Royalty income

   $ (2,809    $ (2,934    $ (5,279    $ (5,278

Foreign currency exchange gain, net

     (539      768        (2,075      411  

Other income

     —          (5      —          (5
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ (3,348    $ (2,171    $ (7,354    $ (4,872
  

 

 

    

 

 

    

 

 

    

 

 

 

Reorganization items, net

Reorganization items, net represent amounts incurred after the Commencement Date as a direct result of the Bankruptcy and are comprised of the following for the three and six months ended August 4, 2018 (in thousands):

 

     Three Months
Ended
August 4, 2018
     Six Months
Ended
August 4, 2018
 

Professional fees

   $ 22,744      $ 33,697  

Rejection of leases and other

     7,277        7,277  

Debtor-in-possession financing costs

     432        4,470  

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

     —          (4,982
  

 

 

    

 

 

 

Total reorganization items, net

   $ 30,453      $ 40,462  
  

 

 

    

 

 

 

 

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Interest expense, net

During the three months ended August 4, 2018, net interest expense aggregated $5.1 million compared to $43.4 million for the three months ended July 29, 2017. The decrease is primarily due to the cessation of recording interest expense on outstanding debt subject to compromise.

During the six months ended August 4, 2018, net interest expense aggregated $30.0 million compared to $87.0 million for the six months ended July 29, 2017. The decrease is primarily due to the cessation of recording interest expense on outstanding debt subject to compromise.

Income taxes

The effective income tax rate was 287.8% and (13.6)% for the three and six months ended August 4, 2018. This effective income tax rate differed from the statutory federal income tax rate of 21.0% primarily from foreign losses with no associated income tax benefit and changes in valuation allowances.

The effective income tax rate was (100.4)% and (8.4)% for the three and six months ended July 29, 2017. This effective income tax rate differed from the statutory federal income tax rate of 35% primarily from foreign tax rate differentials as compared to the U.S. statutory rate, changes in the valuation allowance and the correction of an error associated with the prior quarter.

Segment Operations

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

North America

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

 

     Three Months
Ended
August 4, 2018
    Three Months
Ended
July 29, 2017
    Six Months
Ended
August 4, 2018
    Six Months
Ended
July 29, 2017
 

Net sales

   $ 199,454     $ 196,033     $ 406,388     $ 391,993  

Increase in same store sales

     4.4     2.6     4.9     1.4

Gross profit percentage

     51.8     48.9     52.4     49.9

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

     1,466       1,614       1,466       1,614  

Number of concession stores at the end of the period

     6,190       333       6,190       333  

During the three months ended August 4, 2018, net sales in North America increased $3.4 million, or 1.7%, from the three months ended July 29, 2017. The increase was attributable to an increase in same store and new company-operated store sales of $8.9 million, increased franchisee sales of $0.7 million and a favorable foreign currency translation effect of our non-U.S. net sales of $0.1 million, partially offset by the effect of company-operated and concession store closures of $6.3 million. Sales would have increased 1.7% excluding the impact from foreign currency exchange rate changes.

During the six months ended August 4, 2018, net sales in North America increased $14.4 million, or 3.7%, from the six months ended July 29, 2017. The increase was attributable to an increase in same store sales of $18.1 million, an increase in new concession and company-operated store sales of $4.1 million, increased franchisee sales of $1.1 million and a favorable foreign currency translation effect of our non-U.S. net sales of $0.6 million, partially offset by the effect of company-operated and concession store closures of $9.5 million. Sales would have increased 3.5% excluding the impact from foreign currency exchange rate changes.

 

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For the three months ended August 4, 2018, the increase in same store sales was primarily attributable to an increase in average transaction value of 8.5% and an increase in average number of transactions per store of 1.2%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

For the six months ended August 4, 2018, the increase in same store sales was primarily attributable to an increase in average transaction value of 6.7% and an increase in average number of transactions per store of 1.7%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

During the three months ended August 4, 2018, gross profit percentage increased 290 basis points to 51.8% compared to 48.9% during the three months ended July 29, 2017. The increase in gross profit percentage consisted of a 260 basis point decrease in occupancy costs, a 20 basis point increase in merchandise margin and by a 10 basis point decrease in buying and buying-related costs. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from cost reductions associated with store closures. The increase in merchandise margin percentage resulted primarily from higher initial markups and decreased shrink, partially offset by higher markdowns. Markdowns fluctuate based upon many factors, including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin.

During the six months ended August 4, 2018, gross profit percentage increased 250 basis points to 52.4% compared to 49.9% during the six months ended July 29, 2017. The increase in gross profit percentage consisted of a 260 basis point decrease in occupancy costs, partially offset by a 10 basis point increase in buying and buying-related costs. The decrease in occupancy costs, as a percentage of net sales, resulted primarily from cost reductions associated with store closures.

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

 

     Percentage of Total      Percentage of Total  

Product Category

   Three Months
Ended
August 4, 2018
     Three Months
Ended
July 29, 2017
     Six Months
Ended
August 4, 2018
     Six Months
Ended
July 29, 2017
 

Jewelry

     54.3        54.8        53.8        55.1  

Accessories

     45.7        45.2        46.2        44.9  
  

 

 

    

 

 

    

 

 

    

 

 

 
     100.0        100.0        100.0        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Europe

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

 

     Three Months
Ended
August 4, 2018
    Three Months
Ended
July 29, 2017
    Six Months
Ended
August 4, 2018
    Six Months
Ended
July 29, 2017
 

Net sales

   $ 114,994     $ 120,604     $ 219,066     $ 224,265  

(Decrease) increase in same store sales

     (6.3 )%      3.2     (8.1 )%      7.5

Gross profit percentage

     49.1     49.0     46.6     47.8

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

     1,005       1,046       1,005       1,046  

Number of concession stores at the end of the period

     441       527       441       527  

 

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During the three months ended August 4, 2018, net sales in Europe decreased $5.6 million, or 4.7%, from the three months ended July 29, 2017. The decrease was attributable to a decrease in same stores sales of $7.7 million, and the effect of company-operated and concession store closures of $1.6 million, partially offset by a favorable foreign currency translation effect of our non-U.S. net sales of $3.7 million. Sales would have decreased 7.4% excluding the impact from foreign currency exchange rate changes.

During the six months ended August 4, 2018, net sales in Europe decreased $5.2 million, or 2.3%, from the six months ended July 29, 2017. The decrease was attributable to a decrease in same stores sales of $19.2 million and the effect of company-operated and concession store closures of $3.6 million, partially offset by a favorable foreign currency translation effect of our non-U.S. net sales of $17.6 million. Sales would have decreased 9.4% excluding the impact from foreign currency exchange rate changes.

For the three months ended August 4, 2018, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 13.0%, partially offset by an increase in average transaction value of 9.2%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

For the six months ended August 4, 2018, the decrease in same store sales was primarily attributable to a decrease in average number of transactions per store of 14.4%, partially offset by an increase in average transaction value of 9.6%. The average transaction value and the average number of transactions are calculated on an average store basis rather than a same store basis.

During the three months ended August 4, 2018, gross profit percentage increased 10 basis points to 49.1% compared to 49.0% during the three months ended July 29, 2017. The increase in gross profit percentage consisted of a 150 basis point increase in merchandise margin and a 10 basis point decrease in buying and buying-related costs, partially offset by a 150 basis point increase in occupancy costs. The increase in merchandise margin percentage resulted primarily from a favorable foreign currency translation effect and lower markdowns, partially offset by lower initial markups. Markdowns fluctuate based upon many factors, including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin. The increase in occupancy costs, as a percentage of net sales, resulted primarily from the deleveraging effect of a decrease in same store sales.

During the six months ended August 4, 2018, gross profit percentage decreased 120 basis points to 46.6% compared to 47.8% during the six months ended July 29, 2017. The decrease in gross profit percentage consisted of a 210 basis point increase in occupancy costs, partially offset by a 90 basis point increase in merchandise margin. The increase in occupancy costs, as a percentage of net sales, resulted primarily from the deleveraging effect of a decrease in same store sales. The increase in merchandise margin percentage resulted primarily from a favorable foreign currency translation effect and lower markdowns, partially offset by lower initial markups. Markdowns fluctuate based upon many factors, including the amount of inventory purchased versus the rate of sale and promotional activity. We do not anticipate a significant change in the level of markdowns that would materially affect our merchandise margin.

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

 

     Percentage of Total      Percentage of Total  

Product Category

   Three Months
Ended
August 4, 2018
     Three Months
Ended
July 29, 2017
     Six Months
Ended
August 4, 2018
     Six Months
Ended
July 29, 2017
 

Jewelry

     40.8        38.4        40.2        37.7  

Accessories

     59.2        61.6        59.8        62.3  
  

 

 

    

 

 

    

 

 

    

 

 

 
     100.0        100.0        100.0        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Liquidity and Capital Resources

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

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

The Bankruptcy Court has approved the payment of certain pre-petition employee wages and benefits, the use of the debtors’ existing cash management system, the maintenance and administration of customer programs, the payment of the pre-petition claims of certain vendors, the honoring of insurance-related obligations, and the payment of certain pre-petition taxes and related fees.

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

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

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

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

 

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As of August 4, 2018, we had $65.6 million of availability under the DIP ABL Loan, net of applicable reserves.

Our independent registered public accountants’ report dated as of April 20, 2018, includes an other matter paragraph regarding the Company’s ability to continue as a going concern. This other matter paragraph constitutes an event of default under the CLSIP Term Loan Agreement that would otherwise permit the lenders under the CLSIP Term Loan to cause such indebtedness to become immediately due and payable. CLSIP Holdings, CLSIP, Wilmington Trust, N.A., as Administrative Agent and Collateral Agent under the CLSIP Term Loan Agreement, and certain of the lenders constituting Required Lenders (as that term is defined by the CLSIP Term Loan Agreement) under the CLSIP Term Loan have entered into a forbearance agreement dated as of April 19, 2018 (the “CLSIP Forbearance”) providing that, among other things, such lenders will forbear from causing the CLSIP Term Loan to become immediately due and payable and from exercising remedies arising from such event of default or other events of default that may arise on account of the commencement of the Chapter 11 Cases and/or any other transaction and/or agreement contemplated by the Restructuring Agreement. The CLSIP Forbearance also increased the interest rate of the loan to bear 11.0% per annum. As a result of the CLSIP Forbearance, the CLSIP Term Loan is classified as long-term debt.

Certain indebtedness of our European subsidiaries in an aggregate principal amount of $85.5 million matures in early 2019, as follows (dollars in millions):

 

Facility

   Outstanding Amount      Maturity  

Claire’s Gibraltar Credit Facility

   $ 34.0        February 4, 2019  

Europe Credit Agreement

   $ 51.5        January 31, 2019  

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

A summary of cash flows provided by (used in) operating, investing and financing activities for the six months ended August 4, 2018 and July 29, 2017 is outlined in the table below (in thousands):

 

     Six Months
Ended
August 4, 2018
     Six Months
Ended
July 29, 2017
 

Operating activities

   $ 26,905      $ (33,233

Investing activities

     (9,127      (8,139

Financing activities

     13,007        16,566  

Cash flows from operating activities

For the six months ended August 4, 2018, cash provided by operations increased $60.1 million compared to the prior year period. The primary reason for the increase provided by operations was an increase in operating income and net other items of $85.8 million, offset by an increase in working capital of $25.7 million, excluding cash equivalents. For the six months ended July 29, 2017, cash used in operations decreased $20.3 million compared to the prior year period. The primary reason for the decrease in cash used in operations was an increase in operating income and net other items of $28.8 million, offset by an increase in working capital of $8.5 million, excluding cash equivalents.

 

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Cash flows from investing activities

For the six months ended August 4, 2018, cash used in investing activities was $9.1 million and consisted of $9.1 million for capital expenditures. For the six months ended July 29, 2017, cash used in investing activities was $8.1 million and consisted of $8.1 million for capital expenditures.

Cash flows from financing activities

For the six months ended August 4, 2018, cash provided by financing activities was $13.0 million, which consisted primarily of proceeds from the issuance of our $60.0 million DIP term loan, partially offset by net payments of $31.0 million under our ABL Credit Facility, payment of $5.3 million for unamortized interest related to long-term debt, payment of $4.5 million in financing costs, payment of $6.0 million for current portion of long-term debt and payment of $0.2 million for a capital lease. For the six months ended July 29, 2017, cash provided by financing activities was $16.6 million, which consisted primarily of net borrowings of $39.8 million under our ABL Credit Facility, partially offset by payment of $18.4 million for the extinguishment of the Senior Subordinated Notes, payment of $4.3 million for unamortized interest related to long-term debt, payment of $0.4 million in financing costs and payment of $0.1 million for a capital lease.

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

Cash Position

As of August 4, 2018, we had cash of $69.4 million.

In addition, as of August 4, 2018, our foreign subsidiaries held cash and cash equivalents of $35.1 million. During the six months ended August 4, 2018, we transferred certain cash held by foreign subsidiaries to the U.S. to meet certain liquidity needs.

ABL Credit Facility

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

Debt Covenants

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

 

   

incur additional indebtedness;

 

   

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

 

   

make certain investments;

 

   

create or incur certain liens;

 

   

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

 

   

transfer or sell assets;

 

   

engage in certain transactions with our affiliates; and

 

   

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

For a description of our existing debt and debt agreements, see Note 5 – Debt, in the Unaudited Condensed Consolidated Financial Statements. As of August 4, 2018, we were in compliance with the covenants in all existing debt agreements for debt not subject to compromise.

 

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

Europe Bank Credit Facilities

Our non-U.S. subsidiaries have bank credit facilities totaling $1.9 million. These facilities are used for working capital requirements, letters of credit and various guarantees. These credit facilities have been arranged in accordance with customary lending practices in their respective countries of operation. As of August 4, 2018, we had a reduction of $1.7 million for outstanding bank guarantees, which reduces the borrowing availability to $0.2 million as of that date.

Management Services Agreement

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

Critical Accounting Policies and Estimates

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

Goodwill and indefinite-lived intangible assets are subject to impairment assessments at least annually (or more frequently when events or circumstances indicate that an impairment may have occurred) by applying a fair-value test. These fair value estimates require significant management judgment and are based on the best information available at the time of the analysis. Our principal intangible assets, other than goodwill, are tradenames, franchise agreements, and leases that existed as of the date that the Company was acquired in May 2007, which had terms that were favorable to market at that date. Our impairment testing for Fiscal 2017 resulted in the recognition of a non-cash impairment charge of $1.4 million relating to long-lived assets. We expect to next perform our annual impairment analysis during the fourth fiscal quarter of Fiscal 2018, and we may be required to recognize additional impairment charges at that time or in the future.

Recent Accounting Pronouncements

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

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

We and our representatives may from time to time make written or oral forward-looking statements, including statements contained in this and other filings with the Securities and Exchange Commission and in our press releases and reports to stockholders. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to our future financial performance, business strategy, planned capital expenditures, ability to service our debt, and new store openings for future fiscal years, are forward-looking statements. The forward-looking statements are and will be based on management’s then current views and assumptions regarding future events and operating performance, and we assume no obligation to update any forward-looking statement. The forward-looking statements may use the words “expect,” “anticipate,” “plan,” “intend,” “project,” “may,” “believe,” “forecast,” and similar expressions. Forward-looking statements involve known or unknown risks, uncertainties and other factors, including changes in estimates and judgments discussed under “Critical Accounting Policies and Estimates” which may cause our actual results,

 

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performance or achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Some of these risks, uncertainties and other factors are as follows: our level of indebtedness; general economic conditions; changes in consumer preferences and consumer spending; unwillingness of vendors and service providers to supply goods or services pursuant to historical customary credit arrangements; competition; general political and social conditions such as war, political unrest and terrorism; natural disasters or severe weather events; currency fluctuations and exchange rate adjustments; failure to maintain our favorable brand recognition; failure to successfully market our products through other channels, such as e-commerce; uncertainties generally associated with the specialty retailing business, such as decreases in mall traffic; disruptions in our supply of inventory; inability to increase same store sales; inability to renew, replace or enter into new store leases on favorable terms; increase in our cost of merchandise; significant increases in our merchandise markdowns; inability to grow our company-operated store base, expand our international store base through franchise or similar licensing arrangements, or expand our store base through concession stores; inability to design and implement new information systems; data security breaches of confidential information or other cyber-attacks; delays in anticipated store openings or renovations; results from any future asset impairment analysis, changes in applicable laws, rules and regulations, including laws and regulations governing the sale of our products, particularly regulations relating to heavy metal and chemical content in our products; changes in anti-bribery laws; changes in employment laws, including laws relating to overtime pay, tax laws and import laws; product recalls; loss of key members of management; increases in the costs of healthcare for our employees; increases in the cost of labor; labor disputes; increases in the cost of borrowings; unavailability of additional debt or equity capital; and the impact of our substantial indebtedness on our operating income and our ability to grow. In addition, we typically earn a disproportionate share of our operating income in the fourth quarter due to seasonal buying patterns, which are difficult to forecast with certainty. Risks and uncertainties relating to any capital restructuring initiative include: risks and uncertainties relating to the Chapter 11 Cases, including but not limited to, the Company’s ability to obtain Bankruptcy Court approval with respect to motions filed in the Chapter 11 Cases, the effects of the Chapter 11 Cases on the Company and on the interests of various constituents, Bankruptcy Court rulings in the Chapter 11 Cases and the outcome of the Chapter 11 Cases in general, the length of time the Company will operate as a debtor in possession in Chapter 11, risks associated with motions filed and relief sought by third parties in the Chapter 11 Cases, the potential adverse effects of the Chapter 11 Cases on the Company’s liquidity or results of operations or business prospects and increased legal and other professional costs necessary to execute the Company’s reorganization; risks and uncertainties associated with the transactions contemplated in the DIP Credit Agreement, Backstop Agreement and Restructuring Support Agreement, including satisfaction of the conditions thereto are subject to certain conditions, which conditions may not be satisfied for various reasons, including for reasons outside of the Company’s control, including the negotiation of terms, conditions and provisions related thereto; the ability of the Company to obtain requisite support for the restructuring and a Chapter 11 plan of reorganization from various stakeholders; the ability of the Company to continue as a going concern; the ability of the Company and its Debtor affiliates to confirm a Chapter 11 plan of reorganization; and the effects of disruption from the Chapter 11 Cases and any restructuring transactions pursued or consummated in connection therewith or relating thereto, making it more difficult to maintain business, financing and operational relationships, to obtain and maintain normal terms with customers, suppliers and service providers and to retain key executives and to maintain various licenses and approvals necessary for the Company to conduct its business. The Company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. Additional discussion of these and other risks and uncertainties is contained elsewhere in this Item 2, in Item 3, “Quantitative and Qualitative Disclosures About Market Risk” and in our Form 10-K for Fiscal 2017 under “Statement Regarding Forward-Looking Disclosures” and “Risk Factors.”

 

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Cash

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

Interest Rates

As of August 4, 2018, we had fixed rate debt of $2,066.7 million and variable rate debt of $94.0 million. Based on our variable rate balance as of August 4, 2018, a 1% change in interest rates would increase or decrease our annual interest expense by approximately $0.9 million.

Foreign Currency

We are exposed to market risk from foreign currency exchange rate fluctuations on the United States dollar (“USD” or “dollar”) value of foreign currency denominated transactions and our investments in foreign subsidiaries. We manage this exposure to market risk through our regular operating and financing activities, and may from time to time, use foreign currency hedges. Exposure to market risk for changes in foreign currency exchange rates relates primarily to our foreign operations’ buying, selling, and financing in currencies other than local currencies and to the carrying value of net investments in foreign subsidiaries. As of August 4, 2018, we maintained no foreign currency options. We generally do not hedge the translation exposure related to our net investment in foreign subsidiaries. Included in “Comprehensive loss” are $(15.1) million and $14.0 million, net of tax, reflecting the unrealized gain on foreign currency translations and intra-entity foreign currency transactions during the six months ended August 4, 2018 and July 29, 2017, respectively.

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

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

 

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General Market Risk

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

 

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

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

Changes in Internal Controls over Financial Reporting

No changes in our internal control over financial reporting have been made during the quarter ended August 4, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

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

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

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

 

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Item 1A.

Risk Factors

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

 

Item 6.

Exhibits

 

10.1    Amendment to Restructuring Support Agreement. (1)
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). (1)
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). (1)
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

(1) 

Filed herewith.

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

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    CLAIRE’S STORES, INC.
September 14, 2018     By:  

/s/ Ron Marshall

      Ron Marshall, Chief Executive Officer (principal executive officer)
September 14, 2018     By:  

/s/ Scott Huckins

      Scott Huckins, Executive Vice President and Chief Financial Officer (principal financial officer)

 

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